How to maximise the value of your Tech exit

1

Research what potential buyers value

Understand your buyers’ ‘hot buttons’ and the metrics that matter most to them. Look at the market – how do you compare to competitors, what are the reasons behind other valuations and transactions? Be realistic about your expectations of your business value. The enterprise value of a tech business is commonly valued based on a multiple of EBITDA, recurring revenue or reported revenue.

Recent Australian Technology Transactions

There are several factors that can influence or maximise the value of your business. Size, growth profile, total addressable market size and the appetite of the market or acquirer are a few. Databases which provide multiples of tech deals include S&P Capital IQ, Bloomberg and Factset, but these can be expensive to access and time consuming to learn to navigate and analyse. You should consider using an advisor who specialises in industry research to not only save you time but provide reassurance with accuracy.

2

Know your industry metrics and how they align with buyers

There are common metrics that are analysed and compared against the acquirer’s own metrics and comparable competitors. You want your metrics to accurately reflect your story in the most positive way. Popular metrics in software as a service (“SaaS”) include:

• Customer and revenue retention – Retention rates of customers and revenue show the value or number of customers who are retained by the business over a period of time. This is usually shown as an average of the monthly retention rates over the last 12 months.
• Customer Lifetime Value (“CLV”) – Customer lifetime value is the gross margin expected from a customer over the lifetime of their relationship with the company. This is calculated by the average ARR per customer by the gross profit margin divided by the ARR churn.
• Customer Acquisition Cost (“CAC”) –The customer acquisition cost metric analyses the cost of converting new customers and measures the spend directly incurred in winning new customers.
• CLV / CAC – The CLV / CAC ratio shows the relationship between the lifetime value of a customer and the cost of acquiring that customer.
• Annualised recurring revenue (“ARR”) – Annualised recurring revenue provides an annual forward view of revenue based on the current recurring customer base at period end. ARR is calculated by the current monthly recurring revenue multiplied by 12.

Comparable Australian SaaS Metrics

3

Avoid any surprises in your financial information

A due diligence check on your business will reveal any gaps or abnormalities. Factors like overstated financial performance won’t only lead to reduced value adjustments buy may also create a loss of credibility and put off potential buyers. There are several things you can do to paint the best picture of your business:

• Align your revenue with accounting principles. Buyers will want to review the revenue from an annual contract on a pro-rata basis, however, the seller may be recognising the revenue from an annual contract upfront. The acquirer will recast the revenue under their measurement principles that can lead to a significant reduction in earnings which can affect purchase price.
• Understand your normalisations. Any buyer or investor will want to see normalised financial statements to get the true picture of your business earnings. The process usually involves looking at projections and comparisons of future earnings using normalised records from past earnings. This paints the picture for the expected rate of return for the buyer.
• Look for synergies with the buyer. Help your buyer visualise the future by showing them where customer groups and sales channels align. Provide information that demonstrates future earning capacity and the upside to the acquisition.
• Be diligent with forecasts and budgets. Well assembled forecasts will assist the buyer to get comfortable basing their valuation on the future earnings rather than historical earnings.

 “Don’t underestimate the value of getting an advisor to dig into your numbers and review your financials. Getting an expert’s perspective will highlight any irregularities or misstatements and give you the chance to make any corrections before it’s picked up by a potential buyer.”.

4

Be prepared to provide records quickly

A potential exit can lose momentum if you can’t produce agreements and responses in an acceptable timeframe. Make sure you have the ability to access information easily to reassure the buyer that you’re running a professional business and risk controls are in place. Requests you can expect to get are:

• Corporate records including shareholder and option holder agreements
• Consumer contracts such as master service agreements
• Lease agreements
• Employment contracts
• Supplier contracts
• Evidence of compliance with regulations such as the Privacy Act

Give the buyer more confidence by showing your “house is in order”. This makes your business look more attractive and can result in a higher valuation. Think about pre-sale due diligence (with a legal and financial advisor) to iron out any potential issues. This will ensure you can explain any concerns to a buyer rather than letting them discover the issue/s for themselves.

5

Undertake tax planning

Given that the Tax Office will take a percentage of the proceeds in an exit, it goes without saying that effective tax planning will make a material difference to the after-tax proceeds founds and other shareholders will pocket. This will be the subject of a future article – keep an eye out!