Everything You Need to Know About Selling Your Software Company
We have narrowed down some of the most important pricing tips for your software business to ensure you receive the best price possible.
The United States software industry is currently an engine for economic growth. As the software industry continues to progress, the desirability of acquiring a software business is enhanced. Software has become an essential aspect of for the operations of businesses across all industries. There are several positive factors that are associated with the software industry and how it ultimately affects the economy. Production of software has increased by more than 50 percent from the years 1997 to 2012. The software sector is positioned for extreme growth in 2017 and 2018 and will continue skyrocketing at a fast pace. Software companies are likely to be targeted for interested buyers despite the condition of market trends. If you are planning the sale of your software business, now is the perfect time to get a valuation. If you’re looking to sell your software company, you need to know a few important rules of thumb as well as prominent industry trends that acquirers are looking for. There are many aspects that go into receiving the best price possible for your software company, so we have narrowed down some of the most important pricing tips for your business to ensure you receive the best price possible.
The first step of selling your software company is getting a valuation. Determining the value of your business prepares you for the process, and is the beginning of planning a successful acquisition. We have provided a few simple rules of thumb to help you determine the price of your software company, but remember that only a professional intermediary can truly assist you in determining the value of your business. A professional intermediary can also assist you in increasing the value of your business ahead of time so that you are fully prepared when it is time to sell. The formulas listed below can give you an idea of what goes into the valuation process and how our brokers determine the sales price.
These formulas vary and are highly dependent on revenues, scalability, and the size of a company’s client base.
- Up to 1 to 3 times revenue (trailing 12 months) plus inventory
- Up to 7.5 times SDE
- 5 to 7 times EBITDA
- 4 to 6 times EBIT
Now that you understand what factors go into calculating a business valuation, we have some pricing tips that can help you increase the value of your software company. While you may not be ready to sell for a few months, these tips can help you get a much higher price and attract more buyers when that time comes.
Enterprise value is a factor of business-to-business, business-to-consumer, or the combination of the two customer bases. For B2B, make sure to pay attention to the average length of the maintenance agreement and the length of time the average client remains with the vendor. B2C software companies are more sales focused, so it is necessary to remain ahead of the marketplace. Providing products that consumers want and need is vital. Innovation and progression are essential for sales focused client types.
Software architecture is the engineering platform that consists of high-level structures, the process of creating these structures, and their documentation. The software industry is constantly changing and progressing. Popular technology that is accurate and up to date can influence value dramatically. Fundamental structural changes can be costly and hard to change once executed, so it is vital to understand exactly what is necessary when implementing the architecture of your software company.
Software companies are directed by two crucial factors- existing product sales and most importantly, continuing maintenance dollars. Recurring maintenance revenue is stable within the software industry and surely adds more value. For companies that mainly focus on selling software licenses, maintenance revenue can implement revenue profitability, stability, and support. This recurring revenue stream is highly dependable and high margin and provides earnings stability while enabling margin expansion even if license sales fail.
Another way of selling software is through licensing. Rights, terms, and liability can all be interchanged to create several types of licensing types. Most companies believe that using a licensing model is more beneficial than direct sales. Legacy system license revenue is lessening, but it can certainly add value to your software company.
The sale of software under a subscription is becoming more and more popular and is the common business model for SaaS. According to Gartner, more than 80 percent of software vendors will change their business model from traditional license and maintenance to subscription by the year 2020. Recurring subscription revenue adds more value when selling your software company. Valuations of SaaS companies show that investors and acquirers value the predictability of this progressive business model.
If you are looking to sell your software company, the time has never been better. The economy is flourishing and the middle business market in the Southeast is growing. The first step to selling your business is getting a valuation. At Viking Mergers & Acquisitions, we offer no-cost, no-obligation valuations to business owners. Find out how you can maximize the value of your business.