Blog Post by David Kuritzén, B2B Software Investor at Monterro.
Selling your software business is a big step – but it doesn’t have to be a painful one. By fully preparing your business before you take the plunge, you can avoid the obstacles most founders encounter on the way.
Getting this right will increase the value of your company. A lack of adequate preparation can weaken your negotiating power as investors/partners see higher risk points that you haven’t addressed.
If you’re ready to dive into the full selling process, read our Field-guide to selling your (software) business (the right way).
In the meantime, here’s my cheat sheet to preparing your business for a sale.
Step one: Fix your shareholder agreement
This is the most important document: it’s essentially a playbook for the entire selling process. Which means it’s vital to complete it early.
Your shareholder agreement should include:
- Shared objectives and how to achieve them.
- Drag-along regulations to ensure majority shareholders don’t get blocked by a minority when trying to sell all or a substantial portion of their shares.
- Change of ownership, as trying to address this retrospectively can result in seriously complicated tax issues.
You should also assess your shareholders’ ambition and risk tolerance by discussing company vision, goals, and ownership timelines as early as possible.
Step two: Standardise key contracts
Before you sell your business, you need to standardise your customer agreements and your employee contracts.
Although your customer contracts are negotiated on an individual basis, you can still develop a framework for them. And this is key, as standardised customer agreements make it easier for potential buyers to review your business.
It’s the same principle for employee contracts. If your business is built on the work of a few developers or engineers – who aren’t employees – then you’ll run into potentially deal-breaking challenges…
Step three: Clarify IP ownership
It goes without saying, but it’s vital to keep track of your IP if you’re running a software business. Buyers pay a lot for it, so knowing exactly what’s yours puts you in a greater place to sell.
Answer these questions before a prospective buyer asks. You’ll save yourself a lot of time, effort, and money.
- Have you used external code or freeware?
- How did you handle it?
- Do your contracts state that any code stays with your company, not the individual who created it?
Pro tip: Conduct an IP scan of your tech stack to get an overview of your situation.
Step four: Use reporting figures, over a period of time
You’ll need to use your figures and metrics a lot.
Over a sustained period of time, record key figures such as:
- Annual recurring revenue
- Cost of acquiring a customer
- Net retention
This gives potential buyers quick access to a clear health check of your company.
Crucially, it will also help you get a handle on how your business is performing ahead of a deal – and give you the vital confidence you need in the all-important negotiation stages.
Ready for the next phase?
Now you’ve seen my cheat sheet on preparing your business for a healthy, smooth sales process, it’s time to move to the next stage: approaching a deal.
You can read more about that (plus the importance of hiring a CFO, and how to actually get the deal done) in our Field-guide to selling your (software) business (the right way).
It’s packed with helpful hints and tips from M&A experts – plus experiences from CEOs and founders who’ve been through the journey themselves.
We’re Monterro, a B2B software growth investor (of the get-your-hands-dirty with strategy and operational support variety). Get in touch if you’d like to chat more with me or my colleagues.