When it comes to buying a software company, there are a lot of things to keep in mind.
Instead of starting a software business from scratch, many entrepreneurs choose to buy an existing software business. This can be a great way to become a business owner. But, there are a few things you should know before buying an existing software business.
Guide for Buying a Software Business
Here is a step-by-step guide on how to buy an existing software business:
1. Understand the Market and Niche
The first step to buying an existing software business is to do your research. You should start by gaining a solid understanding of the software industry, and the niche of the specific business(es) in which you are interested.
2. Find a Business to Purchase
Once you understand the market and niche, you can start looking for businesses to purchase. There are two key sources to find software businesses to purchase:
- Business brokers: Find a local or national business broker. They can easily find companies that are looking for buyers. They can also approach businesses you might be interested in that aren’t currently for sale.
- Online business marketplaces such as BizBuySell.com: Many companies that want to sell are listed (by the business owner or their business broker) in online business marketplaces.
3. Evaluate the Business
After you have found a software business to purchase, it is essential to thoroughly evaluate the company. This includes looking at the financials, the products or services offered, the customer base, and anything else that could impact your decision to buy the business.
Also, be sure to ask why the business is being sold. For example, is it because the owner is retiring (good), or is it because the business is failing (generally bad, but could be an opportunity to acquire at a low cost and do a turnaround).
As part of your evaluation, you should perform a valuation of the business. If a business is listed for sale, it will generally already have a published price, or the owner will have a price in mind. You need to make sure that the price is fair. There are a few different ways to value a business. The most common method is to use a multiple of the software business’ annual earnings or sales.
For example, suppose the current multiple (you can figure this out by looking at the prices of other software businesses) is 1.5 times revenues. In that case, if the business generates $500,000 a year in sales, the valuation should be around $750.000.
If the business is being sold at a higher price than the valuation you determine, you can try to negotiate a lower price with the seller.
4. Get Professional Help
As you buy a software business, getting professional help from an experienced business broker, lawyer, or CPA is essential. They can all help you with due diligence, negotiation, and other aspects of the purchase process.
A business broker can help you find businesses for sale and help you negotiate the purchase price. A lawyer can help with the legal aspects of the purchase, such as drafting and reviewing the purchase agreement. Finally, a CPA can help with financial due diligence and tax implications of buying a business.
5. Draft an Offer Letter, also known as a Letter of Intent (LOI)
After you have found a software business in which you are interested, the next step is to make an offer. The offer should be in the form of a letter and it should include the following:
- Your name and contact information
- The name and contact information of the business you are interested in buying
- The purchase price you are offering
- A brief description of the terms of the deal (such as how the payment will be made)
6. Perform Due Diligence
Due diligence is the process of investigating a potential business purchase. This includes reviewing financial statements, examining legal documents, and speaking with current and former employees. The goal of due diligence is to identify any potential risks or problems with the software business before you buy it. If you do find any red flags, you can use them to negotiate a lower purchase price or get some concessions from the seller.
The process of due diligence can be time-consuming, but it is important to do it thoroughly. You should review the following items during due diligence:
- Financial statements: Review the company’s financial statements to get a sense of its overall financial health.
- Legal documents: Examine any legal documents related to the business, such as contracts and leases.
- Current and former employees: Speak with current and former employees to get a better understanding of the software business.
7. Negotiate the Terms of the Deal
Once you have completed due diligence, it is time to negotiate the terms of the deal. This includes the purchase price, the payment schedule, and any other terms that need to be ironed out.
You should have a lawyer or business broker help you with the negotiation process. They will be able to advise you on what is fair and what is not.
If the current owner is not willing to negotiate, you may need to walk away from the deal.
8. Obtain Financing for the Purchase
If you’re going to buy a software business, you’ll need to obtain financing. There are a few different ways to finance a software business purchase:
- Use your own savings: This is the simplest way to finance a business purchase, but it may not be an option if you don’t have enough saved up.
- Get a loan from a bank: You can get a loan from a bank or other financial institution to finance the purchase. The advantage of this is that you won’t have to give up any equity in the business. The downside is that you will have to make monthly loan payments, which could be tough if the business isn’t doing well.
- Find an investor: Another option is to find an investor who is willing to finance the purchase in exchange for a percentage of the business. This can be a good option if you don’t have the cash to buy the business outright, but it does come with some downside. The main downsides are that the investor will take a percentage of the proceeds if/when you eventually sell the business, and the investor’s strategic thoughts may differ from yours, which could cause problems.
9. Close the Deal
After you have negotiated the terms of the deal, it is time to close the deal. This involves signing the contract, transferring business ownership, paying the purchase price, and taking over any leases or contracts.
You will need a lawyer or business broker to help you with this process. They will be able to ensure that all the paperwork is in order and that the transfer of ownership is done correctly.
Congratulations! You have now bought a software business.
10. Write a Business Plan and Get Started Running Your Business
After you’ve closed the deal and taken ownership of the business, it’s time to start running it! This includes everything from hiring employees to marketing the business.
You should also start working on writing a software business plan detailing how you plan to grow the company you’ve acquired. The plan will help you map out your goals for the business and how you plan on achieving them.
By following these steps, you can ensure that you are buying a software business that is right for you and that you are prepared for what comes next. Being a business owner can be a great experience, but it is important to do your homework before taking on this responsibility.