Do you want to exit your tech company? To help you prepare for such a journey, PEAK’s founder Johan van Mil shares his inside knowledge from having sold his own tech company, having invested in many other tech startups, and his learnings from The Big Exit Show podcast.
Selling a business is difficult for several reasons. First, it is difficult to determine the proper value of a business because there are many factors involved such as assets, sales, profits, and growth potential.
Second, finding the right buyer can be time-consuming and confidentiality issues must be handled carefully. And finally, unexpected issues can come to light during the due diligence process that can delay or even cause the deal to fail.
Common Mistakes During The Sales Process
In short, selling a business can be a tricky journey that calls for a cautious approach and expert advice. So let’s talk about being well-prepared and avoiding common mistakes when selling a company.
As a founder and investor at Peak, but also as a host of The Big Exit Show, I usually see three mistakes made when founders want to exit their company.
1. Lack of planning
If you exit without a structured plan, you will end up rushing decisions. Start planning two years ahead to prepare your exit strategy, like the financials, but also your team to maximize your value. In that period you have enough time to streamline your operations and improve your financial records to attract the most favorable terms.
2. No clear valuation
When sellers have no clear idea about the valuation, this can lead to undervaluing or sometimes overvaluing the business. This mismatch often sparks disagreements amongst shareholders.
Analyze the value of comparable companies and talk to investment bankers and founders who sold their companies. This will give you a better understanding of the value of your business.
3. Lack of clear communication
If you fail to communicate properly with your key stakeholders and key employees, some people won’t be fully aligned with your plans. It could even lead to early investors blocking the sale if they perceive their stake to be worth more.
So keep your stakeholders, employees, and investors informed throughout the process. This doesn’t mean that you have to share everything with everybody. But it means that people are involved and aware of what’s happening and how the sale will affect their position or (future) job. Transparency builds trust, and trust leads to a smoother transition during an exit.
4. Creating a leadership vacuum
When you don’t have a clear successor for your position or one or more C-level positions in the new management, this may lead to a leadership vacuum. And therefore a lack of direction after the exit. So you have to ask yourself if you want to be involved in the company after selling it.
I’ve been fortunate to experience this as a founder and investor of Peak and host of The Big Exit Show. The answer, however, isn’t a simple yes or no, it depends – on your agenda and the terms.
One aspect that can be challenging is the shift in dynamics. Your company is now part of something bigger, and that calls for adjustment – reporting to someone else and making decisions collectively. There’s also a risk of overshadowing new leadership if you remain too involved.
From my experience, taking an advisory role often benefits both sides. It allows for a comfortable distance, avoids potential burnout, and paves the way for fresh opportunities.
5. Failing to address the concerns of employees
Another pitfall during the sale of a company is failing to address the concerns of employees. It may result in a high turnover after the exit. And in resistance to the change that will come.
Therefore, managing expectations and addressing the concerns of your employees will help boost morale and reduce the risk of people leaving after the exit.
For example, when one of my companies merged with another one with a completely different culture, the majority of the employees left within a year after the merger. This was challenging for the remaining management since their incentive was based on the future growth of the company.
Ensuring that your team feels rewarded after the exit is also essential. While this is ideally facilitated by the buyer, there’ve been times when I’ve stepped in to ensure the team’s well-being post-exit.
In short, preparing for an exit isn’t easy, but with open communication, clear responsibilities, and a focus on the team’s well-being, the transition can be smoother and beneficial for all parties involved.
Legal and Financial Pitfalls To Avoid When Exiting A Company
Besides those general mistakes, there are some legal and financial pitfalls you’ll probably want to avoid.
6. Not securing IP or tax issues
The first is IP issues. Failing to secure intellectual property can affect not only the valuation but also the transaction of your company.
Another legal issue is tax liability. Ignorance of potential tax implications can drastically affect the net proceeds and ultimately, your personal outcome.
7. Violating agreements
You might think this is a no-brainer, but I’ve seen it happen many times: overlooking the details in shareholder, client, or partner agreements.
Pay meticulous attention to every detail in your shareholder, client, and partner agreement. I once had to abort an acquisition because the contracts didn’t permit a transfer of clients. So, always get legal help early on.
8. Inadequate financial records
In my experience, inadequate or poorly maintained financial records can not only lead to a lower valuation but also sow seeds of distrust in the prospective buyer’s mind.
Having a realistic understanding of your company’s value based on adequate financial records is key. Overestimation can lead to unrealistic expectations and could be a significant roadblock in exiting your company successfully.
9. Misjudging the market
And the last mistake you’ll want to avoid when selling your company is to misjudge the market. If you exit your company during a market downturn, then you’ll probably reduce the selling price. On the other hand, if the market fares well, then try to increase the valuation of your company.
For example, let’s zoom in on startup exits. Since peaking in 2021, startup exits have plummeted over the past year. Driven by rising interest rates, reduced access to cheap money, and fewer opportunities to cash out.
The first half of 2023 saw the lowest combined exit value for U.S. companies and venture capital investors in about 15 years. However, in Q3 2023, exits began to recover, with PE/VC exits in August hitting their highest in over 22 months. Deep tech companies have contributed to this rebound especially. Notably, a quarter of the 16 unicorn exits in 2023 were deep tech companies (source TechCrunch).
This example shows how important the market is in your sales process. Therefore, you should always take market developments into account when establishing your company’s value.
10. Rushing Due Diligence
In the excitement of selling a business, it’s easy to overlook the thoroughness needed in the due diligence process. Skipping steps or rushing through due diligence can lead to unpleasant surprises, like hidden liabilities, compliance issues, or undisclosed risks. These oversights can delay the transaction or even result in a lower selling price.
Ensure that due diligence is conducted meticulously. Work with experienced advisors to uncover any potential issues that could arise later. By addressing these concerns upfront, you present a transparent and prepared front to prospective buyers, increasing their confidence in the transaction.
Want To Learn More About Exiting Your Company?
Would you like to learn more about exiting your company? Check out The Big Exit Show Podcast to learn from others!