Thought Leadership

Timing your exit – do you decide or does the market decide?

8th April 2016

There is often much debate around the boardroom table about the optimal time to exit. Do you decide, or does the market decide? For technology businesses, particularly those with innovative solutions in a new and growing market, timing of a sale usually comes down to key points in the company’s lifecycle, combined with the external market conditions. It could be at a time when the company can achieve a standout valuation based on strategic value of its technology, or more usually it is broadly defined by shareholder objectives on timing and price, assuming the company is doing well and delivering good growth and financial performance. (There is another potential trigger provoking a sale, which is distress, where things aren’t going to plan and the shareholders are looking to recover whatever they can.)

A technology sale can deliver a fantastic result when the company has a novel technology that is strategically important in a new and emerging market (the Internet of Things would be one example today). The combination of a seller’s proven product with a buyer’s existing sales channels and product portfolio could present a powerful and valuable strategic fit. This type of sale tends to be more common when financial markets are buoyant and valuations are high. It often begins with an inbound enquiry by a strategic buyer who may be jostling to be first to market or to build new capability. However, there is usually only a narrow window of opportunity for this type of deal. Typically, this is in the early stages of development of a market (the ‘hype’ stage) and the high prices tend to be commanded by a small number of early transactions. Leave it too late and buyers will already have filled the gap and, at best, you will then have to slog it out for the next few years to build a ‘proper’ business, perhaps needing to raise more capital.

At worst, you will be seen as a ‘me-too’ with a considerably lower transaction value. Most companies are sold on the basis of their financial and business performance. Although valuing private companies is still more art than science, there are sources of data, such as the revenue or profit multiples of publicly traded companies or previous M&A transactions, that can provide guidance to valuation and greater certainty to what a company is worth. However, these only provide a guide, and significant uplift in value can be achieved through careful strategic positioning with the right buyers, a strong competitive process and good negotiation. Ultimately, the valuation comes down to what someone is prepared to pay and what they perceive the value to be.

Key decisions on timing depend on the state of the M&A and financial markets, the growth prospects of the business and its strategic value to buyers in terms of opening up or capitalising on new market opportunities, as well as shareholder objectives. It is important not to leave it too late. You need to ensure that there is still growth in the market for the buyer’s benefit as you will not get much for a business that is past its sell-by date, with numbers flattening or declining.

Markets are dynamic, not static, so on an ongoing basis, you need to reassess your business and exit strategy in the context of external market conditions. It’s worth setting aside some time with your board on an annual basis to formally review the markets, the products that you offer and the position and activity of the buyers to ensure that you are still well positioned. If market growth starts to slow, or the big players start to consolidate, then you probably need to rethink your strategy and act accordingly.