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Purchasing a software shop

I have read about lots of different business opportunities to invest in or purchase.  I have never seen the equivalent for software shops, aside from a questionable franchise here or there.

Is it possible to find a small, yet profitable software shop that can be purchased?  Where would one go about searching for opportunities such as this?

I am slowly trying to do my own thing, but I would find it interesting and enlightening if there was a fast track way to obtain a revenue stream and client base.  However, a big part of me believes this is extremely unlikely to find aside from the corporate level acquisitions.

Thanks,
---Seeker

Seeker
Tuesday, July 20, 2004

Egghead used to operate retail software stores in malls back in the early 90s. They have pretty much disappeared since 1996 or so. My guess is that bundled, online and phone sales make up most retail computer software retailing. For storefront sales I think the major retailers like Best Buy took Egghead's place.

I don't see how you could maintain the stock and the freshness of inventory as a small operator.

.
Tuesday, July 20, 2004

Thanks for the reply, but that wasn't exactly the type of business I had in mind.  I am speaking about a development company, or perhaps even a consultancy.  By purchase, I mean I would own the rights to their contracts and codebase, or something similiar.

Seeker
Tuesday, July 20, 2004

plain and simple, you buy a company. i'm not exactly sure how you go about this. but, i'm sure lawyers are involved.

Patrick
Tuesday, July 20, 2004

Oh. Ok. You said "shop" so I thought you literally meant retail.

So then get this book: "The Software Developer's Guide" by Whil Hentzen:

http://www.amazon.com/exec/obidos/tg/detail/-/B00007FOKL/qid=1090359393/sr=8-6/ref=sr_8_xs_ap_i6_xgl14/104-4376033-6204734?v=glance&s=books&n=507846

This book is basically an operations manual for a software development consultancy.

.
Tuesday, July 20, 2004

And by the way: that book does cover marketing and sales but it's alongside basic process issues of a development shop. So the book covers a lot of territory.

Also consider the vast realm of professional services and sales books by writers like Ford Harding, Dan Kennedy, etc.

No silver bullets reall exist for this stuff. It's why most developers don't attempt it. It's harder than it looks.

.
Tuesday, July 20, 2004

Most major universities have new business incubators attached to their graduate school. You could call the director of one nearest you and find out if there are any that are for sale.

It's fairly rare of course, since the young entrepeneurs have a dream of making it on their own and selling out is the last thing they want to do. So if one is available it's probably already a failure. But it's also possible it was due to a failure to execute and the idea is still marketable.

old_timer
Tuesday, July 20, 2004

Just like there are real estate brokers for helping you buy a house, there are "business brokers" to help you buy a business. There are also online listings of businesses for sale.

John
Tuesday, July 20, 2004

Part of the problem, as I see it, is this: It will necessarily need to be a small (for sufficient values of "small") shop for you to buy it. Let's face it, you ain't gonna buy IBM or MSFT are you?

Most small shops, mine included, have a single asset. The folks doing the development. We're a shop of 6 employess owned by 2 of us as partners with the remaining being employees.

The likely scenario in buying our shop is that it would be my partner and myself executing TheExitStrategy(tm). That means that 2 of us, who have been with it since the beginning, that know the history, the systems, the various code bases, the clients/customers and their issues -- the 2 folks in our shop you'd need the most, would likely be leaving at buyout time.

You'd be paying money for something that would, essentially, be worthless to you after we left.

Get it?

Now, for the flip side: Does anybody see a way around this? I'd like to sell the business in a decade or so, but I don't see anybody willing to deal with the above for a good price.

Not a good scenario, but relatively common across all the small shops I've dealt with over the last decade or so.

Sgt. Sausage
Tuesday, July 20, 2004

Usually when a small people business gets sold, part of the deal is that key staff stay with the operation for a year or so until it gets on its feet under the new ownership.

If the buyer doesn't have the same development expertise that might include hiring the right people.

How much have you got to spend?

MrMcGoo
Tuesday, July 20, 2004

I don't know. Most companies who are big enough to really worry about their licensing already get all their licenses from their favorite PC vendors. Most vendors will sell you anything you want. The boxes come, you keep track of the licenses in a binder, pop the serial numbers into a spreadsheet and end of story. The local PC component wholesaler in most cities also has a full line of products. Whatever they don't sell something like Programmer's Paradise will. Unless you want to open a tiny store that fills the bare minimum (office suites, graphics suites, top 30 pc utilities, top 20 games in all genres) and fill the rest of the store up with accessories (high mark-up, good business)--you might as well not go into the business.

Li-fan Chen
Tuesday, July 20, 2004

Sarge:

>> Does anybody see a way around this? I'd like to sell the business in a decade or so, but I don't see anybody willing to deal with the above for a good price.

Why not approach this incrementally?

What is really valuable (which many consultants such as I would actually pay for) are the existing, current and billable client relationships, plus whatever intellectual property (source code, etc) that is associated with those clients.

I could see a scenario where you sell off "blocks" of the right to replace your own personal services being delivered to specified clients. To be fair to the buyer you'd have to have a non-competition agreement in place that prevented you from working indirectly or directly with those companies for some lengthy time period.  Anything that you could do to visibly assure that the buyer was receiving a substantial degree of lock-in of the existing client(s) would be all the better.

Bored Bystander
Tuesday, July 20, 2004

Man I gotta read the OP write-ups more carefully *lol* If you are purchasing a solid company, the money you spend would be better than buying a bankrupted company. Most solid companies don't feel a particular itch to sell soon (unless the owner has a family emergency or something of the like) so it's rare you'll find the apetite to pay so dearly for the rights and local clientel. Clientels don't necessary warm up to new owners easily, there are tons of story of clientels following old owners and leaving new owners dry--or simply incompatibility. A relationship is difficult to buy, you have to earn it. Other than that you have distribution rights and copyrights, you have to carefully consider just what you own (or not), some not so savvy contracts are written so that the full source is owned by the client, not the author.

Li-fan Chen
Tuesday, July 20, 2004

Well, there has to be a middle ground. If the current owner is willing to lock himself out of future work with a given client; if there is custom code or knowledge known only to the current owner that is required to support that client; and if the prospect can have the chance to interview with the client in order to gauge the level of fit; then I don't see what the problem is.

I also don't see any problem with the prospect interviewing the client. If the relationship walks away with the prospect, then what is being offered for sale isnt' very substantial anyway.

I think the factor that gives the sale of such a concern the most value is the ability to maintain a cash flow. That implies that existing clients must be transferred by "force".

Bored Bystander
Tuesday, July 20, 2004

As other posters have already mentioned the only value a consultancy type of company has is their employees and any long-term loyal clients they might do significant business with.  For a software development company that produces shrink wrap type of software it is their employees and whatever products they have produced or are about to release.

I suggest you run-away as fast as you can from anyone who tries to pitch a franchise type of business model to you. Creating/maintaining software is nothing like pumping out submarine sandwiches on a daily basis.


Seeker wrote, "Is it possible to find a small, yet profitable software shop that can be purchased? "

I don't really have an answer for you. I have always wondered how this process works at the detail level -- where neither the buyer nor the seller wants to open their kimono first.

One Programmer's Opinion
Tuesday, July 20, 2004

You can always buy me out. Mail me for more details. Netter still, mail me a cheque.

<Damn! Someone stole my nick!>

The one and true .
Wednesday, July 21, 2004

> That means that 2 of us, who have been with it since the beginning, that know the history, the systems, the various code bases, the clients/customers and their issues -- the 2 folks in our shop you'd need the most, would likely be leaving at buyout time.  ... Now, for the flip side: Does anybody see a way around this?

Perhaps you could write some of it down.

Also there's the issue of promoting your 6 other employees: they could stay with the company when it's bought, provide continuity.

In the years before he sold his company my boss promoted people to head the various departments (sales, marketing, tech support, development, office/accounting), and having done so he retired to his private office.

Christopher Wells
Wednesday, July 21, 2004

Depending on the size of the company you're talking about, the owners are less or more important. For a company of size, say, 20-50, that, say, develops websites for customers, there are two things that would make it successful:

First, that they have an excellent sales team.

Second, that they have figured out a way to develop decent quality software in a very short time.

The latter is not nearly as easy as it may sound. It requires amongst other things:

the process of development to be well understood and followed as rigorously as possible
a solid framework that can be readily used and adapted to virtually every project
the developers to have a real understanding that time is money, and that taking two weeks to do something that should only have taken them one week may make the project unprofitable
developers that are able to juggle a number of different tasks at the same time (developers need to be working at 80%+ capacity if you want to stay in business - in other words, 80%+ of their time needs to be billable to clients)

Given all this, it's possible to keep going without the original owners. The danger is that a new owner may have other ideas - and while transforming the company to the new "vision" the company will probably go under.

Chris Welsh
Wednesday, July 21, 2004

yes, you want current key staff to stay aboard. and you may want to pay some sort of "stay bonus".

something from my experiences, when the purchasers buy a company, they seldom do the due dillengience as to what they are buying. hence, they maybe buying a piece of crap.
it may be a good side-project to hire new staff to build a new/next version of the software.

Patrick
Wednesday, July 21, 2004

The highly entrepreneurial Sgt. Sausage asked:

"Does anybody see a way around this? I'd like to sell the business in a decade or so, but I don't see anybody willing to deal with the above for a good price."

Maybe you could do something like the veterinary practice a close friend of mine works for: the two founding vets (who have run it for many years) have brought in a third partner with the understanding all 'round that they're going to retire in a few years and transition (which I presume means "sell") their stake to the new 3rd partner.

You'd have to find the right successor(s), of course, and structure the agreement such that all parties were protected... (maybe a phased transfer of equity over a few years, with reasonable escape/contingency clauses, and a few additional years of a percentage of revenues for you & the other founder? just some ideas)  It'd take some effort, but it might be a way to work around the issues listed above when selling your business.

- former car owner in Queens
Wednesday, July 21, 2004

I think the technical term is "the golden handshake".  (The idea that founders have to stay with the company for a specified number of years after a major investment -I've heard five cited most frequently- with an option to stay longer if desired.)

We were a small software shop that toyed with the idea of selling some or all of the company.  We eventually decided to back away from that precipice (more trouble than it was worth).  If they are buying, it's usually because they are looking for a get-rich quick scheme that requires no work. 

Also, entrepreneurs often start their own companies because they want more control, so the idea of selling as much as major investors usually want is somewhat foreign, especially if you have been in business long enough to qualify as an unmitigated success, unless it is part of an exit strategy.

A little cynical about the process, I'll admit - but I've watched a great number of acquisitions and mergers that would have worked out better for the entrepreneur if they had simply focussed on their core business.

Phibian
Wednesday, July 21, 2004

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