5 exit strategies for your software business
by Rachel Jackson
The web is full of advice about building a successful software business, but there’s much about how to leave it behind.
When crafting your business plan, you should also think about your exit strategy. There are many reasons why you may want to exit your business. You might find a better opportunity somewhere else or want to start a brand-new business. Once the time comes when you want to leave your business, you need to have a strategy in place that gives you maximum advantage.
Here are 5 strategies business owners can use to exit from their software companies.
Pass Your Business On
One of the most common transitions for family businesses is to pass ownership to the next generation simply. In reality, it’s not so simple.
Giving your business to a family member is advantageous because it provides continuity. You will be sure that no outsiders are involved in your business and that your company will be continued by someone you trust. By passing on your business to your children, you will be providing for their future if running a family business is an exciting prospect for them.
Other serious advantages are the fact that you don’t need to search for external buyers, negotiate the sale, and endure as long and time-consuming due diligence process. Passing on a business is a smooth transition with minimal impact on the life of your business.
However, not all transitions to the next generation go smoothly. Sometimes your kids might have a completely different business idea or conflict with the sibling who has the most control. Some families are torn apart by disputes over business direction.
Also, you should consider tax implications of the transfer. If you transfer the ownership of the company for no payment or less than its market value, the tax authorities will see it as a gift and charge a gift tax.
Merger and Acquisition or Sell
Another exit option is merger and acquisition. In practice, it means that you will be merging your business with a similar company or that a larger company will buy your business.
It’s a win-win situation when two companies that have complementary skills merge. They can use that union to save resources by combining their expertise. Larger companies can grow their revenue much more efficiently by merging with existing products rather than creating them out of scratch.
Moreover, you can simply try to find a buyer for your sotware business and sell it. Selling your software business to someone is also a good soultion.
Initial Public Offering (IPO)
The initial public offering used to be a method preferred by most business owners and often considered as an easy and quick path to becoming wealthy. However, since the Internet bubble burst in 2000, the IPO rate declined each year until 2010, and today it hovers at around 15%.
If you own a software startup, the initial public offering is not a good approach. Shareholders tend to be demanding, and the liability concerns are high. Just look around to find a better place to sell your business.
Some business owners who don’t have family members to pass their business on consider alternatives such as existing managers or group of employees. These people can pool their funds together to buy the business from you.
The main advantage of that approach is that it also ensures the continuity of the business. Your business will be in the hands of people who know how it’s run and have all the skills to continue growing it with success. Sure, they might pursue a different strategy, but it’s going to be a smooth transition.
However, if your employees want to buy you out, they need to get the money first. And that can be a problem, especially if your business is high-value. Sometimes managers and employees will group and take out a large loan to fund the purchase, but that can be difficult to arrange.
Another solution is that they pay you gradually over time out of the company’s profits, but that could be a disadvantage for you as a seller because there will be a delay in receiving the money and there is also a risk that the company may struggle and won’t be able to pay the full amount.
Another option for making your exit is liquidation. That basically means that you close your business and sell all its assets. In general, considering all the work you put into your business, that’s probably not the exit strategy you prefer.
In general, that strategy is usually the last resort when the business is fading, and other exit options are simply not available. The advantage of liquidation is that it’s a simple solution. You don’t need to plan the transition or negotiate with buyers. All you need to do is list your assets and sell them off to customers, competitors, suppliers, or in an auction.
Everything that is left from the proceeds of the sale belongs to you, reduced by the liabilities to your creditors and other shareholders in the business.
The main disadvantage of liquidation is that you can be sure that you won’t get the full value of your company. Most of the time, you will be selling mainly its physical assets and your business value is based on many immaterial assets starting from your client base to employee skills. And these things are sometimes complicated to liquidate. Plus, even the physical assets won’t be sold at their full value.
If you’re planning to exit your business, consider these 5 strategies for ensuring that you get maximum value out of your software company, all the while ensuring a smooth transition and – if you’re lucky – continuity.
About the Author
Rachel Jackson is a mother of 2 beautiful boys. She loves to hike and write about traveling, education, and business. She is a Senior Content Manager at NYBizDb – an online resource for relevant business information.