We regularly speak to owners, shareholders, and executives across a variety of software and technology organizations considering the sale of their company. In many cases, after some initial discussion and exploration, we recommend they hold off on a sale in order to address specific issues that are likely to hinder the successful completion of a transaction, along with the valuation they are likely to see.
Following are five of the more common reasons we advise not to sell a technology company:
1. Your sales have been declining for several years.
All things being equal, the best time to sell your tech company is when your revenues are rocketing up. You’ve had a few great years of improvements and can show the buyers that it looks like it’s going to continue or be even better in their hands. Potential buyers will pay a premium for companies with consistent growth and a strong pipeline of prospects. If your revenue has been declining, valuations plummet and no matter how good your story is, it’s likely the value and quality of offers will be heavily discounted. We strongly suggest you consider all possible ways to turn the company’s fortunes around before selling. If possible wait until you have 6 or more consecutive quarters of improving results before going to market.
If you don’t have the resources needed to reverse the decline in revenue and decide to sell anyway, get an approximate market valuation to understand your situation. Average multiples won’t apply to you and you’ll need to be realistic in setting your expectations.
2. Your revenue is below a Threshold.
Some shareholders get a little ahead of themselves in wanting to monetize their investment. Your outcome will be much better the higher your revenue reaches before looking for a buyer. Small companies are viewed as “entrepreneurships” and valuations are heavily discounted. Value is often perceived to be in the person, not the company. The firm is too small to have much management or infrastructure to leverage. Buyers can’t cut costs (there aren’t many) so the entire valuation is built around growth. A buyer’s total investment is what it takes to acquire the firm, plus additional sales and marketing injections.
Quality buyers have minimum size firms they will look at because they’re looking for meaningful accretive revenue and profits. The bigger your firm is, the better quality of buyer you’ll attract. Being over $2m, $5m, $10m or $20m in revenue opens doors to an increasing list of quality buyers. One further point is buyers pay more for growth companies that those perceived as operating as a lifestyle company for the benefit of the shareholders.
But, you say, my technology is so disruptive that I think someone like Google or Facebook or (insert name of giant tech company here) will pay a premium for it regardless of my sales. We don’t want to rain on your parade but realistically there are very, very, few companies that fall into this category. In most cases these giant companies have teams dedicated to looking at the market to finding these specific opportunities, so if they haven’t come knocking on your door yet, the likelihood is they aren’t interested. Until they call, do yourself a favor and do everything possible to accelerate growth. This usually means more revenue, but there are situations where it may be measured otherwise (millions of downloads or other activities).
3. You’ve been approached with an offer to buy your company.
STOP! Do not take the first offer that comes along. Do your due diligence and find out if the valuation and deal terms stand up to scrutiny. Engage with an advisor that knows your market and can tell you whether this is a reasonable offer or whether you owe it to yourself to put this buyer on ice while you explore opportunities in the broader market. We have seen many companies make this mistake and leave millions of dollars on the table as a result. (They knew us, we knew them and it was easy, or They have bought a lot of companies and assured us that their offer represented fair market value, or worst of all “I saved the cost of paying an advisor”). The best way to get maximum value for your company is to bring multiple qualified buyers to your deal.
4. Your internal processes are a mess.
Do get your company’s operations in order, preferably long before considering a sale. Ensure financials are up-to-date and have been reviewed, proper revenue recognition rules are used, your shareholder agreements are in place, your collateral materials are up-to-date, your HR policies are in place, customer and employee agreements are standardized and all in place, etc. Ensure you are measuring important KPI’s that will show you are tracking your progress and illustrate your good management.
You should run your company as if it is already for sale. A bad first impression can be devastating. Potential buyers are put off by companies that are disorganized or appear poorly managed. They’ll walk away from the deal or will discount their offer because you’re not showing the attributes needed to attract a premium offer.
5. There are irregularities or issues you haven’t dealt with.
Trust us when we tell you that if you have any ghosts in your closet metaphorically speaking, deal with them now, not in the middle or end of a sale process. Do not wait until you are in due diligence with a potential buyer and hope to explain them away. Finding surprises late in the process is the leading cause of a buyers walking away and transactions falling apart. Such issues put fear into buyers who think: “If this was being hidden or not openly disclosed to me, what else is there?”
You may have none of these but search hard. Consider if your books are GAAP / IFRS compliant, if there any undocumented promises to employees or investors, outstanding (or potential) legal issues, if contracts with customers, suppliers or channel partners are fully up to date and have transferability to buyers. There are hundreds of things that can kill your sale so make sure you have thoroughly polished your company from to bottom and are absolutely sure that you will do well when put under the magnifying glass.
Well before you or your shareholders reach the point of being approached, or considering whether “this is the time to sell”, you should work with advisors who can help you ensure you’re positioning yourself for a successful sale. You may need specialists in accounting, tax, marketing or business development, or perhaps legal advice to prepare. When it comes to learning more about the current market, timing an exit and what your valuation may be get outside help to provide an independent assessment that you can use to help with your decision. These companies often can point you to additional resources that will help ensure you make the most of your big event.