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How and When to Sell a Technology Business

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Preparing to Sell a Technology Business

sell a technology businessAre you a business owner or partnership considering how to value or sell your technology business? Congratulations on taking this exciting step! However, selling a technology business can be a daunting task; the technology industry has its particular personalities, quirks, and special considerations. Don’t worry, though. We’re here to confidentially guide you through the process and help you prepare your software business for a successful sale.

We’ll cover key trends in Technology M&A such as:

  • Technology business sales are a unique, dynamic market
  • Current market timing and trends
  • 3 main types of buyers
  • Enhancing valuation with the “Rule of 40”
  • Steps to take in preparation of a future exit including new product development, sales focus, and costs

Continue reading this blog to explore the crucial steps that will make your defense industry business more attractive to potential buyers. So, buckle up and get ready to unlock the secrets of preparing your technology business for a profitable sale!

Market Uniqueness – Timing

Technology sectors move fast and, as an owner, you need to understand that what might be interesting for buyers now probably will not be in one or two years time. A hot market today can morph into ‘no buyer interested in your company tomorrow’ and, in fact, things may have totally changed. So, in our experience, timing is the key thing in the information technology sector regarding M&A. In fact, we feel that there are two key things which you should keep in mind if you try to sell a technology company.

1. Is the M&A Market Currently Active?

Survey the market and determine if M&A deals are happening in your sector in the last 12 months. If nothing has happened, then it might be a signal that it’s not the best time to sell your company right now because there might be no buyers available or interested. Market M&A activity with deals happening in your technology sector shows you that a) there’s a market and  b) potential buyers are active in the market.

2. Are your Sales and/or Profits Growing? Rule of 40

The second timing consideration is that your product solution or your company itself is growing. Your product solution is attracting new clients and potentially upselling to existing clients. The Rule of 40 is an internationally well known principle that states a software company’s combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a sustainable rate, whereas companies below 40% may face cash flow or liquidity issues.

If you are exceeding this 40% growth rate and profit margin, then your company is always an extremely interesting target for potential buyers, even when the market is not very active.

Ready to see how prepared you really are? Take our Free Exit Readiness Assessment

If you are NOT achieving this 40% growth rate and profit margin, then your company will be a LESS interesting target for potential buyers, even when the market is very active. In fact, you will likely achieve a much lower valuation, and doubly so in a weak market. The sale process will also take longer, perhaps 8, 12, or 18 months.

Market Trend – Complexity

In the last 12 months, deal structures have been getting more complicated. It is not unusual to see seller-financing, an earn out component based on sales or profit, holdbacks for 6, 12 or 18 months, and, finally, a percentage which is rolled over into the new company (rollover equity). The trend has been deal structures with a mix of all of these elements. Of course, you can sometimes achieve 100% cash sale and get the money … but that requires exit planning, preparation, and market timing. Bottomline, you should be aware that you don’t typically get 100% of the price after you sign the deal. The trend is to stay in connected to the buyer for a longer time after closing.

Types of Buyers for Your Technology Business

There are essentially three types of buyers: 1) financial, 2) private equity, and 3) strategic. Whether or not you will concentrate on one type of buyer or market to all three, depends on your goals, objectives, and exit-preparedness.

1. Financial Buyers

Financial Buyers are acquirers that purchase a technology company as an investment to achieve a targeted return. Unlike strategic acquirers, financial buyers are more returns-oriented and have near-term potential exit strategies in mind at purchase. They typically will pay the lowest price, and often, with the highest cash component price for the business, with favorable sales terms to the seller.

2. Private Equity Buyers

Private Equity buyers are investment firms that acquire technology businesses with the intent of growing them and eventually selling them for a profit, typically within 5 to 7 years. They often look for businesses with solid cash flows, strong management teams, and growth potential. If the owner is an integral part of the business (without a strong management team), then these buyers will want the owner to stay for another three to five years. You will NOT be able to leave the company after you have sold your shares.  Private Equity will typically buy a majority stake, with the owner owning a minority. Upon the second sale, owners can typically achieve a 3, 4 or 5x share value compared to the value of their majority shares when they were first sold. This is the proverbial “second bite at the apple”. If you believe that your company is growing fast, then we always recommend selling a small majority share (eg 51%) and maintaining a large minority share (eg 49%) because you can get a lot of money on the second sale. While it can be quite financially attractive, there is a significant incremental time commitment, plus you will be working for someone (as a minority owner). This will be VERY different from when you were the majority owner.

3. Strategic Buyers

Strategic buyers are companies that acquire another business to enhance their existing operations, capture synergies, gain a competitive edge, and achieve long-term strategic goals, rather than solely for financial gain. While strategic buyers are often in the same industry as the target companies, sometimes they are not. If you are looking for a sale in which you will have the fastest exit after closing, then this is probably it. You need to sell to a strategic buyer who has a strong management team, people in the market, knows your market, and can handle that the founder is going to leave the company after selling your shares.

Essential Steps to Prepare Your Technology Business for a Successful Sale

Selling a technology business can be a complex and challenging process. However, with careful preparation and strategic exit planning, you can achieve your goals of a successful sale at your price and terms and on your schedule. Let’s dive in!

1. Conduct A Comprehensive Business Valuation

It’s crucial to conduct a thorough, independent, third party business valuation before marketing your technology industry business for sale. Assess your company’s financial performance, market position, intellectual property, and contracts. Assess areas for growth and devise strategies to maximize your valuing a business for sale.

2. Focus on Profit Drivers – Curtail Product Development

You should lower your investment in new products if you decide to sell now or in the next 6-12 months. If you try to develop new software, solutions, or other kind of products, they will not be ready to market and have first clients. In fact, they will only contribute cost and you won’t be able to demonstrate profitability or if potential clients are willing to buy this solution. Consequently, you should decrease your research and development spending.

3. Focus on Sales Drivers – Full Court Sales Efforts

You should add to your sales team, intensify your sales process, get more clients, and target larger clients.

4. Showcase Strong Intellectual Property

The technology industry heavily relies on intellectual property, including patents, trademarks, and trade secrets. Highlight and protect your valuable intellectual property assets to attract potential buyers. Conduct an IP audit, update registrations, and ensure all necessary licenses are in place. This should be completed both in your domestic market, as well as your international markets where applicable.

5. Strengthen Customer Relationships

Solid customer relationships are a valuable asset when considering to sell a technology business. Strengthen your ties with key clients and maintain open lines of communication. Showcase a loyal customer base and emphasize long-term contracts or recurring revenue streams, demonstrating stability and growth potential to prospective buyers. Ideally, employees will have key relationships with customers (versus the business owner).

CASE STUDIES: How We sold our Business for Premium Price and Terms

We engaged Adam Noble Group for our exit planning process. We implemented all of their recommendations and, when we went to market, achieved a premium value cash sale, followed by a second bite at the apple. Highly recommend!

  Sincerely, Leroy Nabors, President, A-Plus Supertech, LLC, Edu-Net LLC

The exit planning of our medical billing SaaS business positioned us for a strong, premium exit to a major industry player.  Our partners appreciated that the entire process was confidential and moved forward quickly. Market timing was a critical factor!

  Jamie Lynch, President, FTGU Medical Consulting LLC

It was a pleasure working with Jeff on the sale of my security business.  He showed a high degree of professionalism through the entire process with great communication. Anytime I had a question or concern he immediately addressed it regardless of where he was (even while he was in the middle of a hurricane). My degree of satisfaction with Jeff personally exceeded my highest expectations as he mentored me through exit planning and the sale process.  His coaching was extremely helpful as he brought potential buyers sooner then I was expecting.

I always felt he took a great personal interest in me and my family and was careful to make sure I was ok with the direction and terms of the sale.  I have appreciated his follow up as transition was being made with new ownership and potential issues addressed in a discreet manner. I would certainly recommend Jeff to other business owners who were considering their potential sale.

  Sincerely, Keith Short, President, Asset Retrieval & Investigations, LLC

We recently sold our business with Jeff Adam of Adam Noble Group. The process was complicated and lengthy, with Jeff providing patient and professional service throughout. There were many aspects of the sale we did not anticipate or have experience with, where Jeff was a wealth of information and guidance to get us through to a rewarding sale. We were able to achieve an excellent exit with Jeff’s help. Selling a small business is an emotional transaction as well as a business transaction, and Jeff understood this. He coached us throughout, providing resources in areas where they were needed and expert advice in all areas of the transaction. We highly recommend working with Jeff! He’s a great guy to work with, his humor and outlook enabled us to get through the tough parts of the process.

Danita Grill, President, Owens Machine and Tool Company

6. Streamline Operations and Documentation

Are you someone looking to sell my technology business confidentially and discreetly? Efficient and well-documented processes increase the value of your business. Streamline your operations, eliminate inefficiencies, and document standard operating procedures. Additionally, a buyer will appreciate the ability to seamlessly take over the business without major disruptions.

7. Optimize Supply Chain and Vendor Relationships

Evaluate your supply chain and vendor relationships to ensure they are optimized and reliable. Diversify suppliers if necessary and secure favorable agreements. Further, a strong and stable supply chain demonstrates resilience and can be an attractive selling point for potential buyers.

8. Clean Up Financial Records

Potential buyers will scrutinize your financial records, so it’s essential to ensure they are accurate, up-to-date, and well-organized. Compile financial statements, tax returns, contracts, and other relevant documents. If needed, consult with an accountant or financial advisor to ensure everything is in order. Technology buyers will perform a Q of E (Quality of Earnings) review on your business, as part of an acquisition.

9. Seek Professional Guidance

Selling a technology business involves complex legal, financial, and regulatory considerations and for that you need a Technology Business Broker. Engage the services of experienced professionals such as M&A advisors, business brokers, attorneys, and accountants specializing in technology industry transactions. Moreover, our expertise will help navigate potential pitfalls, negotiate favorable terms, and ensure a smooth sale process.

Achieve A Successful Sale of your Technology Business with Adam Noble Group, LLC!

Preparing your technology business for a successful sale is a strategic process that requires careful planning and execution. You’ll significantly increase your chances of attracting qualified buyers and securing a profitable deal by opting for the best business valuations for your business from our experts. Remember, the key to selling a technology business is to highlight the unique value and potential of your business. Ready to begin your journey? Contact Adam Noble Group, LLC for expert assistance in selling your business. Trust us as your reliable partner for a successful sale.

For 3 decades, we have been guiding business owners and their families CONFIDENTIALLY to exit their businesses with the BIGGEST paycheck of their life!