10 necessary actions when selling your tech company
You've made the decision; it's time to start selling your business. You've toiled on your business for years and selling is now a logical next step to cash in on your hard work. But, where do you actually start? We regularly receive this question from No Monkey Business.
We have therefore listed the 10 necessary actions for you. This way you can successfully complete the sales process of your company.
Make a valuation and determine your price & conditions
To start with, it is advisable to have an (independent) valuation carried out. Just like the sale of your house, it is good to have an 'appraiser' take a look at this too. That way you get a feel for the sales value and you can also determine the floor price for yourself. If the valuation is not yet high enough, think about a good preparation for your dream exit. In such a case, wait a little longer before putting the proverbial 'for sale' sign in the garden.
You can leave the determination of your business valuation to a Register Valuator. This is a financial expert who specializes in determining the value of a company. This is often quite pricey, and if you ask three Register Valuators what the value is of your company, you sometimes get very different responses.
The choice of a specific valuation method can have a significant impact on the intended value. Therefore, determine in advance how you want to have the valuation carried out and do not count too rich.
However, you can also make a rough estimate yourself first. For this it makes sense to look at industry averages. In the Netherlands you can use the Brookz . barometer. Internationally, it helps to consult the annual Tech M&A report of the Corum Group. These instances give you market averages, expressed in the form of a multiplier, which you can use to determine enterprise value. However, this is a rough estimate because this number only works in the formula:
'Business Value = EBITDA * Multiplier' or 'Business Value = Sales Revenue * Multiplier'.
Matters such as investments made, the amount of recurring revenue or the possession of patents are not included in this. As a result, it remains useful to use a Register Valuator after you have put yourself on a beer mat determined the value of your company.
Then it is good to keep a bottom price in mind for yourself. Under what conditions do you want to sell the company. Do you plan to play a role for a few more years (possibly in paid employment) or do you want to leave immediately? And what do you think of the idea of an earn-out period; Do you see opportunities or threats here?
If you want to sell your company, these are questions that are important to have answered in advance, so that you do not end up with a proverbial mouth full of teeth in the negotiations.
Create an IM & teaser letter
Now that you have an idea of the value of your company, it's time to start working on the 'sales brochure'. In the world of Mergers & Acquisitions, this brochure is referred to as an Information or Investment Memorandum (IM). This IM is meant to interest potential buyers in your business. A good memorandum has the following parts:
- Mission and vision
- Market analysis
- Your solution
- Competitive position & track record
- Revenue model
- Rating factor and offer
- Financial information
- General Company Information
After finishing your IM, it's time to translate the IM into a teaser letter. This is nothing but a summary of the IM to a maximum of two pages.
You will need this teaser in step 6 when approaching potential buyers. You don't want to immediately throw all your company-sensitive information out into the world. That is why a (often anonymized) teaser can offer a solution when you want to sell your company.
Would you like to know more about the content of a good IM? View our blog
about the 9 basic elements for an information memorandum.
Make a Financial Plan
You already read it, as part of the IM, financial information must also be made available. In the IM, this is limited to information about the figures for the past 3 years, a projection for the next 3 to 5 years and any additional figures. Think, for example, of the percentage of recurring revenue, the churn rate of your company or customer satisfaction scores. The input for this IM comes from your financial plan.
Potential buyers like numbers. Venture Capitals (VCs) certainly love it, but strategic buyers can also get lost in spreadsheets. Therefore, use Excel for the elaboration of your financial plan. It is advisable to work out a number of tabs.
The content of your financial plan
First of all, a P&L (profit and loss) with a forecast for the next five years. A buyer steps in based on potential. Therefore, let the growth potential clearly emerge. You can do this by creating a tab with revenue projections. Provide insight into the Total Addressable Market (TAM) and indicate what percentage you want to claim in it.
Then it is good to make a tab with your revenue model. Less is more in this one, so try to set it up in such a way that it is also understandable to a layman. Is your revenue model too complex? Then go to the drawing board first, because this is a clincher for potential buyers.
Finally, it makes sense to create a tab with the intended costs. Try to split it up as much as possible. Costs for the MT, personnel, IT & Software, rent, administration, marketing and sales; these are all examples that are best broken down separately. This way you work towards an extensive Excel document.
A good set of Excel skills is therefore highly desirable in this step. Your sheet must look tip-top and show the buyers that you are in control.
In addition, it is good to work out two or three scenarios.
The first is a optimistic scenario. Think big, that's the credo here! International buyers will love this.
Then create a realistic scenario that the sober Dutchman gives an insight into your plans. Dreaming is allowed, but realism is important here.
Finally, it is good to work out a pessimistic scenario. What if it all really goes downhill? Then where do you come from? It is wise to work out these scenarios yourself, because an investor will also do this. By taking the initiative yourself, you keep control.
Set up the data room
In the search for a suitable investor, there comes a time when people will want to conduct an investigation to see if there are no bodies in the closet. This Due Dillegene investigation requires good preparation. That is why it is important to set up a data room. A great platform to do this with, for example, is Securedocs. This allows you to set up a virtual data room where the potential buyer can find everything related to your company.
Now I understand that everything is a big concept, that's why I'm happy to help you with an index statement that a good data room must meet:
Business plan and financials
- Financial statements, such as annual reports or other financial documentation.
- Bank statements, such as credits or other reports from the bank.
- Company presentation, this may of course be the IM.
- Data analysis containing customer churn, customer overview per type, country and/or industry, partner overview, top 10 turnover customers, recurring turnover and growth figures of the past 3 years.
- Financial projection, so this is your financial plan that we talked about in step 3.
- Provisional annual accounts for the current financial year.
- Tax, such as documentation from the tax authorities.
- General company information, such as deed of incorporation, shareholders' agreements, etc.
- Insurance and credit
- HR information such as personnel contracts, fringe benefits, personnel guide, current files and an overview of all employees.
- Employee costs
Intellectual Property (IP)
- IP captures
- License Agreements
- Lease contracts
- Customer contracts
- Supplier list
- customer list
Quite a list as you can see. It is therefore advisable to start setting up the data room early. This will save you a lot of questions and searching.
Make a long list of your ideal buyer
Now that the main prep work is done, it's time for the next step. Before your sales skills are really put to the test, it's important to create a profile of your ideal buyer. It makes sense to bring your company to the attention of the right people in a targeted manner. Traditionally, buyers can be divided into three different groups, namely Venture Capital, Strategic Buyer and Management Buy In.
In the case of Venture Capital, it is good to know that the Dutch landscape is very extensive. Peak Capital has it Dutch Ecosystem and this shows that there is a great diversity of parties. Check this list to see which parties may be interesting for your company to approach. Do not write to all these parties, because that is shooting with hail. It is better to determine specifically which VCs you want to approach.
Of course, this also applies to Strategic Buyers. In this case, of course, I don't have an easy picture at hand. However, there are a number of factors on which you can determine who your ideal strategic buyer is. First of all, this can be a competing party. This is always tricky, because they can also abuse this knowledge.
It is wiser to look at a company with adjacent services. In other words, a company that can easily take your proposition to its customers in 'its backpack'. Look at the sector, size of the company and the liquid position. That way you can approach companies in a much more targeted way. It is also useful to look at acquisitions of companies similar to yours. Who bought up your competitors, that's what this is all about. It may be that there is a party that wants to achieve scale with a buy-and-build strategy.
Management Buy In
Finally, a Management Buy In is a third option where it is important to do some homework. Because, who would you like to continue raising 'your child'? Where this question is also relevant for other buyers, it is precisely with an MBI candidate that the importance of that one buyer becomes very great. With the purchase by a VC or Strategic buyer, your company will be merged or a new management team will come on board. With an MBI candidate, one person comes on board and you want to get the confidence that this person will fit. That is why you should also make a profile of this purchasing party.
Next, it's time to compile a list of names of potential buyers. Take a platform like LinkedIn to compile a wish list of parties to whom you would like to send your teaser letter. This will be the acquisition list that you will work with in the coming period.
Long-list, short-list and your staff…
Now is the time to put the for sale sign 'in the garden'. The way in which this is done now depends on a number of factors. For example, if you do not want your staff to know about your sales plans, discretion is extremely important. In that case, we recommend having your teaser letter sent by an external party; without logo and company name. That way you remain completely anonymous to the outside world.
Is a party interested? Great, have them sign an NDA first before sharing the company name and the full IM.
This method, in which you first send a teaser and if you are interested, have an NDA signed for sending the IM, is advisable in all cases. That way you prevent your company information from being misused.
In addition, you can also publish your company (anonymously) on websites such as Deal suite. This is where (international) parties come together that are looking for interesting business purchases. In addition to a targeted acquisition list, you also put the platform's network into operation. I can report from experience that this allows you to enter into discussions with surprising parties. This can also be input to expand your long list. Keep a critical eye on whether you are sitting at the table with the right people. A pitfall is to make an appointment with anyone who shows interest.
When in doubt, use the CHAMP criteria. Here you check whether the interested party has challenges (CHallenges) for which you have a solution. In addition, you check whether someone has authority (Authority) to decide and whether this party is wealthy enough (Money) to be a serious discussion partner. Finally, you determine the urgency (Priority) for the relevant party.
Do they want to make a purchase in the short term, or is it for a long-term acquaintance. This way you avoid pointless conversations.
Inform staff. Or not.
But back to the staff. There are plenty of reasons to inform your staff about the sale of your company. This is how I guide tech companies that are thinking of a partial sale of the company (which can be very smart) in order to be able to grow faster.
The staff is part of the sales process and contributes all kinds of valuable input. They find it very logical that you can grow a company exponentially by joining an extra shareholder in the form of a strategic party. On the other hand, it is also very understandable to hold the cards to your chest, especially if you are an important pillar as an entrepreneur.
An announcement that you have the ambition to sell your company can also lead to an outcry in such a situation.
On the other hand, it is good to be aware that in many situations a purchasing party wants to agree on an earn-out period. Especially when they notice that you are indeed that important pillar. If many people leave after you leave, this will also cost you money. Informing employees about the sales ambitions can therefore, with a good story, even increase value.
A good feeling. Or not.
You are now about 4 to 6 weeks further and a number of parties have (hopefully) responded positively to your teaser letter. They signed the NDA, received the IM and are still positive. Then schedule a physical appointment for a presentation.
In this presentation you tell the content of your IM with some additional information. In addition, you give the buying party the space to tell more about themselves and to ask questions. That way you also get a good feeling with the buying party. My advice namely; doubt is NO!
Too often entrepreneurs are too eager to sell their business. The type of questions and the way in which the interested party presents itself gives you an excellent sense of whether this will be a match or not. If not, then don't do it. Provided you get a great offer, but even that is doubtful if a party already does not convey the right impression on you.
After the first and possibly subsequent conversation, it is time to take stock. You should now have a short-list of companies that are interested and that could also be the right candidate in your opinion.
Great, time for the next step!
Work towards a set of non-binding sacrifices
If interested, ask for a non-binding offer. This is a preliminary offer which is not yet binding. Of course, a party may also immediately submit a proposal, but usually the purchasing party will first want to conduct a Due Diligence investigation before making the proposal binding.
The non-binding offering is thus generally made by a potential buyer. Thanks to the IM, the presentation and the financial plan, the potential buyer has formed a picture of your company.
However, to prevent you from taking all kinds of steps that do not lead to a sale, it is useful to receive this non binding offer. That way you can assess whether it is worth continuing a conversation with someone.
Traditionally, the offering consists of:
- A proposal in terms of transaction structure. The buyer will indicate whether he is interested in taking over the shares or only the assets (and any liabilities).
- An indication of the price/business value he is willing to pay.
- The payment terms. This regularly includes an earn-out arrangement. In such an arrangement, the buyer will only pay part of the sales price after one or more agreed results have been achieved. Although not all entrepreneurs are excited about this, it can also have positive effects. Take the example of Robert van der Wallen who lost his proceeds thanks to an earn-out period at BrandLoyalty rise to almost 1 billion euros.
- The time and conditions that the buyer believes he will need for the due diligence.
- The desired date of transfer.
- Additional conditions such as exclusivity.
Having one or more non-binding offers can help you as an entrepreneur to shape the negotiations to your liking. If you have an interested buyer who appeals to you the most, but who is disappointing in terms of price, this may give rise to this party in the negotiation towards a higher selling price.
Sign a Letter of Intent (LOI)
The end is in sight. You should now have one or two parties with which you want to enter the final phase. So it's time to draw up a letter of intent, the Letter of Intent. Some buyers sometimes refer to this LOI as a term sheet or memorandum of understanding. In all cases, it concerns a compact contract in which subjects such as non-disclosure, exclusivity or articles concerning law and negotiation in 'good faith' are included.
Although often the buying party works out the LOI, this time you also have to sign. Therefore, always have the LOI checked by a lawyer.
When the LOI looks too much like a formal contract, this can lead to unpleasant situations. A set of disclaimers is therefore very common.
You don't just sign an LOI just like that. In all cases, you must have the feeling that you can come to a deal with this party. Certainly before both parties spend a lot of time in the Due Dilegence investigation, it is important to record an intention to sell.
With an LOI you jointly declare that you are negotiating a sale or merger. In all cases, it's about creating a safety net in case a deal does fall off.
Why you wouldn't want to sign an LOI
Now there are also reasons not to sign an LOI. First of all, creating an LOI takes time and money. In addition, this LOI also means that you are often not allowed to conduct negotiations with other parties.
Finally, an LOI can lead to unwanted information leaks when parties start using the LOI to force other deals. In all cases, this is of course doom-mongering and you can of course also make agreements about this.
However, we are in favor of an LOI. This is because the non-commitment has been greatly reduced; you both have a deal intent and you can now more securely share all your business information.
Ensure the course of the Due Diligence Investigation
You share your company information in a Due Diligence investigation, abbreviated to DD investigation. In the Netherlands, the DD-investigation is also referred to as a book-examination. This does not imply that the research is exclusively limited to financial matters, because all kinds of legal and commercial subjects are also covered. Just to be sure; we talked about an NDA agreement before.
If you had postponed that until this point, now is the time to do so in advance. During the DD investigation, you will put all your confidential information on the table.
In many cases, a DD is performed by the purchasing party. Not carrying out a DD investigation carries major risks for a buyer. In the event of a business takeover, an investigation obligation applies and the buyer may not simply rely on the 'blue eyes of the seller'. During the DD research, a wide variety of components will be examined that you should already have neatly ready in your data room. If you think you have 'corpses' in the closet, don't try to hide them. You may suffer from this later on. In addition, there is a good chance that the buying party will find out and that can damage your potential deal enormously.
Examples of topics that are examined are the legal form, organizational structure, financial information, annual accounts and tax returns. But the management team, customer contracts, your sales funnel, insurance, personnel, (environmental) legislation and regulations, (rental) agreements with suppliers and all other relevant information will also be screened. Traditionally, a good DD takes two to five working days, but of course this can also be longer with complex/large deals.
Ultimately, the buying party will take stock. This can lead to a revision of the offer if certain things were presented more positively than reality. Risks can also be defined that lead to additional costs in the future. Think of an unknown claim based on 'overdue' contracts or purchase agreements with suppliers and customers. In short, at the end of the DD, the price and conditions can also be definitively determined.
Now we wrote at the beginning of this 9e step that often the buying party conducts research. With the word 'often' we mainly want to point out the fact that you, as the selling party, can also carry out an investigation. This can be very useful, especially if it concerns a merger or if you sell part of your company. Incidentally, I can report from my own experience that you want to check the creditworthiness of the buyer earlier. I myself once made the mistake of relying on the stories of a buying party. It was only after the DD investigation that the money was not yet in their account, but was still 'fixed' in Dubai.
Ultimately, after two months of negotiations and investigation, the deal fell through because the money was not forthcoming. An expensive lesson I'll gladly spare you. In short, make use of your right to also investigate the purchasing party. It is advisable to be guided by a professional party.
Get help reviewing the Share Purchase Agreement
After successfully completing the DD research, it is time to work out a Share Purchase Agreement, abbreviated to a SPA. The purchase or sale of shares is laid down in this agreement. It is therefore the conclusion of the negotiations about the sale of your company. After signing this agreement, only the way to the notary is necessary to complete the delivery of shares.
In many cases, a SPA is drawn up by the purchasing party. All kinds of matters are recorded in the document regarding the (sale) price, payment conditions, confidentiality, the DD investigation, guarantees, indemnities and securities. But a non-compete (compete clause) or earn-out construction are also common articles. In short, we are dealing here with a complex and extensive legal document.
Since it's getting really exciting now, it's crucial
that you hire a good law firm.
Has everything also been viewed and approved by your lawyer? Great, then it's time for the autograph.
Congratulations, you have sold your business!
Is it the dream exit you've been working towards for so long? Beautiful! You can be proud of yourself.
When you read this, do you doubt whether that will really be the case? Then think about the steps you can still take in the coming period. View us 4 Step Exit program. This blog was about the fourth step, namely the sales process. So you may have skipped three important steps that can help you really realize a dream exit and sell your business for the price you have in mind.