How to create a successful exit strategy for your tech business
Despite the challenges that rising interest rates and geopolitical uncertainty have imposed on M&A activity in the last year, the technology sector and IT services in particular are demonstrating resilience and still attracting investors and buyers in the UK.
As Moore Kingston Smith Corporate Finance, leading corporate finance advisers in the IT sector, explains in its latest M&A report, a total of 620 UK deals were announced in 2023, marginally ahead of 2022, with over 60% of these transactions led by PE or PE-backed businesses.
While the average value of these deals in 2023 could not match up to the records set back in 2021, valuations have recovered because of increasing competition for assets.
Most interestingly, the amount of ‘dry powder’ – money secured by investment firms but not yet invested – held by PE firms globally is at record levels ($2.3tn) and is ready to be deployed in the acquisition of innovative businesses with strong management and a solid customer base.
So, how can you maximise value if you are planning to take your technology company to market? What factors do you need to consider to realise the full value of your business?
Nick Thompson, partner at Moore Kingston Smith Corporate Finance, explains the vital factors and considerations to implement a successful exit strategy for a tech business.
When should start-ups start thinking about their exit strategy and who should be involved in this?
Founders and owners should have a clear exit strategy in mind as early as possible to prepare for a smooth process. Even in the early stages of a start-up, the main stakeholders should have an idea of their long-term goals for the company and the different exit scenarios that may be possible as these may influence business decisions.
Once the exit strategy has been well defined by the founders, it is important to ensure that a strong management team is put in place to transition strategic decision making and client relationships away from the shareholders. Considering incentivisation schemes such as tax-efficient share options or bonus schemes will be a key factor in ensuring goal congruence between the shareholders and management team. This is vital, as acquirers will want to meet the management team to gain confidence that they can drive the business forward if the founders are looking for a full exit.
What factors should be considered when deciding on an exit strategy and timing?
It is key that founders have a clear idea about what type of exit they want – whether that is a 100% sale and immediate exit from the business or a partial exit to de-risk their personal financial position and still provide an opportunity to realise significant value in the future through a second transaction.
Taking on majority or minority investment from PE offers the opportunity to benefit from increased funding to drive growth in the business, either organically or through acquisition and provides a second exit in the future, which can often maximise long-term financial returns.
However, this exit strategy requires the founders to remain heavily involved in the business post-transaction until the next liquidity event.
A sale to a competitor will usually offer a quicker route to a full exit, although this will often involve an ‘earn-out’, where part of the purchase price paid is contingent on performance for some years post-transaction. This makes the strategic and cultural fit with an acquirer key to ensuring the full value for the business is achieved.
What are the key steps between deciding to exit and successfully doing so?
One of the key factors in a successful exit is ensuring that the business has a strong finance function in place and an accurate financial record of the business performance and KPIs. Buyers will expect quick and easy access to all financial information over the last three years as well as a robust, KPI-driven forecast. If this is not easily available, it will make it difficult for potential buyers to assess the valuation of the business and will inevitably lead to a loss of value for the sellers.
When a buyer has been identified, it is essential to establish and maintain a good relationship with the acquirer – especially where the founders are retaining equity or have an earn-out period. The transaction process can become fraught with difficulty and points of contention but being supported by advisers who provide a buffer between the buyer and seller helps to ensure that the working relationship starts out on the right foot post-transaction.
The most successful exits are almost always the result of careful advance planning and preparation.
What is the current market like for businesses considering an exit?
The interest rate increases over the past 18 months made it very difficult for acquirers to obtain funding and commit to M&A and had a knock-on effect on valuations. Now that interest rates have stabilised, it is expected that valuations will begin to rise as competition for the best assets intensifies.
What advice would you give to founders currently considering an exit?
It is important to try and become as redundant to the day-to-day running of the business as possible. If the founder is too central to operations or holds key relationships with clients, a lot of the value of the business is lost if they step back, leading to lower valuations.
Even where the founder intends to remain heavily involved, many acquirers will be wary of ‘key-person risk’ if the business is too reliant on an individual.
We always recommend that owner-founders look to develop the second tier of management well in advance of a potential exit and provide evidence that there is a strong team that can take up the leadership of the business post-transaction.
UKTN in partnership with Moore Kingston Smith Corporate Finance.
