Optimize your Tech exit: 10 actionable tips to boost your Tech start-up’s value in 12 to 24 months

Against the odds, you have done it. 90% of VC funded startups fail, but you are not one of them. You have gone beyond the MVP (Minimum Viable Product) stage and have proven product market fit. Now your ‘baby’ is a growth startup generating 7 figures in revenues. It is a great achievement, but you realise that the role that your company now demands is no longer that of a trailblazing entrepreneur that can go from 0 to 1, but that of a strategic CEO that can take it to 10, 100 and more.

You could retrain to face that new challenge or you could pass the baton and sell your company, ideally getting life changing gains. But how do you prepare to sell (exit) your company for the best possible price?

In every market, but more so in Africa, optimising an exit requires a strategic, well-thought-out approach.

We have discussed in another article how to prepare for an exit if you have to do it within a short time frame. For those not pressed by time, a more advantageous route involves meticulously refining your company’s operations and processes. This strategic enhancement, spread over a period of 12 to 24 months before presenting your business to potential acquirers, is instrumental in augmenting the value of your enterprise.

To guide you through this journey, we present 10 pragmatic tips. Each tip is crafted to bolster two critical aspects of your business’s worth: the Enterprise Value and the Equity Value — essentially, the net worth of your venture at the point of sale.

1 Delegate Effectively to Key Employees:

In small capitalization companies (i.e. companies with a value ranging between $2m and $50m), buyers often assess how much a business depends on its founders. Thus, it is important to structure the business in a way that it will be able to run autonomously. Each key activity should have a specific manager responsible for it and key procedures and automations to support them.

Incentivizing these key employees with vested equity (i.e. shares attributed over a certain period of time to encourage them to stay in the company) might be a good idea. Please note that if you have not established any of this before the M&A negotiation starts, it is better to ask the potential buyer for its plans which could be announced along with the information of the takeover.

Action: Establish a robust system of delegation to key employees, ensuring that critical knowledge and expertise is distributed across the organisation. This avoids concentrating risks in one single key employee and will reassure the buyer that there will be continuity after the sale.

Impact on Value: Mitigate the risk of know-how stealing by empowering key employees, making the company less dependent on specific individuals. This autonomy contributes to the resilience and long-term value of the business, impacting both Enterprise and Equity Value positively.

2 Improve the quality of your Revenues:

Not all revenue is considered equal by investors and acquirers.

When purchasing a company, investors are effectively buying future cash flows. The more predictable and reliable your revenue growth is, the greater the confidence in the cash flow forecasts. Therefore, to better position yourself you need to first try to secure recurring revenue from customers and second diversify your revenue streams.

Acquirers will perform an in-depth due diligence on your financials, starting with your revenues and what proportion of them are recurrent. If you do not generate recurring revenues, explore ways to do it, such as negotiating a membership subscription with your customers in exchange for some advantage or creating loyalty schemes. Getting recurrent revenue is not always possible, but the closer you can get to it, the more certainty acquirers will have and the higher the price you will command.

Besides recurrence, it’s important to diversify risks to avoid sudden declines of revenue. The most typical risk is an over reliance on a small number of large clients. In Africa and other emerging markets, other substantial risks are being overexposed to one country (as governments are known to change legislations rapidly) and to one single currency.

Action: Explore ways to increase the proportion of recurring revenues and seek partnerships and collaborations to widen your customer base, expand geographically and where possible gain clients that will pay you in “hard currencies” (US dollar, euros or British Pounds).

Impact on Value: A robust and varied revenue portfolio contributes to stability and reduced revenue risks positively influencing both Enterprise and Equity Value.

3 Track EBITDA Growth Over the Next 24 Months:

Many startup founders, particularly in the tech world, usually start with a growth at all costs mentality. The rationale is that high growth is needed to reach economies of scale and capture a large portion of the market to stave off competitors. Perhaps more importantly, rapid growth is essential to get VC investment.

Leaving aside debates of whether the above is the right strategy for early stage companies, once your company reaches a certain point of maturity and you are contemplating selling your company, the focus should, in most cases, shift to profitability.

The most used metric of profitability by investors is EBITDA (earnings before interests, taxes, depreciations and amortisations) and that will be the first metric assessed by acquirers and the base on which the valuation will be made. A positive, or at least clear and sustainable path towards profitability will positively impact negotiations on your company’s valuation. So make sure to take action and measure EBITDA’s progress over the 12 to 24 month period before marketing the company to acquirers.

Action: Implement a comprehensive system to track and improve EBITDA growth, ensuring it outpaces Revenue growth over the next 24 months.

Impact on Value: A consistent increase in EBITDA demonstrates financial efficiency and operational strength, potentially attracting discerning buyers and positively influencing both Enterprise and Equity Value.

4 Working capital and cash management:

Besides EBITDA, potential acquirers will look at other financial metrics to assess how sustainable your business is. Some of these key metrics are working capital and cash management.

Perhaps surprisingly, many companies don’t fail because they don’t have a good product or enough buyers, but because they have poor cash flow management practices. If your payables are due much earlier than your receivables you might become insolvent and end up in bankruptcy. That is why it’s important to put the right measures in place to capture all your accounts receivables in a timely manner and ensure you manage your cash flow efficiently. In many cases, working capital often means working capital debt with the resulting interests impacting your profitability, and also additional money to be immobilised by your potential buyer (with its interests in a Leveraged Buyout Scheme scheme).

Action: Showcase you have measures in place to ensure optimal cash flow management and efficient capture of account receivables.

Impact on Value: A well managed cash flow position will increase acquirer’s confidence on the financial sustainability of your business, most likely supporting both Enterprise and Equity Value.

5 Enhance Cybersecurity Measures:

Technology start-ups are often linked to either digital infrastructure with client’s data and/or Intellectual Property and know-how secrets. Both should be protected through cybersecurity measures. Perform a cybersecurity audit and implement up-to-standard security measures prior to marketing your company to Tech acquirers. This will support the revenues certainty through diminishing the odds of loss of revenues or higher expenses due to cybersecurity issues.

Action: Prioritise robust cybersecurity protocols to secure tech assets, contact cybersecurity experts.

Impact on Value: An airtight security infrastructure mitigates risks, potentially safeguarding and even enhancing Enterprise and Equity Value.

6 Ensure your processes are legally watertight:

During due diligence, acquirers will ask lawyers to perform a legal due diligence of your activities. To avoid discovering last minute structural legal issues in the way you operate, perform such an audit prior to marketing your company to acquirers so that you can adapt alternative organisations or operational practices to comply with the most significant laws and regulations applicable to your sector.

Action: Navigate local regulations proactively, ensuring compliance.

Impact on Value: Proactive compliance positions your business as legally sound, potentially safeguarding Equity Value and limiting the risks associated with your Share Purchase Agreement’s contractual warranty.

7 Adapt your growth strategy in line with market reports:

Most potential acquirers of your company will not be specialists in your sector and will largely rely on market studies to assess trends and key growth factors. If your business strategy relies on dying trends, acquirers might not be interested or will offer a lower premium. Conversely, if your business strategy is in line with their analysis of where the latest opportunities are, you will increase the odds of a successful transaction.

Action: Deep dive into Market reports from DFIs, major consulting companies and research institutes about local market trends, regulatory frameworks, and emerging technologies and adjust your business strategy as much as possible to current trends.

Impact on Value: Alignment of your business strategy with key growth trends in your sector mitigates risks and potentially increases investor confidence in your company’s long term growth, positively influencing Equity Value.

8 Showcase Social Impact:

An important aspect that some Private Equity buyers and Corporates will take into account when valuing your company is the value of your brand. A brand with a good reputation in the market and associated as a quality employer can be seen as an asset to integrate in a Group. This will particularly attract Western buyers that have Corporate Social Responsibility (CSR) commitments.

Action: Take social action and highlight the positive societal contributions of your tech business beyond financial gains.

Impact on Value: A socially impactful image can attract socially responsible investors, increasing the pool of potential buyers and therefore adding a premium on your Equity Value.

9 Leverage Local Talent:

Related to the above, positive employer branding is key to attract talent, both internationally and from local institutions. In Africa there is a growing pool of local talent that with the right training can deliver output at international standards while being paid at a competitive price. This can provide an unfair advantage compared to firms solely relying on more expensive international talent that needs to be paid in foreign currency. Additionally, it will provide positive goodwill with the local government as high skilled job creation is high on governments’ agendas. Investors will see that as an aspect that strengthens your case.

Action: Create a robust internal process to train local junior talent and help them gain technical and professional proficiency quickly. Showcase the diverse skill set within the African talent pool.

Impact on Value: A skilled local team strengthens the business’s growth potential, and keeps it at competitive costs compared to western tech companies, impacting positively on both Enterprise and Equity Value.

10 Audit the position for Scalability:

Arguably you will have already shown product market fit and will have scaled the product – to an extent. However, potential buyers will want to see that your Tech architecture has been built for substantial scale and can support growth of 10 to 100 times its activity today, both in your current market and in other geographies. Make sure the backend, databases and automations are in good order and start auditing and improving what needs to be improved.

Action: Showcase how your business can scale operations, penetrate new markets, and adapt to emerging trends. Adapt your back-end technology to be in “plug and play” mode.

Impact on Value: Demonstrating scalability enhances growth potential, positively supporting assumptions in your business plan and thus your Discounted Cash Flow valuation.

Bonus tip: Anticipate your post-sale life plans:

Once you sell your company, your daily life will change considerably. What will you do after selling? How much money will you end up getting? How will you use the money?

Address those questions and make sure that you are mentally ready to leave your business and the market it operates (share purchase agreements often include a non compete agreement).

You might conclude that you are not ready to leave your business because you enjoy the intensity and pressure of it. If that’s the case, better to realise before starting the roadshow and racking up advisor fees. Or you might realise that you want to sell part of it and stay in the company with a different status that requires less day to day involvement.

Another very important aspect to consider is the amount of money that you will actually get.

That amount is not always straightforward because shareholders’ agreements might have specific terms relating to preferred shares liquidation rights that give your investors more money than you anticipated.

Similarly, depending on the size of the sale, you are likely to have to pay a substantial amount in taxes that might impact your take home amount, affecting your post-sale plans. Make sure you choose the best tax structure for your exit. If you have Real Estate in the company assess whether you want to sell it as part of the deal or want to create a separate structure for it to give the option to the buyer to purchase it or rent it.

Action: Ask yourself what you will do after the sale, think about your use of potential proceeds and contact your lawyer and tax adviser to iron out your shareholder agreement and tax strategy respectively.

Impact on Value: Avoid substantial transaction fees to then realise that you don’t want to sell the company. Or if you sell, ensure you optimise your position to get the most of the windfall.

In Conclusion:

Mastering the art of selling your tech startup demands a blend of strategic acumen and practical steps that extend beyond pure financial considerations to take into account, among other things, the value of your social brand, your business practices and strategy as well as your ability to scale while ensuring you adhere to watertight legal procedures and your processes are safe from cyberattacks. 

By integrating these ten tips, you will do more than just prime your venture for success; you will significantly enhance its Enterprise and Equity Value while also maximising the amount of money you will take home. 

Selling a company is not complicated, but there are unforeseen complexities that need to be navigated and many factors to take into account to optimise value and avoid costly mistakes. Our role is to facilitate your journey through this intricate landscape. As dedicated allies of founders and their investors, we specialise in the nuanced art of successfully selling Africa’s tech companies. Our expertise is in aligning your company’s potential with the unique dynamics of the African market, ensuring a sale that is not just profitable, but also forward-thinking.

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Written by Eugene Saint-Grégoire and  Omar Fofanah. Eugene is the founder of Dama Advisory, a Fundraising and M&A services boutique based in Paris that serves French and African tech companies. Omar is the founder of Confluence Africa, a Fundraising and M&A advisory firm based in London that serves African tech startups. Both have created a joint venture to help African and French tech startups with fundraising and M&A needs.

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