By Linda Rose, founder, RoseASP, recently sold to ESW Capital (IT ExchangeNet facilitated transaction)
Part II - Valuations
Welcome to my second in-depth post about selling your Microsoft Business! Hopefully you read my last two posts on why now and the timing of the deal. If not, here is a link to my first post and here is a link to my second post.
Before I get into the actual valuation discussion, a couple of initial comments:
First, buyers want to purchase a growing and scalable business, so even though you are focused on a sale, you need to keep your foot on the gas pedal. Meaning, run the business as if you aren't planning on selling. Per my last post, this process could take close to a year, and the last thing you want to see is revenue and profits drifting downward. In fact, you will be rewarded if the buyer sees revenue and EBITDA trending up and to the right.
Secondly, selling is probably one of the most challenging and emotional things you will do - after all - it's likely been your baby for years, and there is a lot of emotion that goes into creating, building, and nurturing your business. The process is going to require stamina, fortitude, resilience, and a level head. Take care of yourself physically because this process will drain you mentally, and what the professionals call "deal fatigue" is very real.
Buyers buy for a variety of reasons. I was personally surprised to discover the array of buyers that had an interest in our company. Below is a summation of what we saw buyers seeking:
- Round Out Offerings: Acquiring a complementary business to expand existing offerings;
- Customers/Focused Verticals: Accessing a new customer base or an industry vertical that they want to enter into, but don't have that expertise;
- Geographic Expansion: You both are similar, but you represent an area of the country where they want a footprint; and
- Human Capital: Adding resources that are hard to find.
Many times, the above reasons are more important than your revenue or EBITDA (more on EBITDA in a future post) and buyers are more interested in a business based on its future potential rather than past performance. Also, there is a clear vision where 1+1 = a lot more than 2.
After selling two Microsoft Dynamics companies, I will tell you with certainty that Dynamics partners fall into four major categories. Valuations in each category vary considerably:
Traditional VAR - Sells software (perpetual or subscription). 90%+ of revenue is non-recurring. (Annual software enhancements don't count as recurring revenue.)
VAR+Cloud or Managed Services Provider - You have 50%+ of recurring revenue, but it's not your own IP, meaning you resell someone else's cloud (0365/D365/Intacct/NetSuite/Acumatica/SFDC, etc) and provide implementation services around it.
Hosted or SaaS Cloud Provider - 85%+ recurring revenue with some IP around the process of deploying, but it's not your software that you are hosting, it's someone else's in a cloud (either public or private) that you maintain.
SaaS Provider (Own IP) - 90%+ recurring revenue and it is IP that you own. This category includes ISV's that have apps or vendors with their own solutions that work in tandem with an ERP/CRM system. Gross profits here will vary depending on if the cloud solution is bundled into your product or the customer has to procure their own, or in the case of D365, it is an app that sits on Azure.
Below is a quick summary of my personal findings. I also collaborated with Dana Willmer from cloudspeed.co, who recently conducted an analysis of valuations in the channel. Here is a quick chart to help you determine what your company might be worth. This assumes your revenues are under $25M. Valuations are considerably higher for companies greater than $25M.
If you are interested in learning more, have been contemplating a sale, or just want to understand the process, join me on June 28th (re-scheduled from June 21st) for a webinar where I will join Tim Mueller of IT ExchangeNet for a more in-depth conversation on the process.
Registration links TBA
And of course, confidentiality by all participants will be maintained!