In recent years we have seen more and more software businesses achieve what we see as ‘nirvana’ for an individual entrepreneur – bootstrapping or using a modicum of initial capital to scale a vertical or niche horizontal business to $4mm in annual recurring revenue.
The path to that state can be challenging, but the rewards are worthwhile. Life without minority investors is good! No 28-year-old investors who have never worked in a software business giving you advice, no disengaged Board members showing up at the quarterly meeting asking when you’re ready to raise more unnecessary capital (from them!), and nobody to tell you what to do or how to do it.
Getting to this point means that you’ve done a great job solving an important problem for your customers, your recurring revenue is growing, and you have a loyal and dedicated team that shares your vision and passion for the business.
With no or modest amounts of outside capital, you run the show, control your destiny, and have a valuable asset that you understand and can influence.
The picture painted above, though it sounds too good to be true, is very much the reality for thousands upon thousands of software businesses (the number keeps growing!). The question for many founders who find themselves in this scenario is – should I sell my business? While it might seem like a tough question to answer ‘yes’ to, the fact is that hundreds of such businesses do sell each year.
While there are a host of reasons for selling, the founders & businesses that we built Arcadea to serve tend to contemplate a recapitalization / sale when they find themselves in one or more of the following situations.
You want to financially de-risk
After 5, 10, or sometimes 20+ years, you want to reallocate some of the value you’ve built to ensure you, your family and/or the causes you care about will be well cared for no matter what happens. Simply put, you want to take chips off the table, and turn business value into cash. No doubt, this is the top reason in most sellers’ minds (amongst usually two or three others) when they decide the time is right.
De-risking brings with it other considerations, such as
- What relationship do you want to have with the business post-close? For some, this means a full retirement and sailing off into the sunset. For others, the fire still burns brightly and you can never imagine retiring. Or, perhaps, you are excited to lead more than just your business.
While most investors & buyers are rigid in how they partner with you post-close, Arcadea accommodates nearly every possible role for founders post-sale (check out our thoughts on that topic here).
- How much of the business do you want to keep? Are you ready to fully divest your business, wanting a clean break financially, emotionally, and socially? Or, do you see plenty of upside with your new partner and want to compound some of your wealth in the business you’ve built, but with less concentration? Where you fall on this spectrum is likely to correlate to some degree with your views on question 1 above. For example, if you want to continue on with the business in one of a number of potential roles, it’s more likely you want to retain some equity stake in the business.
Typically, the options in retained ownership are from ~45% to 0%, with buyers requiring a majority position. Most rigid volume buyers, such as strategics and high-volume aggregators (and their copycats), don’t offer much chance to maintain ownership and are primarily 100% acquirors. If they do, it’s typically in earn-outs, which can be suspect mechanisms with misaligned incentives when there is no co-equity ownership.
PE firms typically want to consolidate your business into a bigger platform that they are looking to flip and having equity ownership in all of the bolted-on pieces is complex and doesn’t serve their needs. This also leads to a preference towards 100% ownership acquisitions.
At Arcadea, we are happy to invest as partners in a business and welcome ongoing equity participation by founders no matter the situation.
It’s time to provide liquidity for legacy investors and/or employee shareholders
Not all great software businesses are fully bootstrapped (though we think most are!). Many take some friends & family capital, have early angel investors, or perhaps took venture capital several years ago but, despite building a wonderful, growing business, didn’t live up to the 100x requirements that make VC firms tick. Others have taken debt and are no longer served by it (to put things lightly).
You find yourself wanting to provide liquidity to those shareholders who for whatever reason are no longer a good fit for the business, and at the same time bring in a partner who can truly bring value to what you are doing – ideally one that thinks about the next 10+ years as a true partner vs. a strip-and-flip PE or another temporary renter in your business who is focused on short-term returns.
Sometimes, you may want to take some chips off the table as part of this transaction or provide long-serving employees the chance to do so, though it’s not the primary driver.
One of the main benefits of this motivation for a sale process is that it provides you with a new start. With Arcadea, you get this new start as well as a stable home with no perverse incentives or short-term ambitions for your team, customers, or legacy.
We can simplify the relationship with your ownership structure via “cleaning up the capitalization table” while providing tremendous value in strategy, tactics, team, and M&A in all areas of your business.
You want an investor-partner who can help you get to the next level.
While clearing out old shareholders, providing liquidity to some of your team, and de-risking personally may each or in unison be on the table, your primary motivation for selling a part of your business is to bring in a partner who can truly help your life’s work get to the next level.
During the journey from startup to today, you likely haven’t had the chance to measure your business against many other software companies. Perhaps you’ve been able to see what friend or peer has been able to do with their business, or you’ve read some generic report from a consulting company trying to sell you services. With a small “n” of data, it can be difficult to make the seemingly high-risk/high-reward decisions that can change the trajectory your business is on. As a software founder, you are data driven and know that without the right viewpoints, strategic missteps are likely and the ultra-competitive world we live in can be unforgiving to those mistakes. What you are looking for is someone to help bridge that gap to ensure your business thrives for years to come.
Naturally, the next question is: “who is the right partner for my business?” The answer to this all depends on what you want for your team, customers, legacy and personal financial outcome.
There are four main types of partners, each of whom have a different perspective on what that ‘next level’ looks like for your business:
- Venture Capital/Growth Equity: Next level here means putting the business into extreme growth mode to capture as much of the market as possible (burning tons of cash in the process) in a race to the next funding round and eventual sale to a strategic acquiror or IPO. There is considerable upside for founders if successful, but the downside for anything but perfect execution can be a zero either by way of bankruptcy or failure to clear a preferred equity hurdle (more on this in a future article). This path can make sense for businesses growing bookings year-over-year at 75-100%+, have a 10B+ ARR TAM that is growing 10%+ / year, and have a solution that can be sold to any or most businesses. Even with those characteristics, it is not for the faint of heart. You, your team and business will be pushed to the absolute max, and probably behind.
- Private Equity: Next level here means selling for a seemingly high price to a PE-backed strategic player in your industry. Founders can realize significant cash proceeds at sale, but don’t get to participate in any further upside. The business and the team gets consolidated into a larger company with a view to making the combined entity attractive to the next buyer, often by way of irrational synergies (i.e. headcount reductions) and aggressive pricing or product migration requirements for customers. This path can make sense for founders who are not concerned with the future of the business and are mainly focused on taking as much cash off the table as possible.
- Not selling & finding value-add advisors: Next level here means forming a board of benevolent and generous (with their time) advisors & directors to help close the knowledge and experience gap. This is a great option if you can’t or don’t want to sell your business quite yet. Typically you have to incent those folks with options or common equity and hope they can commit enough time and energy to provide you with the levelof support you need.. When this works, it’s a great outcome.
- Long-hold, permanent capital investors (like Arcadea): Next level here means selling some or all of your company to a partner that is focused on generating value over a 10+ year time horizon. Firms like us (there are very few of them) have permanent capital, no ambitions to raise future funds, have perfectly aligned incentives with founders, and never need to sell businesses to another investor to make the model work. We offer equity roll, full buyouts, structured earn-outs, and a host of post-close positions to the businesses and teams we partner with. Without needing to keep stock prices afloat, we don’t optimize for short-term margins at the expense of long-term market share gains. And because we aren’t worried about marking up our investments via never-ending capital transactions, we are also perfectly comfortable with businesses that aren’t growing like lightning nonetheless building value while earning profits and being capital efficient along the way. When racing to a valuation “mark-up” or exit, raising another fund, or immediately getting to peak margins are not on the table, the full potential of strategic options become available. At Arcadea, taking the business to the next level means manifesting the ultimate potential of the business over the long term – the way we believe business is meant to be conducted.
The decision to sell your business is incredibly personal, with a myriad of factors at play. Arcadea is uniquely structured to accommodate just about every situation imaginable. We look forward to finding the right solution for you and your business when the time comes.