Is It Time to Sell Your Hardware or Software Company?

Cashing out! This is the point that most, if not all, technology entrepreneurs aspire to reach. They dream of their exit strategy: selling their company and laying on a beach somewhere. A colorful drink with the requisite tiny umbrella cooling in their hand.

There are a few of you out there that have NO exit strategy and would never sell your company! For some, it’s their identity, after all.  Those of that ilk prefer to work forever lest you slow down and quickly deteriorate. But that’s another story. So we’ll save their psychoanalysis for another day.

Some other entrepreneurs who want to sell their company have the most grandiose plan of all in mind. That’s an initial public offering (IPO) through a brand-name investment banker. The dream is of this bringing not only unimaginable riches but fame along with that fortune. However, that rarely happens. We’ll also table that discussion for another article.

So let’s get back to the great majority out there. Those who set out to someday cash in on all of your hard work by selling their company directly to another company. How do you know when the time is right?

WHAT MAKES PEOPLE WANT TO SELL

There are many potential triggers that set off a serious reflection about whether or not to pursue a sale of a software or hardware company. Let’s examine some of the more common ones:

1. A potential acquirer approaches the company with an offer.
2. A current strategic partnership grows closer and it seems to make sense to grow closer still.
3. Business is bad and the principals begin to worry about losing everything.
4. Negative cash flow is starving the business, forcing a sale to ward off bankruptcy.
5. The owners need cash for another purpose, be it investing in another business or other personal reasons.
6. The owner/operators are burnt out and no longer enjoy the business.
7. Business has been robust and the owners astutely consider their exit strategy. Is it time to maximize their return and minimize their downside risk by selling now?
8. It becomes clear that there is a viable business, but it would be better suited/more valuable within a larger company.
9. It’s time for the owners to retire.  However, it seems that very few high-tech entrepreneurs make it this far!

These are the most common reasons that come to mind. It is certainly not a complete list. Although we are talking about companies, in most cases the decision to sell ultimately comes down to a personal decision by one or a few individuals. So the reasons that these decisions happen are as varied as the population overall.

Given this list of common stimuli for considering a sale, what are the RIGHT and WRONG reasons to consider a sale? That is if you want to maximize your return within your particular circumstances.

WRONG REASONS TO SELL

On an impulse

You’ve been running your business, not even thinking about selling your company. An offer comes along and you get caught up in it, without having planned for it. Or things have been going poorly and you are at an emotional low. This is the opposite of having an exit strategy. Acting in these circumstances is similar to getting married, divorced, or starting a new business: don’t do it without thinking it through or planning it properly.

Fear

Don’t sell just because you are scared! That’s probably the best way to leave money on the table. There are ups and downs to every software and hardware technology business. In my experience, things usually aren’t as bad as they look at a specific “down” point in time. Nor as good as it looks at an “up” time. It’s important to look at the prospects of a business over a period of time. Consider not only how things have been going, but most importantly, the forward-looking forecast.

Sales are in decline

This is usually the worst time to sell. If you do this, all leverage goes to the buyer. Of course, panic can set in as you see your valuation melting away.  Human instinct is to “get what you can” before it degrades further. But first consider the situation coldly, without emotion. Is it reasonable that you can turn it around and reignite growth? Is the decline all specific to your business, or is it a cyclical market or a bad economy overall? Might things turn around in some reasonable time period? Sometimes selling under these circumstances is the right thing to do and is unavoidable. But with proper planning, you may be able to sell your company BEFORE this happens. Or turn it around going forward with a well-thought-out plan.

WELL-THOUGHT-OUT EXIT STRATEGY

You believe you’ve reached the peak of valuation

This seems obvious, but it is difficult to do. Finding the right time to sell is tricky. You don’t want to exit too early and leave money on the table. So the inclination, given that tech businesses are valued as a multiple of revenue or EBITDA is to hold on until growth stalls. But be careful that you don’t wait until you built up your sales so much that little “natural” growth” is left in your product/market cycle. Once this is the case, the business may not look as attractive going forward for the most attractive potential buyers. Most strategic buyers would like to see good growth prospects in a potential acquisition. So the best exit strategy is often to “leave a little growth on the table”. This might lead to a higher multiple from the buyer and a higher price overall.

You haven’t been enjoying running the business for a very long time

When this is the case, I believe strongly this is a time to get out. If you have someone else whom you feel comfortable leaving in charge, that’s fine. But otherwise, you’ll run it into the ground from burnout. Or you’ll walk away and let someone else destroy it because you just don’t care anymore. Passion is important in the tech business. When it’s gone it’s usually a good time to sell. But please do it in a logical, process-oriented manner with a well-planned exit strategy.

A fundamental shift in the market or your business

This could mean many things: you have lost a number of key people, the economics of your market changes, or a major investment will be required to keep the company on a growth path. The specifics here could be quite varied. The common thread is that with the change in fundamentals, there are real clouds on the horizon. This may lead you to a thoughtful belief that continuing to operate the business as a standalone entity isn’t an optimal path forward.

PLAN YOUR EXIT STRATEGY: THINK IT THROUGH

The sale of your company is a very important “life-changing event” for the owners, founders, and managers of a technology company. I’ve seen sales come together very quickly and completely unplanned. I view unplanned company sales as the business equivalent of a quicky divorce. One that ends up as an emotional event. Consequently without careful consideration or an objective study of the alternatives and consequences. Since it is a once-in-a-lifetime event for many, it should be given the careful consideration that these types of events deserve. That’s my view! Post a comment with your own exit tales or opinions.

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