Selling Your Technology Company for Maximum Value: A comprehensive guide for entrepreneurs

By Rupert Cook

Most technology entrepreneurs start companies and spend years of their lives building them with the goal of generating significant wealth through a successful sale. For many, the sale of their company is a one-off event for which they have little or no experience, but whose outcome can make the difference between true financial security and years of frustration and regret.

This book gives honest, practical advice for executives and shareholders of technology businesses on how to prepare their businesses and how to manage and optimise the sale process through to a successful completion for maximum value.

The author draws on his direct experience from a 20-year career in technology and corporate finance, but also on the experience of others in the industry - notably, corporate finance advisers and lawyers, corporate development professionals working at some of the most acquisitive large technology companies and entrepreneurs who have sold their businesses.

After every second chapter, there is a case study of a technology company that has been successfully sold, written from interviews with the key individuals involved. These give real-life experiences from diverse businesses, ranging from a pre-revenue company sold when its product was still in beta to a $100m revenue company sold in its fourteenth year.

This is a practical guide that can be followed and consulted to give insight into every part of the sale process and to learn from others who have gone through it many times.

• Language: English
• Publisher: Harriman House
• Release date: Sep 1, 2009
• ISBN: 9781906659752

Rupert Cook

Rupert Cook has experienced technology corporate finance from every angle over the last 20 years. He understands intimately the aspirations and tribulations of technology entrepreneurs, having worked tirelessly as one of a founding team to build up an IT training and consultancy business from scratch in the late 1980s, the culmination of which was a successful sale to a UK PLC eight years later. Since then, he has bought and sold technology businesses both as a principal and for clients around the world. He has run fund-raisings for early stage businesses and also acted on the other side of the fence as a venture capital investor. Rupert is currently Head of Technology M&A at goetzpartners Corporate Finance, a leading pan-European corporate advisory firm. For five years, Rupert was a board director and head of advisory services at Interregnum PLC (now Parkmead Group PLC), a technology merchant bank, and has twice run his own corporate finance boutiques; ICE Consulting, during the dotcom years, and more recently Crystal Capital. In order to get large technology company experience, Rupert worked at Capgemini for two years, where he was on the board of Capgemini Training and later in strategic consulting and business development. Whilst at Capgemini, he won a group-wide prize for innovation and became the youngest senior manager in the group for his achievements in generating new sales and maximising profits. Rupert has spoken widely at conferences and in the media on the subjects of economic and monetary union and technology corporate finance. He is the author of Leveraging Competitive Advantage from the Euro, published in 1999 by Financial Times Prentice Hall. He was judged one of the ‘Top Ten Venture Capitalists under 35 to Watch’ at the Investor Allstars Awards in 2003 and was an Advisory Board Member of the UK Technology Partnering and Investment Forum in 2004 and 2005.

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HARRIMAN HOUSE LTD

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First published in Great Britain in 2009

Copyright © Harriman House Ltd

The right of Rupert Cook to be identified as the author has been asserted

in accordance with the Copyright, Design and Patents Act 1988.

ISBN 9781906659752

British Library Cataloguing in Publication Data

A CIP catalogue record for this book can be obtained from the British Library.

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher.

No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author.

Case Studies

Case Study 1: The Sale of SiteAdvisor to McAfee

Case Study 2: The Sale of Kidaro to Microsoft

Case Study 3: The Sale of TELLIT to Qualcomm

Case Study 4: The Sale of buy.at to Time Warner

Case Study 5: The Sale of N4 to Experian

Case Study 6: The Sale of KVS to Veritas (now Symantec)

Case Study 7: The Sale of QAS to Experian

About the author

Rupert Cook has experienced technology corporate finance from every angle over the last 20 years. He understands intimately the aspirations and tribulations of technology entrepreneurs, having worked tirelessly as one of the founding team to build up an IT Training and Consultancy business from scratch in the late ’80s, the culmination of which was a successful sale to a UK PLC eight years later. Since then, he has bought and sold technology businesses both as a principal and for clients around the world. He has run fund-raisings for early stage businesses and also acted on the other side of the fence as a venture capital investor.

Rupert is currently Head of Technology M&A at goetzpartners Corporate Finance, a leading pan-European corporate advisory firm. For five years, Rupert was Head of Advisory Services at a technology investment and advisory business, and has twice run his own corporate finance boutiques. Rupert worked at Capgemini PLC for two years in strategic consulting and business development.

Rupert has spoken widely at conferences and in the media on the subjects of Economic & Monetary Union and Technology Corporate Finance. He is the author of Leveraging Competitive Advantage from the Euro, published in 1999 by Financial Times Prentice Hall.

Acknowledgements

My thanks go to all the people who have listened patiently and contributed thoughts to the book over the last year and in particular to those who gave me introductions and interviews:

John Masters, Mike Hedger, Simon Worth, Bruce McLaren, Kevin Brown, Alex Rampell and Steve Jones, who all shared with me their stories for the case studies; Hak Yeung and Stephan Goetz of goetzpartners, Sandy MacPherson and Edward Cook of AVM, Richard Anton of Amadeus, Philip Weston and Patrick Keenan of Kelso Place, Douglas Clark of Tenon, Mike Turner and Steve Wilson of Osborne Clarke, Struan Penwarden and Chris Grew of Orrick, Neil Foster of Field Fisher Waterhouse, Fernando Francisco of Returnil, Karel Obluk of AVG, Nic Brisbourne of DFJ Esprit, Simon Davies of Moblica, Russell Healey of Foresight, Richard Pearce of Symantec, Ken Gonzalez and John Viega of McAfee, Sam Curry of RSA and Anil Hansjee of Google.

I’d also like to thank my ex-colleagues Ken Olisa, Roger Jeynes, Graham Ransom, Mel Morris, Mike Chalfen, Richard Fifield, Alan Hambrook, Geoff Shingles and Anthony Cook for helping to shape my thinking on this book’s subject over many years.

Finally, my great thanks go to Craig Pearce, Suzanne Anderson and Philip Jenks of Harriman House for making the book possible and to Fleur and Cordelia, my wife and daughter, for their unwavering support during the many weekends of writing.

Introduction

Most technology entrepreneurs start companies, and spend years of their lives building them, with the goal of generating significant wealth through a successful sale. For many, the sale of their company is a one-off event for which they have little or no experience, but whose outcome can make the difference between true financial security and years of frustration and regret.

This book is for technology entrepreneurs, whatever stage your company is at and whether or not you have outside investors, and also for the owners, investors and management teams of these companies. It’s designed to be a comprehensive guide to selling your company for maximum value. Much of the key to selling for maximum value lies in preparation before you even begin the sale process and nearly half of the book relates to this.

Many people will tell you that it is better to be bought than to sell. A higher valuation will generally be achieved if potential acquirers are approaching you, or at least think they are, than if they think you’re knocking on their doors wanting to sell. In the majority of cases large companies proactively find the companies they want to buy. But this doesn’t mean you shouldn’t do everything you can to entice them into approaching you. If you’ve done your preparation well and all goes perfectly to plan, you’ll have a desirable enough company, and be well enough known to your potential acquirers, that they will approach you before you ever have to commence a sale process. If this doesn’t happen for whatever reason, you’ll have to approach them.

The steps to selling for maximum value can be summarised as follows:

Agree value expectations with your stakeholders, set a value-building plan and identify triggers that can accelerate the value of your business.

Build value into your company from the start. This includes enhancing the appeal of your technology to a wide audience, recruiting and incentivising the best people, building the best customer base, partner base and brand for a company at your stage and starting to achieve strong financial performance.

Recognise the best time to sell – your point of maximum value – by matching your value expectations and your performance against the developments in the market.

Appoint the best corporate finance advisers and lawyers to advise on the sale.

Prepare all aspects of your business to make the company attractive and easy to buy.

Put in place management and processes to enable your business to continue to perform to plan throughout the sale process.

Identify acquirers with the best strategic fit, who can, in whatever way, derive the largest financial benefit from acquiring your company.

Produce sale materials which best describe the value of your company.

Engage with potential acquirers until they recognise your full value to them.

Create competitive tension, so that there is an urgency of action and a fear of losing out for buyers.

Negotiate well, on both price and terms.

Manage the due diligence process efficiently.

Close the sale and manage any activities post-completion to maximise any contingent consideration.

The chapters in this book cover all the steps above from first thinking about value expectations through to managing an earnout post-sale. This is a straightforward, easy-to-understand guide that can be followed and consulted to give insight in to every part of the sale process and it will enable readers to learn from others who have gone through the process already.

The book draws on my own 20-year career in technology and corporate finance, but also on the experience of others in the industry – notably, corporate finance advisers and lawyers, corporate development professionals working at some of the most acquisitive large technology companies and entrepreneurs who have sold their businesses. After every second chapter, there is a case study of a technology company that has been successfully sold. The case studies cover diverse companies, ranging from a pre-revenue company with its product still in beta to a $100m revenue company in its fourteenth year. The companies were sold in the years from 1999 to 2008 for between $21m and $225m. It was my privilege to speak to key individuals at each of these companies and to record their stories. Since there are as many lessons to be learned from failure as there are from success, I have also considered companies where things went wrong; businesses that were sold too cheaply, deals that didn’t complete, earnouts that failed to yield anything like the expected result and companies that tried to sell too early, or left it too late.

At the time of writing, we are experiencing a world financial crisis that is affecting everyone. Most parts of business are slowing down and this includes the buying and selling of companies, where deals in general are taking longer to complete and companies are changing hands at lower values. Despite this, deals are still going through and companies are still being bought every week. Ken Gonzalez, VP of Corporate Development at McAfee, a regular acquirer of technology businesses over the last few years, describes this period as a MOABO (Mother Of All Buying Opportunities).

In this environment it’s more important than ever to plan effectively, and to know the process and the likely pitfalls inside out before embarking upon a company sale. Particularly in a time of economic uncertainty, it’s my hope that you can draw upon the experience and advice of all those who have contributed to the content of this book, in order to sell your technology company for the maximum value.

1. When To Start Thinking About Selling

Why did you start this company in the first place? If you were looking to build up an empire for your children and your children’s children, then you’re reading the wrong book. This book is for those who started a company so that at some point in the future they could sell up and walk off into the sunshine.

It’s difficult to know in advance when the ideal time to sell will come along. Many technology companies have been sold pre-profit and some even pre-revenue, so it’s never too early to give the matter of selling a little thought. Many successful entrepreneurs and advisers insist that you should consider the time frame for sale and the potential acquirers as soon as you start the business, or as soon as you get involved or acquire it, if you’re not the founder. Rather than building a company in isolation and then finding there’s no exit plan available for it, it’s much better to understand the market and where your business fits into it. All of the companies featured in the case studies in this book started thinking about the potential for sale early on. They knew where they were heading with the business and took every opportunity that came along to progress down that path.

Very few venture capitalists will fund an early-stage business if it does not at least have some idea of its key value proposition and the potential acquirers who might be interested in such a proposition. If you are still in the early days of your business, whether you’re intending to take on venture capital or not, factor this into your early business plans.

Once you’re aware of your key value proposition, try and refine it into a statement of what you can be best in the world at – a concept that Jim Collins makes much of in his excellent book Good to Great. This is what companies will buy you for, unless you have the luxury of growing to such a size that they want you just for market share. For maximum value, make sure that your technology will have as wide an addressable market as possible and that it is a ‘must-have’ product that addresses a particular problem in a more efficient way than currently available solutions. Take the time to develop a standard, packaged product, that once developed can be sold widely without modification. Many technology companies get distracted by short-term revenue opportunities offered by customising their technology for each sale, without ever ending up with a clearly defined, standard product.

To develop great technology and to break into the market when it’s ready, you’re going to need talented staff who are incentivised to contribute their all to the company. From the start, make your company an attractive place to work and take the time to get your recruitment planning right. As you progress, hire the best people you can afford and motivate them with benefits and some sort of stake in the business.

Companies buy other technology companies for a variety of reasons: to increase their sales, their profit margins, their rate of growth; to accelerate their entry into new geographies, acquire a distribution channel, or to give them strong presence in particular sectors; to fill gaps in their own technology solutions or to enter adjacent technology sectors. Even at a very early stage, it’s worth giving thought to why a company might buy you as it will make a difference to your strategy for maximum value. Take your key value proposition and identify a few companies that might be interested in this. Play a little game of ‘what if’. What if the largest company in my sector had what we have, what could they do with it? How would it help them win business or maximise profits?

Becoming known

In large, acquisitive technology companies, there is an on-going process of looking at strategy, identifying desirable areas of growth, or areas of technology that need refreshing, and making build vs buy vs partner decisions. In the majority of cases, acquirers go out and proactively find the companies they want to buy. To find these companies the corporate development team first look at companies they know or which are known to their business units or to their network of venture capitalists, analysts and advisers. Therefore, part of your strategy from an early stage must be to become known by as many of these parties as you can.

Primarily, you want to be known by companies who would most value your technology. For examples of companies that might in time become potential acquirers, look at your direct competitors, the companies that do what you do in other territories, particularly in America, and the companies with adjacent product ranges who sell to your customers. If you consider your technology to be unique in the way that it solves a particular problem, then look for companies who are currently selling less efficient solutions to the same problem. Once you’ve found these companies, try to get to know their people.

The earlier you can get on to a potential acquirer’s radar and strike up a relationship with them, the easier the process will be later on. You may well end up with a lucrative partnership along the way and you will certainly understand more about their strategy and what they look for in companies they buy. In the majority of cases, companies buy other companies that they already know, so make sure you are well known early. If you’re a tiny company in northern France and they are a technology giant in northern California, they’re unlikely to come across you in the normal course of events, so make sure you come to their attention by PR, by wide distribution of your technology, by competitive wins (where a customer chooses your product over theirs), and most directly by just going to see them.

If you have thoughts of selling your company one day in the