Thinking of Selling Your Tech Business? Steps to Take Now
Article
If you are considering selling or divesting part of a technology business, you should be taking these steps now.
5 minute read
February 7, 2024
Partner, Tax - Technology
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To provide capital for future growth, founders of technology companies often look to divest a portion of their business. Selling a technology business takes time and preparation to ensure a satisfactory outcome. Even when a deal seems to be moving along smoothly, unanticipated events can occur: improper accounting for revenue, unknown tax liability, data security issues, or employee concerns are just a few examples of unexpected bumps in the road. If you are considering selling a technology business, you should be taking these steps now.
Initial Steps:
- Develop Relationships and Contacts Early. For many technology businesses, the likely buyer pool includes venture capital firms, private equity firms and strategic buyers. You may have already identified potential buyers. Two or three years before officially launching a sale process, start preliminary conversations with these parties. What you learn can be invaluable in your planning.
- Identify Your Team. Finding a team of partners you trust is essential to completing a successful transaction while mitigating risk and maximizing value. You will ultimately need to involve experts in law, accounting and finance to complete your transaction. You may also want to consider an investment bank to run the sale process.
- Define Your Ongoing Role. For many founders, the question of lifestyle after sale is difficult to address.
- Do you want to exit completely?
- How much equity do you want to rollover?
- What does your post exit employment agreement look like?
- Are you looking to start additional ventures?
- What is the role of other key personnel?
- Knowing what you really want from a sale is important to best align with the right buyer and potential future partner.
- Keep Emotions in Balance. For individuals, the process of selling can be emotionally challenging after having invested so much time and energy in the business. Maintain your perspective and know what you want to accomplish without letting these emotions get in the way.
Financial Steps:
- Organize Information. For many technology businesses, just organizing key information takes months to complete. Financial statements, billing records, contracts, asset lists, operating protocols and licensures should be readily available, accurate and complete. Buyers will want to explore operating metrics and ensure they review final, signed versions of contracts and documents.
- Clean Up the Financial Statements. Know the story. Buyers will typically value a business based on a multiple of revenue or earnings before interest, taxes, depreciation and amortization (EBITDA). While the baseline revenue and EBITDA levels are important, potential buyers will want to understand the historical financial results to best project the future outlook of the business. That’s why it is important to properly record and regularly review the financials of the business. In addition to reviewing your financial statements regularly, start keeping a list of potential one-time and/or non-recurring activity that may not accurately reflect the normal operations of the business (e.g., personal expenses, one-time legal events, etc.).
- Consider Ordering a Valuation. A professional independent valuation may be beneficial for several reasons. These are just a few of the benefits to taking this proactive step: It can: (1) require you to organize information, (2) help provide reasonable expectations in the event of sale, (3) shed light on areas of improvement prior to sale, and (4) provide a “dress rehearsal” for real conversations with potential buyers.
- Understand Tax Implications of the Sale. There are many different ways to structure a transaction, each with different payout terms and tax implications. Differences in these terms can have a sizeable impact on the amount of cash you actually receive from the sale. Knowledgeable M&A tax advisors can help you understand the timing of payments to you and the tax impact of those payments.
- Consider Estate Planning. For individual owners, selling a business can lead to significant proceeds. You may need to explore estate planning issues prior to sale.
Operating Steps:
- Make Necessary Business Changes. Whether you need to switch billing companies, re-negotiate contracts, optimize staffing levels, or improve your brand, preparing to sell your business is no time for procrastination.
- Stay Focused on Business Operations. Preparing for sale is not a reason to let operations slip. The sale process can take months and buyers will be keen to notice declining business trends. It is natural to mentally move forward to life after a sale but maintaining strong operations will be the key to a successful transaction. Continue operating the business as if the sale were not going to happen…because it may not.
- Keep Cybersecurity Top of Mind. As you prepare for a sale, it is even more important to ensure sound security controls remain in place and operating. Allowing your security controls to lapse may result in a breach that could make your business less attractive to buyers.
- Lock Down Financial Processes and Controls. Tie up the valuable package that is your business. A prospective sale event can significantly disrupt standard operating procedures that keep your business running efficiently, effectively and compliant with applicable requirements. As you prepare for a sale, make sure your core processes are firmed up, formalized and documented so that critical control activities continue prior to, during and following a sale event.
Taking these steps will improve your chances for a successful transaction. For more information, contact us.
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