Unfortunately, we see far too many mistakes made by software and technology company owners and shareholders when selling their businesses. These are the top 9:
1. Selling Because they Got an Offer
Too often shareholders are approached by a buyer with what they perceive is a reasonable offer and sell. They think they negotiated well and probably did. It’s unlikely they got the best deal in the market, just the best deal they could get from this particular company. Without preparing or looking for other buyers and weighing options, they often leave millions of dollars behind.
2. Waiting Too Long to Sell
There are Windows Of Opportunity (WOO) to sell in every market where you can achieve better than average returns. Too often we hear “Why would I sell now? The company is growing and doing well!” WOO can be based on the economy, where the company and its products are in their evolution, the M&A activity in their particular markets, the need of a big wealthy buyer to solve a painful problem in their strategy, and other factors. If you sell during a WOO, you get strategic values. Most CEO’s merely think about financial valuations (if we get bigger in a few years, we will be worth more).
3. Picking the Wrong M&A Advisory Firm
If you’re a small firm, don’t pick a huge investment bank or consulting firm as your advisors. The hype that they have thousands of partners around the globe doesn’t materialize in practice and your project will be relegated to the recently-joined juniors.
Often an advisor is chosen because of a friendly reference, but if you own a software company, and the friend had a construction company, their advisor’s contacts and experience are not going to be much good to you. Look for references within your industry.
Pick advisors who will give you their most experienced professionals to work with, that know your market, have had successful deals in related industries, work with companies your size on a regular basis, and that already have the contacts needed to make calls to open doors on your deal.
4. Misunderstanding their Market Value
Financial value, competitive value, strategic value, theoretical value, future value vs. market value. If you don’t have a good idea what you are worth before you start the process, you can either sell for too little, or damage your credibility by asking for way too much.
5. Lack of Preparation
Too many shareholders / executives work in the business, not on the business. Every major decision you make throughout the year impacts your equity value, and the best companies are always preparing for an eventual sale. Inadequate preparation drops valuations. You need to think about where your likely buyers will come from and what they may be looking for. Tracking your performance monthly or quarterly on many measures to demonstrate growth, improvements in productivity or positive trends in performance will give you the credibility needed to garner higher valuations.
6. Not Understanding What Buyers are Looking For
Not every buyer is looking for the same things and you shouldn’t have one pitch. Understanding the strategic fit between your company and theirs improves value.
7. Selling to the Wrong Buyer
You often hear about some large number of acquisitions “failing”, or not achieving the objectives that the buyers had hoped for. While this is more prevalent in large transactions, the cause is often the lack of choice the seller had. They wanted to sell, and this was the only buyer. Getting multiple buyers to the table not only improves your offers, it gives you legitimate choices as to who will be the best fit for your firm, its people, and customers.
8. Surprising Buyers with Bad News
The later in a process that negative news or “skeletons in the closet” are revealed, it is exponentially more likely to destroy your deal. Every business faces setbacks at some point, and your openness to discuss this early in the process builds credibility with your prospective buyers.
9. Choosing an Inappropriate Lawyer
Remember, there are all kinds of lawyers and for this you need a “deal lawyer”. This is someone who invests the majority of their time on M&A transactions. This experience is invaluable. The lawyer who you’ve used all these years for employment, contract, and other issues is unlikely the right lawyer for your deal, and can lead to numerous problems in closing successfully.
On the same topic, some lawyers (and accounting firms) believe they’re good M&A advisors and you don’t need a third party to assist you. We strongly believe that you need all of these firms at the table. M&A advisors are paid to manage the project through to successful completion. Lawyers are paid to protect you and point out all the reasons the deal might be bad. Accountants are a strong resource to provide financial, tax and pre/post transaction support services. We overlap and collaborate, but don’t replace each other.
Kevin Tribe is owner and Managing Director of Tequity Inc. a boutique merger & acquisition consulting firm for entrepreneurs and shareholders of North American Software, Telecom and Technology businesses. These companies have strategic value beyond that shown on their balance sheets; in their intangible assets, intellectual capital, and knowledge-based workers.
A graduate of the Richard Ivey School of Business, Kevin’s worked at senior management levels with multi-nationals, mid-sized firms and owned and been CEO of several software companies.
He is a board member and past Chair of the York Technology Association and facilitator of their CEO Peer Group. He sits on the board of the Information Technology Association of Canada (ITAC). He is an angel investor and member of York Angels, and a member of Communitech, Ottawa Carlton Research & Innovation, Association of Corporate Growth and the International Business Brokers Association. Since 2004 Kevin and his team have assisted dozens of CEO’s and their shareholder groups successfully achieve their personal and business objectives.