Maximising the multiple when selling a software business can be tough in practice. Eddie Harding of ICON Corporate Finance explains how they cast the net wide to land the big fish.
We advised on the sale of my-Channels to Software AG, the multiple we achieved far exceeded management’s expectations at more than 6X revenue. Nirvana, the company’ high-speed data messaging software, was widely recognised for its performance benefits and used by top tier investment banks that accounted for 40% of all trades on the global FX market. Paul Brant and Eddie McDaid, who founded the business in 1999, wanted an acquirer that could take the software to the next level. They had 15 customers when they sold it; Software AG had 4,000.
What were the Challenges
Communicating the real value of a tech product is always tricky, and conveying the broader potential of my-Channels’ ultra-low latency messaging middleware was particularly challenging. You try to identify as many benefits and opportunities as possible in the information memorandum, and try to be all things to all people. You have a good idea, but you can never know for sure why the ultimate acquirer will want to buy a business. We had interest from a wide range of parties and got that down to a shortlist of four. My-Channels were a highly profitable business, with an exceptional customer base and a market leadership position in FX, but also a technology that could easily be applied to other verticals. The first thing competitors would try is to downplay the benefits of the product but, if that was the case, why were we still talking? One party we were in discussions with was a direct competitor to my-Channels. It doesn’t really matter how strong the NDA is, ultimately they are still the competition, and so you constantly have to be on your guard.
How was the Deal Structured
The lion’s share of the consideration was paid in cash upfront. 15% was contingent upon achieving qualitative integration milestones over a three-year period, many of which they have already achieved, and only a very small slice (less than 3%) was performance-based earnout. Software AG wanted management who stayed with the business to focus on the integration rather than just achieving their forecasts, which was compelling.
Don’t just look for the obvious acquirers. Cast the net wider and look for complementary sectors to market the business to. We introduced the founders to a large number of potential acquirers beyond their immediate space, such as Enterprise Software vendors and the major Data Providers. The offers from competitors were a lot tougher valuation-wise, whereas targets from neighbouring markets with a far more complementary fit offered us a “super premium” on the deal. Don’t give a price range to prospective buyers – always try to get them to give an indication first. Set the bar too high you may lose some, too low you may miss out on a potentially better offer. You can sense when someone is interested – see where they start, then use competitive tension to push them and see where you can go.
ICON was the lead advisers on the sale, and dealt directly with Software AG’s internal due diligence teams based in Darmstadt, near Frankfurt and Reston, Virginia. Bristows provided my-Channels’ management with legal advice, and Software AG used Blake Lapthorn.