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14 Ways You're Likely to Blow It When It Comes Time to Sell Your Software Company (Page 3 of 3)

Mistake #10: During the courtship, you take on another large responsibility.

"Once you're in the sell-side cycle, you want to avoid doing anything that could have a long-term, material impact to the buyer," says Gaeto.

"For example, you're in a process, you're talking to a dozen interested parties, you're getting close to an LOI, and you've disclosed a lot of worthwhile info. All of sudden you decide you want to put in an ERP system, and you sign a big deal with the ERP vendor. Well, that's going to greatly affect your financials.

"You don't want to do anything too drastic or too bold. In a few weeks you're going to be part of a bigger whole, and they're going to want to do things their way."

Mistake #11: You think the deal is done before an agreement is signed (and money's in hand).

"It's really just a cautionary tale," Gaeto says. "Don't count your chickens before they've hatched. You  know Murphy's Law? Well, Murphy walks around the halls in the last few weeks of a deal. 

"So, even though only about 10 percent of deals fall apart after the LOI, don't go spend the money yet. 

"I had a deal with a signed LOI from a bigger software company, and at the last minute the buyer called and said, 'We're shutting this deal down.'

"We didn't even know really what happened until six months later, when they called and said, 'Here's what really happened.'  That prospective buyer got acquired by an even bigger company, and all deals in process were stopped."

Mistake #12: You fail to get tax and wealth management advice before the exit.

"Founders or owners do not often understand what they net out of the sale," says Gaeto. "You need to understand the tax implications, and an advisor can help by looking at different payment options that affect the outcome.

"Simply put, what a lot of people need to figure out is, will they get enough out of this? In order to really understand that, you need a wealth management guy to come in and help you decide. Should you hold off selling and wait for something better? How do you analyze terms in regards to taxes?

"A wealth management guy will help you understand risk management, deal terms, and what you and your family need, so that you can build the right deal structure. 

"With our clients, we walk through the trade offs: cash upfront, or leveraged recap, or earn-out. We help people think about those types of things. By the way, some sellers shy away from earn-out, but if the buyer and seller are really well aligned, they can be really good for people."

Mistake #13: You don't plan for the exit.

"Ideally, you'll put an actual project plan several months before you start shopping your company," Gaeto says. "If an owner has the opportunity to think ahead, their best exit plan is a growth plan with some tweaks around documenting and professionalizing parts of the business. 

"This involves really understanding one's revenue and profit model: How do you make money and generate cash flow and profits? Buyers pay premiums for documented historical revenue growth and solid projections.

"Sure, there are business plans that have a lot of hockey stick fog; everyone  plays the game, and everyone knows the game. But you're trying to do two things: build in core operational functionality that really grows the business, and take that and turn it into a executable plan. 

"For a software company, I can tell you there will always be three  initiatives in a good plan. One will be around product, another is a go-to market initiative, and there's something around finance. Those initiatives need to have budgets, plans, and people assigned to them. 

"If you're a CEO, that's what you should be doing anyway. Too many CEOs spend a lot of time in the field, and you need to take those execs and have them think more like operators. When a buyer comes in and does their diligence, they want to make sure the platforms you've built are sustainable going forward.

"The ideal situation is when you have historical growth behind you: The last two or three years, and you can point to another several quarters of growth in front of you. That's probably the best time to sell as long as the other things are aligned. 

"People really pay for revenue growth and margin growth. Company size and customer base are important, but people pay for growth."

Gaeto gave us another great tutorial document, "Growth & Exit Strategy," that explains the three steps you should follow in creating your plan. SoftwareCEO paid subscribers can get the PDF from our Downloads Library.

Mistake #14: Your software license has killer consignments.

"I'm in the process of closing a couple of deals, and the issue of consignments has considerably slowed down one of them," says Gaeto.

"The more prevalent form of a transaction for small and mid-sized firms is an asset sale. In an asset sale or asset purchase, the operating assets of a seller are purchased and must be transferred to the buyer. 

"For technology firms, the transfer of IP and end-user licenses require third-party consents from customers, alliance partners, third-party processors, and the like. This could be a great deal of work, and sometimes leads to unexpected results. 

"Your buyer may view this as an opportunity to renegotiate the terms of the contract and extract concessions. In addition, certain licenses and permits and taxes may require government approval or filings prior to being transferred to the buyer.

"You'll spend a lot of time and effort trying to obtain these approvals and consents, and this can delay a final closing, push out cash payments, and add unwanted terms.

"Sellers should do a legal review of their contracts and zero in on the 'assignment' language. An attorney needs to advise the seller, but one thought is to structure your assignment clause so that the seller simply needs to notify the third party or customer, versus requiring approval.

"Early on, you need to identify all required third-party consents and create an action plan to obtain them. In a stock purchase deal, third party consent is not as big an issue."

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