What tech founders should consider when they’re looking to turn the page.

There’s a well-known saying in the entertainment industry: “You can’t make a living, but you can make a killing.” It reflects the unpredictable nature of success. One project might be successful while the next one struggles, making sustained achievement difficult. A similar perception exists in the software industry, where the benchmark for success is often defined by reaching unicorn status – a paper value of at least a billion dollars. Companies that fall short of this lofty valuation are frequently dismissed. However, overlooks a substantial marketplace with literally thousands of profitable, innovative businesses that have carved out strong reputations and loyal customer bases without pursuing an IPO. These companies have developed robust product portfolios over time, shaped by consistent customer engagement and thoughtful leadership. Eventually, their founders must confront the challenge of succession planning and decide how to exit the businesses they’ve built and nurtured.

Unfortunately, there is no universal roadmap for founders considering a sale. Each company is unique, and a founder’s familiarity with private equity often depends on personal networks and prior experience. Identifying the right buyer can be just as stressful as determining the optimal time to sell. Selling a business is a significant decision that encompasses financial, emotional, and strategic considerations. The encouraging news is that there are practical steps that technology founders can take to make the process more manageable and less overwhelming.

Understanding the Different Types of Buyers

The initial step in selling a company involves understanding different types of buyers and determining which category aligns best with the business’s goals and circumstances. Buyers generally fall into three main groups: strategic buyers, financial buyers, and individual buyers.

·       Strategic buyers are typically other companies in the same industry looking to acquire businesses for strategic reasons, such as expanding their market share, acquiring new technology, or entering new markets. These buyers often offer higher valuations because they see synergies that can be realized post-acquisition.

·       Financial buyers, such as private equity firms, are primarily interested in the financial returns that they can achieve from the acquisition. They often look to improve the company’s operations, grow its revenue, and eventually sell it at a profit. These buyers are usually more focused on the financial metrics and may offer lower valuations compared to strategic buyers.

·       Individual buyers are often entrepreneurs or investors looking to own and operate a business for themselves. They may have personal reasons for acquiring a company and might be more flexible in their approach. However, they may also lack the resources and expertise that strategic or financial buyers possess.

Preparing for Due Diligence

Due diligence is a critical phase in the selling process where the buyer thoroughly examines a company’s financials, operations, legal matters, and other aspects. Preparing for due diligence can be daunting, but when the process is understood in advance, the stress level goes down. 

Diligence typically begins with a thorough evaluation of a company’s financial records. Accuracy and currency in balance sheets, income statements, cash flow statements, and tax returns demonstrate strong organizational oversight and preparedness. These documents are closely examined by potential buyers to assess the financial health of the business.

Next, legal documents should be reviewed, including any legal contracts, intellectual property rights, employee agreements, or any pending litigation. Any legal issues that could potentially disrupt the transaction should be discussed as early in the process as possible.

Operational due diligence entails a close examination of the company’s day-to-day activities. Information regarding core business processes, the customer base, sales processes or GTM strategy, and technology infrastructure should be readily available. Strengths should be emphasized, and any weaknesses or risks that may raise concerns for potential buyers should be proactively managed with mitigation plans. 

Countless successful companies in the tech industry thrive outside of the “unicorn” valuations and are driven by innovation, loyal customers, and steady growth. For the founders of these businesses, deciding whether to sell is a deeply personal and strategic choice. Though there’s no one-size-fits-all roadmap, understanding the types of buyers as well as what to expect during the diligence phase can significantly ease the sales process. Because selling any company is more than a financial transaction; it’s a pivotal moment in a founder’s journey and in the company’s growth journey. With thoughtful planning and clear communication, founders can turn the page with confidence, ensuring their legacy, their team and their customers continue to grow and succeed beyond their tenure.