The technology sector continues to evolve, driven by digital adoption and shifting client demands. That’s why founders in the software business, development agency, or SaaS platform are evaluating their exit options.
For a successful tech exit, you must maximize valuation, attract the right buyers, and make the exit process as smooth as possible.
This guide walks you through the steps to take when selling, what buyers look for, and how you can prepare for a successful business sale.
TL;DR – How to Sell a Tech Company
At a glance, here are the steps to follow when selling a tech business:
- Define your ongoing role
- Partner with advisory firms
- Identify potential buyers
- Inform your team
- Negotiate and close
More on each later on in the article.
What Makes Selling a Tech Company Different
Valuation of tech companies is primarily based on intangible assets and future profitability.
Here are the key differentiators:
- Valuation Method: While most businesses are valued using an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple, tech firms typically use recurring revenue to determine market value.
- Primary Asset: In a traditional sale, buyers inspect equipment and real estate. However, tech buyers assess your codebase, data, and technology’s scalability.
- Technical Due Diligence: Unlike standard business audits, tech deals involve a deep dive into a company’s software system, ensuring it can handle more users without crashing
How to Prepare Your Tech Company for Maximum Sale Price
Starting preparations 3 to 5 years before deciding to sell a business can help you design the right exit strategy that ensures the transition is as smooth as possible.
Here are some tips to increase your company’s value before selling:
- Optimize Your Revenue Quality: Shift as much revenue as possible into monthly or annual subscription models. This will help boost the multiples used to value your business by proving your income is predictable and low-risk.
- Reduce Dependence: Create and document systems and repeatable processes that can be easily adopted after selling the tech business, demonstrating to buyers that the business can run without your involvement and attracting premium sale proceeds.
- Strengthen Your Intellectual Property (IP) Portfolio: Formalize all company trademarks and patents to ensure they are legally watertight before a sale. This reduces the buyer’s risk of future market-share erosion, thereby justifying a higher valuation.
- Grow Your Customer Base: Acquire customers from different geographic regions, age groups, and industries to signal stability to potential buyers. This protects your business from potential risks arising when a major revenue contributor defaults.
- Embrace Strategic Partnerships: Form strategic partnerships with top industry players to gain access to new markets and demonstrate to potential buyers that your company is ready for future success.
- Audit Documents: Ensure all company documents, including financial statements, tax filings, client agreements, and employee contracts, are accurate and up to date. Auditing documents presale will shorten due diligence time, speeding up the process.
Selling Your Tech Company Step by Step
Selling a tech company is a long and complex process because of the multiple stages you have to go through.
Follow the 5 simple steps to sell a tech company:
1. Define Your Ongoing Role
Before engaging an advisor, first define what success looks like. Are you seeking maximum liquidity, or are you looking for a partner that will scale your product?
Some of the questions you should answer include:
- Will I exit completely after selling my tech company?
- How will I structure the sale of my tech business?
- What will happen to employees after the sale?
2. Partner With Advisory Firms
Next, look for top M&A advisory firms specializing in sales for tech companies.
Advisory firms can help you:
- Maximize valuation by highlighting Unique Value Propositions (UVP) to attract buyers.
- Transition through the sales period smoothly, ensuring your vision is well executed.
- Evaluate M&A deal-readiness if you are considering an exit within the next 3 to 5 years.
3. Identify Potential buyers
Build a targeted list of potential acquirers who meet the requirements of your ongoing role.
Some of the types of buyers include:
- Strategic Buyers: These are competitors or similar companies that want your technology.
- Financial Buyers: These are entities focused on scaling your business to generate profits from their investment.
4. Inform Your Team
It’s critical to know when to share the news of the tech business sale.
Here’s how to go about it:
- Inform a small group of executives early, since they are essential in providing the data needed for due diligence.
- For the broader team, wait until the deal is almost complete to avoid morale drops.
- Consider offering bonuses or clearly communicating the career growth opportunities under the new management.
5. Negotiate and Close
After choosing your ideal buyer, the last step is performing due diligence and finalizing the deal.
In this phase:
- Advisors prevent price cuts by providing evidence that validates your financial claims
- Potential buyers perform due diligence on your documents and tech to evaluate whether your business is worth buying
What Tech Acquirers Look for in Due Diligence
Before listing your tech business, it’s essential to create a due diligence checklist to evaluate its readiness.
Buyers typically focus on the following areas:
- Architecture and Scalability: Tech acquirers assess a business’s technology to ensure it is modern, sustainable, and scalable.
- Software Ownership: Tech buyers also evaluate code ownership by reviewing licenses and patents for open-source components.
- Security and Risk: Buyers also assess vulnerabilities by reviewing data breach history and security protocols.
- Data Assets and Regulatory Compliance: Acquirers perform due diligence to confirm that current data sets were obtained legally and that the company complies with privacy laws such as the General Data Protection Regulation (GDPR).
- Restrictive Legal Licenses: Buyers review third-party code libraries used to build your platform to ensure there are no security or legal vulnerabilities.
How Strategic Advisors Maximize Your Tech Exit Value
At JS CPA Strategic Solutions, we are strategic M&A advisors who provide the insights and execution support that 7 to 8-figure tech businesses need to navigate a tech business sale successfully.
Here’s how we maximize your tech exit value:
Growth Road Mapping
With fractional CFO services, we bring a strategic clarity that aligns company operations with strategic growth. We help you identify the hidden revenue leaks and develop actionable roadmaps that find financial clarity and drive sustainable growth.
Structuring for Tax Efficiency
With our tax & compliance services, we help structure exit deals (selling of shares or assets) to minimize tax liabilities and maximize net proceeds. Our team structures the deal to optimize your after-tax proceeds through pre-sale tax structuring and LCGE optimization.
Operational Improvement
As an M&A advisory firm, we help tech founders achieve operational efficiency by identifying bottlenecks in their customer experience journey and optimizing resource allocation.
By conducting audits of existing workflows, we can identify areas to reduce unnecessary costs, thereby improving the valuation of your tech company.
Implementing Due Diligence
We assist with due diligence in Canada and the USA to keep the tech sale moving forward efficiently.
We organize all required documents, including IP assignments and employee and vendor contracts, to ensure they are easily accessible and maintain deal momentum.
Book a consultation call today!
Frequently Asked Questions (FAQs)
Want to know more about how you can ensure your tech exit is successful? Explore the FAQs below:
When Is the Best Time to Sell a Tech Company?
Timing the sale of your tech company can make or break the deal.
Consider selling when:
- The business is at its peak performance.
- The external market conditions, such as industry growth rate and demand, are favourable.
- You are ready to transition your business to a new owner
What Multiple Do Tech Companies Typically Sell For?
Multiples for tech companies vary by industry, company stage, and deal size.
However, tech companies that offer infrastructure as a Service get valued at multiples of 2.7X – 12.9X, whereas Software as a Service(SaaS) companies get 1.6X – 6.6X multiples
Can Small Tech Companies Compete with Large Buyers?
Definitely! Despite the competitive landscape, owners of smaller tech companies can make their business stand out to large buyers by:
- Creating tailored products that focus on a specific niche market.
- Spotting and acting on trends faster to stay ahead of competitors.
- Defining a Unique Value Proposition that makes the business stand out.
How Long Does It Take to Sell a Tech Company?
Selling a tech company typically takes 6-9 months and follows the 3 phases listed below:
- Pre-Sale Preparation: Lasts about 1-2 months as owners organise all necessary documents and address any inadequacies in their tech.
- Marketing and Buyer Identification: Lasts 2-4 months as business owners look for a suitable buyer.
- Due Diligence and Negotiations: Last 2-3 months as buyers examine financial performance, customer base, technology assets, and legal compliance.
What Taxes Will I Owe When Selling a Tech Company?
You primarily owe capital gains tax on the book value, though some proceeds may be charged as ordinary income based on the deal structure.
Other key factors that might affect taxes include state, provincial, and local taxes, as well as eligibility for exceptions such as the Qualified Small Business Stock (QSBS) and Canada’s Lifetime Capital Gain Exemption (LCGE).
Conclusion
As a tech business owner, you must be well prepared and well-advised to ensure a successful transaction.
Whether you’re planning to sell your company in the next 3 to 5 years, you should start by doing tax planning and increasing your company’s value.
At JS CPA Strategic Solutions, we help you navigate the sale process smoothly by offering fractional CFO services, tax compliance support, and high-level M&A advisory to help you achieve a high valuation multiple.
Get in touch today, and let’s help you prepare your business for sale and maximize transaction value!
