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Maximizing Strategic Value in a Software Company Sale - This is for the technology business owner who believes his company is worth more than a rule-of-thumb multiple of EBITDA - one seeking to realize strategic value. There are two essential components necessary to realize this. First there must be multiple qualified buyers. Secondly you must understand and articulate those strategic value drivers to the right buyers. This is how we want buyers to value your company:


1. Analyze the cost to re-create the software code.

2. Determine the time delay for the potential buying company to write the code themselves and calculate the cost of that time to market delay. Do they lose market share? Does their existing customer base defect to a competitor?

3. Pricing power. The smaller software company usually has to sell their software at a discount to compensate the buyer for the additional risk of dealing with a small company. The larger buying company can usually exercise pricing power and raise prices sometimes as much as 50%. Look at the selling company with that new price and check out the new level of profitability.

4. Very powerful recurring revenue business model. Most of the bigger software companies are trying to move to a SaaS model where the user pays a monthly recurring fee instead of a one-time license. This is quite valuable to strategic buyers because it removes much of the risk from a business acquisition.

5. Strategic assets that do not appear on the balance sheet can add a great deal of transaction value. Hard to penetrate strategic accounts or government accounts would be examples of these assets.

6. Customer acquisition cost. If the sales cycle is long and the sale is complex and the required sales skill is high, that means that each installed account cost a significant amount of money in order to close it. The buying company might analyze what it would cost them to build a customer base equal to the one they are acquiring.

7. The defensive factor. What damage could a competitor do if their company owned your technology assets? You often see a counter offensive if one big tech company makes an acquisition in a particular market niche. Shortly after that, you will often see one or more similar acquisitions by their major competitors.

After seeing this you may be saying to yourself, come on, this is a little far-fetched. These components do have real value, but that value is open to a broad interpretation by the marketplace. We are attempting to assign metrics to a very subjective set of components. The buyers are smart, and experienced in the M&A process and quite frankly, they try to deflect these artistic approaches to driving up their financial outlay. The best leverage point we have is that those buyers know that we are presenting the same analysis to their competitors and they don't know which component or components of value that we have presented will resonate with their competition. In the final analysis, we are just trying to provide the buyers some reasonable explanation for their board of directors to justify paying 8 X revenues for an acquisition.

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