The sale of a company is a major milestone for any business owner. But what happens next? “There is a little bit of seller’s remorse that occurs. You’ve spent years building a business, and it is your baby,” says Stephen Chandler, co-founder of email security company MessageLabs, which was sold to Symantec in 2008 for $700m (£550m).
MessageLabs enabled emails to be scanned for viruses and malware in the cloud before they reached a person’s inbox. Its 20,000 plus business clients included the Bank of England and the Federal Reserve.
Chandler initially explored a stock market flotation. But, with the financial crisis on the horizon, a trade sale seemed the better option. After a month of talks, an agreement in principle was made with US software company Symantec. Then began the arduous due diligence process in which MessageLabs faced questions from its buyers, lawyers and company personnel. “[It was] formidable, to say the least,” says Chandler. Symantec had around 100 working on the sale, while there were only four involved on MessageLabs’ side, including Chandler.
The business was sold just as Lehman Brothers was collapsing and global stock markets fell. But the deal was briefly delayed while Symantec’s board meeting was called to discuss the crash. “After keeping us stewing for an hour and a half, they came on the phone and said they were good to close the deal. Then there was euphoria,” says Chandler. “It was a life-changing amount of money for a lot of our staff.” Most employees held share options, and several held shares too.
In 2009, Chandler co-founded the venture capital firm Notion Capital, which backs companies in the SaaS (software as a service) space. He enjoys advising businesses, enabling them to grow and be acquired.
Two other entrepreneurs who’ve enjoyed a successful exit are husband and wife team, Joe and Wendy White. They were the co-founders of website-building business Moonfruit. The business, which launched in 1999, narrowly survived the dotcom crash of 2001. By 2011 it was a major player. Buyer interest was growing and the founders decided it was time to cash out.
The Whites appointed Californian bank Viant Capital to court buyers and manage the selling process. They chose an American bank as the companies that had shown interest in Moonfruit were US-based. Joe says finding an experienced party to do this was wise choice. “When you are selling your first business, the number of [business] transactions you’ve seen is precisely zero. Yet you are going up against corporate development teams, who might be acquiring four to five companies per year.” He adds that bankers typically take a share of the transaction value from the sellers, in this case Moonfruit’s shareholders.
Moonfruit was sold to directory company Yell Group for $37m. The Whites stayed with the business for two years, enabling it to integrate. Now they mentor and invest in entrepreneurs through Entrepreneur First. The pre-seed investment company has backed startups such as Magic Pony, which was sold to Twitter, and nano-satellite business OpenCosmos.
White, like Chandler, says he wants to use his own experience and money to boost entrepreneurship. “What California has done so well is recycling its entrepreneurial talent and money back into the [startup] eco-system. We want to do that too by investing in … and creating the kinds of companies that you don’t often see in Europe.”
For entrepreneurs keen to ready their business for sale, Mark Hardwicke, managing partner at Invenio Corporate Finance, with 23 years experience of leading acquisition teams, offers some advice. “Critical, and often overlooked is the timing of a sale. It is always better to market a company when the future of the business looks bright and profits are increasing.”
Of course, buyers come with different motives. Some see an opportunity to increase sales or expertise within their company. Hardwicke says these types of buyer will find a business attractive if it provides them with access to new products, services, geographies or markets. In other words: “Opportunities that open doors or fill a hole in an existing portfolio”. Meanwhile, strategic buyers may acquire a business to halt a competitor or potential market threat.
The latest Global Technology M&A (markets and acquisitions) report [pdf] from EY showed that company exits reached record levels in 2016, with $466.6bn worth of deals made. The most popular areas for buyers are cloud-based services and software as a service (SaaS) companies. The report also predicts companies in the sectors of Artificial Intelligence (AI) and Internet of Things (IoT) to feature prominently in market and acquisitions activity in 2017 and beyond.
Richard Goold, head of technology law at EY, says: “Soon, almost every software company will be a combination of cloud, AI and machine learning.”
Five qualities that make a business valuable
A successful exit can take many forms. However, a recent report, The Art of Exiteering, from Richard Chandler’s Notion Capital, examined 20 successful European tech exits, including Moonfruit and MessageLabs. Here were the common themes:
1) Problem solving
Successful companies are appealing because they make life easier or better for their buyers; they possess a solution to a big problem.
2) A great team
Even if an entrepreneur has a great idea, they won’t succeed without a great management team.
3) US expansion
The big money is across the Atlantic, but buyers there are unlikely to be interested unless you have a substantial presence in the US.
4) Good administration and governance
The selling process is long and hard, so commit staff and resources and bring in external help.
5) Buyer awareness
Acquirers have different motivations for wanting to buy a company. Understanding what they see as valuable is key to getting a strong valuation.