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If you’re thinking about selling your tech business, you need to carefully consider several factors. Let ICON help you work it out

Deciding to Sell Preparation Timing Valuation Checklist

Deciding to Sell:

Should I sell my business?

  • You need at least two years of preparation before putting your business on the market. Make sure you can produce two to three years of tax returns that are accurate and show maximum profitability to get the best price for your business.

How is a buyer going to value my business?

  • Companies sometimes run everything through the business, such as car allowances, school fees, loading the business with tax write-offs can make you appear less profitable and cause a buyer to undervalue your business.

Do I have a strong management team?

  • It’s important for entrepreneurs to build a strong management team that can bring them through the sales process and help them get the best price for their business.

Is the market right?

  • Before selling, look at current market conditions the market, the company and your own business sector and, if you can align them all on the upward trajectory, then you should get an exceptional price for your business.

Can I cope with the changes on the horizon?

  • Rapidly changing technology, increasing globalization and other business trends can prove too much for some business owners. Keep your eyes trained three or four years down the road, and if you don’t believe you can keep up, sell before your failure to adapt catches up with you. “Some people find it hard to leave, but if you wait too long, the industry may pass you by.

Can my business thrive without me or without a key customer?

  • If a buyer is concerned that a business is too dependent on the owner or a single customer, they may take their offer elsewhere. A good business can operate when the owner is on vacation and has good revenue diversification, where no one customer represents more than five percent of the business.

Would I be willing to stay on if the buyer wants me to?

  • Sometimes you can seal a deal by agreeing to stay on in a consulting role for a period of six months. If you’re willing to stay on, it might reduce the risk to the buyer and increase the value of the company.

What are the potential deal breakers?

  • Unresolved issues can rear their ugly head and interfere with a sale, particularly in areas such as company ownership, accounting and intellectual property rights. For example, an owner may have used a contractor to write software for the company without requiring him to assign his rights to the company. This can create questions about who possesses critical rights, which can scuttle the deal. So, consider what your potential deal breakers are and try to resolve them before you’re near to closing a deal.

Would I consider alternatives to an outright sale?

  • If an outright sale isn’t right for you, we can help evaluate other options. Would you consider selling a percentage of the company to a private equity fund? Or would you do a leveraged recapitalization, which is a loan that puts a portion of the proceeds in your pocket?

Preparation:

Am I ready for exit?

The answer to this question is one of the most important decisions entrepreneurs and shareholders need to get right. Sell too early and you can miss out on significant value, sell too late and you might have completely missed the opportunity.

To sell at the top is perfect timing. The problem is that none of us can predict if and when we’ll reach that key moment. So what are the factors to look out for to maximise our chances of ‘getting lucky’?


Creating the deal

  • The first thing to remember is that, generally, it does not ‘just happen’. Creating a successful sale requires action, momentum and the ‘going after’ of the right and relevant buyers. Creating the deal – is what getting the right adviser on board is all about. The right adviser will help create the right deal at the right time, with the right buyer at the right price.

Timing is everything

  • There are three key cycles to consider: the market, the company and your own business sector and, if you can align them all on the upward trajectory, then you should get an exceptional price for your business.

Strong trading dynamics

  • Whilst all the wider market dynamics may be strong, you must ensure that you also have strong trading dynamics within your company. Acquirers do not want to buy headaches. Earnings, growth and positive cash flow are essential – the stronger the growth the better the price. Remember it’s very difficult to sell a business which has reached a plateau or even worse is on the slide. It is also very difficult to sell a business which is in a sector which is in decline or is notoriously lumpy. The best time is always on the up.

Good waves come in threes

  • As any good surfer will know good waves come in threes and if you can hit all three waves: the wave of growth in trading results; the wave of strong sector activity and the general wave of confidence rolling through the M&A market, then you can get an exceptional ride and may even get to buy the surf beach!

Timing:

Timing your exit is far from straightforward and can be made a great deal trickier as the M&A market tends to follow a cycle of feast and famine. There are three key cycles to consider and, if you can align them all, then you should get an exceptional price for your business.

 
  1. The Market

    Market conditions are arguably the most important factor. Sell on the up. If markets are contracting, confidence dips and rather than dropping prices many trade buyers will simply not make…

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    Timing:

    Step 1

    The Market

    Market conditions are arguably the most important factor. Sell on the up. If markets are contracting, confidence dips and rather than dropping prices many trade buyers will simply not make acquisitions at all. So you need to keep an eye on market conditions; both the macro-economic indicators (interest rates, stock markets, etc.) as well as technology sector indicators and M&A trends.

    The market has recovered strongly from the wobbles of 2002/3 and deal volumes and values continue to grow. Conditions are currently as good as they have been since the top of the last market peak in early 2001. The last cycle was also led by technology companies. This time there has been a more widespread recovery. Although some headline grabbing deals are back, the bulk of deals have been backed by solid cash flows and profits.

  2. Company

    Trade buyers want to buy growth. The more you can demonstrate that your business has grown and will continue to grow, then the more the buyer will pay. The key here is demonstrating that you have…

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    Timing:

    Step 2

    Company

    Trade buyers want to buy growth. The more you can demonstrate that your business has grown and will continue to grow, then the more the buyer will pay. The key here is demonstrating that you have consistently grown profitably and generated cash flow, yet left enough growth on the table for the buyer. They are buying the ability to generate future cash flow and need therefore to buy into your “growth story”. Consistency of earnings is also important; a lumpy earnings pattern is very difficult to value and puts off acquirers.

  3. Individual

    Private businesses will face individual shareholder pressures to realise shareholder value. It may be because a VC or business angel needs to realise their investment in a given period or because of…

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    Timing:

    Step 3

    Individual

    Private businesses will face individual shareholder pressures to realise shareholder value. It may be because a VC or business angel needs to realise their investment in a given period or because of other factors such as retirement, disagreement or most commonly boredom by longer term owner-managers. If these factors can be managed to align with the Market and Company cycles then it will clearly be to the benefit of all shareholders. Another key point is that owner-managed businesses actually need to be sold before you want to exit the business. With your commitment for at least a reasonable handover period it inevitably lowers the risk for the buyer, benefiting price.

Valuation:

What's My Business Worth?

If you lined up ten potential purchasers and asked them to value a business you would get ten different answers. Essentially a business is worth a different amount to different people at different times.

There are any number of different valuation techniques purchasers use, but the most common valuation method we see for private companies is the price earnings or PE ratio adjusted for surplus assets.

 

  • Underlying earnings

    Most trade purchasers are looking at acquisitions as a way of improving their future earnings and as a result improving the valuation of the enlarged group. The best guide to assessing the future…

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    Valuation:

    What's My Business Worth?

    Underlying earnings

    Most trade purchasers are looking at acquisitions as a way of improving their future earnings and as a result improving the valuation of the enlarged group. The best guide to assessing the future earnings of any prospective target is to look at their historic, current and forecast earnings. However, this may not paint a true picture, many private companies are not run to maximise profits; due to a natural reluctance to pay large amounts of tax. So when presenting financials to a buyer, adjustments need to be made to calculate the “underlying earnings”. While these adjustments are common the fewer adjustments that are made the better.

  • Excess staff remuneration

    Packages to staff that are above market norms may be viewed as quasi-equity and adjusted. A recent client paid significant bonuses to staff in lieu of equity participation in the deal, so clearly…

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    Valuation:

    What's My Business Worth?

    Excess staff remuneration

    Packages to staff that are above market norms may be viewed as quasi-equity and adjusted. A recent client paid significant bonuses to staff in lieu of equity participation in the deal, so clearly that needs to be added back.

  • Benefits

    This can include all sorts of expenditure which is common in private companies but tends to be tolerated less in the post-Enron environment at Plcs. As well as the obvious expenses like entertaining,…

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    Valuation:

    What's My Business Worth?

    Benefits

    This can include all sorts of expenditure which is common in private companies but tends to be tolerated less in the post-Enron environment at Plcs. As well as the obvious expenses like entertaining, other real life examples include: the running costs of a team of racing cars, school fees, membership of Loch Lomond golf club, a £150,000 staff party and the overseas holiday home.

  • Non-recurring items

    These are usually large one-off items. Whether they are actually defined as exceptional items in the audited accounts is largely irrelevant, although it certainly makes the inclusion of an item…

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    Valuation:

    What's My Business Worth?

    Non-recurring items

    These are usually large one-off items. Whether they are actually defined as exceptional items in the audited accounts is largely irrelevant, although it certainly makes the inclusion of an item easier to justify. Unusually large bad debts, unusual professional fees, losses on discontinued or sold business divisions, losses on foreign exchange transactions or asset disposals are examples that may fit into this category.

  • Interest

    Most purchasers tend to look at operating profits and will therefore exclude all interest payable or receivable. Once the underlying earnings of the company have been established, this will form the…

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    Valuation:

    What's My Business Worth?

    Interest

    Most purchasers tend to look at operating profits and will therefore exclude all interest payable or receivable. Once the underlying earnings of the company have been established, this will form the basis of a purchaser’s valuation, however, further adjustments may well be needed by the buyer to account for: differing accounting policies, rates of depreciation, software amortisation amongst other things. The more transparent a vendor is in disclosing the financials the better.

  • Multiples

    Multiples used in valuation can vary enormously and are determined by a number of factors, many of which are outside the vendor’s control.

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    Valuation:

    What's My Business Worth?

    Multiples

    Multiples used in valuation can vary enormously and are determined by a number of factors, many of which are outside the vendor’s control.

  • Listed comparables

    First, and foremost, multiples used in valuing private companies have a direct relationship with the value of comparable listed companies. Just ask anyone connected with PWC Consulting who saw its…

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    Valuation:

    What's My Business Worth?

    Listed comparables

    First, and foremost, multiples used in valuing private companies have a direct relationship with the value of comparable listed companies. Just ask anyone connected with PWC Consulting who saw its value drop from a mooted $18bn from HP to an eventual $3.5bn when acquired by IBM eighteen months later.

  • Strategic premium

    Secondly, a strategic buyer will always be prepared to pay a premium over a tactical or financial buyer, as their earnings will benefit from the deal through a combination of: a. Cost savings –…

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    Valuation:

    What's My Business Worth?

    Strategic premium

    Secondly, a strategic buyer will always be prepared to pay a premium over a tactical or financial buyer, as their earnings will benefit from the deal through a combination of: a. Cost savings – profits will be boosted by cutting costs, for instance, cutting the accounts department or closing duplicate offices or manufacturing plants. b. Revenue synergies – companies will often make acquisitions to plug a significant product or skills gap in their portfolio, particularly overseas buyers who need to build a global network quickly and efficiently to service their international accounts. c. Opportunity cost – the acquisition may benefit the strategic buyer in indirect ways. For example, we sold a wireless services company to a financial institution that was able to bring to market its new wireless financial product a lot earlier by deploying the acquired wireless engineers, thus justifying a premium price.

  • Growth

    Buyers want growth, and are prepared to pay for it. As a very rough rule of thumb a listed company that can grow profits or sales at 30% annually will warrant a PE x 30 whereas one growing at 10%…

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    Valuation:

    What's My Business Worth?

    Growth

    Buyers want growth, and are prepared to pay for it. As a very rough rule of thumb a listed company that can grow profits or sales at 30% annually will warrant a PE x 30 whereas one growing at 10% will only have a PE x 10. So, build a robust and compelling growth story. Selling a business at the peak of the business cycle is too late, you need to leave something on the table for the buyer. He needs to buy into your vision for growth to justify paying a premium.

  • Profit records

    A business that has a consistent record of profitability will be worth more than a one-year wonder. You need continuity to build confidence in the business model. Recurrent business, non-reliance on…

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    Valuation:

    What's My Business Worth?

    Profit records

    A business that has a consistent record of profitability will be worth more than a one-year wonder. You need continuity to build confidence in the business model. Recurrent business, non-reliance on one customer, longer term contracts and substantial order books all reduce risk to a buyer and therefore justify a premium in the multiple.

  • Commitment

    Show commitment to the buyer to help reduce handover risk. Many deals have an earn-out or partial deferred payment to retain and incentivise management to stay. If you are an owner/manager and have a…

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    Valuation:

    What's My Business Worth?

    Commitment

    Show commitment to the buyer to help reduce handover risk. Many deals have an earn-out or partial deferred payment to retain and incentivise management to stay. If you are an owner/manager and have a fixed date that you want to exit by, then you are better selling the company early, unless you’re not really involved with the day-to-day management.

  • Flexibility

    Be flexible, every vendor wants cash, yet most purchasers want to use shares. There is usually a compromise. Recently, most of the deals we have seen in the market have actually been all (or…

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    Valuation:

    What's My Business Worth?

    Flexibility

    Be flexible, every vendor wants cash, yet most purchasers want to use shares. There is usually a compromise. Recently, most of the deals we have seen in the market have actually been all (or substantially all) cash, but as equity markets recover shares will be used again. Vendors that were enticed by notionally high valued equity deals in the last bull market had their fingers burned. There is a base price for a business that clearly needs to be in cash, but taking some equity shows commitment and enthusiasm to the purchaser. An earn-out can also be a useful way of increasing value, linking future performance to returns.

Checklist:

Here’s our checklist of what acquirers want:

  • Growth in revenues – historic and future
  • Attractive profits and cash flow record
  • Visibility of future revenues
  • Strength, depth and commitment of management team
  • Brand or product recognition in chosen segment
  • Scalable business model
  • Potential cost or revenue synergies
  • Current technology
  • No surprises

When not to sell—potential issues to consider:

  • Market, sector and company cycles not aligned
  • Reliance on too few clients / employees / suppliers
  • Significant contract renewal imminent
  • Inadequate working capital
  • Lumpy trading patterns
  • Business ex growth
  • No planning – management / processes / housekeeping
  • Sub scale
  • Contingent liabilities – legal, technical

What next? Book an in-person ICON Exit Review:

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