6 Things to Stop Doing When You Want to Sell Your Software Business

Thinking of selling? Even if you aren’t 100% sure, these are the six things I’d start (or, actually “stop”) doing if you are even remotely considering a sale in the next year.

All of them make your business better even if you decide not to sell.

Personal Expenses

The first thing you need to stop doing is running your personal expenses through the business.

I understand that almost all business people run certain types of personal expenses through their business for tax reasons. There’s absolutely nothing wrong with that and all business acquirers understand these expenses and the reasoning behind them.

However, that doesn’t mean it doesn’t muck up some of the sale process when you leave them in there.

For the year before you’re going to try and sell your business, you want your books to be as clean as possible.

One of the best ways to do that is to start moving those personal expenses out into either a different business or into your regular personal accounts where they’re supposed to be.

If you can’t move something out – like health insurance – make sure it’s well documented so that it is easy to add-back the expense into the calculation for the sales valuation for your business.

As a buyer, we really do not want personal expenses to be muddled in together with any business expenses because it makes the due diligence process harder both on you and on the future buyer team.

I know it’s annoying to do for that last year, but it’ll reward you when the business goes for sale. Trust me.

Annual / Lifetime Plans

The second thing you want to stop doing is selling annual plans.

And absolutely do not sell any lifetime plans…ever.

Think about it…Annual plans provide the seller all of the benefit and the buyer gets all the liability.

Therefore, the buyer is not going to reward you for annual plans and will likely discount those sales from the Income valuation of your business.

For example, if you sell an annual plan in the month of December and someone buys your the business in the month of February, that means you got 100% of the reward and the buyer gets 10 months of liability for that customer where they receive no compensation.

The buyer is going to take that 10 months of income off of your market valuation.

Additionally, if you’re selling multiple annual plans, it’s much more difficult to determine the churn rate for customers that have to make a decision once a year versus people that have to make a decision every month.

Think of how reliable it is to look at monthly revenue and know whether a customer is going to come back the next month…

Have they been signed up for the last 26 months without a break in payment? If yes, then they are going to probably be there for month 27 and you can say with a level of certainty that the customer MRR revenue will continue.

If you have an annual plan that paid one time, eight months ago, what certainty do you have that the buyer is going to sign up again in a few months?

That annual churn number is almost always higher and a buyer is going to discount your business net income based on the number of annual plans you have.

The goal is to get as many of your customers on monthly plans with no discount. Plus, there’s another advantage – you do not have to provide a 10 or 20% discount like many companies do for annual plans.

I realize all of this is counterintuitive to what everyone tells you to do online and in entrepreneurial forums. But if you’re going to sell your business in a year, stop selling annual plans and never ever sell lifetime subscriptions.

I’m begging you…please don’t ever sell lifetime plans, ever.

Bookkeeping

The third thing you need to stop doing is not doing your bookkeeping.

Buyers need really, really want good clean financials.

One of the hardest parts of due diligence to get through multiple years of financial expenses and revenue calculations. It sucks for both parties.

Good financials is one of the things that small software companies (and individual entrepreneurs) usually don’t do very well. Sometimes the accounting isn’t done at all and all we get is a pile of tax returns.

If you can get professional bookkeeping and get your accounting into Quicken or Xero and show how money comes into your business, how it’s expensed, and why the business is profitable, it will put you way ahead of most other sellers.

If you have personal expenses in there, it makes it much easier to pull that out and add it back.

I recognize that getting professional accounting and bookkeeping is an annoying and costly expense. But hire that bookkeeper for one year, get your accounting straight, then when you sell the business, that’s not going to cost you any value because buyers will add that expense back into your valuation.

You should assume that every buyer has their own bookkeeper. If it costs you $100 a month for a bookkeeper, that’s not going to hurt your sale price because the buyer is going to add it all back since they will use their own accounting team.

Don’t worry about the cost – because it’s going to pay off 10 times over if you have good accounting numbers.

Make your accounting as professional and easy to follow as possible.

Unnecessary Expenses

The fourth thing you need to stop experimenting with unnecessary expenses.

Every business is going to have a little bit of unnecessary expenses.

Sometimes it’s an attempt to see if a new tactic will get you new revenue. Sometimes it’s just something that’s somewhat personal, somewhat business.

In my case, I would say something like Ahrefs is a not something I really need to track for my businesses because my products are sold on marketplaces. My SEO ranking is just not as critical, yet I keep track of it using Ahrefs just for my own personal interest.

Yet, that’s not really a necessary expense for the business, so if I were going to sell this business in the next year, I’d cancel that subscription.

But a word of warning, do not cancel services that are growing the business and do not cancel expenses that are essential to running the business, because buyers are going to know that and we’re going to catch it.

If all of a sudden you cancel your CRM, cancel all of your marketing, and cancel all of your advertising, that is going to show up in your revenue growth over the next year.

And we’re going to respond that you need to have those essential things in the business.

By cutting them out, you’re actually hurting your valuation.

We’re going to have to add them back in there and add that cost to your valuation.

Again, don’t cut necessary services that generate the growth for your company just because you may sell in the future.

We will not reward that at all…

Professionalize Your Business

The fifth thing you need to avoid doing is not being a professional business yet.

By that I mean the business needs to be incorporated, it needs to be operating all transactions through business bank accounts, and it needs to have business credit cards.

This makes it all very easy for buyers to recognize that you’re running your business professionally, especially if you tie it in with really well done accounting.

When we see a company has really good accounting, everything is professionalized, they’re incorporated correctly and maybe they even have a trademark for the business, it creates a lot of trust.

Creating that trust between the buyer and the seller – where we’re both professionals and are going to work together – can really do wonders for the sale of your business.

Buyers will always find mistakes in due diligence and it’s going to be much easier to get past those issues/questions when buyers know that you’re a professional and the mistake is likely not intentional and just a consequence of normally running a business.

Make sure you’re running in a corporation, in an S-Corp or an LLC, whatever you choose for your own personal situation.

Make sure you’re using business bank accounts.

And make sure you have business credit cards and no personal expenses in there, only business expenses.

This makes your life really easy during due diligence, and makes it really easy for you to survive the sale of your business.

Documentation

Finally, the sixth thing is stop avoiding is doing company documentation, stop avoiding doing SOPs, stop avoiding commenting your code.

I know it sucks, I hate it myself, I hate doing SOPs, I hate bothering my developers to comment the code and remind them all the time that it needs to be done.

My suggestion is to take 30 minutes every other day, work on documentation.

It’s going to help you in three different phases of your sale.

The first phase is it’s going to show a lot of professionalism when we are in the negotiation phase, as well as in the LOI stage.

Second, when we’re working on due diligence, we’re going to be asking about comments in your code, how easy is it to read, how well documented your code base is, how well documented your software is, how well documented your standard operating procedures are for outsiders to review your company.

If something happened to you tomorrow, how would I take it over?

What if something happens to you the day you sell the business to me?

I need to be confident that I can actually run it now because I have all the risk, you have all the money, and if something happens to you, I now need to run the business starting day one.

I’ve got to be sure that you have that documentation in place.

It also causes a double benefit, because in the end you need that documentation in case something does actually happen to you or your team members.

For example, for me, my wife has a book with everything I do every day.

So if I’m hit by a bus and out of commission for 30 days, she can run the business. If I’m hit by something bigger than a bus, she can sell the business and hand over the documentation to the new owner.

The third benefit is during the transition phase. Once we’ve closed the deal, done the handshake and we’re all high-fiving, we now have to go through the transition phase.

We have to do a lot of knowledge transfer. I have to learn everything that you and your team know, so handing me the documentation makes it easy for you because you can just throw it in my lap and say, “Michael, you read this, it’s all in here”.

You don’t have to waste your time with it as much. So with those three things, it really helps convince the buyer that you’re a legit professional.

Make sure you do the documentation. Make sure you comment your software code. It’s going to benefit you both on a sale and in your day to day work.

It helps with due diligence and information. helps with the transition.

Summary

If you do those six things a year before you look to sell your business, you wouldn’t believe how much more your company will stand out, how much more it will get at the sale, and how much easier the sale process will be for you.

Most second-time sellers do these things, because they learned the first time around what a big mistake it was to not have done these things when they sold their first business.

Please use this crib sheet as guidance to sell your first business like you’ve done this before…and walk away with a maximized valuation and a relationship with a good buyer that you’re happy to handover your company to going forward.