Looking To Sell Your Software Business? Here Are 5 Things You Should Know About Potential Buyers

1. Not all buyers are created equal.

Ensure that you are dealing with a buyer experienced in software investing. Software businesses are unique in many ways from traditional businesses. A buyer that understands these nuances will be better positioned to evaluate your business and offer a fair value. In addition, an experienced software investor will be able to execute your transaction more efficiently and effectively. Always make sure you are dealing with an exclusively software focused buyer.

2. Be cautious of private equity buyers.

Private Equity firms have become increasingly interested in acquiring SaaS businesses over the last decade. Unfortunately, these firms can be a black box and not always upfront with their interests. Private Equity firms will typically aim to resell your software business within five years. This is true regardless of whether the firm has a much longer fund life. A private equity fund will also likely require you continue to operate the business and so may not be the best fit for someone looking to transition out of a leadership role. A private equity fund may also have very different plans for the business once under their ownership. They may look to cut costs and fire employees, or combine the business with another one of their portfolio companies. Finally, private equity funds are generally inflexible and rigid in their approach to transaction structuring, timeline and process.

3. Not all buyers are serious.

This is often the case with so called “strategic” buyers. These often times are competitors in the industry that are just trying to learn information about your business and have no intention of doing a transaction. This can be exacerbated if using a broker or bankers who widely markets the deal to many competitors in the industry. Be selective with the strategic buyers that you include in the process and consider giving them a different level of information access until you are able to determine if they are serious.

4. Be aware of your advisor’s incentives.

Hiring an advisor makes sense in certain cases. If you are to go down this path, it is best to be aware of their incentives. For instance, they often times have relationships with Private Equity buyers. A dishonest advisor may nudge you in the direction of the private equity buyer in hopes of generating repeat business in the future. Proceed with caution!

5. Don’t be afraid of seller financing.

Seller financing refers to taking a portion of the proceeds from a business sale in the form of a note payable to you, generally in installments and bearing an interest rate. Most sellers balk at the idea of this, but you would be wise to give it a second thought. Depending on the market conditions and your estate planning goals, a seller note could make a lot of sense. In an environment like today in which interest rates are near 0%, a seller note can be an attractive low-risk, high-interest investment alternative. In addition, an interest-bearing note can be used as a strategy for tax and estate planning. These are just some of the benefits. So don’t be too quick to dismiss the note!