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If you want to sell your technology company in the next three years, it is time to start getting your ducks in a row. Companies that are not adequately prepared may succeed in finding a buyer, however taking this route will likely come in the form of a lower price. If you want to prepare for due diligence and ensure your company will be ready for a transaction, there are many steps you can take now.

The Benefits of Preparing

By taking a proactive approach, you can increase the odds of negotiating the best possible price. First of all, running a sale process is extremely time consuming under the best circumstances, but even more so if you are not properly prepared. When you are in the midst of an exit event, you do not want to be distracted from running your business and hitting your numbers - the prospective buyers will be looking closely at your ability to do just that.

Deals also have a natural momentum, and unforeseen due diligence problems can disrupt that momentum. Finally, a company well prepared for due diligence is a company that makes a good first impression with potential buyers.

Survey Your Environment

A good place to start is taking a temperature check of your industry. Make sure you understand the key valuation metrics for your sector.  Is it revenue, bookings, average recurring revenue, customers, EBITDA or something else?

Next, make sure you understand your competition. Don't restrict yourself to direct competitors. Consider companies with a similar market, customer base or product. If they aren't direct competitors now, they could be in the future. Finally, make an honest assessment as to how your company is performing in relation to those key metrics and your identified competitors.

Once you have considered this, explore ways to improve your performance in these key metrics. Also, contemplate whether there are additional markets you should be addressing. Showing your potential acquirer that you understand the value drivers in your sector as well as the competitive landscape will make you a more desirable target.

Network with Potential Buyers

While you are out doing market research on your competition, you should also be developing relationships with potential buyers. Knowing who the key players are before you want to sell can be very helpful. By taking part in effective networking, you can let potential acquirers know you are out there. In addition, you can get a better sense of where they are looking for opportunities.

The Importance of Agreements 

Before you look to sell, you should have all of your business relationships documented and formalized, including:

  • Employee agreements
  • Noncompetition agreements
  • Customer agreements
  • Contractor agreements

These may seem like mundane administrative tasks, but your prospective buyers will most definitely not see it that way. If your key employees can walk out the door the day after the company is sold, that could diminish the value of the company, especially if those employees can go directly to work for a competitor.

Many companies take pride in their relationships with their customers including the longevity of those relationships. Your prospective buyer will also see the value in those relationships but only if they have a realistic expectation of continuing to benefit from them after the sale. This concern can be minimized by having formal contracts in place with all your customers, preferably for multi-year periods.

If you hire contractors to develop any crucial intellectual property - such as software code - you need to be very careful about who owns the final work product. If there is any ambiguity about this, it will certainly surface in due diligence. It is always best to require all contractors to enter into formal agreements that spell out all the key terms of the relationship.

Due Diligence and Internal Controls 

We all know that the due diligence process starts with the target being presented with a multi-page request list looking for you to provide all manner of records and documents - which is why you should start building your own internal document library now. Maintaining a comprehensive, electronic document library as part of your day-to-day operations will save you untold hour later. As soon as the due diligence process starts, you will need every available hour for more critical tasks.

In addition, businesses should document their internal controls. This is especially critical if you expect that your most likely exit is through a sale to a public company. Regardless of whether you feel your controls are strong or weak, documenting the processes and controls you currently have in place is worthwhile.

Once you have your internal controls documented, you can begin to address any critical controls that you have determined are missing. You might even find that your processes and controls are better than you think.

Next Steps

Now that you have an outline of the different steps needed to prepare for a sale, you can begin getting ready for your exit event. You may not be able to control when the ideal buyer comes along and makes you an offer you can't refuse, but you can control how well you are prepared - even if that offer comes along tomorrow.