Getting maximum value is one of the most important objectives in selling your tech company. After all, you invested a lot of time, money, and effort in building your business. So you want to receive the maximum return on those investments when you sell. Here are 12 tips to help you achieve that goal.
1. Plan for exit from the start
Prepare an exit strategy before you start the process of selling your company. Having an exit strategy mentally prepares you for exiting your company so you'll better be able to recognize when the time is right to pursue a sale. Then when you start down the road to a sale, that exit strategy can provide a framework that will help you make decisions more pragmatically. An exit strategy can even make your company more attractive to potential buyers if they see that you have a clear, well-thought through plan that takes you through the sale of your company and even through post-sale.
2. Think like a buyer
It’s important to think like a buyer to sell to a buyer. Put yourself in their shoes. What things are important to them? What things are not important to them? Answering those questions will help you better align your goals with theirs. You might be focused on an expansion into a new market. But the buyer might see that as a risk not worth taking in acquiring your company. In fact, buyers as a rule want to avoid extra risk. Focus on the aspects of your company that are attractive to a buyer such as the opportunity for growth, an edge over competition, or a stable and growing revenue stream. As is the case for having an exit strategy, thinking like a buyer gives you a framework that will help you make better decisions during the sale process.
3. Clean up your act
Any business, legal, or accounting issues need to be resolved before you pursue a sale. Do a thorough self check of all your important documents, such as financial statements, contracts, and vendor agreements. Keep in mind that a buyer will examine those documents as part of their due diligence. You don’t want them to uncover something, such as a missing financial statement or an unresolved legal claim, that can jeopardize the deal.
4. NDAs across the board
A non-disclosure agreement (NDA) is a legal agreement that helps protect confidential information that you share with another party from being disclosed. Some examples of confidential information you might protect with an NDA are customer lists, financial information, or marketing strategies. You may have an NDA in place as you negotiate with a prospective buyer of your company. You may even have NDAs with some of your suppliers or vendors. However, make sure that those NDAs are current and will not be a problem when you sell your company, especially if you do an asset sale. There have been cases where the asset protection afforded by an NDA agreement did not survive the sale. So review your NDAs to ensure that they are right and non-problematic.
5. Are there IP Issues?
Intellectual property (IP), that is, a company’s creative assets, is often a major reason why a buyer is interested in acquiring a tech company. So it’s crucial that your intellectual property is secure and not compromised as you go into a sale of your company. Ensure that protection mechanisms, such as copyrights, patents, and trademarks, are in place for your IP.
Software, in particular, poses a potential risk of exposure. There are many cases where hackers have successfully compromised code. So make sure that the software your company owns hasn’t been hacked. In fact, is the ownership of the software clean? You don’t want a buyer to discover that there are claims on that code by other parties or that work agreements to develop that code for your company are not proper or specific enough.
6. Is your open source clean?
Open source software is code that anyone is allowed to modify and enhance without having to pay royalties or fees. Software developers love it because they can freely incorporate open source that provides the functions they need into their projects, cutting software development time and cost. But using open source software is governed by a number of licenses and notice requirements. Violating those rules can lead to legal issues and get in the way of selling your company. So ensure that your company’s use of open source software follows all the rules. You don’t want a black duck or similar software audit to uncover any surprises in your code.
7. Careful of customer concentration
Recall the idiom, “Don't put all your eggs in one basket.” It applies to business just as it does to other aspects of life. You should not concentrate all your efforts and resources in one area because you could lose everything. Potential buyers of tech companies have that in mind when they see your tech company relying on a narrow base of just a few clients. What if your biggest client decides to do their business with a competitor? What if your biggest client goes out of business? What if the economy in the sector your biggest clients are in has a dramatic downturn? If your client base is narrow, it can seriously damage your business. So try to diversify. A well-diversified tech company provides products and services across various market sectors and geographies. And because diversifying is good for your company, it makes your company more attractive to buyers. Remember, buyers want to avoid unnecessary risk, and diversifying your client base reduces risk.
8. Quality of revenue
One of the things a sophisticated buyer will examine is the quality of your company’s revenue. Is the bulk of your revenue annual recurring revenue (ARR)? Is it primarily coming from professional services? How much of it is transactional revenue derived from your goods and services? Is the revenue regularly repeating from sources across long periods of time, or is it more unpredictable? Buyers will examine the quality of your revenue in terms of how well it leads to growth. They’ll ask questions such as how predictable is your revenue? Where does your profit come from? And how diversified are your revenue sources? So make sure you understand where and how your company gets its revenue and try to ensure that it aligns with the buyer's important metrics.
9. Team in sync?
It is critical that your management team have a unified story when you are in the process of selling your company. Make sure the team is consistent about your company's strengths, weaknesses, and why you're selling. Buyers will take advantage of any inconsistences in how your company is presented to them. You don't want someone on your management team airing a point of view that significantly differs from the others, especially if they voice perceived internal conflicts, problems with customers, or threats from competitors. Inconsistencies weaken credibility and the trusting relationship you want to establish between you and the buyer. And the buyer will use those inconsistencies to lower their valuation of your company.
10. Mission, model, processes
Buyers are looking for an underlying structure in your company that provides a basis for profitability and growth and that will stand up to global competition. They will look for things like a mission statement that clearly articulates your company's purpose and goals. Buyers want to know if you had to pivot from that mission statement, and if so, why? They want to know your business models, processes, and practices. And they want assurance that those models, processes, and practices are optimized to reach your company's goals, and are adaptable to meet changing conditions. Having that structure in place provides the foundation for a successful company and a higher company valuation at sale.
11. Product roadmap: Now/Future
Buyers want to know what your product roadmap looks like ‒ in the short term and the longer term. Can you scale, port to other markets, or expand to other countries? Does your product roadmap align with the disruptive trends that are shaping the future of technology and driving M&A deals? Do your practices leverage these trends? New and emerging technologies that positively impact business and society present companies with opportunities for rapid growth. Companies that provide products and services that take advantage of those technologies are attractive to potential buyers and so increase a company’s value.
12. Prepared personally for an exit?
What do you want to get out of the sale of your company? This is not simply a question about how much money you make in the deal, although you should decide whether you will accept contingencies in the purchase agreement such as earnouts. It’s also about after the sale. Do you plan to stay with the acquiring company, and if so, what role do you want to play? How long do you plan to stay with the acquiring company? And what about your employees? Do you plan to include employee-related agreements such as retention plans in the deal? Remember the first tip, “Plan for exit from the start.” Having a clear, well thought through exit plan will help smooth the way to a successful and rewarding sale of your company and allow you to go on to your next phase with peace of mind.