Evaluating and Seeking Input on a Mature Software Business with Potential

September 20, 2024

by a searcher from The University of Chicago - Booth School of Business in Dallas, TX, USA

I'm considering an acquisition of a 40+ year-old software business with a solid product and customer base, but very poor business management. No question, this deal presents significant challenges due to inconsistent financials, owner-operator management, a lack of recurring revenue, and outdated systems and processes.

Despite all of this, the core product is mission critical, would take millions to develop, and it has proven its value through numerous repeat customers. Under new ownership with experience in building software businesses, this could and should become predominantly a recurring revenue subscription business with significant growth potential over a 5+ year horizon.

I realize this deal would not qualify for 99% of searchers or search investors, but I am looking for advice from searchers and investors who may have experience evaluating and investing in similiar deals.

Key Points:

Financials: The business has generated an average revenue of $800k and SDE of $600k from###-###-#### Following the owners semi-retirement in 2019, the business has generated annual revenue of $300-400k and a high SDE margin while effectively on auto-pilot. Growth Potential: Under professional management, this business should achieve substantial revenue growth. While the product could benefit from a major update, there's immediate opportunity to grow by increasing marketing and sales efforts both within the current market (one US city) and in new regions. Challenges: The current owner has limited marketing experience, a fear of travel (he sells >90% of his software in one US city), and health issues that have sidelined him for months at a time. The company's outdated technology and limited distribution are also factors to consider.

Proposed Deal Structure: Proposed Deal Structure: To successfully acquire this business, I would need to secure outside equity investment of $200-$500k. I'm envisioning a deal structure that includes upfront cash and a substantial seller note, with an earn-out to motivate the seller and bridge the gap between his valuation expecations and mine.

Seeking Advice: Given the risk and potential of this business, I'm interested in hearing from other investors or searchers who have experience with similar opportunities. What are your thoughts on valuation, deal structure, and potential risk-reward given the known challenges? Please feel free to reach out privately if you have any interest in co-investing or discussing this opportunity further.

Reply by a searcher
from University of California, Los Angeles in Santa Monica, CA, USA

Here’s my two cents: For valuation, I’d focus on the current performance given the revenue decline. An earn-out structure is smart to bridge the gap between the seller’s expectations and the business's current state, ensuring you’re not overpaying for future potential. Your deal structure of combining upfront cash, a seller note, and an earn-out is a solid way to manage risk. Push for favorable terms on the seller note, and tie the earn-out to realistic growth targets to keep the seller motivated. The core product has strong potential, but modernizing the technology and expanding beyond the current market are key to unlocking growth. With the right focus on sales and marketing, there’s a real opportunity to scale. Executing the transition to a recurring revenue model will require some investment, but with tech upgrades and improved distribution, long-term growth looks promising. Expanding into new regions could deliver quick wins while you work on bigger improvements. Best of luck—it’s a challenging but exciting opportunity!

Reply by a searcher
from INSEAD in Warsaw, Poland

In my experience you need to focus on 3 things: (1) check your IP rights very carefully. Do not trust the Seller on that; (2) understand the strenghts of the team. Don't trust the Seller on how good and motivated they are. Consider giving some of them equity from day one; (3) talk f2f to the largest clients to understand how happy they are

+3 more replies.

Join the discussion