Sell Your Information Technology Company -Why Pay an Investment Banker?

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

Selling Your Software Company - Important Factors in Determining Its Valuation

I just posted my first unscripted video on YouTube. Nothing like expanding your horizons. Not bad, if I do say so myself, for this ship's maiden voyage. I may have a future doing this.

http://youtu.be/zz8Qe636J1s

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

How to Drive Value in Your Healthcare Information Technology Company Sale

One of the most demanding aspects of selling a Healthcare Software Company  is coming up with a business valuation. Sometimes the valuations provided by the marketplace defy the valuation judgment that commonly dictates a selling price for a bricks and mortar company, for example. This article covers how an investment banker can correctly position your Healthcare Information Technology Company  to the right buyer in order to accomplish a attractive transaction price.

One of the most demanding factors of selling a Healthcare Software Company  is coming up with a business valuation. Sometimes the valuations provided by the market (translation - a concluded transaction) defy all logic. In other business segments there are some pretty helpful rules of thumb for valuation metrics. In one line of business it may be 1 X Revenue, in another it could be 5 X EBITDA or cash flow.

Since it is essential to our business to aid our Healthcare Information Technology Company clients raise their business selling value, I have given this considerable thought. Why are some of these Healthcare Software Company valuations so elevated?

It is because of the profitability leverage a Healthcare Software Company  can generate. A clear-cut case in point is; what is Microsoft's incremental expense to supply the next copy of Office Professional? It is most likely $1.20 for three CD's and 80 cents for packaging. Let's say the license cost is $400. The gross margin is north of 99%. That does not materialize in manufacturing or services or retail or most other industries.

One drawback in selling a small Healthcare Information Technology Company  is that they do not have any of the brand recognition, distribution, or standards leverage that the big companies own. So, on their own, they cannot produce this profitability leverage. The buying company, however, does not aim to compensate the small seller for the post acquisition results that are directly attributable to the buyer's market presence. This is what we refer to as the valuation gap.

What we attempt to do is to help the buyer rationalize paying a much higher price than a pre-acquisition financial valuation of the target company. In other words, we want to get strategic value for our seller. Below are the factors that we use in positioning our Healthcare Information Technology Company  for maximum selling price:

Cost for the buyer to develop the product internally - Many years ago, Barry Boehm, in his book, Software Engineering Economics, developed a constructive cost model for projecting the programming costs for writing computer code. He called it the COCOMO model. It was quite comprehensive and complex, but I have boiled it down and simplified it for our purposes. We have the advantage of estimating the "projects" retrospectively because we already know the number of lines of code comprising our client's products. This information is designed to help us understand what it might cost the buyer to build it internally so that he starts his own build versus buy analysis.

Most acquirers could write the code themselves, but we put forward they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not getting your product today. We were able to convince one buyer that they would be able to defend our seller's entire purchase price predicated on the amount of client defections their acquisition would avert.

Another arrow in our valuation driving quiver for our sellers is we restate historical financials using the pricing premium of the brand name acquirer. We had one client that was a small IT company that had developed a superior piece of software that compared favorably with a sizable, publicly traded company's solution. Our product had the same functionality, ease of use, and open systems platform, but there was one very significant difference. The buyer's perception of risk was far greater with the little IT company that could be "out of business tomorrow."

We were literally able to increase twofold the financial performance of our client on paper and put forward a compelling line of reasoning to the big company buyer that those results would be immediately obtainable to him post acquisition. It certainly was not GAP Accounting, but it was helpful as a tool to direct transaction value.

Financials are of great consequence so we have to acknowledge this aspect of buyer valuation as well. We generally like to build in a baseline value (before we start adding the strategic value factors) of 2 X contractually recurring revenue during the current year. So, for example, if the company has monthly maintenance contracts of $100,000 times 12 months = $1.2 million X 2 = $2.4 million as a baseline company value component. Again, this financial analysis is to establish a baseline, before we pile on the strategic value components.

We try to assign values for miscellaneous assets that the seller is providing to the buyer. Don't overlook the strategic value of Blue Chip accounts. Those accounts become a platform for the buyer's complete product suite being offered post acquisition into an "installed account." It is a lot easier to market add-on applications and products into an loyal account than it is to close that new account. These strategic accounts can possess huge importance to a purchaser.

Lastly, we use a customer acquisition cost model to propel value in the eyes of a prospective buyer. Let's say that your sales professional at 100% of Quota earns total salary and commissions of $125,000 and sells 5 net new accounts. That would mean that your base customer acquisition cost per account was $25,000. Add a 20% company overhead for the 85 accounts, for example, and the company value, using this calculation would be $2,550,000.

After reading this you may be saying to yourself, come on, this is a little far-fetched. These factors do have real value, but that value is open to a varied interpretation by the marketplace. We are trying to assign metrics to a very subjective set of components. The buyers are intelligent, and practiced in the Merger and Acquisition process and quite frankly, they try to repel these inventive approaches to driving up their economic outlay. The greatest leverage point we have is that those buyers recognize that we are presenting the same analysis to their competitors and they don't know which component or components of value that we have presented will resonate with their competition. In the final analysis, we are just trying to provide the buyers some reasonable explanation for their board of directors to justify paying far more than a financial multiple for our client's

 


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