What to Expect When Selling Your Technology Company
This article is part 1 of a 4-part series.
Some entrepreneurs are planning to sell their company before they even start it. Others are approached by a potential acquirer with an unsolicited offer. In either case, understanding the process of selling your technology company and having good resources in place before the time comes to sell will lead to a smoother transaction and possibly a higher sale price.
This is the first in a series of four articles about selling your technology company. This article will provide an overview of the process. Future articles will explore due diligence (with an emphasis on IT due diligence) and integration after the deal closes. While much of the information applies to companies in all industries, the main focus of some of the articles will be squarely on technology companies.
These articles are focused on relatively small tech companies--usually well under $100M of annual revenue. Larger deals take on much more complexity than what will be described.
Connecting with a buyer to sell your technology company
How do you find a potential buyer? If you know you want to sell your technology company, one of the best things you can do is to network with others in your industry or niche. Obviously, networking has many other benefits, but one of the most significant is getting to know the people you may later look to as potential acquirers. These relationships don’t develop overnight, so you should be networking years before you hope to sell.
Even if you’re not actively marketing your company for sale, you may appear on the radar of a competitor, private equity or venture capital firm, and you may receive an unsolicited inquiry about your interest in selling.
Starting the conversation
Once you’ve started a discussion with a potential buyer, you’ll almost immediately need the services of a good lawyer who has worked on company transactions before. This isn’t a job for your brother-in-law the real estate attorney.
Before you get past the most basic of conversations about selling the company, it’s in both parties’ best interest to sign a confidentiality agreement. The buyer will understandably want to know more details about your business than you’d wish to provide without any protection, and the buyer will probably also disclose some of their future business plans at this stage. It’s important that both sides are protected as they exchange initial information, and you’ll want an attorney to review the confidentiality agreement.
More articles from AllBusiness.com:
- Selling Your Technology Company: The Due Diligence Process
- 15 Common Mistakes CEOs Make When Selling Their Company
- Selling a Business: Entity Sale vs. Asset Sale
- 10 Questions to Ask Investment Bankers When Selling Your Business
- The Importance of Disclosure Schedules in Mergers and Acquisitions
Informal due diligence
Once a confidentiality agreement is in place, there is normally a period of initial, informal due diligence. This means the buyer is seeking enough information, from a 30,000-foot level, to determine whether your business is worth buying. Are you profitable? What are your products? What will your revenue look like next year?
At this stage, it’s not unreasonable for the buyer to ask for at least summary financial statements and projections. This isn’t full-blown due diligence, however. Even though you’ve signed a confidentiality agreement, you should be selective in the information you provide. Once it’s out, it’s out. Things like customer lists, contracts, future product plans, etc., are not usually required to be divulged at this point.
If in this process you determine there is some circumstance that might immediately cause the buyer to pass on the deal if they knew about it, such as a significant pending lawsuit or a government investigation, you might want to consider disclosing it to avoid wasting everyone’s time. Moreover, in these examples, you might want to postpone any serious discussions until they’re resolved.
On the other hand, if you just signed a new customer to a five-year contract that will increase your revenue by 20 percent, you should provide at least some level of detail as it could increase the price the buyer is willing to pay.
Suffice it to say this stage of the potential transaction is fairly delicate and the best strategy is determined on a case-by-case basis.
Advisors are important
This is another part of the process of selling your technology company that can benefit from outside advisors. An accountant can be very helpful in putting together your projections and helping you to best present your financial information.
In addition, if you haven’t been through a business sale or purchase before, you may want to obtain a financial advisor familiar with your industry to help you with the negotiation process. This expert can educate you as to what’s reasonable to discuss and what’s not during the informal due diligence process, and guide you throughout the more detailed due diligence to come. They should also be familiar with how companies like yours have been valued in recent transactions.
The letter of intent
If the potential acquirer gets to the point where they want to move ahead with a purchase, they will typically present a letter of intent, or LOI. The LOI summarizes the terms of the proposed deal and will usually include items such as the purchase price, any earnout (future performance-based payment) details, and an employment agreement summary for key executives and staff. It will also normally indicate other terms, such as deadlines, exclusivity, and the fact that the business should be run in its normal fashion.
If you want to proceed with the deal and you didn’t get an attorney involved before, you’ll definitely want to do so before you sign the LOI. Without proper language, the LOI can effectively become a contract. If you don’t take it seriously, you may be sorry later.
After the LOI is signed, you’ll enter the formal due diligence phase. The next article will focus on what you can expect.
RELATED: Selling Your Technology Company: Five Ways to Kill the Deal
