Planning an exit strategy for my IT business


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Earlier this year, then-Prime Minister Theresa May said as part of her Tech Nation Report 2019: “The UK is a global tech powerhouse. I am immensely proud of our country’s ambitious tech scaleups. These companies are delivering significant economic value to the nation through the investment they raise, the jobs they create and the innovative products and services they deliver’’.

The UK has long been known for being a hotbed of innovation and investment for IT companies, making the industry an incredibly lucrative one for those looking to venture into the technology space. In 2018, the British economy secured £6.3 billion worth of venture capital investment in UK tech firms - more than any other country in Europe - and was home to 35 per cent of all tech unicorns in the world, valued at $1 billion or more.

And despite being one of the top five countries in the world in which to secure scale-up investment, the British IT industry also poses great M&A opportunities for business sellers and buyers; given the complex nature of the industry, however, the acquisition process is more difficult, and the stakes much higher.

If you are the proud owner of a tech business and are looking to make a swift exit, here are things to consider while you develop your strategy to ensure a smooth transition as your IT enterprise looks to change hands.

Start planning in advance

When considering the sale of an IT business, planning in advance is essential as it permits you time to do your research and see how other companies in the tech space have performed in comparison. This time will allow you to collate all your documents and see that they are in order; this will also allow you to conduct your own due diligence before a potential buyer does, so you are able to assess and address any business red flags yourself instead of receiving an unpleasant surprise from prospective acquirers.

Most business owners state that they purchase companies with its sale in mind down the line, meaning that its growth potential, revenue streams and profit margins need to be considered right from the beginning. Buyers will want to see where there is scope for further growth and how to boost business initiatives should they take it on, and this is something that you will need to showcase from the very start. Otherwise, why not simply go for a competitor with better prospects?

Getting the documents ready

In addition to thinking about how your company has fared against competitors (which should give you an indication of how to price your business for sale), you need to gather relevant documents to facilitate a smooth transition. As part of the Information Memorandum, you will need to provide:

  • Accounts dating back at least three years
  • Balance sheets and financial statements
  • Forecasts of revenues and profits
  • Tax and legal documents
  • Employee details
  • Contracts with clients and customers
  • Information on its shareholders and of how it is financed
  • Growth plans
  • Marketing strategy

By no means is this list exhaustive, but it does provide a comprehensive start for sellers like yourself. These documents will allow you to showcase your business in the best light, make positive projections for tempted individuals, and craft a story around its sale to attract the most serious buyers on the market.

What is specific to IT businesses?

Once a buyer begins the negotiation process, they will definitely conduct their own due diligence on the company to see if it is a right fit, and a worthy investment. Beyond the general inquiries into the business they would make regardless of sector, there are some technology-specific assessments they are likely to pursue.

Cybersecurity

As an IT company, you are likely to be sitting at the front of innovation and technological breakthroughs. But don’t let this prevent you from ensuring that your business is safe from cybersecurity threats and hacking attacks, as IT firms tend to be lucrative targets for online criminals.

Not just from the perspective of being compliant with government regulation (GDPR in the UK and Europe, for example), take care to put in place measures to halt ransomware and phishing scams at the door, and to ensure that there are procedures in place should the company’s privacy be compromised. This could make or break the value of your company, as poor cybersecurity could impact reputation, data management, and trust from clients and customers.

Employees

Your employees form the backbone of the company, and are the reason your business stands as it is today. Without the talent, there would be no IT business! It is for this reason that you prepare your staff as best as possible for the sale, and not leave them behind or in the dark during the process. Inform them of the changes that are likely to be made and clarify any doubts they may have with regards to job security - being honest with them from the start will go a long way in terms of morale and agreeability with the sale of the company.

Interested buyers will be speaking in depth to your workforce to understand more about their roles and objectives, and if their working culture will align with their acquisition goals. To make sure discussions from both parties remain positive and productive, spend some time boosting transparency and resolving any employee-related issues, which should prevent the value of the company dropping as a result.

Intellectual Property

The business’s selling point is the technology it provides, and the specific product or service it can boast in comparison to all its competitors in the market. As it is the company’s most valuable asset, ensure that it is legally protected and that all the intellectual property rights are reserved; failure to do this may allow unauthorised parties to take advantage of the technology and incorporate it into their own enterprises without the formal right to do so.

Moreover, a potential buyer may be discouraged from proceeding with the negotiations unless the technology has been properly patented and protected.

Software as a Service (SaaS)

In recent years, there has been a big jump away from licensed software to Software as a Service (SaaS), meaning that technology has evolved to suit consumer needs and that it has advanced to operate from a cloud computing capacity. It is imperative that your business keeps up with the fast-changing times so as to remain competitive in the market, and continue to be attractive to potential acquirers during the sales period.

Final negotiations

Your company will demonstrate its worth to buyers as a result of the due diligence process, and if your assessment aligns with the buyer’s, negotiations should be a natural and easy next-step. Hold your ground as a seller when discussing price and value, and take care to address the capacity in which you will be required to stay on in a post-sale scenario to ensure a smooth transition.

Once terms of the deal are agreed, and the papers all signed, you can rest assured that your technology business will be thriving under new management. Planning for your exit merely requires attention to detail and time to prepare; it otherwise is a swift process that can be both an exciting and rewarding one.



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