Well ahwoo-ga,
You asked a hundred dollar question, you deserve a hundred dollar
answer. I think I've rounded one up for you (sorry, I live in Texas
and we talk like that).
First of all, congratulations on succeeding in a very tough industry.
Software development is not for the weak of heart as I know from
first-hand experience. Happily, in the course of looking into your
query, I discovered that a company I once worked for was sold to
Computer Associates in 1991 for $300,000,000! May you have such good
fortune!
Because Google Amswers is not intended to render detailed,
company-specific consultation, and because you haven't provided
specifics about such things as the nature of your market, the actual
size or legal structure of your company, your company's potential, or
the possible reasons another company might want to acquire yours, I
want to start by giving you a couple of good generalized references
for further research using your specific parameters. The first is the
Mergers and Acquistions section of Business.com at
http://www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/financial_advisers/
The second reference is at the USBX.com website:
http://www.usbx.com/resource/need_advice_PIN.asp
Both these websites have "axes to grind" in that they are in the
business of arranging merger/acquisition services. However, they also
have some good references and FAQ's, and I believe you will find their
websites and links to be useful.
That said, let me tell you the primary reason I grabbed your question.
I have worked over the years for at least three different companies in
your position. One was sold to Intel, then spun off by Intel to SAS. I
already mentioned another that was sold very profitably to CA. The one
that was acquired most recently (about five years ago) happens to have
been founded, run, and ultimately sold by a gentleman I know well
enough to ask a favor of. Before I let you hear his thoughts, you
should know what he has NOT told you. His company was started in the
late '70's, survived through consulting, applications development, and
product sales into the mid-90's, and was ultimately bought by a French
software concern. He is an expert in large-scale database management,
and has fought the high-tech wars for decades. Recognizing that no one
personal experience will exactly match your own situation, here are
his thoughts:
"To answer this question at a detailed level requires many return
questions. Among them:
1. What does "a fairly successful product" mean? Does it mean "it
works", or "you've sold one or two", or "you've sold 50 and can
identify potential for thousands more"?
2. What do you mean by "promising candidates"? There's always the risk
that you might sell for what seems to you like a grand sum at this
time, only to realize that you've sold your birthright for a mess of
potage. On the flip side, you could sell for a small advance and
ongoing royalties, only to see that the buyer doesn't maximize the
market potential of the product and there is little or no follow-on.
------------------------
I founded a software company and managed it for many years before
selling it to the one buyer I found. Because there was only one
candidate, I sold it at a lower price that I might have been able to
command had I had numerous companies bidding for it. But that was
because of the limited market for the company, not because I failed to
look. If you have found a few potential buyers almost without effort,
how many more might you find if you were to conduct an even more
extensive search? I will assure you that selling it to a large
established company will create more of a market for the product than
selling it to some two-bit website promoter ... IF you can find a big
company that's truly interested.
Yes, there are attorneys who specialize in mergers and acquisitions
(M&A). But I don't think that should be your first step. They tend to
charge money rather than to evaluate business plans and bet on the
come. Depending on the dollar potential, here are a few
considerations:
a. If you're one or two people working from your kitchen table and the
product took you three months to whip together and put up on a website
and it's not patentable, you would probably welcome a $100,000 buyout
and a guaranteed job for a few years or some such (since you mention
"compensation" later on, that would be my read).
b. At the other extreme, if you're incorporated and have marketing
momentum and have sunk $500,000 or more into getting the product off
the ground (across development, marketing and infrastructure), you're
probably looking for 7 figures and you can bear some reasonable costs.
Even then, I would suggest your first call should be to an investment
banker or a business broker, not to an attorney. If you can interest
an investment banker or a broker, he will have recourse to an
attorney. Investment bankers work on a commission, ranging from 8% or
so up to 1/3. Some larger, established business brokers have sliding
scales and can assist you in determining valuation ... but the most
successful among them wants about $20,000 up front, plus a sliding
scale based on the transaction.
Are they worth it? That depends on what incremental value they
provide. If you're selling for $100,000 and they charge you $20,000
and get you $140,000 and take 20% of that, you would have been better
off without them. But if in the same scenario you were about to sell
it for $50,000 then they've done you a world of good, haven't they?
There are no "rules" for company valuation until a company becomes
mature; even then, books don't speak to the future. Its value is what
the market will bear. Even on the stock market, why do two companies,
both with similar sales and similar profit margins, have vastly
different price to earnings (PE) ratios? Why did so many people pay
hundreds of millions for dot-coms only a few years ago, and why did
the markets run their capitalizations up into the billions, only to
fall back to, in some cases, 1% or 2% of their peak values? Their
products didn't change, but perceptions did.
Prior to the company's achieving maturity, its value is what it's
worth to the buyer willing to pay the most. More accurately, it's what
that buyer THINKS, HOPES and PROJECTS it will be worth. So put
yourself in the buyer's shoes. What can they do with this product?
What's the market as seen through their eyes? Are there significant
marketing synergies with the products they already have? On the flip
side, will they need to spend money and resources retooling the
product to fit their corporate "look and feel"? Are there completion
issues, which may be the reasons you're hoping to sell it?
Put together a business plan. Lay out what you see as the market. Put
a projection into it, including realistic pricing and realistic
expenses for advertising, promotion, support, ongoing product
maintenance and enhancement, etc. Use a spreadsheet. Run it out for a
few years. Calculate the potential profits. One rule of thumb (but be
careful - rules of thumb are more frequently honored in their breach
than in their application) is that you should be able to sell an
ongoing small business for three times current year's profits. For a
company in its early growth phases, however, try to sell it for for
three times that 3rd or 4th year's projected profits.
The pitfalls are many from the buyer's perspective: am I buying a pig
in a poke, am I incurring indemnification risks, does the guy who is
selling me this product really own it or am I going to be hit with a
copyright suit next year? From the seller's perspective, the main
pitfall is "will I be paid" and "when do I get the money"? When you
have an offer in hand and you've done due diligence to determine that
the buyer is trustworthy, it will then be time enough if you're not
using a broker to see an attorney. "
If this is truly big enough, you might also consider NOT selling it
right now and advertising on one of the job websites for a CEO, or for
a Sales and Marketing Manager, who can come in, take it and run with
it. If you find the right person, he'll know where to go for the next
step and you may do a lot better in the long run.
Good luck.
-----------------------------
The response above was written by Al Lowenstein. The company he
founded, ran for almost twenty years, and ultimately sold was Data
Interface Systems Corporation (marketing, among other things, a family
of products known as DI3270), which became a part of ICOM Informatics.
I think the information from the websites provided and Mr.
Lowenstein's personal insights into the perils and pitfalls of selling
a software business should provide excellent groundwork for your
purposes. I have permission of both Mr. Lowenstein and Google Answers
to provide you with his email address should you wish to further
correspond with him. It is lowenstein@jump.net.
I too wish you the best of luck in your business ventures. Should you
wish clarification of any of the above, please let me know.
ericynot-ga
p.s. For the record, primary search criteria on Google were:
acquisitions small business advice |
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