For tech founders considering their next move, the M&A space can be complex and daunting. But it can also be hugely rewarding – both financially and in protecting the legacy of the business they’ve worked so hard to build.
M&A activity is particularly dynamic in the tech sector, given the fast-moving nature of the technologies and trends, but one thing is certain: preparation is key to maximising an exit strategy.
While there are several options available, the first priority is establishing which one works for the specific needs and priorities of the business. Here are some of the most common exit routes for tech founders:
Sale to trade
For founders looking for a clean break, this can provide a compelling option. Higher valuations are possible due to the cost synergies available through consolidating functions and processes, but it’s important to remember that there’s usually no further financial upside post-sale as the seller relinquishes their full stake in the business.
In tech, trade sales can be driven by anything from acquiring specific talent and expertise, in which case the security of the team could be paramount, to directly absorbing specific products.
As the seller relinquishes control over the company, team and clients, it’s important to be sure the acquiring company has the right strategy and culture to protect the founder’s legacy.
Investment from private equity (PE)
Most PE houses have a dedicated tech team, and others solely invest in the sector, so this could be a good option for the founder who isn’t quite finished yet. It allows owners to de-risk their holding whilst retaining the potential of future upside.
Most PE houses will have a three-to-five-year hold period and expect founders to roll over a portion of their consideration, and most will aim for a 3x return on the consideration carried over, providing further financial opportunity into the future with a supportive partner along for the journey.
Sale to PE-backed trade
This is a hybrid between the two previous options, where a PE buyer acquires a company to add it to an existing platform. Some buy out 100% of the business like a straight trade sale, while others allow the exiting founder to rollover some of their consideration for a possible future upside (usually in the combined platform), without the stress of continuing to manage the operational aspects of the business.
Employee Ownership Trust (EOT)
This option is popular among owners whose top priority is protecting the company, team and legacy into the future. It involves selling a majority stake into a trust to be managed on behalf of employees.
This gives the team an indirect interest in the business, which has been shown to improve retention and loyalty, and also means the seller will pay 0% Capital Gains Tax if they meet the requirements for the set period after the EOT is formed.
The nature of the EOT means the founder can’t just walk away with all the cash on day one, instead the business repays a loan note over time.
There is no one-size-fits-all approach to M&A
The breadth of options available means it’s key for founders to consider their priorities for themselves, their business and their team before making any decisions.
A market testing exercise can then identify the most valuable and viable options aligned with those priorities, giving founders the reassurance that their business is in good hands.
At LAVA, having advised both buy- and sell-side across many UK tech M&A deals, we know that there is no one-size-fits-all approach. Each deal is unique, just as each tech business and each founder is unique. But, again, preparation is key; the earlier a founder begins considering their exit options, the better placed they’ll be to achieve their desired outcomes.
Hamish Martin is a partner at LAVA Advisory Partners
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