How To Smooth The Path For The Exit
Startups take a lot of hard work, dedication, and sacrifices to make it happen. Even then, your dream doesn’t always pan out in the real world. Maybe you were able to make your startup work for a while, but the reality of what it takes to sustain it is too much for you and your team. Or, maybe your success was short-lived, and now your startup has lost steam and isn’t doing well. Whatever the reason may be, consider building your startup from the beginning ready to be acquired. But how do you make your startup desirable to buyers?
As a startup, you might not have had the time to dedicate to administrative-type tasks like bookkeeping and contracts. In the beginning, there’s not much to be organized anyway. However, a lack of organization looks messy to outside buyers. While it works for you in this stage, it can instill doubt in potential buyers. Don’t make things hard for potential buyers by leaving things a mess but structure early on the following things:
BOOKS: make sure all of your expenses are organized and entered, bills are up-to-date, bank accounts are balanced, and your finances records are in order.
CONTACTS: If your contract data is not easily accessible and organized, it is essentially useless to potential buyers
IP: Have a system in place to define your private and public IP addresses and how they are allocated amongst locations, subnets, users, etc.
CAP TABLE: Simplified, your cap table should tell potential buyers who owns what. You can have holders grouped into simplified buckets called “founders” and “investors.” You could even include formulas that map out the hypothetical sale of your startup. Not only will it impress buyers, but having an updated and organized cap table allows you to make good decisions quickly.
Use the tools at your disposal to get organized. Cloud-based tools allow you to save and share documents with potential buyers, and many of them are free to use. Consider taking advantage of Google Drive, Box, or Dropbox to keep your startup’s information organized into folders. Not only will this make the due diligence process much faster, it will impress potential buyers.
Keep Your Valuation Up
The quickest way for you to reduce the valuation of your startup is by actively seeking a buyer. In fact, there is a ten-times or more valuation difference between you approaching a buyer and a buyer approaching you. Additionally, if you are selling non-stop, you’ll start to look desperate to potential buyers.
If you want to get the best valuation for your startup, you need to be convincing about its growth opportunity. If you use your existing operating performance, or EBITDA, you’ll only get a valuation based on the now. However, if you can be convincing about the potential of your startup, it is possible you will be able to sell for a much higher valuation.
When you have a potential buyer, think about how your startup can do for them and create a product integration plan for post-acquisition. Show the buyer what your startup can do for their company in the next five years before they make an investment to prove your potential.
Get to Know Buyers
Identify potential buyers early. And by early, I mean at least 18 months in advance. When you make that list of all of your potential buyers, start building relationships with them. When it comes time to sell, you’ll have multiple potential buyers who are interested in your startup.
Start by talking to potential buyers about a partnership or alliance. Having an existing business relationship with the buyer can lead to a strong and stable outcome.
If you have friends within a company you could sell to, see if they can coordinate introductions with high-level managers. Don’t waste too much time talking to people within companies who do not have the decision making power required to acquire your startup.
Be upfront about the fact that you are selling your company, but don’t be all sales all the time. The saying goes, “Ask for money, you get advice; ask for advice, you get money,” and it does apply to the sale of your startup.
Have ongoing conversations with potential buyers about ways you can work together. This is the best way to drum up offers. You might have to work your way up the ladder with your conversations and have them with many different people before you get to a decision maker who is high-up enough to make you an offer. You must convince that person that buying your startup is a better idea than partnering with it.
Get your team on the same page with your valuation and what will go and stay with the startup. There will likely be valuation parameters and other things to discuss. Will everyone be satisfied if the buyer shuts down the product? What will you do if the buyer won’t take all of the current employees? Will the company allow your startup to run independently? Consider these important questions with your co-founders and make sure everyone is on the same page before you start the acquisition process.
Understand you might not get premium, even if you think you deserve it. In most startup cases where deal sizes vary from $5M-$20M acquisition prices, founder teams are out for being acquired because they managed it up to a certain point but can’t move ahead. In all likelihood, business has stalled or you’ve lost your drive and are ready to move on. Taking these factors into consideration, realistically, you won’t get a premium valuation. Save time and protect yourself by taking the time to understand the market and having realistic expectations. Of course, you will feel like you deserve premium considering how much time, effort, and money you’ve put into the startup and how many sacrifices you’ve made. However, this won’t make a difference to buyers, and sometimes you have to accept that getting something is better than getting nothing.
Understand how investors will value your startup. It’ll be by either your financial value or your strategic value, and it will mainly depend on your revenue and model of your future cash flow. In tech, however, it’s likely you’ll be valued based on how you fit in with the buyer’s future strategy. Some things that could give you strategic value are:
- A buyer who wants to keep you away from a different tech company.
- You can help the buyer become better than a competitor.
- You have employees that meet the buyer’s talent needs.
- You are executing better than the buyer, so they are protecting themselves with the acquisition.
There is no “right” price for your startup, so your price depends on what you can negotiate based on what metrics the buyer’s team uses to justify a price. Keep in mind that the first offer is rarely the best offer, so don’t be afraid to say no and counteroffer.
Nail Your Timing
A Startup is NEVER in sale because business is great — but be always open to chat! Hence sell only when you are ready. Negotiating a sale is incredibly time consuming and distracting for your startup, even more so than raising money. You’ll have to cease running day-to-day operations as you pursue an acquisition, so only start the process if you definitely want to sell the startup, and you’re likely to get a price you are willing to accept. Don’t waste your time or efforts talking to potential buyers just out of curiosity. However, don’t wait too long to sell if things start to stagnate. You are much less likely to get an acceptable offer if you wait until things get too far downhill.
Take advantage of multiple options. The best time to sell is when you have options, and they are not necessarily all acquisition offers. You could have options of venture term sheets for your next round. You might be in the position to turn down offers if you are operating profitably and buyers are looking to absorb the competition.
As a team, agree upon a sell-by deadline. This is not a date that everything has to be finalized. It is just a date by which an offer needs to be accepted by. Consider giving yourself a quick deadline, like 30 to 60 days. Not only will this motivate you every day and give you something concrete to pursue, it will limit the amount of time and energy you spend on pursuing an acquisition. A deadline will help you weed out buyers who are not genuinely serious about your startup.
Regardless of how passionate and dedicated you were to your startup, build your path in a way that you are always ready to be acquired — as you don’t know what you don’t know. Whether progress has stalled or you’ve just lost your drive, there are always options and a path to exit. Perhaps you haven’t considered being acquired yet, and you were approached with tempting offers because of your success. Whatever the reason, worst thing that can happen is that such a situation comes up and it catches you off guard — which leaves you with no time to run the process, or eventually with less key players in your team which would raise the valuation.