Growth: Preparing for exit, what should you be thinking about now?

Tips on preparing to sell your business – from the 2018 series of Threads discussions.

Discussion host: Rory Suggett, Partner at Ashfords LLC. 

Context

Selling, or exiting, your technology business might seem like a distance off, with more pressing needs to manage the business day-to-day. With attention the right things along the way you can be prepared to sell/exit if opportunity arrives sooner.

Preparing your mindset for exit

As a founder, envision what you want early, to whom you want to sell and what kind of culture and fit your core team offers a prospective buyer. Work towards this so that you can have a clean and worthwhile exit.

Getting your house in order

Selling a business is like selling a house; you need to make it look good. You need to identify the value of the business and be able to demonstrate it; e.g. with three years of accounts.

You will need to ensure your house is in order throughout its lifespan. The financials should be reviewed and sorted out with the right contracts in place and shareholders accurately recorded. This is best done not in a rush or under scrutiny.

Identifying the value of the business

When selling, or exiting, a product-based business, it’s more about IP, technology and market share transfer. Be ready to demonstrate such aspects. Services or skills-based businesses are usually sold as buyouts, with the founders and key people retained for an agreed period.

Talking to service providers early can be a good thing, gaining an objective sense of your business with an impartial valuation, often identifying objectives you hadn’t spotted. This also lets you compare providers and fees, which may be contingent.

The ‘right’ time to sell

Founders should be aware of commercial timing and the surrounding conditions, balancing this with it being an opportune time to get out of the business. It may seem the right time personally, but not be commercially optimal.

Be prepared for someone asking “would you sell your business?” at any time. Know in advance how you’d feel. Balance the potential commercial upside with the effort of being ‘always available to sell’.

Preparing for due diligence

If considering selling a professional services-based business, first ensure there is a good culture match with the culture of the acquirer, because a clash of management philosophy or a lack of shared values may cause the original team to leave in droves.

If considering selling, going to market lets you build alternative deal structures, with different models. Work with your accountants, private corporate finance and lawyers. This gives you the preparation and homework in advance, with the right people on board, to engage multiple prospects for the best outcomes.

Profitability is the one metric that trumps all in the eyes of acquirers. This needs to be demonstrable and sustainable.

VC’s will typically undertake strong due diligence, seeking more spectacular returns from lower risk (many aspire to find that 20x gem). Seed investors are usually more benign in their scrutiny, as they are investing lesser amounts across a number of firms.

Buyers typically want 100% share capital, or 51% of the business. If as the founder who stays on, you want to retain some control, you must bake this into the contract.

When seeking an acquirer it can be tempting to wish for a clone of yourself as the new CEO, hoping they will run the business as you would. Remain prudent; the acquirers may run the business differently, but in an equally ‘correct’ – or better – way. You almost certainly won’t recognise the original business three years down the line. 

Protecting your staff when selling the company

A common regret among the founders who sell their business is the impact on staff; usually arising from a mismatching culture and values. If your staff aren’t making lots of cash from the sale, they at least expect job security. Make exit a positive experience for your people so that they want to stay and succeed.

Most buyers miss the key, fluffier, ingredients in due diligence. Focusing primarily on the numbers and insufficiently on people and culture is a prime cause of an acquisition falling apart. As a founder, do your own due diligence to ensure success for your people too.

A good merger and acquisition process should involve meeting shareholders and the core team, not just the founders. It should be a blend of people, technical and business.

Take care not to destroy potential future leaders from within the original business through a clumsy merge of philosophies, cultures and approach. Involve such people in the shaping of the new entity for them to make their own impact and buy into the new chapter.

Some founders run the business as an extension of their ego, and can find it hard to hand over fully to the acquirer. Be clear about any remit that you want going forward, and be prepared to let go of aspects that aren’t a strength. You may be much happier in a subset of your original role.

When selling, or exiting, a services-based business, key people will usually be tied into the new deal. This ensures the new joint venture has the ability to run without the founder. You will likely need to stay on in a modified version of your original role, to prove continuity and revenues. 

Handover and stability

If the financial performance looks uncertain – or is dependent on key people – it’s likely the founder will receive a ‘deferred consideration’ with a longer ‘earn out’, whereby valuation of earnings from the acquisition is contingent on sustained performance and revenues.

If the acquiring business proposes an earnout, try to retain some form of governance, so that you can still directly influence and shape outcomes.

Appointing a new CEO is a bit like exiting as a founder, retaining some control but awarding commercial direction to someone with greater skills.