Perhaps
the most important transaction you will ever pursue is the sale of your
business. Many owners of information technology companies attempt to do
it themselves and often times these very capable business people
approach the sale of their business with less formality than in the sale
of a home. The purpose of this article is to answer the questions - Why
would I use an investment banker and what am I getting for the fees I
will pay?
More than any other type of business sale,
the intellectual property based business is the most complex and
difficult. The primary reason is that the seller is not interested in
selling their company for a financial multiple like 5 X EBITDA. They
almost always want that amount plus a premium for strategic value.
Another very important factor is that most smaller information
technology companies run their financials on a cash basis and the buyers
usually employ the accrual method. The adjustments in transaction value
that often occur during the due diligence process are often surprising
and expensive. Below are several reasons why a seller of an IT business
should seek a firm that specializes in this type of business sale.
1.
Confidentiality. If an owner tries to sell his own business, that
process alone reveals to the world that his business is for sale.
Employees, customers, suppliers, and bankers all get nervous and
competitors get predatory. The investment banker protects the identity
of the company he represents for sale with a process designed to contact
only owner approved buyers with a blind profile - a document describing
the company without revealing its identity. In order for the buyer to
gain access to any sensitive information he must sign a confidentiality
agreement. That generally eliminates the tire kickers and deters
behaviors detrimental to the seller’s business
2.
Business Continuity. Selling a business is a full time job. The business
owner is already performing multiple functions instrumental to the
success of his business. By taking on the load of selling his business,
many of those essential functions will get less attention, sometimes
causing irreparable damage to the business. The owner must maintain
focus on running his business at its full potential while it is being
sold.
3. Time to Close. Since the investment banker's
function is to sell the business, he has a much better chance of closing
a transaction faster than the owner. The faster the sale, the lower the
risk of business erosion, customer defection, employee problems and
predatory competition.
4. Large Universe of Buyers.
The investment banking firm that specializes in information technology
and software companies already has a developed list of target companies
with contact information for the individual that runs the merger and
acquisition process. They recognize that information technology
companies with the same SIC Code 5734-01 can be vastly different and
need a further categorization like document management software, SaaS
CRM Systems, or healthcare financial software.
5.
Marketing. A merger and acquisition advisor can help present the
business in its best light to maximize selling price. He understands how
to recast financials to recognize the EBITDA potential post
acquisition. He understands the key value drivers for buyers and can
position the selling company to enhance its strategic value in the eyes
of the buyer.
6. Valuation Knowledge. The value of a
business is far more difficult to ascertain than the value of a house.
Every business is unique and has hundreds of variables that effect
value. This is especially true with companies with a strong component of
intellectual property. Investment Bankers have access to business
transaction databases, but those should be used as guidelines or
reference points. The best way for a business owner to truly feel
comfortable that he got the best deal is to have several strategic
industry buyers bidding for his business. An industry database may
indicate the value of your business based on certain valuation
multiples, but the market provides the real answer.
7.
Balance of Experience. Most corporate buyers have acquired multiple
businesses while sellers usually have only one sale. In one situation we
represented a first-time seller being pursued by a buyer with 26
previous acquisitions. Buyers want the lowest price and the most
favorable terms. The inexperienced seller will be negotiating in the
dark. To every term and condition in the buyer’s favor the buyer will
respond with, “that is standard practice” or “that is the market” or
“this is how we did it in ten other deals.” Our firm has saved our
clients transaction value greater than our total fees during the due
diligence and closing adjustments process. By engaging an investment
banker that specializes in information technology companies, the seller
has an advocate with an experience base to help preserve the seller’s
transaction value and deal structure.
8. Maximize the
Value of Seller’s Outside Professionals. Experienced investment bankers
can save the seller significantly on professional hourly fees by
managing several important functions leading up to contract. His
compensation is usually comprised of a reasonable monthly fee plus a
success fee that is a percentage of the transaction value. The
M&A advisor and seller negotiate with the buyer the business
terms of the transaction (sale price, down payment, seller financing,
etc.) prior to turning the purchase agreement over to outside counsel
for legal review. In the absence of the investment banker, that
sometimes-exhaustive negotiation process would default to the outside
attorney. The economics of the deal are not your attorney's area of
expertise and could result in significant hourly fees or even a
breakdown of the transaction.
9. Maintain Buyer -
Seller Relationship. The sale of a business is an emotional process and
can become contentious. The investment banker acts as a buffer between
the buyer and seller. This not only improves the likelihood of the
transaction closing, but helps preserve a healthy buyer - seller
relationship post closing. Often buyers want sellers to have a portion
of their transaction value contingent on the successful performance of
the company post closing. Buyer and seller need to be on the same team
after closing.
Our experiences with information
technology companies that engaged our firm as a result of an unsolicited
offer from a buyer have been quite instructive. The eventual selling
price averaged over 30% higher than the first offer. In no case was the
business sold at the initial price.
The technology
focused investment banker helps reduce the risk of business erosion with
improved confidentiality while allowing the owner to focus on running
the business. The advisor- led sale helps maximize sales proceeds by
involving a large universe of qualified and targeted buyers in a
competitive bidding process. Finally, the investment banker can improve
the likelihood that the sale closes by buffering buyer - seller
negotiations and by balancing the experience scales.
Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital
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