Choosing to sell your tech venture is a monumental decision. It’s complex and stressful. It requires strategic planning. And timing is never perfect. In this Agile Thinking® article, we peel back the layers of this process, equipping both founders and shareholders with vital insights that can be beneficial, regardless of their current intent to sell or not.
Deciding When to Sell
Unmasking the Complexity Planning and strategising for tech businesses are often multifaceted, but setting the right time to sell poses an even greater challenge. Typically, a sale tends to stem from one or more of five catalysts:
- Business Hurdles: Although not ideal, when your company’s survival is in jeopardy, it’s advisable to focus on stabilising operations urgently and engage advisors to prepare a sale.
- Exceptional Performance: Paradoxically, selling may be the least of your interests when your company is thriving. However, an irresistibly compelling offer can tip the scales.
- External Forces: Sometimes, external circumstances or events can spur a sale. For example, as a founder, you might decide to transition from a small firm to a bigger one if it promises more lucrative gains.
- Founder’s Limitations: Selling may become attractive when founders feel they’ve maximised their company’s potential within their capability and capital gain has maxed out in their hands.
- Retirement: For tech companies that have been operational for 12 to 15 years and are still runby their original founders, retirement can act as a catalyst for sale. Founders in their 50s often consider selling their company as a step towards a new phase of life.
Often, external forces can be more potent than those within a founder’s control, influencing the sale’s timing.
Making the Critical Decision: To Sell or Not to Sell?
When it comes to company acquisitions, there are three major avenues:
- Industry Peers: Larger firms in your sector, or closely related ones, may view your company as a catalyst for innovation or customer base expansion.
- Private Equity Firms: Such entities often buy out all existing stakeholders, sometimes incentivising the management team to stay engaged post-acquisition. These transactions often come with hefty valuations.
- New Investment Rounds: This strategy involves new investors purchasing all existing stakes, typically at lower valuations.
Before deciding to sell, it’s crucial to gauge your bargaining strength. Having a current offer or a history of declined offers can place you in a strong position, often drawing additional proposals. Without any firm offers but indications of interest, the journey may resemble fundraising — requiring patience and strategic relationship building to avoid underselling your equity.
Consider consulting an investment bank or M&A advisory firm to help reposition your company for a more favourable sale. They can provide both operational guidance and connections.
Remember to keep communication lines open with your board, investors, executive team, and advisors to ensure alignment on expectations.
Bracing for the Sale: Key Preparations
Your company’s sale price is typically calculated using one of three methods:
- Service-based Companies: These are often valued at 1x to 2x annual revenue. This can increase slightly if your firm also has product components or intellectual property.
- Product-based Companies: Companies owning their products usually attract 4x to 10x annual revenue, depending on market position, unique differentiators, and technological complexity.
- Exceptional Innovation: In cases of ground-breaking innovation, product companies can command prices up to 20x to 30x annual revenue.
To convince potential buyers of your company’s worth, demonstrate clear paths to a solid return on their investment. Additionally, prepare for rigorous due diligence that will scrutinise every aspect of your business.
Understanding the Timeline
The acquisition process can be lengthy. According to Cube Capital’s experience, the fastest deal took six months to complete, while the longest stretched to eighteen. The timeline usually includes negotiations that can take between 2 weeks to 2 months, due diligence that may last 1 to 3 months, and drafting and finalising legal agreements, which can consume an additional 1 to 2 months.
Numerous internal and external factors can impact this timeline. It’s crucial to assess your company’s readiness, your bargaining position and prepare for the long haul.
Envisioning Life After the Sale
Contemplating your next steps, post-sale is equally important. Often, founders find themselves in high-ranking positions within the acquiring company, offering a lucrative salary and a comfortable position for a few years. However, the ‘corporate world’ might only sometimes mesh well with an entrepreneurial spirit.
Post-acquisition, your landscape might feel unfamiliar and daunting. After years of intense focus on your venture, it’s natural to need ‘time out’ to adjust to your new phase of life. Fear of the unknown, without their companies, often makes founders hesitate to sell.
Selling your company requiresdeep reflection, preparation, communication, patience, and foresight. The reality isthat internal challenges and external circumstances are the driving forces. Regardless ofwhether the potential buyer is a larger company, a private equity firm, or a new investor, the process is intricate and often protracted. It requires a clear understanding and strategic approach to navigate through successfully. Your exit from your tech company is much like the surfer’s perfect wave—is there for the taking if you can successfully anticipate and seize the moment. The wave is outside your control, but your ability to predict when to catch it is vital and can mean a difference of one or several times its annual revenue.