Selling your software business: the parts of the price nobody mentions in the first meeting

I have spent a fair chunk of my working life on the buy side of software deals, which means I am about to tell you a few things that do not obviously flatter my own side of the table.

Here is the first of them. Founders are usually outgunned when they come to sell.  

Not because buyers are villains, most are perfectly decent, but because you will do this once and the person opposite you does it several times a year. That asymmetry rarely shows up in the headline number, which everybody stares at. It shows up in half a dozen schedules underneath it, which most people skim.

I am not going to pretend that gap closes in a thousand words. What I can usefully do is tell you what the moving parts are called, because it is a great deal easier to ask about something once you know it has a name.

What sits between the offer and your bank account

An offer arrives as a single figure. By completion it has passed through several mechanisms, any of which can change what actually reaches you.

• Working capital and net tangible assets. The business is expected to be handed over with enough in it to keep running. A target gets set, and any shortfall at completion comes off your proceeds.
• Deferred revenue. If you collect annual fees up front, you are holding customers' money against service you still owe. Some or all of that balance may be treated as debt and deducted from the price.
• Earnouts. Part of the payment is made contingent on future performance, after the point at which you stop controlling the levers that drive it.
• Escrows, holdbacks and indemnities. A portion of your money stays behind for a period, at risk against warranty claims.
• Leverage and rolled equity. Where the purchase is debt-funded, you may be asked to reinvest part of your proceeds into the new holding company, often in shares that rank behind the buyer's.
• Adjusted EBITDA. The multiple is applied to an adjusted earnings figure, not the one in your accounts, and the adjustments are a matter of negotiation.
• Repricing during diligence. Offers can be revised once exclusivity is signed and the alternatives have gone quiet.

None of these is improper. Every one exists for a sound reason, and you will find them in perfectly fair deals, including ours. But they are the part of the transaction where the real price is decided, and they tend to arrive late, in a schedule, after the number has been agreed and celebrated.

So the question worth asking about each of them is the same: what is this meant to represent, and how was the figure arrived at? A buyer who can answer that plainly, early, and in language you recognise is usually a buyer worth dealing with. One who cannot is telling you something.

The question that comes after the price

All of that concerns the money. The money is only half the story. The other half is what becomes of the thing you spent years building: your team, your customers, your name above the door.

Many buyers work to a fund cycle. They acquire, improve and sell again within roughly three to seven years, and there is nothing improper about that either. It is what their investors have asked them to do. But a deal can be entirely fair on price and still mean your business is restructured, merged or passed on to the next owner not long after you have handed over the keys.

So the question to put to any acquirer is a simple one: what is your intention for this business in five years, and in ten? Then ring the founders they have bought from before and find out whether the answer held.

How we approach it

I should declare my interest. I work for Harris Computer, part of Constellation Software. We buy vertical market software businesses, and we buy them to keep. There is no fund clock, no plan to resell, and no exit for you to engineer the business towards.

That changes how we handle the mechanics above, and this is what you can expect from us.

We pay in equity. Our offers are funded from our own balance sheet. We use leverage only where a particular transaction genuinely calls for it, which means you are not being asked to underwrite someone else's debt, and there is no capital stack for your proceeds to disappear underneath.

We treat completion accounts as shared risk, not a lever. Working capital targets, net tangible assets and deferred revenue adjustments exist so that neither side is handed a problem the other created. We set them to reflect how your business has actually run, we show you the working, and we will tell you what each figure is meant to represent before you are locked into anything.

We are flexible on structure. Every business arrives in a different shape. Some founders want a clean exit, some want to stay for years, some have partners with different plans, and some situations genuinely call for an element of deferred or contingent consideration. We would rather build the structure around your circumstances than push you through a standard template.

We do our diligence with our own operational people. The people who look at your product, your team and your customers are the people who will work with them afterwards. That tends to produce a more practical process, fewer surprises late on, and far less appetite for repricing a deal on a technicality.

We are still here afterwards. A buyer who intends to hand the business on in a few years is optimising a transaction. One who intends to own it indefinitely is optimising a relationship, and that shows up in how the schedules get negotiated and in what happens in the first year after completion.

I am not going to pretend we are the right answer for everybody. If maximum headline value is what you are after and you are relaxed about what follows, another buyer may well pay you more. But the persuasive evidence is never the promise, it is the history. Ask to speak to founders who sold to us years ago and see what became of their businesses.

Whoever you sell to, go in knowing what the moving parts are called and asking what each one is for. The headline number will get all the attention. The mechanics, and the intentions behind them, are what you will live with.

If you are thinking about the next chapter for your software business and would like an informal conversation, we are always happy to have one, whatever stage you are at.

This article is general information and not legal or financial advice. Every business and every transaction is different.