| Selling your information technology business is the | | | | happens when the work gets out that your company |
| most important transaction you will ever make. | | | | is for sale.6. Poor Contracts - Here we mean the |
| Mistakes in this process can greatly erode your | | | | day-to-day contracts that are in place with |
| transaction proceeds. Do not spend twenty years of | | | | employees, customers, contractors, and suppliers. Do |
| your toil and skill building your business like a pro only | | | | your employees have non-competes, for example? If |
| to exit like an amateur. Below are ten common | | | | your company has intellectual property, do you have |
| mistakes to avoid:1. Selling because of an unsolicited | | | | very clear ownership rights defined in your employee |
| offer to buy - One of the most common reasons | | | | and contractor agreements. If not, you could be |
| owners tell us they sold their business was they got | | | | looking at meaningful escrow holdbacks post closing. |
| an offer from a competitor or more often these | | | | Are your customer agreements assignable without |
| days, an Indian company looking to buy a customer | | | | consent? If they are not, customers could cancel |
| base in the United States. If you previously were not | | | | post transaction. Your buyer will make you pay for |
| considering this business sale, you probably have not | | | | this one way or another. If you are tempted to sign |
| taken some important personal and business steps to | | | | that big deal at bargain rates to pump up your |
| exit on your terms. The business may have some | | | | business selling price, think again. Locking in a contract |
| easily correctable issues that could detract from its | | | | at below market rates could actually cause a discount |
| value. You may not have prepared for an identity | | | | to your selling price.7. Bad employee behavior - You |
| and lifestyle to replace the void caused by the | | | | need to make sure you have agreements in place so |
| separation from your company. If you are prepared, | | | | that employees cannot hold you hostage on a |
| you are more likely to exit on your own terms.2. | | | | pending transaction. Key employees are key to |
| Poor books and records - Business owners wear | | | | transaction value. If you suspect there are issues, |
| many hats. Sometimes they become so focused on | | | | you may want to implement stay on bonuses. If you |
| the next version release that they are lax in financial | | | | have a bad actor, firing him or her during a |
| record keeping. A buyer is going to do a | | | | transaction could cause issues. You may want to be |
| comprehensive look into your financial records. If | | | | pre-emptive with your buyer and minimize any |
| they are done poorly, the buyer loses confidence in | | | | damage your employee might cause.8. No |
| what he is buying and his perception of risk increases. | | | | understanding of your company's value - Business |
| If he finds some negative surprises late in the | | | | valuations are complex. A good business broker or M |
| process, the purchase price adjustments can be | | | | & A advisor that has experience in your industry is |
| harsh. The transaction value is often attacked well | | | | your best bet. Business valuation firms are great for |
| beyond the economic impact of the surprise. Get a | | | | business valuations for gift and estate tax situations, |
| good accountant to do your books.3. Going it alone - | | | | divorce, etc. They tend to be very conservative and |
| The business owner may be the foremost expert in | | | | their results could vary significantly from your results |
| GUI interfaces, but it is likely that his business sale will | | | | from three strategic buyers in a battle to acquire |
| be a once in a lifetime occurrence. Mistakes at this | | | | your firm. Where a services business may sell for |
| juncture have a huge impact. It is especially critical to | | | | between 75% and 100% of last years sales, for |
| have a good M&A advisor if you are selling an | | | | example, technology companies are all over the map. |
| information technology company because these | | | | One of our clients had a coveted piece of software |
| companies do not fit traditional company valuation | | | | technology and was able to get 8 X last years sales |
| metrics. If an owner does not get the right | | | | as his purchase price. We certainly could not have |
| representation and have several qualified buyers that | | | | and would not have predicted that at the start of |
| covet his technology, he possibly can leave a lot of | | | | the engagement, but what a nice surprise. When it |
| money on the table. Selling a technology company is | | | | comes to selling your company, let the competitive |
| complex. Is it a better deal to structure some of the | | | | market provide a value.9. Getting into an auction of |
| transaction value as an earn out based on post | | | | one - This is a silly visual, but imagine a big auction hall |
| acquisition sales performance?Do you understand the | | | | at Sotheby's occupied by an auctioneer and one guy |
| difference in after tax proceeds between an asset | | | | with an auction paddle. "Do I hear $5 million? Anybody |
| sale and a stock sale? Your everyday bookkeeper | | | | $5.5 million?' The guy is sitting on his paddle. Pretty |
| may not, but a tax accountant surely does. Is your | | | | silly, right? And yet we hear countless stories about a |
| business attorney familiar with business sales legal | | | | competitor coming in with an unsolicited offer and |
| work? Would he advise you properly on Reps and | | | | after a little light negotiating the owner sells. Another |
| Warranties that will be in the purchase agreement? | | | | common story is the owner tells his banker, lawyer, |
| Your buyer's team will have this experience. Your | | | | or accountant that he is considering selling. His |
| team should match that experience of it will cost you | | | | well-meaning professional says, "I have another client |
| way more than their fees.4. Skeletons in the closet - | | | | that is in your business. I will introduce you." The next |
| If your company has any, the due diligence process | | | | thing you know the business is sold. Believe me, |
| will surely reveal them. One of the key issues in | | | | these folks are buying you business at a big discount. |
| information technology companies is the clear title to | | | | That's not silly at all!10. Giving away value in |
| intellectual property. Are your employee agreements | | | | negotiations and due diligence - When selling your |
| well written? If you hired outside programmers, was | | | | business, your objective is to get the best terms and |
| their agreement specific in ownership of their output? | | | | conditions. I know this is a shocker, but the buyer is |
| The concern of the buyer is that once it becomes | | | | trying to pay as little as possible and he is trying to |
| public that the deep pockets company is owner, | | | | get contractual terms favorable to him. These goals |
| previous disgruntled employees or contractors may | | | | are not compatible with yours. The buyer is going to |
| resurface looking to bring legal action.Before your firm | | | | fight hard on issues like total price, cash at close, |
| is turned inside out and the buyer spends thousands | | | | earn outs, seller notes, reps and warranties, escrow |
| in this process and before the other interested | | | | and holdbacks, post closing adjustments, etc. If you |
| buyers are put on hold - reveal that problem up-front. | | | | get into a meet in the middle compromise |
| We sold a company that had an outstanding CFO. In | | | | negotiation, before you know it, your Big Mac is a |
| the first meeting with us, he told us of his company's | | | | Junior Cheeseburger.Due diligence has a dual purpose. |
| under funded pension liability. We were able to bring | | | | The first is obviously to insure that the buyer knows |
| the appropriate legal and actuarial resources to the | | | | exactly what he is paying for. The second is to |
| table and give the buyer and his advisors plenty of | | | | attack transaction value with adjustments. Of course |
| notice to get their arms around the issue. If this had | | | | this happens after their LOI has sent the other |
| come up late in the process, the buyer might have | | | | bidders away for 30 to 60 days of exclusivity. If you |
| blown up the deal or attacked transaction value for | | | | don't have a good team of advisors, this can get |
| an amount far in excess of the potential liability.5. | | | | expensiveAs my dad used to say, there is no |
| Letting the word out - Confidentiality in the business | | | | replacement for experience. Another saying is that |
| sale process is crucial. If your competitors find out, | | | | when a man with money and no experience meets a |
| they can cause a lot of damage to your customers | | | | man with experience, the man with the experience |
| and prospects. It can be a big drain on employee | | | | walks away with the money and the man with the |
| morale and productivity. What if your head of | | | | money walks away with some experience. Keep this |
| systems development gets skittish and entertains | | | | in mind when contemplating the sale of your business. |
| offers from other companies and leaves while you | | | | It will likely be your first and only experience. Avoid |
| are selling? The buyer wants your top people and | | | | these mistakes and make that experience a |
| they represent a significant portion of your future | | | | profitable one.Dave Kauppi is a business broker and |
| transaction value. If word you are for sale gets out, | | | | President of MidMarket Capital. We help business |
| your suppliers and bankers get nervous. Nothing good | | | | owners with all aspects of Mergers and Acquisitions. |