How to buy a tech company
There are thousands of small tech companies for sale at any time-they are often websites that take 1 or 2 people to run. You can find out about a tech company on listings on Flippa.com and similar sites. They can be run from home. Sometimes they require a particular expertise but other times they can be managed by the owner and technical or time-consuming work can be done by contractors, often offshore.
Some examples are Amazon reseller businesses, or other ecommerce sites. There are many ways to make money, such as affiliate marketing to refer traffic to a bigger site, pay per click to bring in traffic, or adsense to get people to click on ads. Converting traffic to customers is key. SEO is one thing that impacts this-also things like site speed and content are important. Also flipping the business or providing premium content are other ways one can monetize the site.
If you have a desire to own a business and don’t want to start it from scratch, often this can be a solution.
Regardless of intention and how you ended up with the new business, there are several considerations to plan for, especially on the tech side.
Have the previous owner stay on after the sale. The owner can serve as an advisor or consultant for a predetermined period of time. This can add some much-needed stability during the transitional period.
Start with minor changes. Customers may react unfavorably to sweeping changes. Therefore, at the beginning, less is more. Make minor changes and pay attention to your customers’ initial reactions. It’s important to maintain site traffic. If you change hosting, site appearance, plugins or social media ensure you do in a test environment first and plan for/minimize interruptions.
Ask Questions
Ask lots of questions and take notes. Let the previous owner and the staff teach you how to run the business. You can implement new procedures, but before doing so, make sure you know how things are currently done. Only then can you make informed decisions on changing business processes.
Maintain current record keeping-procedures. Do your best to ensure that records and to-do items remain on schedule through the transition.
Review customer service policies. Customers are used to having issues handled in a certain manner. Review the policies and maintain them for the first few months. After the transition is complete, amend them as necessary.
Familiarize yourself with your new technology. While meeting the people behind the business and learning the procedures is important, you must also learn as much as you can about the technology that supports the business. You need to familiarize yourself with software programs and learn about their shortcomings. Learn what has gone wrong and in the past and what shouldn’t be ‘messed with’.
Do something nice for your customers. Make sure any site conversions or feature changes don’t turn off loyal customers. Offer something free to make up for this.
What I Learned Buying 12 Tech Companies — Due Diligence
That Matters
Buying a $5k Flippa site is different than buying a $5M
SaaS. After buying 12 companies and serving as CFO for 6 public boards, here is
what actually kills deals:
1. Tech Due Diligence — Beyond Financials
- Code ownership: Is code owned by company or by contractor who never signed
IP assignment? I request contractor agreements, GitHub history, IP
assignment. No assignment = no asset. Cost to fix: $10k-$50k. - Open source contamination: GPL code in proprietary SaaS requires you to
open source your product. I run Black Duck scan. - Customer concentration: 40% revenue from 1 customer = high risk. Adjust
valuation down 20-30%. - Churn and NRR: For SaaS, I look at logo churn, net revenue retention. Under
85% NRR = product problem. Check Stripe / QuickBooks 24 months. - Tech debt: AWS bill $30k/mo with no auto-scale? That’s $200k fix.
2. Valuation — How Tech Companies Are Valued
Small tech: 2x-4x SDE (Seller Discretionary Earnings). SaaS:
4x-8x ARR depending on growth, churn, gross margin. IT services: 4x-6x EBITDA.
I do quality of earnings: Add back owner’s personal Tesla,
family on payroll, one-time lawsuit. Then normalize for market salary for owner
— $300k owner doing $100k job = $200k add back but then subtract $150k
replacement cost.
3. Structure — Asset vs Stock for Tech
Most small tech deals are asset sales — you don’t want their
payroll tax liability or pending IP lawsuit. But for SaaS with 100+ contracts,
stock sale avoids re-assigning every contract (needs consent). Consider
338(h)(10) election: treated as asset for tax, stock for legal.
4. Working Capital and Holdback
Define working capital peg — e.g., $500k. If at close it’s
$400k, you get $100k reduction. Holdback 10-20% for 12 months for reps and
warranties — code ownership, customer contracts valid, no open source
violation.
5. Transition — Have Seller Stay 90 Days
Have previous owner stay as consultant 90 days at $10k/mo,
with non-compete 2 years, non-solicit of customers/employees. Put in purchase
agreement.
Cost: Tech due diligence $7.5k-$20k includes QOE,
code/IP review, customer contract review, valuation. I provide checklist of 50
items: financial, tech, legal, tax.
Checklist to request: P&L 3 years, tax returns,
cap table, customer list with revenue, churn report, GitHub access, contractor
agreements, open source list, AWS bills, SOC 2 report.