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How to sell a technology business

If you are thinking of selling your technology business, it is a good idea to plan well ahead of the sale so that industry-specific problems can be better addressed. Technology businesses face a number of issues that could affect their value and a buyer’s view of that valuation, which is why some business owners plan their exit strategy years in advance.

Issues such as revenue recognition where a multi-element contract has been signed, protection of intellectual property rights, and Software as a Service (SaaS), all serve to complicate an already complex selling procedure, so how do you plan for your sale?

A planned exit strategy

Purposefully planning an exit strategy before putting the business up for sale, allows you the time to find out why other businesses in the sector have sold. Maybe a clear and defined national presence, strong local reputation, or loyal and motivated staff, made a difference. 

This type of research also gives you a deeper understanding of what buyers want/need when acquiring a technology business. In the main, they will be looking to see how they can improve on your current position, and the areas where there is potential to boost profit.

If you have focused on growth rather than profit in the early years, your business may not be the ideal investment for those looking mainly at profit levels.

Providing details about your company: the Information Memorandum

Once you have set your objectives and goals for selling, the Information Memorandum provides a general outline of how your business works, and why you are selling it. The document should also include:

  • Profit and revenue forecasts
  • Historic profit levels
  • Simplified financial statements
  • Information about staff and supplier contracts
  • How the business is financed
  • Your marketing strategy

The main aim is to present your business in the best light, which is why it is so important to plan the sale well in advance. The Information Memorandum is circulated to prospective buyers, with the aim being to create competition between them and increase the achievable price.

Negotiations with prospective purchasers

Negotiating with potential purchasers is a stressful process, but is one which you could hand over to a business broker if you so choose. The caveat to this is that you should make sure they have sufficient experience of your industry.

Hiring a broker allows you to take a step back from the practicalities of selling the business, focus on day-to-day business operations, and retain a degree of separation from potential buyers.

Once a interested party is believed to be a good strategic ‘fit’ and has the necessary finances to complete the sale, you will need to go through a due diligence process with them.

Due diligence by the buyer

There could be a number of outcomes from the due diligence process, including the buyer demanding warranties or indemnities before they agree to the full price. If this is the case you should seek legal help before committing to this or signing any formal documents, as it could expose you to the risk of litigation in the future.

You need to ensure that all information provided to the buyer and their team is accurate, and a true reflection of your company’s financial position. Failing to do this, or deliberately concealing a negative aspect of the business, could result in a compensation claim being made against you.

So what issues might the buyer be concerned about?

Software as a Service (SaaS)

The move away from licensed software to Software as a Service, has been one of the most disruptive issues for businesses in the technology industry. Formulating the best pricing model to provide value to the customer, as well as competing with new and existing rivals, is crucial to profits and long-term business growth.

Intellectual Property rights

It is vital for technology companies to be able to identify and confirm rights to their intellectual property, ensuring they are wholly owned, and protecting them from unauthorised use.

For a technology business, intellectual property constitutes one of the most valuable assets, and if they have not been adequately protected, it could be of great concern to a potential buyer.

Staffing

Some of your staff are likely to be interviewed as part of the buyer’s due diligence process. This can lead to negative information being disclosed about previous staff issues - if the buyer uncovers a pending employment tribunal, for example, they may be dissuaded from continuing with the purchase.

To find out more about selling your technology business, and benefit from professional guidance based on practical experience, call one of our industry experts at Selling My Business.

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