Buying and selling companies within the tech industry can be a lucrative business. When individuals or businesses buy or sell a tech company, they should be aware of several points that can help them choose the right company and get the best return on their investment.
Cyrus Baseghi is an industry professional with experience buying and selling tech companies. He shares his expertise with Augusta Free Press readers.
Prices for tech companies are often not set based on the financial metrics that are typically used for other types of businesses. Tech companies are priced based on the value of the employees, the engineers in particular. Another factor is the price of recent sales of similar companies. The potential for large consumer demand is also taken into consideration.
Buying a Tech Company
Buying a tech company can be an exciting investment, but the process is full of pitfalls for the unwary investor. Here are some potential trouble spots to watch out for.
1. Be Prepared for a Long Search Process
It can be challenging to find a company to buy. It is necessary to keep abreast of all developments in the industry and to learn which companies may be struggling or may need a cash infusion immediately. In the case of a struggling company with good fundamentals, it is important to move quickly, because there may be a great deal of interest in this firm.
2. Narrow Down the Requirements
Buyers must be careful when selecting a “shortlist” of companies to buy. While a buyer may be interested in the broad category of tech companies, it is a better idea to focus down to certain types of companies, like e-commerce firms or software companies.
3. Caution with Due Diligence
As buyers go through the process of acquiring a company, they must do due diligence to make sure their investment is secure. If there are problems with the data or with the company’s background, these can’t be swept under the rug. For example, a company’s actual profits must be checked against realistic metrics.
Sellers may also have other areas in which due diligence can set off alarms with the buyer. For example, a company may look good on paper, but they may turn out to be dependent on another company like Amazon for their customer list and sales. Amazon could squeeze them out at any time. It is much better to invest in a company with control over its own fortunes.
4. Be Prepared for Competition
Attractive companies will have many suitors. Buyers and investors need to be ready to move if they want to beat out other firms with their offer. They need to have their financing lined up and be prepared to pay a premium to acquire the company they want the most.
5. Unrealistic Valuations
One of the unique problems within the tech industry is the explosion in asking prices. If they have been involved in venture capital, they may value their company 10 times higher than it should be valued.
Selling a Tech Company
These 4 points will help prospective sellers decide on the most important factors in finding new owners for their company.
1. Realistic Expectations for Pricing
People within the company need to understand the structure for a realistic price. When companies are realistic about the price they can reasonably expect, they can preserve company morale and allow everyone involved to adjust their expectations accordingly.
Companies should also take a look at whether one of the industry giants like Google or Amazon might have an interest in purchasing them. This can drive prices higher.
2. Staging the Company Properly
Before attempting to sell a company, it makes sense that the fundamentals of the business need to be solid. Companies need to be prepared for all of the information requests that will come in from prospective buyers.
Making sure that the financial statements are accurate and honest is one of the most important factors. Another crucial factor is the status of contracts and employee onboarding materials. Each employee must be accounted for.
Companies also need to make sure that their intellectual property is clearly defined.
3. Understanding Different Types of Investors
There are multiple models for investors in today’s tech world. Venture capital, accelerators, crowdsourcing, “unicorn” investors, and traditional institutional investors have different styles when it comes to investing in or purchasing a company outright.
Growth-capital investors take longer to decide whether they want to purchase a company. They are beholden to their partners and stakeholders. These companies cannot move quickly because their investors expect their capital to be kept in steady ownership.
Small investors have quicker timelines. They may be more impulsive in buying a company, so the selling company needs to be responsive and ready to move quickly.
4. Be Open-Minded about Potential Buyers
There are huge numbers of firms in every industry that may be interested in purchasing a tech company. Companies should look outside the usual possibilities and into a variety of industries like retail, insurance, and advertising.
Companies that need to sell should have at least two offers lined up before choosing an investor. This means that you will be able to play their offers off each other and get a better price.
It is a must to be aware of the possibility for a “sneaking acquisition.” Investors who regularly buy and sell companies can sometimes twist a deal into a solo acquisition. This can trick the selling company into accepting an offer they should pass up.
Exploring the Tech Industry Market
These tips from Cyrus Baseghi should be able to give tech company investors and sellers an idea of how they should conduct their transactions. Taking the time to understand the fundamentals of a deal is a must.
For buyers, be skeptical of a seller’s asking price when venture capital is involved. Sellers should be aware of the buyer’s intentions when it comes to their company. When these points of due diligence are followed, buying or selling a tech company can be a profitable enterprise.
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