September 27, 2014
As a long-time reader of business and motivational articles, I often come across mantras, mottoes, and slogans to guide business people through their daily lives. One has stuck with me more than the others – “Start with the end in mind”. I can’t think of a more appropriate motto for tech company entrepreneurs who are building a company that they one day hope to sell. The truth is that the best time to start thinking about the eventual sale of your company may in fact be years before you are ready to sell.
Which brings me to the first of 5 rules for tech company owners considering a sale of their business:
Rule #1 – Planning for the Sale Should be Done Well Before the Sale (Years Even!)
The early years of a company’s life is a good time to begin assembling your team to help guide through not only the operational phase of your business, but also an eventual sale. How would you answer the following questions about your team of advisers?
Your Attorney – Are they capable of not only doing a quality job handling your current needs, but also handling the legal work in an eventual sale? It helps if your lawyers in any sale negotiations are intimately familiar with you and your business.
Your Accountant – Do they have the tax planning expertise that you will need when you begin negotiations with a possible buyer? Have they walked you through important early stage decisions such as should you be an S or a C Corporation? What about the tax implications of various alternatives for sharing ownership with your employees? The time to get a handle on these issues is now, not just before a sale.
Investment Banker – Have you found someone who can help you not only find a buyer, but also evaluate possible deal structure? If not, you may want to find them now so you are ready when a deal arises.
Personal Financial Planner – Do you have a trusted personal adviser who can help you organize your financial house today, walk you through the personal financial implications of potential sale transactions, and help you make decisions for your family? If not, now would be a great time to find that person or firm.
Rule #2 – Choose Your Merger Partner Like You Choose Your Spouse – Very Carefully!
It seems to me that when tech company mergers fail, it’s most often due to issues with corporate culture. Here’s a few questions that may help you decide if this is the right merger partner for you:
Why are you selling (specifically)? What problems are solved or opportunities created?
Will our employees be happy in the new company? Do we agree with our new partners on the big philosophical issues? Will I like my role in the new entity?
Rule #3 – Understand the Tax and Investment Implications
This takes us back to Rule #1, as you will want to have an experienced and trusted team around you to help answer very complicated pre and post transaction questions, such as:
What type of equity (options, restricted stock, phantom stock) best suits our company?
Should we be an S Corp for tax reasons?
Stock swaps are great for tax deferral, but are you sure you want to own that much stock in the new owner?
Would you buy that stock with cash today?
How can you protect yourself from a sharp drop in the new company stock?
Which employees should participate in a liquidity event?
Rule #4 – Understand Your Valuation – You Know What You Would Like it to be Worth, but
What It’s Really Worth?
If you are serious about one day selling your business, you owe it to yourself to get out into the business community, meet key execs from competitors, suppliers, customers, etc., and make sure that you understand how your company is perceived in the industry. You might start by understanding industry valuation metrics for your competitors, which can then be applied to your business. What’s your value to strategic buyers versus outside investors? What’s the impact of earnouts and other means of participating in post transaction growth of the enterprise? Obtaining a good understanding of these issues will prove invaluable in assessing any potential transaction.
Rule #5 – Have a Plan for Any Cash You Will Receive in a Sale
You made this money by investing yourself completely in your business – part of your new job will be immersing yourself in the management of your investments. This is where your personal financial adviser comes in, and you owe it to yourself to find a good one now, rather than waiting until you’ve received a windfall from the sale of your company.
My bottom line advice – Start with the end in mind.
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