Case study: How we Sold a Tricky $700,000 Software CompanyBy Los Silva
Case Study: Applian.com
With Tom Mayes & Bill Dettering: Owners
May 18th, 2018
Wondering about selling your software company? Want to know the ins and outs that go into the valuation, negotiation and handover stages of selling a business? This case study digs into how Dealflow Brokerage helped sell high-speed video downloading and screen recording business, Applian.
After an inflated valuation from another broker and lack of buyer interest, in 2017 disheartened Applian owners turned to Dealflow to sell. Applian’s owners were working double-time managing two businesses simultaneously.
They were keen to fully switch their time and finances over to their secondary site as soon as possible. This case study explores the sales process from start to finish. The Q&A format directly with the sellers, highlights all the challenges that can come with selling a business. From arduous paperwork to the importance of triple checking your numbers.
In Applian’s case, despite some unexpected hurdles, Dealflow was able to lead the process, manage the offers, and administer price negotiations and deal terms. “This took a huge amount of stress off our [Applian’s] plates,” and resulted in a successful sale in early 2018.
We have broken the sales process down into the following 8 phases. Let’s dive right in.
- Initial discussions
- Listing Preparation
- Active Listing
- Due Diligence
- Purchase Agreement
- Escrow / Asset Transfer
1. Initial discussions
Before talking with Dealflow about brokering your business you had been working with another brokerage company. According to our records, they had been representing Applian for 6 months. They had marketed Applian at a dramatically different price (compared to Dealflow’s valuation) and you weren’t receiving the interest you had hoped for.
What are the main reasons you decided to work with the other brokerage initially?
With more time spent on our other company, we decided it made sense to look at the possibility of selling Applian. We had a couple of discussions with local, prospective buyers but nothing substantive materialized. We had received an invitation to check out the Broker, did our research and decided to have a further discussion. The Broker was optimistic that we would be able to sell our business.
What were your thoughts on their valuation? At the time did you believe it to be realistic, overstated, or understated? Did their high valuation influence your decision to sign with them initially?
The question of valuation is so open-ended. As the seller, one expects as high a price as possible. Applian had generated a lot of consistent revenue over the years. We really had no idea what a true multiple valuation should be, the range that was parlayed was anywhere from a 1x to 3x multiplier.
This seemed realistic in our minds, given other conversations we had with people who had sold similar businesses. The higher valuation we started with, did not influence our decision to sign on. We were looking for someone with industry experience to market our company and sell it. Ideally with as little involvement from us as possible.
Why did you ultimately decide to leave that Brokerage?
We had a number of conversations with prospective buyers in the first 6 to 8 weeks. But, interest began to wane thereafter. We had a 6 month agreement which would automatically renew for another 6 months. We decided to opt out before renewal and not be tied to an irrevocable agreement.
We began discussing the possibility of brokering your business in the last week of June, 2017.
Bill had met an associate at a conference who referred to Dealflow. Since we were still in an existing agreement until early August, it was premature to have a conversation until our pre-existing agreement had terminated.
After several weeks of discussions and analysis, we provided a valuation approximately equal to 1.5x of Applian’s trailing twelve month Net Income at the time. Our valuation was approximately 40% of the asking price marketed by the other brokerage. Dealflow valued Applian at ~$1.1 million dollars less than what had been previously marketed for by the other brokerage.
We knew that our valuation might come as a shock,given your previous valuation experience. Thus we scheduled a phone call to explain how we arrived at that figure and why we believed it to be accurate.
What were your initial thoughts regarding this valuation?
While sad that the valuation was much less than the previous brokerage’s range, we figured that Dealflow’s was a more realistic number. We were provided a range in our previous selling attempt, and opted to go with the higher number.
Once offers dissipated after a few months, and there was inactivity even with lowering our price point, we knew that the range had to be recalculated.
Was it higher or lower than you expected?
Lower than expected, but realistic given the trending of Applian’s revenue.
After some continued discussions you executed Dealflow’s Exclusive Brokerage Agreement (EBA) in the second week of September 2017.
Before you signed the EBA, did you have any concerns?
The main concern was the time to be spent again doing financials, filling out documents, setting up meetings with prospective buyers. Having tried and not found resolution previously, we weren’t “excited” about the idea of spending more time finding a buyer. Especially when we were trying to focus our time and efforts on Zingtree.
Were your questions appropriately addressed by your broker?
Yes. Answers were articulated thoughtfully and well laid out.
Why did you ultimately decide to move forward?
We knew that it was beneficial to follow through with offering our business. We were spinning our wheels trying to run two distinct companies.
2. Listing Preparation
After you Executed the EBA we began our final analysis of the business and started listing preparation. This process took approximately three-weeks. During this phase we requested many of the documents required to prepare your listing and finalize your marketing materials, and asking price, including:
- Historical Monthly P&L Statements
- Monthly Bank Records
- Tax documents
- Follow-up Seller Interview questions
- Inquiries about your website’s traffic performance etc.
Can you provide some detail regarding how you approached these deliverables? Specifically, how did you prepare the information and please touch on any challenges you encountered along the way.
Fortunately, we already had some of these deliverables from the previous selling effort. But, as with anything, the details are critical. It was a matter of spending a specified number of hours (and knowing further effort would be needed) to collate all the requested documents.
Were any challenges you encountered due to how you had been historically operating and accounting for your business?
The challenges pertained to how long we had been in business and not preparing for an actual sale. Since I (Tom) had to do 99% of this work, I had to learn quickly how to find and aggregate the financials. My forte is running operations and day to day management,not being a financial analyst. So, there was certainly some frustration in being compelled to do so much.
Did you personally feel you had enough spare time and capacity to commit to preparing these documents?
The simple answer is no. The effort seemed all-consuming at times. It was difficult being tied to two jobs at once.
Having been through the listing preparation process, do you have any tips or advice for a business owner about how to start this process?
Prepare well in advance of when you think you want to sell a business. Having a good exit strategy and learning some of the basic financial documents needed is key. It will help prepare for when one finally decides to put the business up for sale.
Approximately 4 months elapsed from when you initially contacted Dealflow in late June to when your listing was officially launched. This is considerably longer than our average timeframe which generally spans 2-4 weeks.
Late-June: Initial Contact
July-August: Discussions and Analysis
Mid-September: EBA Executed by Owners
Mid-October: Listing Launched
Dealflow attributes an extended period of time during this phase to the fact that you were very busy with your other business ventures. You seldom had the spare time to commit to answering follow-up questions and compiling the requested information and reports. Being time-poor is very common among business owners and entrepreneurs!
Were you at all concerned or disappointed with the length of time it took to get through the phases listed above?
Not really. We had to wait until the 1st week of August to let our previous broker arrangement expire.
Could Dealflow have done anything to better assist you through these phases?
Short of knowing our business and compiling all of the documents for us, I don’t think Dealflow could have done anything to get us to do our part quicker.
Do you feel that you were waiting on your broker or that Dealfow was causing delays or being unresponsive?
No. There were a couple of Dealflow delays but the source and effort fell to Applian to provide the executables.
Imagine you had more free time available to dedicate to preparing the deliverables necessary to ready Applian for sale. In this case, do you believe this process could have been completed in 2-4 weeks?
I think that time frame could have been achieved if we weren’t working two full-time jobs.
3. Active Listing
We began marketing your business on 10/20/2017.
Describe your feelings when the prospectus was completed and the business officially launched. ere you excited? Nervous?
Definitely excited that the time consuming part was completed, and ready for offers to be extended!
What were some of your initial expectations? Did you expect to be speaking to dozens of buyers in the first week?
No. Expectations were cautious but hopeful that we would receive a few ( 2 to 3) bona fide offers in the first two weeks.
Your business attracted a high-level of interest from buyers initially.
Describe how you felt and what you experienced during the first few weeks of your business being marketed.
Relief. We were elated to get real offers and think that we could be selling the business possibly by year end.
Did your Broker provide a high-level of service, including updates, feedback, etc. during this time?
Yes. There was an excellent amount of communication and feedback from the broker as
engagement was in full force with potential buyers.
By the third week after we began marketing your business several serious buyers materialized. You had multiple conference calls with a variety of buyers with different backgrounds who had a serious interest in acquiring your business.
Describe your overall experience meeting with buyers for the first time.
The meetings were easy. I think this had a lot to do with the buyers being excited about the opportunity that Applian had to offer. There was real interest and excitement on their part.
Was it beneficial to have your broker on the calls with you to outline the call, facilitate, and assist with questions?
Having the broker take part in the meeting, and initially outline the framework of the call, was extremely important. Both parties felt that they could engage in a professional Q & A, and know that further questions could be asked following the meeting. It made for an efficient initial assessment as to what next steps were needed.
Did you believe communicating with buyers over conference calls was essential to finalizing the sale? Please detail why or why not.
Not sure about this question. Are you asking if a conference call is the best, most efficient method? My feeling is that conference calls are essential. A face to face meeting is always the best method (if possible).
Did you feel the buyers were appropriately vetted before you were introduced to them?
After most of the conference calls, buyers asked additional follow up questions and made requests for additional financial and business reports. Describe your experience preparing the information they requested.
It was often a lot of work.
Would you have done anything differently regarding the conference calls?
No. The calls allowed for introductions and sharing of information.
Do you have any tips for a business owner who is about to engage in conference calls with buyers?
Have your information at your fingertips, and sound confident and knowledgeable about your data.
By the third week of your business being actively marketed you received an offer (offer 1). It was very close to the asking price and had several other buyers seriously interested. The first offer was for $660k, 95% of the original asking price.
There were several other seriously-interested parties at the time the first offer was received. Your broker was able to negotiate the offer on the table up to above the original asking price ($700k), all-cash, with a four week quick close .
By this time you had had several conference calls with the buyer(s).
What were you feeling when your broker informed you of the original offer?
Happy to have received a substantial offer.
How important was it to have your broker manage the offers, price negotiations, and deal terms?
It took a huge amount of stress off of our plates. I can’t imagine having to do those pieces directly with the buyer.
Did you have any concerns at this time regarding the closing schedule or deliverables required to finalize the sale?
You officially accepted Offer 1 and the LOI was executed on 11/15/2017. Immediately after its execution we began the closing process which included the buyer’s financial review and due-diligence.
During the buyer’s financial due-diligence review it was discovered that several unintentional, yet substantial, accounting discrepancies/errors existed. These were due to the variances in how the business was accounted for over its lifespan.
The complexities of which made these errors difficult to find, itemize and resolve. Additionally, during this time it was discovered that an error in your code caused overpayments to certain providers, which had gone unnoticed for over a year.
After several days of reviewing the data and making corrections with your Broker, the asking price of the business was adjusted accordingly. This was in order to align with the corrected financial performance data. The multiple was not changed.
In the end, the buyers decided to withdraw their offer. This was because the business was not generating the income levels they expected when they first expressed interest in the business.
Can you describe your experience and feelings when the discrepancies/errors were discovered?
Super frustrated and annoyed internally that this happened. I did not look forward to redoing all of the documentation anew, especially given that we might lose the deal.
What could you have done differently to have avoided that situation, if anything?
That is a tough question, and much easier in hindsight, to confirm that our data checks were in place. It would have saved us a lot of money that flowed to our developers unnecessarily. It would have precluded the embarrassment of those initial faulty numbers.
Can you provide some detail regarding how you approached fixing the accounting errors? Specifically, how did you prepare the information and please touch on any challenges you encountered along the way.
The proper programming had to be put into place retroactively. That was the easy part. Then, I had to recompile all of the month to month and annualized numbers. The challenge was more emotional and psychological. It involved all that extra time, and the knowledge that the mistake would probably cost us what looked to be a good offer, with a buyer we had forged a solid relationship with.
Having been through this, do you have any tips or advice for a business owner about to sell his/her business?
Get your numbers correct, and then triple check.
Applian’s marketing materials were updated with the new information and asking price which was 25% lower than before. The listing was relaunched just before Christmas 2017.
Did you ever consider backing out or canceling the sale of Applian?
No. We had gone this far, we wanted to see it through (at a fair price).
Why did you continue?
The same reason we started the process, we couldn’t keep running two businesses simultaneously. We needed to focus on Zingtree.
The eventual buyer surfaced towards the end of January 2018. After several conference calls, email communications, and negotiations, he made an offer (offer 2). This occurred during the first week of February 2018. The LOI was executed 2/13/2018.
The accepted offer was below the asking price and considerably lower than the first offer you received. Why did you ultimately decide to move forward with this buyer and his offer?
The buyer seemed committed. The offer was low but we wanted to sell.
At the time you accepted the offer what was your confidence level with regard to successfully closing the deal? Especially given you had recently experienced a deal collapse.
Being an optimist, I felt a strong chance that this offer would come to fruition. Plus, the price was so low, it was a great deal for the buyer.
What did you learn from these experiences with the contract negotiation?
Some people love to negotiate for the sake of getting an even better deal. It certainly became a frustrating experience as this buyer kept pounding us down.
Do you have any tips for future business owners looking to exit their business?
Understand why you are selling your business. Hopefully, have an exit strategy in place while the business is on an upward trend so that you can sell at the peak. If price is your main concern, know that your numbers substantiate the offered price point and stick to it.
5. Due Diligence
What was the original agreed due diligence timeframe in the LOI?
How did this compare with how much time it actually took for the buyer to complete their Due Diligence (DD)?
I don’t remember exact time frames, but the due diligence effort went on much longer than advertised. Much more was asked from us than originally requested.
Were there any substantial delays during the due dilligence and closing phase? If so, please describe.
There were just a lot of extra requests that took even more time to coordinate.
Was the due diligence process how you expected it would be? If not, explain why.
For this specific buyer, the DD process was painfully long, slow and frustrating. It was not expected, especially in light of the quicker process for the previous prospective buyer.
How long did the due diligence phase take to complete?
If anything, what would you have done differently?
Not sure. Due diligence is important. I suppose we could have just stuck with the requested initial documents and said that we wouldn’t deliver anything further. That would have certainly run the risk of a collapsed effort.
Did the buyer request anything during this phase that you weren’t comfortable providing? If so, explain what it was, why it made you uncomfortable, and how this situation was navigated.
There was no documentation that was uncomfortable to share. It was just a matter of prolonging the DD process with additional info that was not initially requested.
Did the buyer request anything that you couldn’t provide?
I don’t think so.
Were there any issues during this due-diligence phase? If so, explain what they were, how this affected the deal (if at all), and how it was (or wasn’t) resolved.
The buyer used the additional time to negotiate the price lower. The resolution is that the buyer reduced the final offer below the original asking price.
Did you ever meet the buyer in-person?
If so, please detail the experience.
No in-person meeting, only conference calls.
6. Purchase Agreement
The final legal document, the Asset Purchase Agreement (APA), was finalized March 22nd, approximately 5 weeks after the LOI was completed.
While negotiating and finalizing the APA there were several challenges including assigning the legal contracts with your current providers over to the buyer. One of your providers declined to continue business under the current circumstances with the new owner. This caused a high degree of contention with the buyer and threatened the deal.
After several days of negotiations a minimal compensatory price reduction was awarded, the deal was back on track and the contracts were finalized.
Did you anticipate any of these challenges?
I had thought that a lot of things could go wrong, including a conflict with one of our developers. There were a lot of complexities to Applian. Fortunately, this buyer preferred to have an outside developing team(s), as opposed to managing source code themselves.
Were there any other challenges of note during this phase?
The main challenge was keeping the buyer focused on closing the deal. He kept asking for more information which was both taxing from a time perspective and certainly frustrating. We were just ready to get the deal done.
Did you ultimately feel comfortable with how the negotiations concluded?
Comfortable wouldn’t be the first word to come to mind; relieved, ready, exhausted. Those are better adjectives to describe where we were at the end of it all.
Were you satisfied with your brokers performance, involvement, and responsiveness?
Absolutely. It was great for someone to keep us on track, and handle the other side. That is actually really important from both an emotional standpoint as well as a tactical perspective. Our brains were turning to mush and just wanted to focus on Zingtree. We needed the external guidance to get us to the finish line.
What other concerns did you have during this stage?
Always the concern of when the buyer would throw another wrench into the deal.
Would you have done anything differently to better prepare for the requirements of the asset purchase agreement and eventual transfer of assets?
Not sure. As far as I knew, we did everything as efficiently and quickly as we could, responding to requests as they arose.
Finally, the buyer employed legal services to finalize the APA and escrow payment but you chose not to. Instead you finalized everything through your broker.
Why did you choose not to employ legal services?
We’re cheap, ha. But really, we didn’t think we needed legal guidance. We were getting some assistance from our accounting firm. And we had faith that the broker was guiding us on the right path.
Do you feel that legal counsel delayed or progressed the closing process and timeline?
I think it delayed the process a little. But the buyer was not going to take a different route. So, in the end, the process was done correctly from a legal standpoint which made us feel comfortable that the deal wasn’t going to backfire.
Were you satisfied with your brokers performance regarding the contract drafts, negotiations and closing?
Yes. The broker was extremely patient but persistent and forthright to get the deal across the line.
What advice would you provide a business owner in your position?
That is a wide open question with too many varied answers. Ultimately, a business owner needs to be prepared, substantiate their sales price through numbers and be steadfast. I think this was a complex deal,most are probably not this difficult.
7. Escrow / Asset Transfer
Several asset transfer documents were provided to assist you and the buyer to keep track of all of the assets to be transferred.
How long did the transfer take?
The actual transfer of assets went smoothly. The additional assistance to get the new owner up to speed was more laborious.
Did any complications or obstacles arise during the asset transfer phase? If so please detail.
Not really. Everything was documented well. We had paperwork signed off in preparation for the exchange.
Would you have done anything different?
What advice would you give to a business owner about to encounter the asset transfer phase of the sales process?
Go over each and every document twice. Make sure that everything is checked off appropriately so no last minute complications or halts can occur. The asset exchange and transition part should be the one seamless thing in the deal because all of the negotiations are complete.
The sale officially closed on March 22nd 2018, approximately 5 months after the business was initially listed for sale publically.
Did the length of time from listing launch to close align with your original expectations? Why or why not?
Yes and no. I thought that it could take that long. But, after the initial offer came in so quickly, and looked like it was going to close before year-end, my expectations had then been set that we could do a fast sale. Unfortunately, what looked to then be a fast sale based upon a date we set, got pushed back by the buyer’s due diligence and constant renegotiation.
Would you have done anything differently? If so, what?
I’d like to think that we would have called his bluff and kept the original close date. Take it or leave it.
The payment did not go through one of the neutral third-party escrow services Dealflow partners with. Instead, the buyer chose to use his legal counsel as the escrow agent.
Did this have any impact on the closing process?
Not from my perspective. I know that Dealflow wasn’t happy with the process. But I didn’t notice any difference.
How did this make you feel initially? Did you have any concerns?
No. I figured that the transaction was legally binding and as long as the money was transferred according to the agreement, then all was fine.
If so, what made you ultimately feel comfortable and agreeable to these terms?
The legal documents we signed.
If you could do it again, would you insist on using a neutral third party escrow service like Escrow.com? Why or why not?
The preference would be to use a 3rd party escrow. But, I never felt that having “their” legal firm handle the paperwork and asset transfer was in any way a negative.
Do you have any tips for a business owner deciding where and how to set up escrow?
It has been 2 months since you officially sold Applian. You agreed to a number of training and support obligations.
Provide and overview of the training and support you have provided the buyer post-sale up to this point.
There were some screen shares, many phone calls and a lot of e-mail exchanges to get the buyer up to speed with the business processes.
Has the support you’ve provided and the time required been in-line with the training and support contracts agreed to in the APA? Please describe if yes or no.
Yes, the support and activity were in-line with what was called for. Not to say that it was easy. The buyer expected immediate responses and availability. We, on the other hand, wanted some freedom from a company we just sold, and to use our new time for Zingtree. We stayed the course.
How many hours did you spend helping the new owner the first week after sale vs week 2, 3, 4, 5, 6?
I can’t remember the exact time committed. But, it definitely went in descending order as the weeks passed. The first few weeks were the heaviest with probably 10 hours per week between Bill and myself. After 2 months our time became negligible, but still with questions at maybe an hour per week.
Do you have any contact with the new owner now? If so, how often? How much time per week is spent communicating with the new owner?
Yes. There are still some questions on his part. More importantly, there had been nagging communications in which I had still been on. These were systems communications in which I had asked 25 to 50 times to make sure I was removed from. It has taken a long time (until last week) but I think I am finally removed from any system or process.
Do you anticipate continued interactions with the new owner 6 months from now? If so, what level of contact?
Maybe some contact but it should be very minimal.
Have there been any complications or issues that you are aware of since finalizing the sale? If so, please describe.
Nothing major that I am aware of. The buyer kept everything in place as it had been run previously.
Was the post-sale training and support in-line with your expectations before you sold the business? Explain why or why not.
Yes. We knew that whoever would be taking over the business would need our guidance, if they were planning on keeping everything the same.
Is there any advice you can offer a business owner specific to preparing for post-sale training and support?
Be very specific about how much time you are willing to provide, and stick to those guidelines.
Approximately 20% of the purchase price is being seller financed via a Promissory Note.
Has the buyer made timely payments up to this point?
Do you feel all terms have been upheld by the buyer up to this point?
Do you have any concern about receiving the full amount of payments?
I try not to think about that. Nothing has prompted any type of concern up to this point.
Looking at the process overall, is there anything you would have done anything differently?
1. Had a better exit strategy
2. Be better prepared with the financials at the onset
Of the eight phases, which was the easiest? Hardest? Most time consuming?
Easiest: Asset transfer phase. It’s nice to get the payoff.
Hardest: The delays through the negotiation phase
Time consuming: Aggregation of all of the documentation and financials
Do you have anything else to add?
Just glad to be done!