Exits for a Technology Business
Technology is one of the most important sectors of the economy in the Thames Valley with tens of thousands of people engaged in this market across the region. By its very nature the sector is extremely dynamic, with significant numbers of new entrants each year – whether as spin outs from one of the many local research institutions; more developed large technology businesses or as UK subsidiaries of large overseas corporations.
As technology companies usually require access to capital through their development, such companies have shareholders who are ultimately seeking an exit to allow them to realise their investment. Indeed, successful exits are fundamental to the sector as it is the opportunity for the realisation of gains by investors that encourages them and other investors to make the investments (which are usually very high risk) in the first place.
The recent global economic turmoil has meant that finding an exit for technology companies has been as challenging as finding a bank prepared to lend money. Indeed the similarities don’t end there as even if an exit was available then the terms were usually unattractive. But the signs are that conditions might be improving.
As exits can be achieved by either a trade sale or an IPO (aka flotation) in the context of technology exits, the second half of 2009 was significant for the following reasons:
- The recovery in stock markets generally
- A reopening of the IPO market
- An increase in the average price paid for privately owned companies by trade acquirers
Whilst this hasn’t yet seen a significant upturn in the number of technology exits the auspices are good for 2010 and onwards. So time to prepare for the exit.
The key areas for any technology business to look at in advance of any exit are:
- Refreshing the business plan
- IP
- Management
- Building partnerships with potential acquirers
The Business Plan – inevitably the original business plan will have been gathering dust for some time and it is important a new version is agreed. Are the market opportunities as originally envisaged, have competing products or technologies emerged or are they in development, what barriers to entry exist or could be created, what additional human or physical resources are required, what is the best route to market, what follow up products or second generation are being developed, what finance is required – all these are questions that should be considered by those considering positioning themselves for exit.
The refreshed business plan will more than anything (other than personal preference perhaps) determine whether a trade sale or IPO will be the appropriate route. For example, companies with a single product or market are probably better seeking trade exit whilst those requiring large amounts additional funding may be better looking at IPO.
IP – Ensuring there is clear and unencumbered ownership of the intellectual property is a no brainer. Whether the IP is best protected through patents etc is more of a moot point but certainly registered IP that is owned by the company is more helpful if following the IPO exit route.
Management – One of the more difficult features of an exit are that it usually involves changing the senior management team. But in reality this is less to do with the exit and more to do with the maturity of the business. As technology companies mature and the technology nears commercialisation the skills required to fully exploit the opportunities change. Sales and marketing and (yes even) financial skills are required to lead and manage the business. Therefore, whether it is for exit or the continued development of the business a cold hard look at the management and board (including non executive directors) is required to ensure the on going team is right for the business and the exit.
Building partnerships with potential acquirers – Achieving a successful exit is not a discrete process which starts “x” months before exit. The truly smart management team considers the exit throughout the business cycle and one tactic it might employ is to drive its business or partnership relations towards those companies which might be the most likely trade acquirers. Not without risks such a tactic should mean the potential acquirers will more easily see the benefits of an amalgamation
Nick Rogers, Head of James Cowper Corporate Finance, commented “after a very quiet period in the M&A markets driven by the economic and fiscal uncertainty, activity is picking up. Trade buyers are back and the IPO markets are open again. Technology companies will enjoy far greater exit opportunities in 2010 than 2009”.
At James Cowper our commitment to the technology industry extends beyond our service to our clients to seeking to support the sector by lobbying for relevant changes in public policy. To facilitate this we will be conducting a survey of technology businesses in the Thames Valley to ascertain what is important to them in the current market. Results will be published in the Thames Valley Business Magazine. If you would like to take part please contact Sarah Constable on 0118 9590261 or sconstable@jamescowper.co.uk.
Sue Staunton, Partner, James Cowper LLP, Tel: 01865 200500 or email: sstaunton@jamescowper.co.uk
12.01.2010