Doctor: It's a garden-variety panic attack. Welcome to Silicon Valley, we see people like you all the time!
Richard: It's just I have to make this decision by tomorrow.
Doctor: Yeah. You know, a while back, we had a guy in here in almost the exact same situation, take the money or keep the company.
The scene from Silicon Valley depicts a too-common experience for tech entrepreneurs—feeling a lot of pressure to scale and sell your business. And, feeling alone and, sometimes, overwhelmed by the work involved.
“Plan for exit on day one,” Michael Hiley, who leads the Alberta TLS practice at BDO Canada, suggests. “Tech leaders are often very, very good at programming software or understanding the market for software. But, they may not understand international business contracts, accounting and tax issues, but these issues will impact the valuation of their business. The tech industry moves fast—the time from startup to sale is typically four or five years. Either companies grow really, really fast or they die. Successful scale-ups are led by people who know it's going to move fast, and that in order to survive they need to get the right people to give them the right information.”
“It's a full-time job,” says, Saud Juman, founder and former CEO of PolicyMedical on the process of selling his company. “It's a complete additional job. And, a lot of times you're doing it in secret.”
What isn't a secret is that the business life-cycle for technology companies, from scale-up to exit, is accelerating—intensifying the pressure.
Determining objectives and achieving vision
The most onerous task may be the one that's constant. Scale to sale or IPO, tech leaders need to know what their objectives are—vision and values are foundational at every stage of your company's growth.
“I had a little piece of paper in my wallet—I wrote down three things that were non-negotiables for me,” says Saud, describing what he needed for the sale of his business. While such non-negotiables will be individual to every tech scale-up, there's value in deciding what they are, and not losing sight of them along the journey.
“What type of exit matches your objectives?” Ryan Farkas, who leads Transaction Advisory Services at BDO Canada, asks. “It always comes back to your personal and your professional ambitions. […] Our mission, our ‘big why,' is to be people who help people achieve their dreams. Our clients, our communities—our goals is to get them where they want to be.”
Compliance and local standards
“Tech's a really interesting space because there's always an exit strategy. You either think you're going to be the next Facebook, or Google, or Microsoft, or you think they're going to buy you,” says Armand Capasciolto, National Accounting Standards partner at BDO. “And, it's not something you can prepare for overnight.”
Armand adds: “If an IPO is your exit strategy—your monetization strategy to get the value out of your company—you need to be thinking about that three years in advance. If you're building something and that's your strategy, that's how you start building your company from day one. I'm not saying you have to be a public company on day one, but step-by-step evolving toward that.”
“If I'm thinking about an IPO, and an IPO in Canada, I need to be following IFRS. If I'm thinking about an IPO in the U.S., I need to be thinking about U.S. GAAP,” he advises. “But private companies in Canada aren't required to follow either of those—we have our own private-enterprise standards. There are mechanisms to move between standards, but it's a lot easier from day one.”
“Having an appropriate framework informs how an acquirer will view and value your business,” Michael says. “It helps them compare like entities.”
“Because there are differences,” Armand adds, “especially in how we account for revenue, between IFRS, U.S. GAAP, and Canadian private-enterprise standards, and, all of a sudden, a private-equity fund in the U.S. is using metrics that aren't working to determine the value of a Canadian company. If their metrics aren't working in the way they've traditionally valued companies, there's too much uncertainty, the investor could think ‘Maybe, I should just walk away. My models aren't working the way I want my models to work.'”
Valuations
Saud, who exited PolicyMedical in 2017, explains: “When I got all the offers in, they were all super low. I had to try to figure out how I was going to increase the valuation of those offers—another whole process to learn.”
“It's not the same as buying an apple at the grocery store. Businesses tend to not be homogenous assets with set pricing where if it's a Granny Smith apple, it's $2.50 per pound, or it's a Red Delicious, it's $2.00 per pound. It's just not that straightforward, says Daniel Ma, a BDO partner in Financial Advisory Services.
“Most companies are valued on a multiple of earnings,” Daniel continues. “We sit down with that business, we understand what it does, and then we try to discern how much revenue the company is going to earn over the next few years—what are the margins on those revenues? How do they compare to what we're seeing in the industry? When we're doing valuations, we're looking at that company through the lens of a third-party buyer [or investor]. So: ‘If I were to buy [or invest] in the company, what kind of earnings could I [get] out of the business?' Then, we go and look at the market, and we look at how similar businesses are being transacted on—and what multiples they sold at. That forms a very rudimentary valuation analysis.”
Jeff Chapman, Managing Partner in Financial Advisory Services at BDO Canada, adds: “Tech is one of the most difficult businesses to value because of how significantly the intangibles of the business drive that value. Having a team that understands the value of those intangibles, and understands how the market prices those intangibles helps give you insight that supports value creation for the business.”
Setting up for a sale
“It was a huge—huge—learning curve for me,” Saud says. “I didn't truly know what an investment banker was, what the purpose of their investment was, and if I should even use one. Once I made the decision [to sell my company], the process followed of coming up with the confidential-selling memorandum, positioning the company, finding interested parties, and getting the initial offer.”
“A good M&A advisor really focuses on understanding your requirements, your objectives, and helping you navigate your transaction, whether that's a partial sale or a complete exit,” says Ryan.
Ryan's advice for tech founders considering a sale: “Educate yourself in the market because that allows you to assess where you are from a valuations perspective and how buyers are going to look at you. Be self-aware around the scale of the business and the implication of value. Get the financial foundation in place and be prepared to tell your story. There's the quantitative, there's the qualitative, and then there's understanding who you are.”
“That's your value proposition,” Michael adds.
“I saw the upside in continuing to push to get the valuation in there for the shareholders and for my family. That's qualitative,” Saud says. “Quantitatively, when I decided, ‘Hey, you know what, let's do this. Let's see what this process looks like. Let's actually try to sell this company' was around October 2017. The board wanted to see whether we could continue to grow the valuation for the next five years. But, I was controlling shareholder. With the way things have gone, I'm glad that we did sell.”
Ryan adds: “You are going to have to answer questions the buyers [and other potential stakeholders] are going to ask, so invest in the finance function: How scalable is your cost structure? What does your infrastructure look like? What are your sales?”
Saud continues: “I wish I'd known the importance of our contracts for our clients, and the importance of having certain terms in your client contracts consistent. Even though we had a good handle on contracts, we had enough variations across different contracts with various terms that added lots and lots and lots of extra time with diligence in term of us getting information and explaining that to the acquirer.”
“But, it helped tremendously that I got Peter [Matutat] to do the audit because the acquirer really respected that [our financials] were audited and that they were audited by a firm that is respected,” Saud adds.
“We have a tech client right now who has a great product and a private-equity fund that's interested—they need the money to scale up,” Armand says. “But, they're not ready from a financial-reporting standpoint. In this case, the client was preparing unaudited financial statements. The deal is contingent on them showing what their financial reporting looks like when they start doing proper financial statements. Until they can prove their finances look as good, the deal is on hold. This is the biggest challenge I see in my work. If you want someone to give you millions of dollars, they want to know you're accountable for how that money is spent. You have to think about compliance and financial reporting, because it's the only way anyone is going to give you money so they can go back to thinking about your product. A lot of founders don't realize they need that until it's too late.”
“Be prepared for what you are asking for and what the other side is going to need to close the deal,” Michael concludes, whether you're looking to sell or to scale.