The dream for some founders is to exit their multi-million dollar technology business within five years. The reality for many is that they run out of cash long before that, and the company dies. There are no hard and fast rules about converting dreams to reality. Yes, you need to dream ‘big’ , that is your vision. If you think small, well, small is what you will remain. We look for at the essentials of a successful exit sale in this interview with Ian Shearer, Director of Mergers and Acquisitions House, Atlanta International.
Tell me a bit about Atlanta International
Atlanta International Ltd is an International Mergers and Acquisitions (M & A) House focussed totally on the technology sector. Atlanta has successfully sold a large number of technology companies both in Ireland and elsewhere. Atlanta is different to other Mergers and Acquisitions advisers because all our staff are technology people. We have all successfully built technology businesses ourselves so we understand the challenges of building a technology company.
Do you just sell Irish companies?
Absolutely not. We sell companies around the world. For example, at this moment we are acting for an Indian Client who is conducting a transaction in China. Because I am based in Ireland and spend a lot of time in the Irish Technology Industry, I tend to have mainly Irish Clients but I can, (and do), act for clients anywhere.
How do companies approach you to act on their behalf in an exit sale?
Quite often they are referred to me by other intermediaries, (such as lawyers), or previous clients who are happy to recommend me. However sometimes they simply pick up my name from our website and send me an introductory email. I will respond to any introduction very quickly but I would encourage prospective clients to contact me earlier rather than later. I am in touch with a number of prospective clients right now, who I know will not be ready to sell for at least two years. However by giving them a few pointers now, I can make their eventual sale a lot easier and hopefully get them a higher price.
You specialise in selling technology companies. What types of business does this encompass?
When we say Technology I guess we really mean the whole ICT area and in particular Software. Within software everyone in Atlanta has a particular niche. My personal strengths tend to be around the areas of SaaS, Hosting/ Cloud, Telco and IT Services. I am a huge believer in the future of the Cloud and the benefits it can bring. In Ireland we are still in the early days of the Cloud revolution. In this regard we are, (as usual), a number of years behind our US cousins!
How do you decide if a company is fit for sale?
When a potential client approaches me I will do a quick evaluation of the company to try and ascertain if the company is fit for sale and, most especially, what sort of price they can expect. This evaluation is based on a number of factors, mainly general industry knowledge and knowledge of other transactions. I will then advise the client of what price they can expect and a decision to proceed, (or not), can then be taken. Sometimes this quick evaluation leads a client to delay the sale while they implement changes I might recommend.
How do you source buyers?
Because we track deals in the ICT sector we tend to either know, or know of, most of the major acquirers in this sector. We also quite often will know exactly what type of company a particular acquirer is looking for and we try to get some knowledge of how they will value a company so that we can position our clients to maximise the price they get. We are quite unusual in that we have a very active Indian office so we can source Indian buyers.
Selling a company involves making detailed disclosures of a commercially sensitive nature to potential buyers. Often, a company may not even wish it to be widely known that it is looking for a buyer. How do you establish the bona fides of a potential buyer and what say does a company have over what information you disclose on its behalf?
This is quite a complex area and often quite an issue for our Clients. In general we know most of the acquirers and we find that serious acquirers are very unlikely to abuse any Confidential Information which we supply. This is partially because we will ensure they sign a Confidentiality Agreement first and partially because they know that if they once abused any information we supplied to them, we would never again show them a client. At all stages in the process the Client has absolute control over the Information we supply on its behalf.
How are companies valued and who performs the valuation?
They say that “beauty is in the eye of the beholder” and this certainly applies in the case of the sale of a technology company. It is our job to present the company in such a fashion as to maximise the valuation of the company for an acquirer. We will sometimes give an “indicative valuation” based on suitable comparatives but quite often the valuer will just do their own valuation. The valuation is usually based on either a multiple of profits or, more likely, a multiple of revenues. While there are norms out there the actual price paid will usually come down to how badly the acquirer wants a company.
What types of companies are ‘hot’ at the moment in terms of Mergers and Acquisitions?
At the moment the “hot” areas include enabling Cloud, SaaS, PaaS, Security and Infrastructure. Some of the prices being paid in these areas are off the wall. For example consider Heroku’s acquisition by Salesforce.com. Salesforce paid about $1bn for Heroku even though it had minimal revenues. But it was a platform which could potentially open up a whole new line of business for Salesforce. So companies in the enabling space, especially in the Cloud, with recurring revenues, are hot.
What happens in the due diligence part of a sale?
We notice an increasing trend for large acquirers to spend more and more time and resources on Due Diligence. The attitude seems to be “lets spend the time and money beforehand ensuring that we are getting what we think we are getting” So this means they will do due diligence not just on the financials but pretty much on all aspects of the business and most especially around the technology, the IP (if any) and ownership of the IP. Expect every aspect of your business to be examined in detail. This can be a very difficult time for clients but we stay heavily involved in the process and we can usually mitigate the pain for a client.
Why would a technology company choose Atlanta to sell them?
Many advisers, especially in a small company are “generalists” who will do a range of Corporate transactions across a number of industries. They will claim to know and understand technology but they don’t. Atlanta only work in technology and only on M & A. This means we know the industry, we know the Acquirers and we know how to get the best price. If an adviser does not really understand the drivers of an industry they are unlikely to get the best price. In addition we work largely on a “success fee” basis. This means that we work with a client all the way through the whole process up to and including completion of legal contracts.
Thanks to Ian for his insight into how a technology company is sold. If you have any questions for Ian on exit sales, please feel free to ask in the comments below.