This article is part 4 of a 4-part series. In three previous articles, I reviewed the overall process of selling your tech company, discussed what you can expect during due diligence, and then went over five issues to watch out for that could kill the deal.

If you survive the negotiation and due diligence process described in my previous three articles and your deal closes, congratulations! You’ve sold your tech company. Now the real fun begins. If this is the first time you’ve sold a company, there are some things you need to know.

What happens during integration will depend on the model that the acquiring company intends to follow. There are a few common integration scenarios when a small to medium-sized company is acquired:

• The buyer may decide to continue to run your company on a standalone basis. In this case, there may not be a lot of change, at least in the beginning. For many entrepreneurs, this is the best of both worlds. You retain a decent level of control, but you most likely have access to additional resources. This is not an unusual first step in an acquisition.
• More commonly, the acquiring company is hoping to leverage your technology in its own operations, and plans to fully integrate you into the existing company. If this is the plan, I hope you like meetings.
• If you’re a hot startup or app developer, it’s very possible that the buyer wanted you for your people and not your product. In that case, your company may essentially be dissolved soon after the deal closes, and your employees will work on new projects within the new company.
• It’s not unheard of for companies to purchase an upstart competitor simply to shut them down and eliminate a perceived threat. If that happens, you and your employees may not have a long future with the buyer, and you probably also signed a significant seller’s non-compete agreement.
• If your company was acquired to replace an existing or outdated technology, you might find yourself in charge after the two companies come together, but don’t count on that happening — this is probably the least likely scenario.

As you can see, it’s important to understand the buyer’s integration plans before the deal closes. This should be part of the conversations leading up to the deal. You may need to balance payoffs for the owners of the company, jobs for your employees, the level of your personal control and your freedom to work in the same industry for years after the deal.

Too many entrepreneurs are surprised to find out what life is like after their company has been acquired. They’ve gotten used to working for themselves and they’ve forgotten what it’s like to be an employee. Maybe they were never an employee at all if they started their company in their college dorm.

Here are some things you’ll need to deal with to one degree or another regardless of the buyer’s integration model and plans. Think about this list long and hard before you decide that working for someone else is worth the financial rewards from selling your company:

Decision Making

Many buyers have good intentions for their acquisitions, but the employees from the selling company can end up feeling like second-class citizens. It’s not uncommon to hear comments like “WE’RE the ones who bought YOU” when the new people try to make suggestions or shake things up a little. It can be very hard, especially for the owners of the company who sold, to accept that they have less authority and influence than they previously did.

Bureaucracy / Policies / HR

Startups and small tech companies usually put a low premium on written policies, employee handbooks, expense reports, time sheets, etc. Many entrepreneurs feel like they’re swimming in a sea of red tape when they become part of a bigger company. Bureaucracy is often a fact of life when you’re acquired. Can you deal with it?

Meetings

Remember that even though you probably feel thoroughly investigated after you laid bare the details of your company during due diligence, the majority of the people working at your acquirer know very little about you. You’ll spend a decent amount of time after the deal closes telling people at the new company what you do. They’ll also want to know how your technology can help them in their areas of the business. Be prepared to do a lot of educating. At many companies, this means meetings.

Not Being in the Loop

After the deal closes, you probably won’t be in charge. There most likely is a new hierarchy of leadership and politics to navigate. Besides having less influence in general, you might not even be in the room when big decisions are being made. Can you accept that?

Financial Requirements and Responsibility

Many startups are focused on goals around market penetration, user experience and innovation. Can you see yourself successfully projecting revenue, living within a budget and making decisions around quarterly financial goals (if your acquirer is a public company)? You may find that your business needs to be focused on a completely different set of priorities. Can you be successful under those circumstances?

Selling your company can be very rewarding, but you need to go down the path with your eyes open. The best way to see the deal through to a successful conclusion is to be prepared. Understand the process, know what to expect during due diligence and run your business accordingly — well before the deal making starts. Understand the buyer’s intentions for integration and be sure their plans align with your goals, aspirations and needs. Get important commitments in writing.

I hope this overview of the process of selling your technology company has been as useful to you as it has been enjoyable for me to write. If you haven’t already seen the previous articles in the series, check them out below.

Be sure to read part 1: What to Expect When Selling Your Technology Company

part 2: Selling Your Technology Company: The Due Diligence Process

part 3: Selling Your Technology Company: Five Ways to Kill the Deal

This article is part 3 of a 4-part series. In two previous articles, I reviewed the overall process of selling your tech company, and then discussed what you can expect during due diligence.

While most acquisitions will involve due diligence around legal and financial issues, more and more transactions include IT due diligence — a deep dive into the technology supporting or in some cases largely defining the business.

This series is focused on selling technology companies, so we’ll review some of the issues that, if discovered in a thorough IT due diligence effort, can derail your deal. Before you even consider selling your company, you need to be sure none of these situations apply to you.

Software Licensing and Ownership Issues

If the acquiring company discovers unlicensed software, this can lead to a number of negative consequences. If the cost to properly license the software is too high, the deal price may be reduced or the deal may be killed because the financials no longer work. The buyer may also be concerned about the possibility of an employee reporting you to one of several software trade groups that provide a reward for software piracy whistleblowers. Finally, you can look either incompetent or dishonest to a knowledgeable investor.

Many small companies utilize outside consultants to develop all or part of their software when they’re starting out. If a proper work-for-hire agreement isn’t in place, the ownership of the software or source code can be uncertain. Your buyer may discover this and make it a prerequisite of the deal that you get your contractor to explicitly sign over the rights to the software. This can be a difficult or uncomfortable situation at any time, but especially on the eve of closing your deal where it means much more to you than to the contractor.

Security / IT Infrastructure

Many industries and business transaction types have specific security and regulatory requirements — HIPAA in healthcare, Sarbanes Oxley in finance, PCI for credit card processing, etc. It’s not unusual to find companies started by entrepreneurs with business experience in relevant areas, but without knowledge of the security and technical issues mandated for their industry.

They then hire software developers and DBAs who also don’t have the industry-specific security knowledge. This can result in a disaster during IT due diligence when these major gaps are exposed.

In healthcare, for example, it’s not uncommon to find small companies where the developers have not taken HIPAA best practices for security and data encryption into account when designing technology solutions. A savvy investor will evaluate the cost to remediate this situation, which again can end up as a significant purchase price reduction or an all-out deal killer.

Employee Issues

Do you have any skeletons in the closet when it comes to your employees? If so, you can be sure they will be identified during due diligence. At least some of your existing employees will be interviewed, and the person performing due diligence will know the right questions to ask.

Do you have non-compete agreements in place for at least your key employees? The time to do so is not while you’re in the process of selling your company, and they have you over a barrel.

Are there any key employees on medical leave? It’s surprising how often this turns up. I’ve seen more than one situation where the main architect of a company’s software was on medical leave with no hope of returning.

Are you the subject of the any existing or pending lawsuits involving past employees? Such a situation has a potentially high cost associated with it, and can make your investor think twice.

General Deficiencies

There are some miscellaneous issues that can, under certain circumstances, rise to the level of killing the deal.

More than one IT due diligence effort has determined that the target company had a complete lack of domain knowledge. Some companies receive all product ideas from large customers. A potential acquirer won’t view that as a long-term model for success.

Do your customer and supplier contracts take into account a potential change of control or contract assignment? If your largest customers can hold your deal hostage, it’s going to make your buyer think twice about your company.

Do you have all of your source code available? You’d be surprised at how often companies are running a key internally developed product or supporting technology without access to the source code. The company never had it because the tool was developed by an outside party who didn’t provide it, or it was lost in a computer or server crash.

Are there scalability issues with your software? Many technology company transactions are based on the economics of significantly expanding the acquired company’s user base. If IT due diligence discovers that your systems can’t support ten or more times the number of current users without a major rewrite or other investment, your deal may be in jeopardy.

How have you accounted for the costs of your software development and maintenance? Accounting principles have very specific guidelines for how to handle these expenses. If you haven’t had the advice of a good accountant, your numbers may not be as good as you think they are.

Flat-Out Lies

Don’t expect to get away with complete fabrications about your company.

I’ve seen companies for sale that touted huge numbers of website registered users and high Web traffic statistics. Five minutes of good IT due diligence can tell if these numbers are real.

Expect that the backgrounds of owners and key employees will be checked. A senior software developer at a company being acquired had a resume full of inaccurate employment history and college degrees. With today’s easy access to information, these misrepresentations are simple to find.

I once saw a target company’s deal PowerPoint that listed 25 customers as users of a newly-launched product. In reality, there were fewer than five. Even a cursory IT due diligence effort can uncover this.

Conclusion

If an investor finds a serious issue during IT due diligence, they may be concerned enough to walk away from the deal, and if not, they may want to reduce the price of the deal more than is necessary to address this single issue, since they’ll wonder if others exist.

The best way to identify these problems before you sell your company is to look at it as an investor would. IT due diligence checklists are available online for free. Use them to objectively evaluate your company. Is your company one that you’d want to buy? If not, get to work addressing the issues you discover.

This article is part 2 of a 4-part series. If you haven’t already, make sure to read part 1: What to Expect When Selling Your Technology Company.

Once you’ve signed a letter of intent with a potential acquirer, the due diligence process will begin. Up to this point, you’ve likely turned over summary financials and other high-level documentation, but now the buyer will want to get into the details. You’ve probably agreed via the letter of intent to fully cooperate with the buyer as they proceed with due diligence.

Initial Contact

Depending on the size of your company and the buyer’s company, the buyer will assign one or more people to their due diligence team. These may include accounting, financial, legal, operations, HR and IT experts. The team members may be employees of the buyer or consultants.

You can be sure that when the letter of intent was signed, if not before, the due diligence team began to research you online and has been reviewing some or all of the documents you provided during the informal due diligence stage.

Your main contact with the buyer will put you in touch with one or more of the members of the due diligence team to coordinate the effort. You’ll likely get an introductory phone call to review the buyer’s due diligence process and timeline. This call can also help to create a personal connection that can help to keep the process running smoothly.

You Need a Cover Story

One thing that should be discussed on this call is a cover story. Most buyers don’t want to tell all of their employees that the company is in the process of being sold. This can create distraction and stress for the employees. Some might even leave before the deal is done, which can put you in a difficult position whether or not the deal closes.

For these reasons, a cover story is a good idea. You’ll most likely need the assistance of certain employees to provide information during due diligence, and at some point there will be site visits to your company by the due diligence team. Common cover stories are that “the company is engaging outside consultants to review the business to identify possible improvements” or “a potential business partner is interested in more information on the company.” It’s best to keep it vague and not an outright lie, because your employees may have to deal with or report to members of the due diligence team after the transaction, and starting that relationship with deception is a bad idea.

Due Diligence Requests

After initial contact, the next thing you can expect is to receive one or more lists of due diligence requests. Requests will typically include:

• Detailed financials and projections going out three to five years
• Copies of customer and vendor contracts
• Bank records
• Corporate documents
• Insurance policy information
• Network diagrams and other IT details
• Information on patents and trademarks
• Employee records
• Customer references
• Details on any lawsuits involving your company
• Customer listings and customer support records

This is by no means an exhaustive list, but as you can see, the buyer will want to look at every aspect of your business.

Depending on the size of your company, there may be items on the list that don’t apply to you. The buyer will expect this, so just discuss them with your main due diligence contact.

The bar is set fairly high, but there are still things that are unreasonable for a buyer to request. For example, a recent online discussion centered on whether it would be reasonable for a buyer to have access to the selling company’s email system to review internal emails as they saw fit. This would be unreasonable. If the request sounds ridiculous, it probably is, and again, this should be discussed with the head of the buyer’s due diligence team.

Site Visit

When the buyer has had the opportunity to complete their own research and review your responses to the due diligence request list, a site visit is the normal next step.

Your due diligence responses will most likely generate additional questions. During the site visit, the due diligence team will want to spend time with their counterparts at your company to get answers to these questions.

It’s also expected that the due diligence team will want to speak with key employees they’ve identified, and possibly even a random sample of other employees. This is where having your cover story straight is important.

The site visit may last anywhere from a day to a week or more depending on the size of the transaction or the complexity of your business. Other onsite activities may include tours of facilities, product demos, and a review of your data center or hosting platform.

Due Diligence Report

After the site visit, the due diligence team will compile a due diligence report for the buyer. This will include details on your business, identified strengths and weaknesses, cost estimates to mitigate problems that were discovered, and usually an overall “go / no go” recommendation on the deal.

You probably won’t see the report, but you’ll definitely hear about anything in it that’s negative.

At this point, the buyer may decide to proceed with the deal as per the terms of the letter of intent, withdraw their offer, or negotiate further.

Conclusion

If you understand the things that are important to a buyer when they’re performing due diligence, you can objectively review the current state of your company before you’re involved in a potential sale. Look at sample due diligence lists — they’re freely available on the Internet.

Since this series is focused on selling a technology company, the next article will go into detail about IT due diligence, and how certain discoveries during that process can derail your sale.