The Reality Of Selling Your Software Business Is Harder Than It Seems
By Abby Sorensen, Editor
My inbox is bombarded with a daily stream of news about tech acquisitions. I know the mainstream tech media is obligated to cover the biggest of the big deals, but to me the headlines about billion dollar exits aren’t painting an accurate picture of just how difficult it can be to sell your software company.
For example, Tomasz Tunguz, partner at Redpoint Ventures, recently wrote a blog post titled, “The Blockbuster Software M&A Market Of 2018” from. He says, “It’s a great time to sell a fast growing billion dollar company.” What I’d like this post to say is, “It’s a great time to sell any successful software company, but it’s still not an easy time.”
He continues to marvel at the fact that, “Billion-dollar plus acquisitions in 2018 have commanded a median 17.7x trailing enterprise value to revenue multiple.” That’s great, except for the fact that very, very, very few software companies will ever see an acquisition the size of recent ones like LinkedIn ($26 billion), Github ($7.5 billion), Mulesoft ($6.5 billion), Concur ($8.3 billion), and Ariba ($4.3 billion). These companies should be applauded – but so should the ones who are successfully securing smaller scale exits. Again, blockbuster deals like this neglect to mention just how challenging it can be to run a software company, prepare it to be sold, and then actually sell it.
The complexity involved in selling a software company was reinforced when I took the short road trip to Cleveland for one of Corum Group’s Merge Briefings. It was refreshing to get away from the headlines of megadeals and spend the morning with people who are building companies away from the Silicon Valley limelight. Corum Group’s presentation was also a good reminder to our Software Executive magazine and SoftwareBusinessGrowth.com readers that it’s not as easy to sell your company as the market and media headlines might make you think.
Here are a few quick takeaways from Corum Group’s presentation:
- Buyers are sitting on $4 trillion in cash right now ($1 trillion from strategic buyers and $3 trillion from private equity). That’s more than ever before, but the M&A process isn’t getting any easier despite the market being so hot. Due diligence is getting more complex, buyers have more opportunities than ever, and buyers are smarter than ever.
- While it can feel exciting when a buyer comes knocking on the door of your software company, only 11 percent of those solicitations actually end in a sale. What’s worse than that low probability is the risk that the potential buyer might not even be serious about buying your company – instead that “buyer” might just be looking to learn more about your company and your top employees than you’d be willing to share.
- Successfully selling isn’t the only positive outcome that can come from trying to sell your company. Even if the sale falls through, you can still gather valuable market feedback and build relationships with key executives and stakeholders, for example.
- When I envision the M&A process, I picture the champagne at the end of the sale. What we don’t think about is the concept of “deal fatigue.” The process of selling your company can takes longer than you think, and it can be exhausting. Corum estimates there can be upwards of 1,000 communications (emails, phone calls, etc.) when selling a company. Add to that the fact that you still have to run your business while you’re trying to sell it, and it becomes clear that selling is harder than you’d think.
The Cleveland briefing was hosted by Rob Griggs and Martin Lowrie, both VPs at Corum Group. Lowrie was a startup CEO and has worked in a strategic management consulting role with over 25 startups. Griggs was a serial entrepreneur and investment banker who founded his first software company in the mid-1980’s. Griggs also authored the blog post, “Lessons Learned From Selling Companies,” where he spells out tips on the complexity of the due diligence process, importance of cultural integration, and more.
Corum Group hosts these Merge Briefings worldwide. Check out their schedule of events online to see if one of their M&A experts are presenting near you: https://www.corumgroup.com/Events/select/product
For more coverage of software M&A, spend some time reading these guest articles published in Software Executive or on SoftwareBusinessGrowth.com: