Maximizing Value – Preparing for a Sale

There are many areas that need to be reviewed, evaluated, and often addressed before a technology company is ready to be presented for sale to prospective buyers. Following are a few items to think about and address in order to prepare for a sale and maximize your company’s value:

1.  Check Your Ego:  One of the more common refrains we hear from owners is something along the lines of “Our product is technically superior to everyone else’s offering out there.  If we were only better at X (most often marketing and sales), we could easily be a $XX mm (insert huge revenue number) company.“  On further probing by us, we find out the company is 10 (or 15 or 20+) years old and hasn’t yet broken $3MM in revenue.  If you’ve been at something for this long and still don’t have a great deal of traction in the market, you aren’t worth a premium to a potential buyer.  Be realistic – you may have strong technology but there may be a whole list of items that need “fixing” (along with a substantial investment) to turn your company into a sales juggernaut.

2. Make Yourself Redundant: For many companies, the founder or founders are driving many areas of the company (sales, operations, implementations, development, etc.).  At some point it is important to make sure that you turn these tasks over to key people on your executive team, especially if you are starting to think about retirement or leaving the company post-sale to do something new.  A strong team that can function well without being overly reliant on the owner(s) is attractive to potential buyers because it lowers their risk.

3.  Develop Strong Systems:  Ensuring that you’ve got a strong internal infrastructure in place does a couple of things:  it helps everyone in the company to work more effectively and efficiently, and it proves to potential buyers that you’ve got your act together.  Stable internal systems also provide the company with the ability to scale more efficiently than a company without these in place.  Most buyers are looking at you with a view to charge their growth up.  In some cases, the acquirer will fold you into their infrastructure, while in others you may be acquired as a pivotal lead-in to additional acquisitions.  In the latter scenario, having strong systems and processes in place makes you additionally attractive.

4.  Clean Up the Financials:  It is surprising how often we see companies whose financials are not clean.  Companies may not be GAAP compliant, they may not be accounting for revenues and expenses with enough detail to help buyers understand their financial picture, or worse, there may be malfeasance.  This is a huge issue because it is extremely rare to see a really well run firm with messy financials…it just doesn’t happen.  Ensure that you are GAAP compliant, get your statements reviewed or audited annually, and stay away from setting up overly complicated company structures that require a ton of inter-company transfers and adjustments.  Potential buyers want to see clean, consistent financials that are easily read and understood.  If you have to start explaining gaps in your financials, you’re in trouble.

5.  Focus on Growth:  Profitability is important, but what buyers really want to see is a pattern of YOY growth.  If you are growing consistently year over year and your projections forecast this to continue, buyers are going to be immediately drawn to your opportunity and will recognize any growth above the market’s rate with a premium valuation. Again, it is important to be aware what is happening in your market. If you are growing at 20% but the market is growing at 30%, you aren’t going to get a premium valuation.

6.  Recurring Revenue:  As more and more firms move to a SaaS model, buyers look for a strong recurring revenue stream.  Again, a premium is placed on companies that have a significant portion of recurring revenue as a percentage of overall revenue.

7.  Evaluate Your Team:  Take the time to look honestly at your people.  Are there gaps in competencies?  Do you need leaders with more “big firm” experience?  Are there sales people who are consistently underperforming?  Make changes to your team that will help your firm’s growth before you go out to the market.

8.  Stability:  This applies to Clients, Partners, Employees, and Vendors.  Low turnover and sticky customers shows stability, cohesiveness, and long-term value in most cases.  One of the biggest risks to a potential buyer is a lack of stability.  The longer the tenure of your relationships, the deeper the roots, the better the communication, and the more elasticity you’ll offer for the challenges that will inevitably arise post-transaction.

9.  Develop Reasonable Expectations on Value:  Industry multiples derived from billion dollar cash and stock transactions executed by large multinationals are not in the same ballpark and really can’t be used effectively as a comparison for the sale of a software or tech company generating less than $30M in revenue. Be realistic.  If your $3M company has 20% ($600K) EBITDA, and has been growing at an average pace, do you really think you’re going to get 6X or 7X revenue (a $20M valuation)?  It would take the buyer 33 years to make back their investment!  Sure, perhaps given the right sales and marketing resources, annual sales can be pushed significantly higher, but this is the risk the buyer is facing:  he or she will not value you as if this success has already occurred. We’ve seen more than one deal fail due to unrealistic expectations.

10.  Consider the Structure:  Every deal is closed with a structure unique to that deal.  In some cases, the sellers will pay a majority of cash on closing and pay the balance over several years.  Or maybe there will be some cash, some payout over time, some earn-out based on projections, and some stock in the new company.  There are many ways to structure a transaction – what matters is what you are wiling to accept.  It’s important to note that when more cash is paid up front, the overall valuation tends to be lower (often by about 1/3) than when a small amount of cash is paid up front and a larger sum is paid out on contingencies or over time.  Increased risk to the seller is the tradeoff for a higher valuation.

This is list is certainly not exhaustive, but these are a few of the main issues we often run into when reviewing the readiness of a company for a sale.

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