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M&A Trends for Tech Company Selling Strategies and Timing

Posted by Ron Matheson in Articles

Tech companies come in all shapes and sizes, from small businesses that started out as a Bricks & Mortar retail business, and converted all or part of its sales channel to the Internet, to a company that started out via Online Retail and began selling via a physical storefront, to a software application developer that has succeeded at scale and is ready for the perfect exit. Or, perhaps the company focuses on Internet Wholesale, eCommerce Fulfillment or the hundreds of other companies that have been created and that are generating revenue in the tech sector today, not all of which are simply eCommerce support companies. The question all of these Tech and Internet Companies have in common is whether NOW is the right time to exit and what kind of plan of action should be put into place to make it happy. For this, you need a strategy and a long term exit partner – for this, you need an expert that has done this hundreds of times, specifically in the tech sector.

The fact is that the recession is in the past – the entrepreneurs we are talking to today are very upbeat about current and future prospects for the tech industry as a whole. Because of this, a couple things are trending in our sector. First, business owners are holding their properties longer to offset the negative trends in their financials caused by the previous recession. And second, buyers are begging for deals due to the lower-than-normal availability of solid Internet Companies on the market. This mixture is causing selling multiples on SBEs and Mid-Market Tech Companies with solid Net Margins to be far higher than normal in the marketplace. In fact, when we are engaged by a client that holds such a business, rarely (less than 1%) do those businesses go into the public domain. Our VIP buyers are drooling for such opportunities and the lenders that we work with are exceedingly happy when we continue to bring them these great transactions.  Forbes has recently noted that small businesses, particularly privately-owned, middle-market businesses, are getting better valuations than they have in a number of years – these high valuations are helping us get these transactions through lenders and investors.

Because of these economic factors, many entrepreneurs are taking a fresh look at their exit strategies and timelines and beginning to talk to M&A Intermediaries, like, to identify their options and to begin taking steps to maximizing their strike price upon exit. This is a smart move, and we’ve come up with a couple of things that we like small business owners to think about when they are at this point in the lifespan of the business they are looking to exit:

1. Except for Software / Application Companies, Companies with a Proprietary Nature to them, and Companies that have created a Brand profile, most technology companies tend to sell pursuant to a multiple of Cash Flow as agreed to by Buyer and Seller (and ultimately by the lender providing debt financing on the acquisition due to its (and potentially the SBA’s), allowable debt service coverage ratio. Because of this discrepancy in selling strategies, it is important to contact business broker intermediaries that have specific experience in selling Technology / Internet Companies and getting them properly packaged and approved before investors, private equity groups and banks.

2. Don’t put yourself in a situation where you need to rush. Rushing causes mistakes, including leaving cash on the table. If you back plan and create an action plan that is forward looking with hard dates based on certain benchmarks, then you’re in the very best position to be successful when going to market. This is important because there may be certain preparatory activities you’ll want to undertake before going to market. For instance, you may need to hire managers or support staff to take over what you have been doing so that a potential buyer won’t see the continued operation of your company, post-acquisition, as a challenge without you involved. Additionally, there may be certain financial steps you’ll want to take so that your financial profile is in tip-top shape before going to market. Again, you need intermediaries that are experts in what they do – you need

3. Another very important preparatory activity to go through with your business broker intermediary is a full analysis of all of your financials, including your balance sheet, P/L and tax returns. This process will help you and your intermediary put a plan together with time elements to ensure your purchase price is maximized, including inventory management, tax return review, bankability analysis, etc. By taking these actions early, business operations can be tweaked to ensure that before the business is put up for sale, it is in prime shape when reviewed by buyers and lenders.

The Website Closers brokerage will undertake all of these services without any upfront cost to the seller. Our job is to ensure the seller is in a position to maximize their sales price – and the brokerage only earns commission once it has proven itself – through the successful sale of the company on terms fully agreed to by the seller. Because of this, it is in the entrepreneur’s best interest to call us early to begin development of an exit plan so that our team can be on your side from beginning to end. You’ve spent years building your business – and when it’s time for it to sell – make sure you maximize its value.