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 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.
Here, James Pressley, pictured above, corporate and commercial solicitor at Kirwans law firm, sets out eight legal points to consider if you’re approached to sell your digital business.
1) Know what your business is worth
Tech businesses typically tend to be valued at five or six 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.
2) Insist on a non-disclosure agreement
The crown jewels of your operation might be source code, algorithms or just customer lists. A non-disclosure agreement (NDA) 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 likely that you and the other founders or directors will be crucial to the deal, so you may need to stay on for as long as two years after the purchase has completed. 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 proof, for example, that you own all the code in your program, or website, or app. 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
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
Part of what your purchaser is buying is your trusted cohort – freelancers and employers – so perhaps you could consider incentives for them, or making certain benefits for them part of the deal with the buyer. You may need to give special consideration to experts in specific programming languages, if these are vital to your business.
7) Plan for supplier transition
Your data is important and you may be entirely dependent on one cloud storage provider – who may not agree to transferring your account to the buyer. Alternatively, the buyer may have their own provider they wish to use. 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.