# How entrepreneurs can prepare to sell a tech business  
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2019-01-16
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Tech M&A Strategies: Expert Advice from John Farrugia,
Meta Description: In today’s tech-fuelled climate, new technology companies are emerging rapidly. Ensure a successful sale with these essential M&A strategies from John
URL: https://financedigest.com/entrepreneurs-can-prepare-sell-tech-businesshtml

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**John Farrugia,** Cavendish

In today’s tech-fuelled climate, new technology companies seem to appear almost every day. Indeed, research suggests that the number of technology startups launched in the UK last year rose by almost 60 per cent from 2016, with over 10,000 companies incorporated in total and 4,238 in London alone [\[i\]](#_edn1).

This fast-moving environment has led to rapid rates of consolidation and high expectations of growth, with products or services first imagined by tech startups frequently being sold to global giants such as Google, Apple and Amazon. Music service Shazam was bought for £400m by Apple last year, and 2014 saw Facebook’s acquisition of Whatsapp for $21.8bn. Only two years prior, the social network famously purchased photo-streaming service Instagram for $1bn – the company is now estimated to be worth more than one hundred times that price [\[ii\]](#_edn2).

All this has made mergers and acquisitions (M&A) activity an essential part of [business growth](https://www.financedigest.com/harnessing-the-power-of-super-deduction-for-business-growth.html "Harnessing the power of super-deduction for business growth") for tech companies. With [interest rates](https://www.financedigest.com/london-stocks-slip-ahead-of-key-interest-rate-decisions.html "London stocks slip ahead of key interest rate decisions") low, share prices high, and thousands of tech companies with the potential to generate huge amounts of money, tech M&A is thriving.

Below, John Farrugia, Partner at Cavendish Corporate Finance, outlines the five key [strategies tech entrepreneurs should take into account when negotiating the sale of their business](https://www.financedigest.com/fortified-dairy-products-market-outlook-cover-new-business-strategy-with-upcoming-opportunity-2022-to-2032.html "Fortified Dairy Products Market Outlook Cover New Business Strategy with Upcoming Opportunity 2022 to 2032") in such a fast-growth, ever-changing landscape.

**_Create a realistic [growth strategy](https://www.financedigest.com/cable-cars-and-ropeways-market-competitive-growth-strategies-based-on-type-applications-end-user-and-region.html "Cable Cars And Ropeways Market Competitive Growth Strategies Based on Type, Applications, End User and Region") – but keep M&A front of mind_**

Even with such an abundance of activity, [acquiring firms](https://www.financedigest.com/temasek-to-acquire-bridgepoints-uk-based-testing-firm-for-7-billion-sources.html "Temasek to acquire Bridgepoint’s UK-based testing firm for billion -sources") remains complicated as strategic and financial buyers compete avidly for the best deals. That means tech entrepreneurs must have a well-thought-out M&A strategy from the outset; it’s now become a crucial, necessary part of any [growth strategy](https://www.financedigest.com/industrial-magnetrons-market-competitive-growth-strategies-based-on-type-applications-end-user-and-region.html "Industrial Magnetrons Market Competitive Growth Strategies Based on Type, Applications, End User and Region").

But with so many tech [companies in existence](https://www.financedigest.com/computerized-physician-order-entry-cpoe-systems-market-to-generate-profitable-avenues-for-existing-companies-as-well-as-new-players.html "Computerized Physician Order Entry (CPOE) Systems Market to Generate Profitable Avenues for Existing Companies as Well as New Players"), any strategy must be not only thorough, but realistic. Without a genuine understanding of their business, entrepreneurs could risk massively under or over-valuing their companies, with the latter [due to the common pipedream many entrepreneurs hold of being snapped up by a tech giant shortly](https://www.financedigest.com/air-france-cancels-55-of-short-medium-haul-flights-sept-16-due-to-strike.html "Air France cancels 55% of short, medium-haul flights Sept. 16 due to strike") after inception.

However while behemoth deals involving such tech giants as [Apple and Google may dominate](https://www.financedigest.com/s-korea-parliament-committee-votes-to-curb-google-apple-commission-dominance.html "S.Korea parliament committee votes to curb Google, Apple commission dominance") the media, most tech M&A activity doesn’t take this form. European tech firms are most likely to be acquired by a company from the same geography rather than a [Silicon Valley](https://www.financedigest.com/kpmg-stands-by-audits-of-silicon-valley-bank-and-signature-bank-ft.html "KPMG stands by audits of Silicon Valley Bank and Signature Bank – FT") colossus, and the majority of deals go largely unnoticed outside of small technological communities.

**[Reduce risk](https://www.financedigest.com/driving-returns-and-reducing-risk-with-data.html "Driving returns and reducing risk with data") by accurately positioning your business**

Properly positioning the business, and understanding how it could be integrated into a target acquirer, is critical for entrepreneurs looking to sell. This is especially true for tech firms, which can be particularly unique given that what sets one apart from another is often a complicated source code, or small differences between apps or programmes.

[Ahead of any sale](https://www.financedigest.com/zara-owner-inditexs-first-half-sales-surge-ahead-of-potential-slowdown.html "Zara owner Inditex’s first-half sales surge ahead of potential slowdown"), ensuring there are no gaps in this code, data and IP, is crucial. [Entrepreneurs should ensure their business](https://www.financedigest.com/california-attractions-smart-entrepreneurs-use-to-attract-business.html "California Attractions Smart Entrepreneurs Use to Attract Business") fully owns the IP behind its product – and if not, whether there is any reliance on third-party technology. If this isn’t properly disclosed in negotiations, there could be a risk that the buyer could pull out or the business could eventually be sold for a much [lower price](https://www.financedigest.com/companies-cost-inflation-is-slowing-but-shoppers-may-wait-for-lower-prices.html "Companies’ cost inflation is slowing but shoppers may wait for lower prices").

Entrepreneurs should also ensure the company is ready and presentable before showing it to prospective buyers and ahead of any due-diligence process starting, and financial [statements](https://www.financedigest.com/uk-finance-minister-hunt-to-make-statement-at-1000-gmt-source.html "UK finance minister Hunt to make statement at 1000 GMT – source") must be up-to-date and in order. Acquirers will want to see steady, predictable [revenue as much as they want to see cutting-edge technology](https://www.financedigest.com/mldw-technology-market-size-share-top-leading-companies-consumption-drivers-trends-forces-analysis-revenue-challenges-and-global-forecast-2028.html "MLDW Technology Market: Size, Share, Top Leading Companies, Consumption, Drivers, Trends, Forces Analysis, Revenue, Challenges And Global Forecast 2028").

**_Value your team, but don’t forget your own goals_**

Tech firms are all different, particularly when it comes to their employees. Many are built upon the particular strengths and personalities within development teams, so it’s very important that the [key players](https://www.financedigest.com/catharanthine-market-2022-research-on-user-demand-size-applications-key-players.html "Catharanthine Market 2022 Research on User Demand, Size, Applications, Key Players:") are retained after a merger or acquisition has taken place. Those who know how to evolve the software as the [market develops can be critical for future](https://www.financedigest.com/chromoendoscopy-agents-market-2031-report-details-the-future-development-manufacturers-trends-share-size-and-forecast.html "Chromoendoscopy Agents Market 2031 Report Details the Future Development, Manufacturers, Trends, Share, Size and Forecast") success, and a strong management team behind any shareholders and founders can help put buyers at ease and reduce risk during the sale process.

But, as well as the wider team, it’s [equally critical that the entrepreneur behind the business](https://www.financedigest.com/business-leaders-flexibility-for-everyone-contributes-to-gender-equality-in-the-workplace-without-affecting-your-bottom-line.html "Business leaders: flexibility for everyone contributes to gender equality in the workplace, without affecting your bottom line") is protected and valued. Three in four entrepreneurs want to stay on after selling their business, and this is particularly true in the tech sector – here, only 19 per cent of founders want a clean break after selling, compared with 26 per cent of consumer entrepreneurs [\[iii\]](#_edn3).

This makes it crucial that the entrepreneurs’ own interests are protected, depending on the [level of involvement they wish to have once the business](https://www.financedigest.com/ukraine-war-energy-crisis-send-german-business-sentiment-to-lowest-level-since-june-2020.html "Ukraine war, energy crisis send German business sentiment to lowest level since June 2020") is sold. This can be done by locking down elements like double-trigger acceleration vesting, as well as change-of control incentives and [severance packages](https://www.financedigest.com/outbreak-of-the-covid-19-pandemic-is-expected-to-severely-affect-the-global-packaging-and-labelling-services-market.html "Outbreak of The COVID-19 Pandemic is Expected To Severely Affect The Global Packaging And Labelling Services Market ").

Recent research found that 73% of UK [companies keep their digital acquisition as separate business](https://www.financedigest.com/keeping-an-eye-on-company-purse-strings-where-do-businesses-go-wrong.html "Keeping an eye on company purse strings – where do businesses go wrong?") entities – which is a shame, as this reluctance to integrate businesses can mean firms miss out on the expertise and varied working styles that a blended team can offer. And in the tech world, where creativity and innovation is key, this could mean that a huge amount of the potential that these [deals offer](https://www.financedigest.com/philip-morris-offers-eu-concessions-in-16-billion-swedish-match-deal.html "Philip Morris offers EU concessions in billion Swedish Match deal") is being lost.

**_Keep sight of your product – and your brand_**

[Customers or users are a critical part of any brand’s](https://www.financedigest.com/how-brands-can-adapt-marketing-tactics-to-better-suit-customers-changing-shopping-habits.html "How brands can adapt marketing tactics to better suit customers’ changing shopping habits") value. This is certainly the case in tech, where [products often generate](https://www.financedigest.com/demand-for-healthy-food-products-is-pushing-sales-growth-of-next-generation-stevia-market.html "Demand For Healthy Food Products Is Pushing Sales Growth Of Next Generation Stevia Market") a very loyal, and divisive, following. It’s crucial that entrepreneurs looking to sell are aware of this, as subtle differences between [products could cause a customer](https://www.financedigest.com/sports-and-athletic-insole-market-players-eye-custom-and-3-d-printed-products-for-performance-optimization-says-future-market-insights.html "Sports and Athletic Insole Market Players Eye Custom and 3-D Printed Products for Performance Optimization, Says Future Market Insights") base to turn away. Sellers need only look at the divisions between Spotify and Apple Music, or Android vs iPhone, as evidence of this.

This means that both buyers and sellers [must think](https://www.financedigest.com/new-uk-pm-must-be-radical-to-stop-power-bill-catastrophe-think-tank.html "New UK PM must be radical to stop power bill catastrophe – think tank") very carefully about the look and branding of any product after the merger or acquisition is complete. Firms with customer facing platforms should decide whether they want to converge or diverge the brands before completing an acquisition, and be ready to [communicate this to the market](https://www.financedigest.com/optical-satellite-communication-market-emerging-trends-to-boost-the-global-revenue-growth-discussed-in-a-new-market-research-report-by-tmr.html "Optical Satellite Communication Market – Emerging Trends to Boost the Global Revenue Growth Discussed in a New Market Research Report by TMR").

**_Engage a trusted adviser early on in the process_**

Finding a trusted M&A adviser can take time, and one with [deep industry](https://www.financedigest.com/musical-instruments-market-insights-deep-analysis-of-key-vendor-in-the-industry-2022-2026.html "Musical Instruments Market Insights, Deep Analysis of Key Vendor in the Industry 2022-2026") knowledge and connections often requires another adviser with a strong network themselves to leverage. An adviser with experience in [managing and negotiating the often competing influences of investors](https://www.financedigest.com/activist-investor-elliott-management-takes-stake-in-salesforce-sources.html "Activist investor Elliott Management takes stake in Salesforce -sources"), acquirers, employees and founders, is of paramount importance to the success of a transaction.

It is critical that the keystone adviser has a firm grasp of typical [deal structures and potentially hidden clauses often negotiated](https://www.financedigest.com/s-africa-negotiates-deal-with-eu-to-clear-citrus-blockage-at-ports.html "S.Africa negotiates deal with EU to clear citrus blockage at ports") by acquirers and equity investors. And just as critically, they must be involved in the earliest discussions, before the main terms are set or after the best time to [voice key](https://www.financedigest.com/b2b-specialist-pr-agency-the-digital-voice-announces-four-key-account-wins-as-it-celebrates-its-tenth-birthday.html "B2B specialist PR agency The Digital Voice announces four key account wins as it celebrates its tenth birthday") deal points has passed.

[\[i\]](#_ednref1) https://www.rsmuk.com/news/tech-company-start-ups-jump-by-60-per-cent

[\[ii\]](#_ednref2) https://www.cnet.com/news/instagram-estimated-to-be-worth-more-than-100-billion/

[\[iii\]](#_ednref3) https://smallbusiness.co.uk/stay-on-after-selling-business-2546104/


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