This is second in a series of posts about my experiences selling ClientSpot, a software as a service project management solution I created in 2008, and sold in late 2014. Read Part 1 to get the background on why I decided to sell.
Preparing to Sell
Now that I had decided to sell, my brokers from FE International put me to work.
The process was straightforward, but fairly tedious. I thought I had been pretty organized in the business, and had all the numbers ready to go, but I didn’t expect the level of detail that they asked for.
In the first round of paperwork, I filled out financials and a large questionaire covering: - Financials: earnings and costs by category for the last 2 years, with month-by-month detailed breakdowns - Why are you selling? - What is unique / defensible about the business (something to keep competitors at bay)? - Who are the major competitors? - What is the typical customer profile? - Breakdown of customers by what plan they were on - Customer lifetime value - Churn rate, growth rate - Is the product using modern technology? Would it be easy to find programmers to support it? - Time spent on support, new feature development - Marketing strategy / plan - What worked, didn’t work, could work in the future? - Known technical issues - and 40 other questions about the business, the market, the product, and the customers
I buckled down over a weekend and filled it all out, digging for numbers, running database queries, analyzing logs and just plain thinking hard to get all of the answers.
I sent off the packet, exhausted, but satisfied I had taken the important first step.
The broker had some followup questions, which meant another round of pulling numbers from wherever I could, cross checking merchant account records with payment processor records, and doing some spreadsheet jockeying to provide the answers.
Finally, after a few more followup questions, the broker put together a package for prospective buyers with all of the numbers and detailed answers to any conceivable question. They also included their own sales pitch of the opportunity. They planned to run it by some selected buyers, before opening it up to their entire network.
An Initial Offer
About a week later, the broker had lined up the first potential buyers.
We set up a conference call, and I had my first taste of what interacting with buyers would be like.
The first prospective buyers were a husband and wife who had been looking for a subscription software business, and had some background in project management. We had a good chat, and I tried to answer all of their questions honestly and thoroughly.
A good part of the conversation was around “why are you selling?” As if my wanting to sell was an indication of a problem with the business. I answered much the way I wrote about in Part 1: I was tired, busy, and overwhlemed with a new venture, but still wanted someone to take care of my customers and keep the product healthy and growing over time.
I wasn’t sure what to make of the first buyers - they sounded interested, but skeptical.
But less than a day later, my broker was back with an offer from them. I was excited to get an offer, but disappointed to learn that it was about 40% lower than the listing price. I didn’t expect to get the full listing price value, since the broker had listed it somewhat higher than the expected valuation, but this was still a pretty lowball offer.
The broker assured me that we would probably get more offers, and that we should certainly counter offer. I decided to counter with a number that was still quite a bit higher than where I wanted to end up while we waited for more buyers.
More Buyer Interest
A few days later there were more signs of buyer interest. My broker asked me to pull more numbers for a buyer from further back (4 years of history versus the 2 I had provided already).
Meanwhile the couple that had makde the initial offer weren’t interested in further negotations, which confirmed my impression that they were bargain hunting, not trying to offer fair value.
About this time I started to get nervious for the first time. What if all the buyers just wanted to offer low prices? Would I be able to sell the business for the value I thought is was worth? Or would I have to settle for a lackluster offer?
Shortly after, the broker schdeuled meeting with two more potential buyers.
One buyer was a pure investor who owned a portfolio of web properties, and was mainly interested in cashflow - the equivalent of being a landlord. He asked mainly about how long he could avoid making updates, and made it clear he was not interested in making improvements for customers, but just milking the revenue stream as long as he could. His offer had an unusual clause - a portion of the sale price (about 20%) would be paid out 12 months later, if I guaranteed a minimum level of revenue over that one year period. For a business I would no longer own or have involvement with, that didn’t seem to make much sense.
The second potential buyer was a corporate group who were looking to add a project management application to their portfolio of software. They were interested in talking to quite a few of my existing customers, which made me uncomfortable, since I wasn’t planning to annouce a sale until it was a certainty. I was concerned that having potential buyers talk to my customers might scare them needlessly. I was able to put off this buyer by suggesting that once they made an offer, we could discuss that. They never did make an actual offer.
I was really beginning to wonder if I could pull the trigger on a sale to the buyers I had seen so far. I was getting a queasy feeling from the buyer who was a pure investor, and didn’t think I could stomach that sale because he had no intention of improving the software or supporting the customers to the level I wanted.
Luckily things shifted in a better direction. The broker scheduled a conference call with a potential buyer who had never owned an online business. He was eager to learn, thoughtful, and asked great questions. He had a finance background, not a technical background, so he had someone helping him evaluate the technical details of the product.
After the call, he presented the strongest offer we had seen so far. It was actually 3 alternative offers - one all cash, one cash with a 10% profit-sharing “earnout” for me, and one that had me helping out over a 6-month transition period, with a “holdback” (a percentage of the sales price of about 20%) due at the end of the transition.
This buyer had what I had hoped to find - ambition to improve the product and service the customers properly. I could feel good about this sale, especially with the idea that I could spend a couple of hours a week helping him through the transition, so I could be sure that customers got support, and that nothing blew up.
In the next post I’ll cover the sale itself, and the aftermath of the whole process.