OnStartups

Building It Well: Increasing Acquisition Value

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In my last article, we looked at the relationship between decisions you’d make when you are “Building To Sell” vs. “Building It Well”.

 

Now, we’ll look at some practical advice for how you can maximize your acquisition value (and still be focused on building it well).  These are in no particular order, and your mileage may vary.  Please consult a trained professional before attempting to follow any of these guidelines.

 

  1. Ensure you make a “clean” exit from your prior employer.  Read any employment agreements you may have and pay special attention to any “non-compete” clauses you may have.  DO NOT use any of your current employer resources when starting your new company (especially existing code, hardware, software, etc.).  If you don’t have the money to do it right, then wait until you do (total cost for a computer and a compiler is low enough that this should not be a big problem).  Let me repeat this again for emphasis:  DO NOT use your employer’s computer to write code for your new startup.  Buy a new one.  Keep it separate, keep it clean.

 

  1. Start a corporation or LLC.  In most cases, I’d recommend an LLC (it provides decent legal protection, does not manifest the “double taxation” issue and is relatively simple to get started).  Next best choice is an S-corp.  If you’re not going to be raising outside capital, chances are you can stay an LLC or S-corp indefinitely.

 

  1. Keep a clean “capitalization table”.  This means not allocating shares in the company to random friends and family.  If you are going to take outside money, make sure you talk to a lawyer and have sufficient clarity on what rights and privileges your investors have.  Very few things will turn off an acquirer like having many people with equity in your company (many of whom may or may not be happy with the sale, their share in the company, how you’ve treated them, or any number of other things).

 

  1. Have formal independent contractor agreements with any consultants that help you write code (or otherwise help you develop your product).  I can’t emphasize the importance of this enough.  A potential acquirer will dramatically decrease your valuation (and often walk away from the deal) if you can’t support that you have clear ownership and title to your software assets.  This is essentially what they are buying.  Also, though employees have an implicit assignment of rights to the company as part of their employment (i.e. the “default”), any consultants that do work for you own the code they write by default, unless you have a contract that transfers those rights to you.

 

  1. When possible, pick mainstream platforms for your product development.  This one’s going to be controversial, because many people will argue that you should pick the platform/language that makes the most sense and gives you “competitive differentiation”.  Though I recognize the advantages of platforms like Ruby On Rails, LISP, Python and others, in my opinion, mainstream platforms like Java and .Net can often get the job done, have a strong surrounding ecosystem and are much less likely to cause an acquirer to heavily discount the valuation.

 

  1. Implement at least a minimal CRM system.  This means having a database all of your customers, prospective customers, and anyone else that has ever downloaded a trial or looked at purchasing your products.  Maintain regular dialog with your best customers – and document them.  Establish and maintain online support forums.  Foster customers talking to other customers.  Do whatever you can to make it easy for your customers to get value from your products.  Next to any code you have written, strong customer relationships is likely one of your biggest assets.  If an acquirer feels like they can leverage these relationships (or at least maintain them), it will reflect positively on your valuation.

 

  1. Maintain “clean” finances.  You don’t need a full-time CFO, but its critical to ensure that you are keeping your personal and business financials separate.  Don’t buy company things on your personal card and personal things on your company credit card.  Maintain simple and clean records of your fundamental financials (expenses and revenues).

 

  1. Make sure your customer agreements leave you an out.  Though its not uncommon to provide “perpetual licenses” (whereby your customers can continue to use your product indefinitely without paying you additional money), you should avoid perpetual support obligations.  For example:  “Pay $5,000 now and receive unlimited support for life!”.  Instead, approximate what your annual support fees should be and have an agreement that allows you to terminate should the need arise.  The rationale here is that the acquirer may see any long-term obligations that you have to our customers as a liability (and they may want the ability to discontinue certain products).  

 

  1. Pay attention to your “partnerships”.  It is likely you will consider forging partnerships that help you distribute and/or build your products.  This is usually a good thing.  However, be mindful of exclusivity provisions (that restrict your ability to do business with others in the future), as this may be a roadblock for acquisition.  Any time you enter into a new contractual relationship, make sure you look at it from the lens of your most likely acquirers in the future.  Though you may need to sign exclusivity provisions and long-term binding contracts without clean termination rights, its important that you consultant an attorney and business advisor before you do.

 

One thing all of the above items share in common is that they are in your long-term interests, regardless of whether you ever plan to sell your company or not.  This is an important element of your decision-making:  Build your company well, and should you decide you ever want to sell, you will be better positioned to do so.