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