What a buyer checks first
- Monthly recurring revenue and how it has trended
- Gross churn and net revenue retention by cohort
- Signed IP assignments from every developer and contractor
- Revenue share of the top five customers
- Who on the team can ship without the founder
- Hosting cost and gross margin
Recurring Revenue Gets Priced Differently
A software company that bills on subscription is valued on the durability of that revenue. A shop that sells custom development hours is valued more like a services firm, with a lower multiple and more scrutiny on the owner.
Many companies are a mix. Separate the two in your financials so a buyer can see what share of revenue renews on its own. Implementation fees and one time projects belong in their own line.
Smaller deals tend to be priced on seller's discretionary earnings. Once a company has a real management team, buyers move to EBITDA. Our valuation page covers how that switch works.
Retention Is Read Before the Income Statement
Experienced buyers open the customer data first. They want monthly recurring revenue by customer, start dates, cancellations, upgrades and downgrades, going back as far as you have clean records.
Gross churn tells them how fast customers leave. Net revenue retention tells them whether the customers who stay are paying more each year. A company above 100 percent grows even with no new sales, and buyers pay for that.
Build the cohort tables yourself before diligence. If a buyer's analyst produces them first, you lose control of how the numbers are framed.
In a software sale, the spreadsheet of customer start and cancel dates is worth more than the deck.
Who Owns the Code?
Every person who wrote code for you, including early contractors and a cofounder who left, should have signed an agreement assigning their work to the company. Gaps here can stall a deal or move money into escrow.
Buyers also scan for open source licenses that could force disclosure of your code, and for anything built on a former employer's time. Run that audit now, while the people involved are still easy to reach.
If You Are the Roadmap, the Price Falls
Founder dependence is the most common discount in small software deals. If you are the only one who knows the architecture, closes the large accounts and sets priorities, a buyer is paying for you.
The fix takes a year or more. Document the system, give a senior engineer real ownership, and move key accounts to someone else. A buyer who sees the company run while you were away will pay more for it.
Strategic Buyers and Private Equity Want Different Things
A strategic buyer is usually a larger software company that wants your product, customers or team. They may pay for fit and may fold you into their own platform.
Private equity usually wants profit and a platform it can build on by buying smaller companies. Many firms prefer companies with EBITDA near $1M or more, and many will ask you to stay on and roll some equity into the new company.
Both groups show up in San Francisco. A broad, confidential process that reaches both is how you find out which one values you more.
That process starts with a blind profile, moves to an NDA and a confidential information memorandum, and ends with letters of intent you can compare side by side. Our process page walks through each stage.
Watch for an unsolicited offer that arrives with a short exclusivity window. It usually means the buyer wants to keep you from testing the market. Get a valuation before you sign anything.
Earnouts Bridge Two Forecasts
When you believe next year's growth and the buyer does not, an earnout splits the difference. Part of the price is paid later, if revenue or retention hits agreed targets.
Earnouts move risk back onto you, and you will no longer control the budget or the sales team. Define the metric tightly, keep the period short, and get your attorney to spell out what the buyer may not change.
Should You Sell Stock or Assets?
Asset sales are common in smaller deals because buyers avoid unknown liabilities. Software companies more often sell stock, since customer contracts, app store accounts and vendor agreements can be hard to reassign.
The choice affects your tax bill, and California gives capital gains no special break, so the state's share is large. Have a CPA model both versions early. Our note on asset sale vs stock sale lays out the tradeoffs.
To see a range based on your recurring revenue and margins, fill in the estimate form or call (415) 555-0163.