The goal of most tech company founders is to build a successful business that will ultimately reward them with a high value exit.
As tech sector lawyers, we are strongly aligned with this goal. Our work with companies and investors is guided by the experience of our senior lawyers who have, between them, worked on hundreds of mergers and acquisitions (M&A) transactions around the world, as well as on IPOs and takeovers. We use this experience to help our tech company clients make the most of immediate opportunities, while maintaining and maximising longer term value for an eventual exit.
This series of blogs is intended to share what we have learnt about maximising value for an eventual exit, and to provide some streetwise guidance about the process of selling a tech company.
In this first blog we share six tips for successful tech company exits. In later blogs we will dive into the detail of building value in tech companies and positioning for exit. To complete this series, we will drill down into the mechanics of the M&A transaction process.
tip 1 – assume you will exit in a private sale
The most common exit event for tech companies is a private sale to a trade buyer or, depending on how buoyant capital markets are, to a private equity or similar buyer. IPOs provide exit opportunities as well, but for most NZ tech companies a listing will simply be a staging post to an eventual acquisition by a trade buyer (at that stage, probably via a takeover offer rather than an Agreement for Sale and Purchase).
For this reason, our advice to tech companies is to build your company to make it as attractive as possible to a trade or private equity buyer.
Of course, the things that maximise value in a sale to a trade or private equity buyer are consistent with maximising value in an IPO. There are usually some additional things that are needed in an IPO (for example a board with capital markets and accounting expertise, and often an accelerated growth plan). However, building a company that is able to attract a high value trade sale is also likely to be core to the value achieved in an IPO.
tip 2 – keep your options open
In order for your company to be attractive to as many different acquirers as possible, build your company in a way that keeps your exit options open. There are two aspects to be mindful of.
First, keep your options as open as possible when entering into new commercial arrangements or legal commitments. For example, signing up to a long-term exclusive arrangement with a distributor for a key territory may deter potential acquirers in the future, particularly if they have their own channels to market in that territory.
If you are making decisions which may limit your options down the track, make sure you are doing so consciously in light of the opportunity costs. Try to have a backup plan available if a particular arrangement does not work out, for example limiting exclusivity to performance, or including a buy-out right. We will talk about this topic in greater detail in a later blog, including noting common mistakes and how to avoid or mitigate them.
Second, don’t become overly fixated on building your company for a particular exit. Your priority should be to build a successful business. Fortunately, the factors relevant to aiming for a high value exit are also relevant for building a good company in general. As the common saying goes, and described by Brett Martin in his blog Post-mortem of a venture-backed startup:
Companies don’t get sold, they get bought. The best way to get bought is to build something of value. That’s hard to do when you are trying to sell.
As your, or your potential acquirer’s, company evolves, you might identify an exit opportunity that at the beginning of your startup journey would have made little sense – so don’t unintentionally rule out opportunities by focusing too much on the obvious acquirers early on. Focus on building a good company, instead of building a company for Google or LinkedIn to acquire.
tip 3 – check in with your shareholders
As your company grows, you need to understand and keep up-to-date with your shareholders’ expectations around:
▲ the timeframe for an exit; and
▲ the expected exit value.
These are obviously also key questions for potential new investors – it is essential to have alignment between founders and incoming investors on these matters.
Problems arise when shareholders have divergent needs for an exit and return on investment, as some may prefer short-term liquidity whereas others have a longer time horizon to exit. If all the stakeholders agree, then it becomes easier to devise a strategy to achieve that the common goal. Conversely, differing time horizons can lead to ugly shareholder disputes.
tip 4 – study the valuation metrics in your industry
Become an expert on valuation metrics relevant to your company.
Different industries buy or sell companies based on different metrics. Start building information about your industry and potential acquirers – articles or press releases on relevant company exits can be used to track M&A and IPO activity. This can help your board and key people to understand how potential acquirers and their advisors will assess the value in your company.
For example, is your valuation driven by monthly recurring revenue, or annualised contract values? Or is customer numbers the valuation metric, in which case what is the multiplier per customer? Knowing this information will guide your company to focus its efforts on metrics which drive higher valuations.
tip 5 – learn as much as you can about M&A deals
There are many commercial and process driven considerations for first time founders to learn about, which can make a difference to your chances of a successful exit.
You should learn as much as possible about M&A transactions. Potential acquirers often come from mature tech markets such as the US, and they can deploy executives with deep experience in the M&A field. This often places founders in younger tech markets at a disadvantage, for example in New Zealand where serial entrepreneurs who have previously gone through the acquisition process are thin on the ground.
At present there is no M&A version of Brad Feld’s Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, but there are various blogs to search for information in, such as TechCrunch or SaaStr.
tip 6 – develop relationships with good advisors
As well as learning by reading and talking with others, it pays to have good advisors on board to help you get M&A ready.
Finding good accountants and lawyers with corporate finance experience, as well as the ability to do your day-to-day work, is a good place to start. Cultivate these relationships and take the opportunity to learn as much as you can from them. Once you are a paying client, you can learn a lot over regular coffee catch-ups.
If possible, develop these relationships early on. Good long-term advisors will know a lot more about your business than new advisors brought on at the last minute, and they will be able to represent you more effectively and efficiently.
Follow this blog series as we delve deeper into the drivers and mechanics of successful tech exits.
by andrew simmonds, 13 May 2015