Investment and Exits: 2024 Guide to Maximizing Company Value

As 2024 unfolds, the M&A landscape in the tech sector is poised for a modest uptick (check out our bold predictions on the 2024 tech sector here), paving the way for strategic growth and acquisitions. According to Morgan Stanley, M&A activity in technology companies, especially those relating to artificial intelligence or biotechnology, are expected to increase considerably compared to 2023.

If you are looking to raise funds for your tech business in 2024, or are contemplating an exit, you will want to maximise the value of the deal. When you have put so much work into your company, the last thing you want to be told is that it is worth significantly less than you imagined because of issues around IP rights, unclear contracts, or the risk of reputational damage due to cybersecurity attacks.

Do you want to maximise the growth potential or valuation of your business? Here are 5 areas to focus on NOW to prevent your company from being undervalued.

Protect your intellectual property rights

One of the first things that any prospective tech investor or buyer will ask you is “Who owns the IP?” and it’s a good idea to know the answer before going into those meetings!  You don’t want to be left scrambling to assign core IP from a former co-founder and risk delaying or even losing out on a multi-million dollar deal. 

Don’t wait until a potential acquirer or investor uncovers holes in the due diligence process.  Taking proactive action to do some spring cleaning now can save you a lot of stress down the line.

Key things to consider

• Keep a clear IP tracker and comprehensive IP documentation for all IP you own or use (whether it is legally owned by your holding company, any subsidiaries, key individuals or third parties)
• Locate any IP registration documents and ensure they are kept securely
• Label and store safely all know-how and other information that is confidential and proprietary and ensure that employees of all levels are properly trained on handling such information

Engaging employees, contractors or casual workers? Use written contracts

If you have employees or contract workers, you should formalise these arrangements in writing. A written contract is essential to clarify expectations and responsibilities for both parties, offer legal protection in the case of disputes and ensure that IP ownership is effectively transferred. Verbal agreements between parties can lead to messy and costly disputes.

Some key elements to include are

• Scope of work that the employee or contractor is to undertake
• Assignment of intellectual property rights to your company
• Duration of the contract and working hours (for casual workers, this can be set flexibly)
• Compensation
• Confidentiality and data privacy obligations
• Termination conditions
• Local law compliance requirements

Document customer and supplier termination rights

They say “all good things come to an end”, but being caught out by a surprise termination, whether it be a key customer or supplier, can be a serious risk for a scaling business. Having a good understanding of when this could occur will avoid nasty surprises and can help you avoid unwanted termination. 

For customer contracts, this means tracking key customer renewals, and ensuring that your sales team engages with the customer in good time to explore whether there are any barriers to renewal. This may also be a good opportunity to upsell new products or adjust pricing.

For suppliers, you should consider whether a supplier remains a good fit before their contract renewal date.  This gives you an opportunity to make an informed decision about your likely future needs and to renegotiate or replace any supply contracts that are not working well for you - potentially saving costs and boosting your bottom line. 

Key considerations when reviewing term and termination clauses include

• Whether the contract renews automatically
• Whether there is a notice period to terminate, and whether the other party is given a reasonable period to rectify a breach of contract
• What circumstances give rise to a right to termination - these should be limited in scope and specifically enunciated in the contract 
• Whether termination rights are given to both parties in the contract, or whether they are one-sided
• Whether there is a force majeure clause, and how that is defined in the contract

It is particularly important to consider whether a change of control will trigger termination rights for your counterparty. Change of control termination provisions can be a red flag for investors or acquirers, as they may permit a material client or supplier to terminate their contract with you as soon as you sell a majority stake in your company.

Update your data protection and cyber security practices

In today's evolving digital world, it is more and more important to stay on top of your data protection and cybersecurity practices. This is more than just a compliance requirement, for many tech businesses it is a vital aspect linked with the goodwill and reputation of your business. 

Research by the World Economic Forum in collaboration with Accenture indicates that 25% of organisations have insufficient cyber resilience, and 36% meet only the minimum requirements. This  is dangerous in an environment where cyber risk is increasing, with 41% of organisations stating that they have suffered a material cybersecurity incident in the past 12 months caused by a third party.

Customers are also increasingly looking for businesses that have strong data protection business practices. According to a global survey conducted by the International Association of Privacy Professionals (IAPP), 67% of consumers have avoided making online purchases due to privacy concerns.

Some quick wins to bring your business up to date include

• Reviewing your privacy and cookies policies - tech moves fast, so these policies need to be reviewed regularly to avoid them going stale.
• Mapping your data flows - where do you receive data from and who do you send it to?  Understanding this will help you ensure that these transfers are compliant and properly documented. This is especially important for international data transfers.
• Updating your cybersecurity policies and practices. This could include implementing interactive and practical training scenarios for employees and contractors, such as simulated phishing exercises with fake spam emails.
• Developing a Data Breach Response Plan which is clear and actionable, ensuring a swift response to minimise the impact of any data breach.

Ensure your accounts and finances are organized

A prospective buyer or investor will be all over your finances.  Keeping your accounts in order and financial documentation well-organised is crucial, both for ensuring your business continues to operate successfully, and to appeal to potential investors and acquirers.

Some key things to consider

• Conduct a comprehensive review of last year's financial records, including invoices, bank statements, payroll data, and documents related to share sales, capital raises, ESOPs and any loans. Ensure everything is current and accurately reflects your business's financial standing.
• Regularly update your cap table and security holder registers  and ensure your ASIC record accurately reflects your ownership structure. This is crucial for transparent equity management and investor relations.
• Confirm that all relevant share certificates have been properly issued. This is particularly important when considering a company sale as the certificates act as evidence of ownership of the company.
• Utilise efficient bookkeeping practices, potentially leveraging online accounting software for accuracy and ease of management. Regular bookkeeping ensures real-time financial insight, vital for strategic decision-making.
• Implement a schedule for regular financial audits. These checks are not just for compliance but also serve as a health check for your business, identifying areas for financial improvement or potential risks.

Securing and documenting your intellectual property, establishing clear written agreements with employees and contractors, understanding the ins and outs of termination rights in customer and supplier contracts, staying vigilant with data protection and cybersecurity practices, and maintaining organised and transparent financial records are all essential to preparing your company for an investment or sale. By proactively addressing these areas you can maximise your company's valuation and safeguard your operational integrity, positioning your company as an attractive investment opportunity or acquisition target.

Tackling a merger or acquisition? Biztech Lawyers is a multi-award-winning law firm, known for fuelling and protecting tech innovation worldwide. Get in touch now to see how we can help.