How to Sell a Technology Business

1. Do they offer any form of guarantee of your total, unconditional satisfaction from your very first meeting?
2. Are they an independent organisation of specialist business brokers, (not merely operating as a sub-division of an accountancy firm or, even more disturbingly, an estate agent)?
3. Will you be assigned a qualified business broker from the outset, who’ll work closely with you throughout the complete selling process, as a true mentor and professional adviser?
4. Do they get rewarded solely on achievement and only on the successful completion of the sale of your business, without charging any up-front fees?
5. Will they keep in touch and regularly update you on the progress of the sale of your business, at least once every two weeks?
6. Do they painstakingly pre-qualify potential buyers for commitment and their ability to finance the purchase before introducing them to you, so as not to waste your time?
7. Do they assign a specialist broker to you who has several decades of experience in your type of business or industry sector? (The average age of a proficient business broker is 55 . . . for good reason).

 

FIVE more, not-so-critical but still very important, questions . . .

1. Will they actively promote, market and advertise your business to potential buyers (not simply post it on the internet then sit back and wait for a response . . . if any)?
2. Are they thorough and conscientious in safeguarding your confidentiality at all times?
3. Will they attend, conduct and ‘chair’ all meetings between you and potential buyers of your business?
4. Are they active members of a reputable, well respected, business broker association and do they rigorously abide by its code of ethics?
5. And last but not least . . . do you like and trust them?

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Have you ever sold a house through an estate agent who did hardly any work? OK, they listed your house on a website, but that’s about all, and that will be the last you hear from them until the house sells and they magically appear for their commission.

 

 

Sadly, many business brokers, or business transfer agents are not much different. It’s down to you to choose carefully.

 

Don’t be rushed

 

First, remember there’s no hurry. So don’t feel you have to rush to make a decision. Most business owners need to speak to several brokers to get a feel for how it all works … what they can reasonably expect … and how much it costs. A good broker will be quite happy to take the time to explain all.

 

There are similarities between a brokerage company and businesses that sell high-ticket items on a commission basis. Like with the estate agent, the amount of commission earned on each job is considerable. So the broker will be happy to meet with you at your convenience, go through your figures, explain the process and spend a few hours with you … all with no obligation on your part to take any decision.

 

Association memberships

 

There is no single international vetting agency that all business brokers subscribe to, so it’s less than easy to check their credentials.

 

You should feel free to ask your broker if they are members of a professional association/trade body/better business bureau/and other similar organisations.

 

References

 

You should ask the broker to provide references. And do follow them up by actually contacting the referees.

 

You can also seek out opinions yourself. If the broker has businesses for sale listed on their website you essentially have a list of their current clients. OK, you’re not going to mass mail them to ask them to participate in your online poll … but a discreet phone call or two does no harm.

 

Professionalism

 

Business brokers are not selling £500 used cars. Expect only the highest levels of professionalism. Are they well presented? Do they keep appointments? Do they return calls promptly? Do they seem to know what they are talking about? Do their documents, letters, forms, policies, procedures, contracts, disclaimers etc., look professional? What type of confidentiality agreement do they send out to prospective buyers? What type of ads/locations do they use to advertise the businesses they are selling?

 

If you suspect shoddy, they most likely are.

 

Optimism

 

Landing your order is pretty important to the broker. So they may exude confidence in that they can get you your asking price or higher, and within a very short period of time. They then might ask for an up-front payment while you are still fired-up and excited about having found the ‘right’ broker. Sometimes alarm bells are just alarm bells.

 

Make your broker earn their crust

 

Remember your chosen broker is on your side. So work with them, rather than against them. Ask at the outset how you can complement their efforts.

 

Ensure at least part of their reward is based on a percentage of the final selling price. Do remember though, an additional £10,000 for you will only provide a £1,000 ‘incentive’ for the broker (at 10%).

 

Make them weed out the tyre kickers. Pre-agree what type of buyer you’d consider as appropriate. If you’re looking for funds up front, there will be little point in extensive negotiations with a buyer who assumed you’d finance up to 50% of the agreed price (sellers often do finance the sale by taking deferred payment).

 

Cooperate with the broker in drawing up a Sales Memorandum / Business Profile. And don’t be afraid to ask for it to be amended, polished, tweaked or changed until you are 100% happy with it.

 

Allow your broker to handle the legal issues relating to confidentiality.

 

Check there’s a walk-away clause in the listing Agreement. If your broker is unable to sell your business within a specified time, you want to be able to pull out and try someone else without being financially penalised.

 

And finally … Good Luck!

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Prospective buyers of your technology business either exist within it … such as family members, junior partners or a management buy-out team … or outside of it in the form of a buyer financially backing a management buy-in team, or an ‘in-the-trade’ buyer looking to acquire a suitable business to add value or extra dimension to their existing operation.

Since you already know the people within your business very well, this is probably the best place to start when looking to sell.

Selling internally has a number of distinct advantages. Current employees already know the nature of the business, its markets, its customers and suppliers etc. So their need for an expensive, prolonged fact-finding exercise is significantly reduced … although not completely eliminated. They will, of course, have to take on a fair amount of work to gather together sufficient ‘due diligence’ information to present to their financial backer.

Also, you may be more comfortable negotiating structured payment terms, or an ‘earn-out’ arrangement, with an internal team than you would if dealing with an external buyer. And, even if you think there’s not much chance of a successful management buy-out, you may consider it worthwhile to at least explore the possibility.

Why?

Because, if your management team feel they have been given the chance of making a bid - but decided amongst themselves not to – then any bad feeling towards the successful external buyer will be minimised, if not eradicated totally. This, in turn, helps confirm to the buyer that they have inherited a committed, loyal and positive-minded management team looking to dig in and drive the business forward … rather than one harbouring a simmering resentment simply because they were not allowed to even attempt a buy-out, or worse, had one rejected!

Whether or not you consider the option of a management buy-out is a matter of judgement. Only you know the personalities, the qualities and the nature of your internal management team. You also need to be tuned-in as to whether this course of action could prove in the long run to be detrimental or counter-productive. For example, the view of an external buyer may well be biased if your management team decided not to pursue the buy-out opportunity offered to them. If nothing else, they would want to know why the sale stalled.

Management buy-outs may or may not be backed by a venture capitalist. In either case they tend not to realise the best possible price for your business and, if not backed by a sound financial institution, will typically require a larger than usual amount of ‘seller finance’. This means a significant proportion of the sales proceeds will be paid to you over time by some form of earn-out, or profit share arrangement.

Most management buy-outs, whether backed by venture capital or not, will almost certainly require the management team to borrow against the existing assets of the business, in order to raise the purchase price. They will also often need to borrow against their own assets (such as their homes) in order to raise the equity to invest into the business. In order to help the management team raise as much money as possible for the purchase of the business and for working capital going forwards, they should contact an experienced asset finance brokerage in order to explore how best to raise money against their personal assets and those of the business.

Whilst on the subject of company assets …

Section 151 of the Companies Act prohibits a buyer (including your management buy-out team) pledging assets of the company as security for money to be raised to purchase the company’s shares.

This provision is designed to prevent ‘asset stripping’. This is where a company with significant assets is bought by someone with money raised from financial institutions on the basis that as soon as they have bought the business, they will break it up, sell off the assets and use the proceeds to repay the money borrowed to buy the business.

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Usually there is more than just one single, simple reason for thinking about selling your business. There is often a complex web of emotions, thoughts and feelings which have to be unravelled before finally deciding to even explore the option of selling up.

Your desire to sell may be driven by some form of external pressure, or your wish to retire or to hand over succession to other family members, business partners or the existing management. You might even be bored and want to move onto something completely different!

Most reasons for selling apply equally whether you operate as a sole trader, or in a partnership, or the owner of shares in a limited company.

Any emotional feelings towards selling your business must take second place to a down-to-earth practical approach. This can be difficult to do where a whole life’s work is involved. Emotion can blur the focus on your reasons for selling and adversely affect the constructive analysis of the objectives to be achieved … particularly the price. At worst it can grind the process to a complete standstill and stop a sale stone dead in its tracks.

Getting experienced, competent and professional advisers on-board at the early stages will inject the necessary dose of impartial objectivity towards achieving your ultimate goal of selling your business for all it’s worth - not a penny less - in the shortest possible timescale.

We’ll take a look at some of the most usual reasons for selling an IT or other technology-based business, together with their effect on the process, in the next post. Until then …

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