Selling a business: a tech perspective

02 November 2023 - Luke Morris

The French word “entreprendre” is a verb. It means “to set about or to undertake something”.

Over time this word somehow morphed into an English noun for an energetic individual who is very focused on getting on with some business enterprise or other involving a significant degree of personal speculation, uncertainty, and risk.

Et voila, we have the “Entrepreneur”.

In my experience many entrepreneurs are fantastic at building businesses, but they tend to be a bit shakier when it comes to moving them on…

The process of selling a business is not unlike guiding it through a recession but make it ready for the upturn requires careful planning – as this is the key to success.

You can see how careful planners aren’t necessarily the sort of people who thrive on speculation, uncertainty, and risk.

Whenever we have the “exit” conversation with clients we always go back to first principles. It always makes sense to think about the alternatives and plan an exit well in advance.

There are a range of options available, and each has its challenges:

You may want to keep your business in the family. But you need to be sure you have a suitable successor.

You may want to sell your business to the management. But are they capable of running the business? And can they raise the finance?

You could decide to carry on yourself, but this only postpones the exit problem. And working on after you want to retire is unlikely to be in your best interests or the business’.

You could bring in new management from outside, but you would still own the business and retain ultimate control over how it is run. So, no real exit event.

Perhaps the most common method of exiting a business is a trade sale to another business. But this can be time-consuming and disruptive and involves disclosing confidential information to competitors. A variation on this theme is bringing in an institutional investor: a PE house of VC fund. The perceived potential for a profitable exit, such as an acquisition by a larger tech company or a successful initial public offering (IPO), can be a significant value driver. It is where some of the crazy valuation multiples we see for tech businesses come from.

You might decide that the business is worth more if you close it down and sell off the assets. But this means that employees lose their jobs, and your reputation could suffer. A management buyout or some other sale to employees can sometimes save a business in this position.

The tech space is a little different. A little special. Often these businesses comprise little more than a collection of very bright individuals. Institutional investors like this because it gives them the opportunity for scalability on the back of a light balance sheet. (Scalability allows for rapid growth without proportionally increasing costs.)

So, what should the tech entrepreneur be thinking about when it comes to the unnatural process of careful planning, well in advance of an exit?

Some of the primary value drivers in tech businesses to think around are as follows:

  • Technology and Intellectual Property (IP): Innovative and patented solutions often set a tech company apart from its competitors.
  • Market Opportunity: Tech businesses operating in large and expanding markets have greater growth potential and, therefore, higher valuations.
  • Revenue Growth: Steady and substantial revenue growth is a powerful value driver. Investors and acquirers often prioritise companies that demonstrate a track record of increasing sales.
  • Customer Base: A diverse and loyal customer base is valuable. Repeat customers and long-term contracts can provide a stable revenue stream and reduce customer acquisition costs. High customer retention rates and a focus on maximising the lifetime value of each customer contribute to a more stable and valuable business.
  • Product Differentiation: Tech companies that offer unique features or a competitive edge through their products or services have a clear advantage. Differentiation can lead to higher pricing and market share.
  • Team and Talent: Top talent can drive innovation, execute growth strategies, and navigate challenges effectively.
  • Recurring Revenue Models: Subscription-based or recurring revenue models create predictability and long-term value, as they provide a steady income stream. Investors love this.
  • Partnerships and Alliances: Strategic partnerships with other companies can open new opportunities, enhance distribution channels, and create additional revenue streams.
  • Data and Analytics: The ability to collect, analyse, and utilise data effectively is increasingly valuable. We have worked with several companies considering how they protect and maximise the use of data in their businesses.
  • Innovation and Research and Development (R&D): A strong commitment to continuous innovation and ongoing R&D efforts can lead to new product offerings and improved technology, which are attractive to investors and customers.

Understanding, careful planning, and maximising these value drivers is critical for tech businesses looking to attract investors, achieve higher valuations, and position themselves for a successful exit. Each case is different, every entrepreneur is different, and we would be very happy to discuss some of our cases with you as you embark on this journey.

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