With the fast-paced nature of the tech industry, the exit process can often be disjointed and problematic for both an entrepreneur and their business. Fahim Amdani, client advisor at UBS Global Wealth Management in Manchester, explores some of the key considerations for tech entrepreneurs when planning an exit and their future career.
The northern technology sector is undoubtedly thriving with innovation hubs developing across the region. Many founders and entrepreneurs are scaling at pace and are soon finding themselves facing important, life-changing decisions, often at a young age.
For some founders and entrepreneurs in the sector, particularly those with young or early-stage companies, an exit might be the last thing on their mind. However, the fast-paced nature of the technology industry might leave others eager to build on momentum, take some cash off the table and work on the next venture. Regardless of where the entrepreneur is on their journey, considering an exit or succession strategy is key.
The absence of a plan can make an exit turbulent for the founder, as planning for this event requires delicate and in-depth management to be successful.
Weighing up the options
For some, contemplating an exit may feel unrealistic given the current macro conditions and the high interest rates that are adversely affecting investors and deal appetite. However, it’s never too early to start planning.
Preparation includes consideration of the exit options at the business owner’s disposal. The main three options are: a partial or full sale through merger and acquisition, raising capital from private equity funds, or listing on the stock exchange. In the case of a tech start-up or scale-up most options are feasible, but the needs of an early-stage founder or entrepreneur do differ significantly from those involved in a multi-generational family business. Working with a wealth manager can help them decide which option is best suited to them considering their current circumstances and future goals.
Being prepared from the start
The planning process differs depending on the mindset of the founder or entrepreneur. For those content with staying in their business for the foreseeable, the focus should remain on driving value. To get the highest valuation in the future, they should be ensuring that income streams are diversified, earnings are consistent and predictable, and that the company’s management team is strong. By failing to address these value drivers throughout the business journey, a future sale may be at risk during due diligence checks.
By nature, tech start-ups carry some risk due to their age and investment levels. However, by taking steps like developing a robust cashflow framework and recurring revenues, the business is more likely to be perceived as a solid opportunity. This may create a competitive buyer environment, increase value, improve room for negotiation and minimise the time to close the sale in the future.
Early-stage planning
If in the early stages of planning a business succession or exit and considering a sale in the next three years, there are slightly more advanced steps for the founder or entrepreneur to take. This is when a pre-sale advisory team should be established including a wealth manager, a corporate finance advisor, a legal team, and a tax advisor.
Working closely with a corporate finance advisor will help the founder or entrepreneur understand the likelihood of buyer interest and the sector outlook. This will support all parties to decide on the best timing. Engaging a legal team is also a crucial to review any commitments, or potential risks and liabilities. They will support people to develop a plan for dealing with any concerns, should they arise. For a tax advisor, the role is to help the founder or entrepreneur understand the tax implications of the exit and develop an efficient strategy. Meanwhile, a wealth manager will work with the individual to understand their own personal wealth management and future planning should an exit go ahead.
Closer to the time
If an exit or succession is likely to happen in the next year, it’s time to finalise the plan in its entirety and focus on securing the best possible outcome. When appropriate, preparing employees and managers for the transition through regular communication and internal planning should also take place at this stage.
Additionally at this point, wealth managers will support founders and entrepreneurs to think about their role after the exit or succession. This includes discussing personal goals such as providing cash flow to maintain their lifestyle in the near term, which is most pressing for those already planning their next business venture. A more long-term consideration is thinking about how they would like their lifestyle to improve in the future. This can include travelling more, having more free time for hobbies, or spending time with loved ones. Also, how the individual plans to improve the lives of others through their wealth, whether this be through helping their family or supporting philanthropic causes.
As the tech sector continues to boom in the North, we are keen to ensure that the fast-paced nature of innovation does not come at the detriment of a founder or entrepreneur’s future personal goals. With many young people developing game-changing businesses, we encourage all founders to regularly consider the future. Whether this be honing their business for a sale or succession, or simply just discussing with their wealth manager how they would like to utilise their wealth going forward, it is never too early to start these conversations.
