Is Value More Vital Than Timing When Selling a Tech Business?

Is Value More Vital Than Timing When Selling a Tech Business?
A recent spate of major M&A deals within the global technology sector has sparked many smaller firms into action – but for those thinking about selling up, what needs to be considered?

While Google’s buy-out of Motorola Mobility, HP’s purchase of Autonomy Corporation and Time Warner Cable's $3bn purchase of Insight Communications demonstrates a serious level of consolidation activity at the high end of the technology and telecommunications sectors, the last few weeks have also seen a spate of mid-market acquisitions led by category sector leaders pouncing on new technologies, assets and tech start-ups. Skype has announced its intention to buy the year-old group messaging service GroupMe, Cisco is about to buy Comtel's Axioss software assets and Facebook is still on the prowl for strategic acquisitions having already picked up 13 companies this year.

For tech companies of any size, now could be a good time to think about selling up. Figures from Thomson Reuters suggest a 31 per cent increase in the value of global M&As so far this year compared with August 2010 and with technology sector deals being valued as high as $9.1 billion (Microsoft’s Skype takeover), tech is one of the industries leading the pack.

For smaller middle-market players based outside the US, the prospect of competing in the technology industry can be daunting and, understandably, many consider a sale to a larger corporation as a positive result. Challenges facing smaller players include limitation within domestic markets and obtaining sufficient finance, which can lead to a more positive attitude towards selling to a larger firm. For exiting business owners there are plenty of buyers waiting in the wings, according to Daniel Goldman, partner at Goldrock Capital and son of Sage founder David Goldman. He stated, “If you look from a stock perspective and look at the cash on the balance sheet of the 20 biggest tech companies in the world they are in very good shape.

“Next look at the tech companies that have significant countries on their balance sheets. If they are global then they are likely to buy growth rather than see organic growth,” he added.

Timing is important when looking to sell a technology firm, but as it’s often impossible to predict market development with any real confidence, selling just at the right time is a rarity. When it comes to business, we never truly know what’s around the corner.

For example, factors like natural disasters, acts of terrorism and political turmoil can have a heavy impact on businesses operating in all sectors, including technology. If these factors do not affect a business directly, they could impact customers or suppliers.

Other less dramatic, but as potentially damaging factors, such as new competition, additional regulations and the loss of key staff, can also lead to unexpected hard times for tech firms. As a result, company owners who want to sell and feel they are in a strong position in the market, are still growing and are profitable need not delay in putting their exit strategy into action.

This stage in the selling process is all about adding value to a business to enable it to attract the best price. Two types of value need to be looked at: intrinsic value and strategic value, and there are several ways to enhance both.

Firstly, intrinsic value incorporates tangible assets, such as revenue streams, equipment and intellectual property (IP) rights. It also includes ability to raise financing for investment in IP and other assets. Intrinsic value can be added through simple measures like ensuring all IP license agreements, employment contracts and other business contracts are designed to protect assets and retain the business’ financial security. The way the business is organized is also vital in demonstrating strong intrinsic value. It should be tax-efficient and assets should be protected, along with business financing.

Strategic value is more of an abstract concept and is all about non-tangible assets, including any market advantages, such as market position, partnerships, brand value and customer relationships. Again, value comes when buyers can see that these advantages are protected and assets are fully leveraged.

For technology business owners who are eager to sell their firm during the current busy period for M&As, they have the best chance of attracting a strong offer if they can take measures now to enhance value. If they do this successfully, timing will be less important to the overall success of a deal.
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