Navigating a Business Transaction in the Tech World

Practicing due diligence in business transactions can set you up for financial success.

Company personnel discussing a pending business transaction, such as a sale or capital raise.

A business transaction — such as a merger, a sale or an acquisition — consumes a significant amount of internal and external resources in the lead-up to the event. While there are certain transaction-related tasks and projects that you are equipped to handle on your own, you can ensure your deal’s success by leveraging a CFO or other financial leader for guidance. As industry professionals, they can determine whether or not you have the necessary operations and strategy in place before you engage in a new transaction.

This type of expert guidance can be particularly useful if you work in a high-growth, fast-paced industry — such as technology. Here are four key areas your tech company should examine to prepare for a potential deal.

Decide: Acquisition or Investment

According to Justin Kan of Y Combinator, going through a merger or acquisition is “an order of magnitude more distracting than raising money.” As such, you must commit to your approach before you take action: You don’t want to inadvertently lower the value of your company by allowing your sales and operations to lapse for the sake of a failed transaction.

When trying to decide whether it’s the right time to engage in this deal, you should analyze your firm’s mid-term and long-term goals and clearly articulate your strategy to achieve them. Some tech founders prefer the thrill of the start-up but not the scaling process to reach critical mass, while others want to stay onboard through an IPO. Think about the milestones in your expansion strategy relative to where you are now in your business lifecycle: Do you have access to the required talent? Will you need to acquire another business or invest heavily in R&D over the next one, three or five years? The answers to these and similar questions will help you determine whether you need to engage in successive capital raises or a funding round and a sale — and when these actions should occur.

Have a Strong Management Team

To achieve a successful business transaction, you must have a strong management team in place. After all, you can only reach the strategic goals you identified in the section above if you have the right team to execute on them.

According to Entrepreneur, an effective tech CEO implements a clear, defined strategy, a culture that supports growth, a visionary staffing process and employee empowerment. As your company grows, it’s essential you strengthen your executive management team to support the growth goals you’ve identified. Make sure you have a team who can level-up your marketing, expand your business into new target markets or build the infrastructure needed to rapidly scale while staying true to your founder’s vision. Having the right team in place demonstrates your ability to execute your growth strategy, which makes your company increasingly attractive to potential investors. If your company is, eventually, acquired, this culture, infrastructure and empowered talent will all remain after you leave — further raising the business’s value.

Use GAAP and Related Financials

According to Bloomberg, high-growth technology companies have been the primary culprits of non-GAAP numbers. In fact, the use of proforma, adjusted and non-GAAP earnings has grown significantly. The problem is that this calculation method varies by company, which can make direct comparisons nearly impossible. These numbers also make companies look better than their actual GAAP financials show. Therefore, it’s critical you use standard GAAP measures such as EBITDA and operating profit to enable investors or prospective acquirers to compare apples to apples.

Although audited financials are the most effective means to ensure confidence that your company’s numbers are real and reflective of your business operations, you can also leverage reviewed financials by an accounting firm that has experience in the technology industry. If your organization is the one pursuing a merger or acquisition, you should make an effort to focus on companies with audited financials. Regardless of the type of transaction in which you’re engaging, you should use any firm-specific financial measurements that your team understands to communicate changes that have occurred or growth potential that GAAP may not fully convey.

Find and Address Red Flags

Eliminating any red flags doesn’t just increase your company’s value — it increases the speed of a deal’s closing. On the other hand, not knowing or disclosing deficiencies up front will almost always result in a larger valuation impact during the due diligence process of the potential buyer or investor.

To protect yourself (and your company) from jeopardizing a deal or facing financial penalties down the line, it’s crucial you conduct internal due diligence or have outside advisors assist. Areas to investigate further include your patent protection strategy, tax position, sales and marketing processes, security infrastructure and so on. Ask yourself: What’s the status of your R&D? Are there weaknesses in your IT protocol? Are your sales and marketing metrics favorable in your competitive climate? By answering these and similar questions — with an advisor, if possible — you will be well-equipped to identify any gaps that may impact your company valuation. Once you identify these gaps, your team can work swiftly to address them before they stand in the way of a potential deal.

Whether your tech company is preparing for a merger, an acquisition or a sale, it’s crucial you assess the above four key areas before engaging in any type of business transaction. Performing this analysis can help you ensure that you and your company maximize the value you will obtain from a business move. By doing the necessary internal prep work — and leveraging higher level financial experts as needed — you can determine whether or not your company is currently well-equipped to take on a new endeavor.