Selling a Company or Courting Potential Investors: 4 Key Things Tech Companies Need to Know

June 7, 2017

According to recent trends in the marketplace, it may be the right year to consider selling a company or begin courting potential investors — especially if you operate in the technology sector. reports that sales and purchases of small businesses soared in 2016, up 8.6 percent from the previous year. Experts at ValueWalk stress that “the seemingly unstoppable tech industry will prove more immune to any sort of macroeconomic troubles” than other sectors, creating a market state in which your company will be a highly desirable target for equity investors.

If you decide to move forward with a business transaction, there are four key things you need to know: your strategy, your business, your financials and your gaps. The following overview will unpack those four critical areas and help you maximize your value in a sale or capital raise.

Know Your Strategy

First, solidify your strategy — both from a corporate and personal perspective. As a business owner, you may want liquidity sooner rather than later, while your company may need capital for growth, acquisitions or hires. Make sure that your goals for a potential transaction align with your overall strategy. For example, if you’re the entrepreneur who loves the chaos of a startup, you may want to sell now and move on to your next project, or negotiate a contract for a three-year operational or consultant role to stay connected with what you built while trusting others to lead the company. However, if you’re comfortable managing the day-to-day execution of a growth plan, you should look for investors with whom you can strike the right balance of strategic advice and operational influence.

Answer the following questions about your business strategy to think through what you really want to accomplish over the next few years and determine if you should pursue a sale or equity funding:

  1. Where do you see yourself and your company in one, three and five years?
  2. Are you looking to cash out now, or are you seeking capital for growth, acquisitions and hires?
  3. Are you the entrepreneur who loves the chaos of a startup, or are you comfortable managing the day-to-day execution of a growth plan?
  4. Do you want to remain part of the company going forward?
  5. How much operational and ownership control are you willing to give up?

Know Your Business

Before engaging in a business transaction, you must clearly identify your business and market objectives. Evaluate where you are in your business lifecycle to ensure your documentation accurately explains your market position and growth plans to potential buyers and investors.

Be prepared to talk about senior management positions in your company, as well. Investors and buyers will focus on whether or not you have the right team in place to achieve your growth objectives. They may want to bring in their own people, displacing your long-term employee leaders. As such, you should come to these meetings prepared with information that will speak to the key figures on your team, compensation and employee costs such as healthcare.

Answer the following questions to ensure you have a clear picture of what you want to achieve with a potential deal:

  1. Where are you in your business lifecycle? Is your business at a plateau, where you need to double down on R&D or marketing?
  2. Are you and your management team the right people to take your business to the next level?
  3. How fast is the market you are in growing or changing? Are there other markets you need to be in, though you lack the capital or expertise to pursue them?
  4. Do you have the capital to meet your growth objectives? Are you adequately funded to hire enough developers to be first to market?
  5. Who are your key competitors, and how is your business differentiated?
  6. Is your intellectual property adequately protected?

Know Your Financials

While not every tech company will have a seasoned veteran as CFO, working with an experienced accounting firm to make sure that you have professionally reviewed (preferably audited) financials to present is key. Whether you’re selling a company or obtaining capital, having financials that are prepared to a standard will be critical for anyone to understand the performance of your business and make sound judgments about a transaction. Potential investors or buyers will require documentation that gives an accurate snapshot of the current financial health of your company, as well as its future potential. If investors or buyers find that your financial statements are not prepared in accordance with acceptable standards, it’s more than likely your discussions with them will come to an abrupt halt.

To ensure you are well-equipped to provide accurate financial information, answer the following questions to ascertain what prep work you need to complete:

  1. What are earnings before interest, taxes, depreciation and amortization (“EBITDA”), normalized for any one-time, non-recurring items that would depict the recurring earnings/cash flow of the business?
  2. Do you have audited or reviewed financials? How far back?
  3. What is the state of the company’s balance sheet and working capital?
  4. How does the current ownership structure impact your financials and tax position?
  5. Does your company have any legal or other risk management challenges?

Know Your Gaps

Make no mistake: Prospective investors and buyers will dig into your operations during due diligence. Their team of lawyers will comb through your files, contracts, customer information, processes and protocols in order to arrive at a fair valuation. To maximize your valuation potential, you have to conduct your own due diligence ahead of time. Pre-sale or capital raise due diligence can help expose gaps in your operations, financials, tax position, marketing and sales processes, IT systems and cybersecurity protocol.

By identifying these gaps prior to a transaction, you can either fix the issues or disclose them to a potential buyer or investor so that those gaps are baked into their valuation. Not knowing or trying to hide deficiencies will almost always result in a larger valuation impact if found during the due diligence of the potential buyer or investor.

That’s why it’s necessary that you answer the following questions to identify key operational gaps to fix or disclose before approaching investors or buyers:

  1. What elements of your operational structure currently have the greatest impact on your financials and tax position?
  2. How sophisticated is your technology development process?
  3. Are there hiccups in your sales and marketing processes that impact revenue generation?
  4. What do your IT infrastructure and cybersecurity protocols look like?
  5. How solid are your regulatory and compliance policies and procedures?

Well-positioned tech companies are attractive investment targets — this year, in particular. Before you make your move, make sure to keep the above information in mind. By knowing your strategy, business, financials and gaps, you can go into any deal with the confidence and preparation needed to maximize your value.

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