Guide to Selling Your Company

Things you MUST know if you want to sell your company. Understand the differences between selling to private equity versus a strategic.

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With the IPO possibility even more out of reach for many companies today given the required metrics to be successful, many companies need to better understand their other exit alternatives so they can properly plan.

There are primarily two alternatives for most companies:

1. Sell your business

2. Shut down and give investors their money back

For today’s post I wanted to cover #1. Everything you NEED to know if you want to sell your company. There are a lot of things management doesn’t think about in the process, but it is critical to start on them early to maximize your potential.

While I have been through this process before, I asked an M&A pro to go through all the things companies should be thinking about.

I asked carrynointerest from Twitter (X) to guest write this post. He leads investing at a software focused private equity fund deploying $2B into B2B SaaS companies. Before he joined that fund, he acquired Keysearch, an SEO optimization software business with >12,000 paying customers.

His current fund specializes in acquiring software businesses having trouble with growth. If you have >$7mm in ARR and are thinking about exit paths, shoot him a DM on Twitter (carrynointerest). He is always super helpful and responsive.

Now on to his post on the things you need to know about selling you business 👇

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You Want to Sell Your Company?

I’ve been told a lot of you are in software (MY PEOPLE) so I am going to gear this writing a little bit more towards software…although some aspects mirror other industries.

There are four main topics I am going to cover:

1. Types of Acquirers: Who you might sell to and how they are different

2. Due Diligence: What will these acquirers want to see

3. Post Close Operational Difference: Life after the acquisition

4. Valuation Expectations: What can you sell your company for

If you are even considering selling your company in the future, then you need to be very familiar with these topics to help you navigate the process and make the best decisions for your company.

The Personas (type of acquirers):

Let’s start with the PERSONAS of the entities that might be trying to acquire you. 

There are really 3 personas that matter here:

1. PE funds that buy profitable software businesses

2. PE funds that buy high growth no profit software businesses (growth equity)

3. Strategics

Understanding the nuances of each will help you decide who you want to sell to. 

EBITDA PE:

These funds typically target profitable software businesses. Preferably, they want software businesses that exceed the Rule of 40. You have a decision to make…if you aren’t profitable but you’re growing a lot, you can sprint towards profitability to hit the Rule of 40.

From what I am seeing in the market, high growth software companies are NOT fetching high multiples relative to 2021. The biggest deals I’m seeing are Rule of 40 software businesses, so this might be a great option for getting the highest multiple.

Growth NO LONGER comes at all costs (at least to PE buyers). Quite a few PE funds have gotten burned overpaying for growth and ASSUMING they can make it profitable at some point. These are the most aggressive buyers I see in the market, paying anywhere from 10-25x EBITDA. If you DON’T exceed the Rule of 40, I would expect to see somewhere between 7-12x EBITDA. 

Growth PE:

These funds love growth. You might see them referred to as ‘growth equity’ funds. These deal structures can look like buying 40-60% of the business with the assumption that they will fuel growth for a while and then sprint it to profitability. I have genuinely seen multiples come down for this strategy. Expect for a buyer here to value your company on ARR between 6-12x, assuming you have really impressive growth numbers. 20% YoY growth is not impressive unfortunately…this number will need to be higher than 50%. Your cap table also can’t be stupid for these guys to make an offer, just a heads up. 

Strategics:

There is a reason why everyone says the following about selling a business:

Your NUMBER 1 GOAL should be to sell to a strategic.

Strategics genuinely don’t have the valuation…rigor… of their friends in PE. Strategics are going to underwrite all sorts of funny synergies into your deal. That’s how you see the deranged 20-30x ARR multiples. They might be acquiring you for the tech. They might be acquiring you for the team. They might be acquiring you for the cross sell opportunities. Who knows how they get their valuation number.

That being said, strategics are flat out not doing as many deals as they used to. I’m seeing more and more Rule of 40 software businesses selling to PE funds instead of strategics. Why? They just don’t have the money or board support they used to. In contrast, there’s a tremendous amount of dry powder in the private equity system that NEEDS to be put to work.

That being said, the goal is ALWAYS to sell to a strategic…assuming you’re okay with the culture, which we will get to in detail below. 

Due Diligence

So you’ve received some LOIs, and it is time for some due diligence. The data that each type of acquirer requires will be unique, but there should be a great deal over overlap. I will dig into those types in the next section. Excellent acquirers will want similar things…so I’m just going to lump them all together.

Remember, don’t give something to them unless they ask for it. You should start preparing these ahead of time if you plan on starting the process in a month or so. Also, if you don’t have these already, WHY DON’T YOU?! These will help you run your business! There are lots of other things involved with due diligence, but I’m going to give you my most important ones. 

1. Financials: Unaudited / Audited financials. This is a gimme. Obviously, you should have these prepped ahead of time, preferably by a reputable firm. Trial Balances, General Ledger, and bank statements should probably be included to tie everything out. 

2. Customers/Churn/Retention: No matter the investor, if they have any level of sophistication this is likely where they will spend a LOT of time. Ideally, you should have your MRR/ARR data tagged and ready to go. Acquirers will want to see a few things:

   1. Churn over time across cohorts. This could be churn by customer type, customer industry, customer size, etc.

   2. Net retention over time across cohorts. Same thing. You want to be able to view / quantify net retention across customer types, sizes, and everything in between. 

   3. ACV / LTV across customer types. What’s the lifetime value of a customer? What’s the ACV? 

   4. Profitability by customer type: which customers are most profitable after accounting for things like sales ops, support, etc? 

   5. CAC: Notice how I saved this one for last. That’s because IT GETS ITS OWN CATEGORY FOR ME!

3. The Funnel: This is where I see SaaS businesses lacking the most…even larger ones. Break down your funnel for me across: Inbound, (SEO, etc), Warm Inbound, Outbound, and PPC. What’s the CAC across each channel? Do you have attribution in place? Can you tell me what % of people come into the funnel from each source? ‘IS THERE ROOM FOR ME TO SPEND MORE ON PPC AND GROW’ is the big question many are thinking in the back of their heads. 

4. Sales Efficiency: If you have an enterprise sales team…or even a sales team in general…they’re gonna have questions. How many touch points is it taking for each deal to move through phases? What’s the sales cycle length? Can we stratify by customer type / industry? What is the quota attainment for your sales team? Excellent acquirers are trying to determine the UNIT ECONOMICS of your sales team. If I put in $10 of sales salaries, how many dollars will I get out in revenue and EBITDA? If you don’t have ANY of these metrics, might as well compile them because they will help you run the business AND sell the company. 

5. Product Usage: If they are good, and this is a big if, they will dive into the actual utility of your software product. Ideally, you will have some sort of usage tracking system. Which features of your product can’t users live without? Which feature gets the most love both anecdotally and metric wise? Which features were flops, and why? 

6. Market Size / Opportunity: They will ask you about this. Who owns the market share? Is there a green field opportunity? If so, how much? If they are good, they will not trust you. They should be retaining some outside advisors to help them map the market. Have some good answers ready though, hopefully with evidence.

7. Pricing: If they start asking about pricing and customer contract language, you should be able to predict where their head is at. If a PE fund is looking at it, they are thinking about raising prices. Chances are you built your pricing stuff out eons ago and have been terrified to touch it. That’s okay! That being said, be prepared to answer questions and provide any data on which customers are on discounts, and which customers you can raise prices on. 

8. There will be lots of questions about general corporate stuff, legal nonsense, and contract language. I’m not covering these here but you can do some googling of your own. 

Post Close Operational Difference

Depending on who you sell to, your life over the next few years can be VERY different. Let’s dive into the differences between private equity and strategics:

Private Equity Ops:

So you’ve accepted an LOI from a private equity fund. What are some operational changes you should expect? 

1. Financial Reporting: if the fund isn’t lousy, the first thing they will want is pretty intense financial reporting/metrics. They can’t improve what they can’t monitor. They will want stats on everything related to a variety of things: financials, sales funnels, ops, etc. They’ll want it all (again, if they don’t suck).

2. Intense Goals: Private equity funds frequently don’t derive their IRR on cash flow alone. A good chunk of their returns will be when they sell you AGAIN. They will want you to have intense aggressive goals on both sales and profitability. You might be expected to grow profitability without a ton of extra capital. Get ready for a ‘do more with less’ attitude. 

3. New Hires: One of the supposed ‘value adds’ of many PE funds is their industry network. Expect your new PE overlords to want to bring new people that you don’t know and don’t trust. Are they loyal to you? Are they loyal to the fund? Welcome to a fun game of ‘is this person on my side’. This can actually be really high value if they bring in a few killer salespeople that are well connected. 

4. Add Ons: Most PE funds will also start building a pipeline of potential add ons. If you are big enough, they will want to come up with an inorganic growth strategy as well. Expect CEO/CFO to spend a chunk of time meeting with potential targets and trying to grow via acquisition. 

5. PE Synergies: this usually means firing people. Just a heads up. If you’re bloated ANYWHERE, the PE fund will find it. 

6. You’re in control, but also not in control: Before, you could do whatever you wanted to with your business (to an extent). You will have a new voice in the room around any big product bets or sales efforts. 

Strategic Ops:

So you picked the LOI from the strategic? There’s a big difference culturally here. 

1. Culture: You are going from ‘I run things how I want’ to possibly being a VP in a much larger org. This is a HUGE culture shift for most CEOs. You are no longer setting the culture, you’re a part of someone ELSE’S culture. All of their flaws and broken org charts are now your flaws and broken org charts. You will notice differences in culture IMMEDIATELY. 

2. Synergy Time: It is officially synergy-o-clock. You will be asked to find synergies. This might mean integrating your software with one of their products. This might mean firing your devops team because THEY already HAVE a dev ops team. This might mean working with the VP of sales to figure out how to cross your product with the strategics product. It is VERY unlikely you will just be left alone to operate in a silo. The strategic CEO (now more than ever) will have to find a way for this acquisition to be ‘ACCRETIVE’! Get ready. Does this sound like it will suck? It probably will! 

3. Loss of Autonomy: It goes without saying, but you’re no longer the driver. Even if the PE fund technically owns you, they at least let you stay in the driver’s seat while they yell from the back row. Not so in a strategic acquisition. You are just a piece in another machine…and you will feel it. What made entrepreneurship so fun before is no longer the thing. 

Let’s Talk Valuations

I’d feel remiss if I didn’t touch on what software businesses are trading at…and unfortunately it isn’t the best news. First, a short history lesson. Please peruse the graph below. 

As you can see, the world went CRAZY on software M&A in 2021 and 2022. A real deal bonanza. This drove the price of software businesses up pretty far as both strategics and private equity funds went wild on acquisitions. In a real ‘chicken or the egg’ situation, public Enterprise Software multiples followed (or precluded). Public software comps dragged the price of private software assets much higher.

Unfortunately, what goes up must come down (evidently). Valuations / Stock prices for public software companies cratered in the years after. As interest rates went up, everyone went ‘risk off’. 

In 2023, an M&A correction began for software businesses. Public companies, no longer bolstered by their…aggressive…valuations, stepped away from the M&A buffet. Private Equity funds saw this and realized their exit liquidity might be evaporating. On top of that, Lina Khan, the head of the FTC, made it clear that she wanted no more tech monopolies. 

You know what that means… With less demand for software companies comes a lower price. If you thought your $10mm ARR software business growing 20% at break even was worth 8-12x ARR… I would NOT get your hopes up.

In my deal flow, we are seeing the median quality software business (not exceeding Rule of 20) trading for anywhere from 1-5x ARR. If you are a software business that exceeds the Rule of 40, you should be fine. That being said, most software businesses do not exceed the Rule of 40. 

To venture-backed software companies struggling to meet growth targets: consider stepping back, winding down, or selling your business. Just because you raised $50 million and reached $7 million in revenue without further growth doesn’t mean you need to spend the next five years trying to turn things around. The VCs who invested in you aren’t in it for charity, and you don’t owe them ANYTHING. To them, this is simply an investment that didn’t pan out—a statistic in the broader portfolio. Don’t risk your career trying to keep them satisfied. If you aren’t experiencing break neck growth and excellent sales unit economics, please make the hard decision.

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OnlyCFO Thoughts

Appreciate my anonymous friend, carrynointerest, sharing his wisdom on this topic.

If you learn nothing else…I want you to remember that you must start all of this EARLY. If you wait too long then the acquirer has significantly more leverage in negotiations (if they are still interested at all).

Also, be honest with the type of acquirer that might be interested in you based on your metrics and at what valuation — this often requires hard conversations internally and with your board. You need to plan all of this way of ahead of actually being acquired so you can be ready.

The acquisition process can suck up A LOT of time so make sure you are ready and it is something you *really* want to do.

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