Company sales in the field of software and IT companies in Germany, Austria and Switzerland (DACH region)
Selling a company in the software and IT business sectors can be a complex matter. There are many factors to consider, such as valuing the business or finding potential buyers and negotiating contracts. Experience is crucial It is important to seek expert advice to ensure that you get the best possible price for your company and that the sales process goes smoothly.
Which software and IT companies are of interest to buyers?
The more stable the business model of a software/IT company is, the more interesting it is for strategists and investment companies. Stable means a high proportion of recurring revenues, such as monthly recurring revenues from the rental of software (SaaS, cloud). If such customer contracts also have a term of more than 12 months and the contracts are automatically renewed, the enterprise value of the software company increases in the event of a company sale.
"Stickiness"
In addition, so-called "stickiness" is a strong driver for a high number of prospective buyers and for high purchase prices. Stickiness indicates how easily a customer can replace the installed software with a competitor's solution. If such a replacement of the software solution represents an extreme pain - in terms of time and money - for a customer due to a deep anchoring in the company processes, such a software company is rated very highly. A share of more than 50% in recurring revenues characterises a software company that is interesting for buyers. The broadest possible distribution of turnover among a large number of customers also increases value. If >30% of the turnover is achieved with a single customer, the interest of buyers decreases disproportionately, as the risk from a buyer's point of view increases strongly.
What other features characterise interesting software companies?
- Critical company size of >30 employees with a first and second level of management where the company does not depend on the founder(s)
- Meaningful and up-to-date financial reporting is implemented
- The software development processes as well as the software itself are documented and all rights to the software solution are held by the company - no spaghetti code and no open source code
- Scalable business model (international): low implementation effort at the customer or a large network of implementation partners. If this is not available, sales cannot increase exponentially
- Upselling potential with existing customers is available
- Low price sensitivity among customers allows price increases, or these are already contractually regulated
- Interesting reference customers
- Low staff turnover, especially in software development and sales
- High customer satisfaction and low churn rate (cancellations) of existing customers
How are software companies valued when selling a company? Which factors increase the value of a company and which factors decrease its value?
Every buyer of a software company is interested not only in the employees and customers, but also in the business model and the organisational stability of the company. The higher the strategic fit from the buyer's point of view, the higher the company value will be. Deal killers either prevent the sale of the company or significantly reduce the purchase price (by more than 50% compared to the peer group). In principle, deal killers can be all the points mentioned in the list above, such as high employee turnover, a high churn rate with customers, the business model is not scalable, the company (employees and customers) are attached to the founder and there is no extended management and no second management level, etc..
Valuation of software companies: Every serious and professional M&A consultant has access to corresponding databases from which he can see a list of M&A transactions that have taken place in the last 24 months and their parameters (e.g. EBITDA multiples, sales multiples, etc.) and on this basis can take a list with valuations of comparable transactions ("peer group"). On this basis and with an additionally prepared company valuation according to the internationally recognised Discounted Cash-Flow Method (DCF Method), the M & A consultant can very quickly show his client a valuation range.
What does the process of selling a company look like?
Decisive for a successful company sale is a prior preparation of the company and the professional implementation of each individual step in the M & A process. This includes:
- Preparation of an Information Memorandum (also called Info Memo or IM) tailored to software companies. It is important that the information memorandum answers all the important questions from the point of view of a buyer of software companies. Since its foundation in 2003, KP Tech has advised many software companies on their sale and purchase and knows all the relevant points that should be included in an Info Memo for software companies. Furthermore, a comprehensible financial plan (P&L, balance sheet, cash flow statement) based on premises for the next 5-10 years must be prepared
- Preparation of an extensive list of potential buyers (strategists and financial investors). As M & A consultants, we draw up this so-called long list on the basis of our many years of M & A experience in the software industry. After discussion with the client, this long list is reduced to a manageable number of potential buyers (approx. 30 to 50) - this list of "A candidates" is also called a short list
- In addition to the info memo, the M & A consultant prepares the teaser. The teaser is a one-page document that presents the information relevant to buyers in an anonymous form
- After the teaser has been approved by the client, the M&A consultant contacts the A-candidates together with the teaser and sends the interested A-candidates a non-disclosure agreement (NDA). After signing the NDA, the interested A-candidates receive the Info Memo together with a so-called Procedure Letter. The procedure letter describes the further timing and content of the M&A process
- In the next step, interested buyers are given the opportunity to attend a telco or management presentation with the seller
- On this basis, interested buyers must submit a non-binding offer (called a Non-Binding Offer ("NBO" or Indicative Offer "IO")
- The further M&A process can be carried out in the form of a bidding procedure or with less "pressure". The decisive factor here is the number of interested parties who have submitted a reasonable indicative offer. The decision on the design of the further M&A process is made by the M&A consultant based on his many years of experience in consultation with the client
- The next steps in the sales process are then: letter of intent, due diligence (it is important to prepare all documents professionally using a due diligence checklist tailored to software companies), contract negotiation
The management team of KP Tech Corporate Finance have worked for several years in the management of software companies and IT consulting/IT services companies and have 20 to 30 years of experience in M&A consulting. You can find an excerpt of our M&A transactions in the area of software, IT consulting, IT services, etc. under "Transactions".
