It’s the moment that most business owners dream of; when another firm recognises the fruits of your labour and approaches you to discuss buying your digital company.
Whether the suggestion has come out of the blue, or if selling up is an exit strategy you’ve been working on for some time, it’s vital to have plans in place if you’re thinking of making a sale.
According to James Pressley, corporate and commercial solicitor at Kirwans law firm, it’s not unusual for owners to put so much work into making their business attractive to buyers, they fail to prepare a comprehensive strategy for how to respond to any offers.
“That means they can find themselves on the back foot, unsure of how to protect their business and its assets as they go through the sale process, and potentially even uncertain about what value to put on the firm,” he says.
“It’s absolutely vital to think about the legal aspects of selling your company to ensure a good price, a long-term future for your business, and a continued income for your employees and suppliers.”
Here, James sets out eight legal points to consider if you’re approached to sell your digital business.
1) Know what your business is worth
This is key. As a guideline, tech businesses typically tend to be valued at 5 or 6 times the value of your EBITDA (earnings before interest, tax, depreciation and amortisation). Your EBITDA is, roughly speaking, your profit. Your profitability may increase substantially once you have launched your product, so it is worth considering timing.
1) Ensure the potential buyer signs a non-disclosure agreement
Tech businesses are used to working collaboratively, but the same approach can’t necessarily be used when selling your company. The crown jewels of your operation might be source code, algorithms or just customer lists. A non-disclosure agreement (NDA) is a document which requires your buyer to keep those crown jewels confidential until the purchase goes through. This gives you some protection in case your buyer decides to pull out of the purchase having already seen what makes your business special.
3) Accept that you may not be able to just walk away
It is quite likely that you and the other founders or directors will be crucial to the deal. You may need to stay on after the purchase has completed to make sure the buyer gets the full benefit of your business. This could be as long as two years. The buyer may incentivise you to do this by paying you perhaps 60% of the purchase price on completion, with the remaining payments varying depending on how the business performs during that period.
4) Check third party agreements
Tech businesses have a tendency to work collaboratively and informally. But when a purchaser is looking at your business, they will want to be sure of the provenance of what they are buying. Could you, for example, prove that you own all the code in your program, or website, or app? It is important to check agreements with freelancers and employees to make sure you are in control of all your intellectual property rights.
5) Look at your licensing terms
It is crucial to check the documentation you have in place with your clients, as the likelihood is that a buyer of your business will want to maintain relationships with existing clients and roll your product out to new ones. Your licensing terms and the control they give you of your product will be crucial to proving the security of your business to the buyer.
6) Consider incentives for contacts
Tech is a people business, and it is likely you will have built a trusted cohort. This is also partly what the purchaser is buying, but will your freelancers and employees stick with you when you sell? Perhaps you could consider incentives for them, or making certain benefits for them part of the deal with the buyer. In particular, you may need to give special consideration to experts in specific programming languages, if these are vital for your business.
7) Plan for supplier transition
Your suppliers may have been sitting quietly in the background, for example, providing cloud storage or wifi, but they also need to be considered. Your data will be important and you may be entirely dependent on one cloud storage provider. The buyer may have their own provider they wish to use, or your existing provider may not agree to transferring your account to the buyer. This transition process should be carefully planned for and managed.
8) Make plans for after the sale
The buyer may require you to sign a document saying that you will not work for your clients once you have left the business. This will mean that, once you get back from your world cruise, you have no income and no way back to your old business. It would be a good idea to think through the process to what you will do once it is finished.
As Feature In: SME
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