Selling Your Software Company - Market Timing is Critical

When a large software company makes an acquisition in a particular niche, several other comparable acquisitions soon follow. This post discusses this market dynamic and the importance for owners of similar software companies to reevaluate their exit plans.

Our firm was engaged as a merger and acquisition advisor in 2007 to sell a Content / Document Management Software Firm. We put together a database of likely buyers in that software category and began our contact process. Fast Forward to early 2010. We have been engaged by a second Content / Document Management Firm to sell their software company. From our earlier engagement, we dusted off our database of mid-market software companies in that space and began making our phone calls.

A very interesting thing happened. 40% of these middle market software companies had been acquired by one of the large software companies. We would call one document management software company expecting the receptionist to answer by the company name in our database. Instead, we got, "Thank you for calling OpenText." Next call, instead of the expected company name, we got an EMC Company. Another call and this time, "thank you for calling Oracle." Two calls later, we reach an IBM Company.

Wow. Between mid 2007 and early 2010, there was a buying spree by the enterprise software vendors shoring up their product offering to become a much more comprehensive offering, now called ECM or enterprise content management. It was almost like a heavyweight fight - IBM punches, EMC counters, and Oracle lands a blow while OpenText dodges a punch.

For the midsized software companies in this space, these were exciting times. This rapid consolidation and active buying caused the transaction values to increase rapidly. Once the enterprise companies have added what they needed, however, the buying stops, the market returns to normal and sellers no longer command a premium price.

Now the bad news. If you were a mid-sized competitor of the acquired companies, you are now competing with very large, powerful competitors. They will dwarf your company in terms of sales force size, marketing resources, brand awareness and pricing power. Their product now becomes the safe choice in a head-to -head competition with yours.

To now compete effectively will require even more skill. Your firm can continue to provide outstanding service and responsiveness. You can provide the small company customer attention that many customers require. You can be nimble and innovate with new products and features as another way to successfully compete.

You often hear the stock market pundits say, “the trend is your friend" or "don't fight the trend." There is a certain wisdom to this sentiment. If you are in a software category that suddenly has become the target for the big software vendors, you may do best to exit according to the market conditions rather than your original retirement schedule.

Actually, the buying company will most likely want you to stay on board for a period of time to transfer customer relationships and intellectual property. So you can take your chips off the table today at an opportune time for rich valuation multiples and then retire a few years later.

If you are younger, you can secure your family's financial future, work for the new company for a few years, gain valuable experience and then exit. Now you are ready to launch your next great idea. This time it will be far easier. You will have a large base of resources and influential contacts. Also the venture capital guys might even give you money under reasonable terms. Home Run, touch em all!

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Elements of a Successful Sell-Side Engagement

Our Latest Presentation -  Welcome to our brief presentation on the MidMarket Capital Selling Process – Elements of a Successful Sell-Side Engagement. We believe there are several desired results from a successful process including completing the sale in the shortest amount of time, minimizing the demands on the company executive team, maximizing the price and terms for the owners, and finding the right buyers that will serve both current employees and acquired customers while preserving the legacy of quality the owners have built.

http://www.slideshare.net/davekauppi/selling-your-business-the-successful-sell-side-engagement-process


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Survey Results - Information Technology Merger & Acquisition Trends from MidMarket Capital

We surveyed CEO’s and Directors of Mergers and Acquisitions over a broad cross section of software, Healthcare IT, IT services, and Information Technology. We were pleasantly surprised by the robust growth projections and level of optimism from these Information Technology Executives. Below are the results from this brief survey:

After a very difficult 2009, the executives surveyed were surprisingly upbeat, with 32% of respondents believing that their business will grow by more than 20% over last year. 57.7% of those surveyed are either actively seeking acquisitions or would make an acquisition if the right opportunity were available. With customer acquisition one of the greatest challenges for IT companies, not surprisingly, the most important acquisition criteria was to acquire customers at 26% of respondents. 19% would use an acquisition to enter a new market.

The top three growth categories, according to the respondents were projected to be Mobility/Smart Phone Apps, Healthcare/Electronic Medical Records, and SaaS/Web Based Apps. The hottest areas in terms of potential acquisitions were SaaS/Web Based Apps, at 22% and Healthcare/Electronic Medical Records at 20% of respondents. It sure looks like these IT executives are confident that their sector will be one of the engines to drive this economy into recovery.

To view the complete survey results visit
http://www.midmarkcap.com/Documents/survey/RESULTS_GRAPHS.pdf


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

Selling Your Company – Finding the Right Buyers

We are in the middle of a merger and acquisition engagement representing a Human Resources Consulting Company. We had contacted several industry players and had gotten some good initial interest. Several buyers dropped out because their entire management team was comprised of family members. We asked our client to take their company off the market and to bring in at least one non family executive that had the authority and the ability to run the company. They successfully implemented this change and asked us to take them back out to market.

Because their business is counter cyclical and actually grew during the economic downturn they posted some pretty impressive growth and profit numbers. It was difficult to determine how much of the improvement was due to the addition of the new senior manager.

As we re-launched our marketing efforts, we identified several interested buyers. One buyer was particularly interested and after signing the confidentiality agreement and reviewing the memorandum, contacted us almost daily with additional detailed information requests. Before long he started to grill us about selling price expectations. As we usually do, we deflected his requests and asked him to put together his letter of intent based on the value of the business to his company.

He started giving us a lecture about valuing services companies whose assets (meaning people) walked out the door every evening. He pointed out that their revenues were based on new sales each year and not “contractually recurring revenue”. We had our client put together for us a chart that showed the “historically recurring revenue” generated from their top 20 clients over the past five years. This was our way to demonstrate some consistency and predictability of revenues.

As we conversed further, my radar started buzzing loudly. This guy was getting ready to provide a low ball offer and was trying to sell me on all the reasons why I should go back to our client and pitch his offer. I politely listened to his well practiced approach for a little while longer. Then he came up with the statement that I just could not let go. He said that last year’s revenues were an unusual upward spike and “I am just going to use 2008’s revenues as my basis for my offer. Well, I just could not let that one go. I asked him how he would have made an offer if last year was unusually bad, but the prior five years were strong. He would not respond, but of course, the answer was that he would have made his offer based on the new trend.

There are thousands of business buyers out there that are just like this guy. There is a famous residential real estate investor that has written a book and gives classes to help individuals become real estate moguls. I could sum up his book and his class in one sentence. Find 100 people with their homes for sale. Approach them aggressively and make a low ball offer and one of them will take it.

When I reviewed where our buyer had originated, I traced it back to a posting we had made on our business broker’s association Web Site. As I think about it, these Business-for-Sale Web Sites actually give these buyers a powerful tool to actively and aggressively contact their 100 potential sellers. As I thought about this, sure enough, I have seen this behavior repeated multiple times and the source was always a Business-for-Sale Web Site.

So we are always preaching to our prospective clients to get multiple buyers involved in the process. If they post their business on one of the Business-for-Sale Web Sites, they may get multiple buyers interested, but they are those buyers that are contacting 100 sellers very efficiently through the power of the Internet in order to make their low ball offers.

But I digress. Let’s get back to our client. The good news is that we had 6 other industry buyers that we had contacted and they were looking for acquisitions that were based on acquiring new customers or adding another product offering, or leveraging their sales force or install base. In other words, their buyer motivation was not to buy a company with a low-ball offer.

The only way we can encourage buyers to make fair offers is to conduct an outbound marketing campaign to industry buyers that have strategic reasons for making acquisitions. If we can get several involved, then the buyer that comes in and says that he is going to base his offer on 2008 performance, is easily eliminated from consideration. If a business seller is only going to attract these inbound, bargain seeker buyers from Web Sites, he/she will only be getting low ball offers and wasting a lot of time.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist