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