Growth and exit strategies for software and it companies

Buyers may require substantial seller financing or earn-out arrangements. This could expose owners without proper exit planning to additional risk.

With this strategy, owners plan out and agree to the terms long before the sale. Often, this strategy builds upon an existing buy-sell agreement. A buy-sell agreement is an agreement the owners should put in place when starting a business. The agreement outlines a plan for all of the potential planned and unplanned triggers for a business exit.

In case you were curious, the triggers for a buy-sell agreement are: termination of employment, retirement, disability, death, divorce and bankruptcy. Key Challenge: Agreeing on Business Valuation. The buy-sell often dictates a formula for valuation. Sales process can be the simplest and provide for the smoothest transition.

The buyer knows the business. Seller is able to deal with a buyer who wants to buy stock. This typically reduces taxes for the seller. Life insurance on the seller can facilitate an automatic sale and payment in the event of an unexpected death. Banks are typically willing to finance a partner buy-out. If structured with a note, financial risk is created for the seller in the event of business failure after the sale.

Relationship between owners can go sour making the process very challenging. If the buy-sell agreement valuation formula is incorrect, both parties need to agree to amend it.

Key Challenge: Funding the Sale. The management buyout exit strategy is best for a business owner wanting to pass the business on to those who helped build it. With this strategy, funding the purchase is typically the challenge. It is rare for management to have the resources needed to purchase the business.

Because they lack the necessary resource, alternatives need to be evaluated. The first option is to get a loan from a credited lender. Bank and SBA loans are typically available. Another option is the leveraged buy-out. In a leverage buyout, the management team loans against the assets of the business to finance the purchase. If the buyers lack the assets for the remainder of the purchase, a seller can finance the remainder.

In some cases, the management team can secure financing from a private equity firm. This is rare though as private equity firms often require specific returns and have minimums they are willing to invest. This is typically an option available only to mid-size businesses. Likelihood for business success is high as the management team knows the business. The management team is able to share accurate forecasts and business plans to a lender.

Transition to the new owners is typically smooth as relationships and knowledge are maintained. Allows the seller to maintain a portion of ownership and stay on as a consultant or board member. For the management team, the seller is typically more willing to provide owner financing. A seller may not receive the maximum price for the business.

The sale proceeds often have a mix of financing, cash and seller financing. The deal may require investment from an outside party to make the deal happen. If using a leveraged buyout, additional pressure is put on business profitability. If the owner finances a portion of the sale, it creates added financial risk for the seller. The business is able to stay in the family. The family legacy can continue on for another generation. It provides opportunity for future generations i. The seller can stay active in the business.

An owner can sell the business in chunks over time as child takes more responsibility. Seller gets final say on the sales price and terms of the transfer. Often puts additional financial risk on the seller in the event family member fails. These large companies are that VCs dream of, as they often provide large sums of capital to all parts involved founders, early employees and investors.

However, in recent times companies such as eDreams Odigeo , Zalando , or Rocket Internet have chosen the Madrid, Frankfurt or London stock exchanges to go public.

According to Tech. An interested trend in the startup world when it comes to going public is that more and more companies are taking longer to IPO.

This is a consequence of the high amount of capital available in the startup market from Venture Capitalists, private equity firms and other investment institutions. This type of exit is often chosen by big companies that are looking for complimentary skills in the market, and buying a smaller startup is a better way to develop a product than creating it in-house.

In the same way that not every startup needs to raise money from VCs and business angels bootstrapping is a viable alternative , not every startup needs to sell itself to a bigger company to provide a return to founders, employees and investors.

Companies that are able to establish a solid business model and scale might choose to stay independent and reinvest the profits in the company. Part of those profits can also be distributed amongst investors as a dividend, providing liquidity to outside partners while avoiding the public markets and the obligations that come with it.

Many business owners view their exit strategy as a chance to reap the benefits of their hard work and to increase their personal liquidity.

However, not all exit strategies work equally well in this respect. In an IPO, for instance, your shares likely will be subject to a share lock-up agreement, which means you will not be able to sell your shares -- even after the IPO -- for a period of time, typically six months. A strategic acquisition will often generate an immediate cash payment, thereby increasing owner liquidity. Sometimes, however, the final price is not determined until the end of an earn-out period, which can last several years.

In a management buyout, the original owners also generally will receive liquidity over a period of time. If you accept outside investment, you essentially take on partners, and those partners at some point are going to want liquidity.

Entrepreneurs should look for good partners who don't pressure companies to sell or go public, but wait until the time is right for a liquidity event when the company has matured. Think about your company's future potential. Perhaps you do not require immediate liquidity, but want to participate in your company's future growth potential. In this scenario, you will want to choose an exit strategy that allows you to retain an ownership interest.

An IPO allows you to keep a substantial interest in the company, as well as to time the ultimate disposition of your shares to meet your own personal needs. A management buyout also will allow for continued participation in a company's growth.

However, an acquisition will generally eliminate, or at least greatly reduce, your ownership interest in your company, as well as your ability to influence its future direction and performance.

Consider the impact of Sarbanes-Oxley. Market Penetration — Expand your pool of local customers Become More Competitive — Win a larger share of projects with your existing clients Market Expansion — Expand into other market sectors Geographic Expansion — Generate customers in other regions Services Expansion or Diversification — add new services to your repertoire for additional project opportunities.

Learn about Strategic Marketing Campaigns. Book your free consultation.