Can you afford to sell your company?

November 2013

In This Issue

IT only bright spot in M&A Deals in 2013

Built to Sell: Financial Factors for Technology Companies

Presented by Austin Dale Group

Do you wonder if you could sell your technology business if you wanted (or needed) to? Are you stuck at a plateau and asking, "Why can't I get to the next level?" Does it ever seem like your business is taking over your life?

If you answered 'yes' to any of these questions, you're really asking the question: How sellable is my business?

It doesn't matter if you actually intend to sell your business - though most entrepreneurs say they do think about selling their business in the next 5-10 years. It's about creating more value in what may be your most important financial investment. Remember, the goal is to build a sellable business - not necessarily because you want to sell it, but because owning a sellable business can give you more freedom and professional satisfaction.

In this brief presentation we will focus on some of the key financial ingredients in building a sellable technology business and identify the steps to get there. In
next month's presentation we will cover some of the non-financial aspects. Join us to start the journey of creating a thriving and sustainable business that doesn't take over your life.

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Date: November 20, 2013 (Wednesday)

Time: 11 AM Central / 12 PM Eastern

This webinar is recommended for owners and executives of privately-held technology companies.

Can You Really Afford to Sell?

In many cases, the sale of a small company is "event" driven. That is, the reason for sale is often an event such as a health decline or illness, divorce, partnership issues, or even a decline in business.

A much more difficult reason for selling is one in which the owners simply want to retire and live happily ever after. Here is the problem:

Suppose two owners have a prosperous IT service business. They each draw about $200,000 annually from the business plus cars and other benefits. If the company sold for $2 million, let's say after debt, taxes and closing expenses the net proceeds would be $1.5 million. Sounds good, until you realize that the net proceeds only represent about 3 1/2 years of income for each (and that doesn't include the cars, health insurance, etc.). Then what?

The above scenario is not atypical, especially in small companies. These are solid companies that provide a very comfortable living for two owners. In the above example, the owners decided they couldn't sell because it didn't make economic sense to them. The business was worth more to the owners than to any outside buyer. Perhaps they thought that an intermediary could produce a buyer who would be willing to pay far more than the business was worth. But the M&A market is a fairly efficient one. So what should they do?

If they do nothing, there is a risk that competition could come along and reduce their business's cash flow. The business could also suffer because the owners are not continuing to invest and build it. They apparently want to retire and take life easy, and this mind-set could dramatically undermine the business. If the owners are forced to sell the business because it is declining, they probably won't receive the $2 million they might have received earlier.

On the other hand, the owners, ready to begin the rest of their lives, could hire an executive or general manager. This addition would cut their earnings to pay for the new manager, but it would also reduce their responsibilities and give the business a chance to grow with new energy and ideas.

Some Well-Known Truisms

When someone asks you what a business is worth, you need to ask him, "Are you a buyer or a seller?"

One can't sell a business to someone who doesn't want to buy it. Conversely, one can't buy a business from someone who doesn't want to sell it.

The term: "Don't worry, it's a done deal," should cause great concern among the parties involved.

All businesses that go down the drain have one thing in common - They have all run out of money!

A deal that looks too good to be true - usually is.

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Welcome to our November newsletter. Check out our articles for technology company owners in this issue and take a look at our busy presentation calendar this month.

The end of the year is in sight and it's time to give thanks for our many blessings. Austin Dale Group is an M&A advisory firm that specializes in technology companies. We welcome your inquiries and appreciate your referrals.

John Austin & Bob Dale

info@austindalegroup.com

512-327-0427

IT - Only Bright Spot in M&A Deals in 2013

In the first half of 2013, private equity M&A transaction volume was lower than even the pessimists had forecast. In fact, it was the lowest 6-month total since the second half of 2009. After the slow start, deal activity increased by 16% in the 3rd quarter.

Information technology contradicted the trend in the first half of the year as the sole industry to see an increase in deals from Q1 to Q2. The trend continued with a gain of 8.5% in Q3.

Total vs IT Deal Flow 2008-2013

Capital invested is still far below peak levels of a few years ago, but IT seems to be more resilient than other sectors. That has caused valuations to be high for some IT companies which may have the effect of slowing down some future deals or encouraging some investors such as private equity to invest growth capital without taking a controlling stake in the target company.

Once again software was the leading sector in the industry with 56% of the transactions, followed by services at 18%. Within the IT service sector here is a breakdown of the leading targets for M&A deals:

Managed services - 18.9%
ERP/CRM providers - 13.2%
Digital strategy, SEO, etc. - 8.5%
SaaS - 7.5%
Hosting - 6.6%

The most popular vertical market for acquisitions in the IT service sector was federal government, followed by health care.

Sources: PitchBook & Lyndhurst Partners

What are Your Company's Weaknesses

Every company has weaknesses; the trick is to fix them.

Some companies on paper may look the same, but one may be much more valuable than the other, due to weaknesses in one of them.

Fixing or improving company weaknesses can not only significantly improve the value, but also increase the chances of finding the right buyer. Not all problems or weaknesses can be resolved or fixed, but most can be improved.

There is a saying that the test of a good company president or CEO is what happens to the company when he or she leaves.

Here are some common weaknesses that buyers can be concerned about and that may cause them to look elsewhere for an acquisition:

"The One-Man Band"

Many small companies were founded by the current president and he has made all of the major decisions. He has not developed a succession plan and has no one in place to take over if he gets hit by the proverbial truck. He is the typical one-man band and, as a result, the company is not an attractive target for acquisition.

The One-Product Company

Many one-man band owners run companies created and based on the manufacture and sale of one product; or the creation and development of a single service. Henry Ford made a wonderful car - the Model A, but that's all he made. General Motors decided that enough people would like something different and were willing to pay for it. Fortunately, for Ford, he caught on quickly, but he almost went out of business because of the mindset that one model fit everyone.

Declining Industry

Companies that are in a declining industry have to be smart enough to see it and make changes. One example was a company that made ties. They were smart enough to see the decline in this apparel item and switched over to making personalized polo shirts. A company can still make ties but has to have the foresight - and ability - to move into new product lines.

Customer Concentration

This area is a major concern to most buyers. It is not unusual for the one-man band to focus on what made the company successful - one or two major customers. The owner has built the relationships over the years and these relationships are seldom transferable. Finding new customers may take time and money, but it is absolutely necessary if the owner ever wants to sell.

There are many other areas that could be considered company weaknesses. If there is a Board of Directors or an Advisory Board, perhaps they can help the one-man band create a succession plan and just as importantly - a successor. The time for this is before the company goes on the market. Whether current ownership plans on staying or eventually selling the company, the good news is that resolving company weaknesses is a win-win situation.