When you’re just starting out and trying to find investors for your first startup, you may have never imagined there would come a day when you decided to sell. However, mergers and acquisitions is an innate part of the entrepreneurial cycle and the question is likely to come up sooner or later.
The decision to sell your startup or not can be a difficult one for many reasons. But if the question “Should I sell?” has been on your mind, then it’s definitely worth exploring the possibility and the terrain that comes with it.
Common reasons for selling
Though there can be an infinite number of reasons to sell including personal issues and unpredictable external factors, there are some common reasons startup founders cite for wanting to sell.
You’re burned out – The adrenaline rush of the beginning of a startup can be addictive. You believe in your mission, your job is to make others believe in it too and the harder you work to make the company grow, the more fulfilled you feel. However, it can sometimes happen that when things stabilize, you lose your drive. The long hours wore you down and you’re tired. The business has the potential to expand, it can get investors to take things to the next level, but the work and commitment are no longer appealing to you. At that point, you owe it to the business you started, the investors, cofounders and employees to pass it off to someone else who has the energy to see things through to the next phase. When things get stagnant for you, it’s probably time to sell. Keep in mind also that the longer you stay with the business without being able to make any significant growth happen, the less value your company will have when you do sell it.
You can’t afford top talent - As your startup grows and matures, at some point you’ll be looking at replacing your awesome freelancers and independent contractors with players with more advanced skills and experience who have the ability to take your company to the next level. The thing is, good talent is expensive and even if the company is making money and there are investors interested, hiring top talent is a very pricey investment. If you don’t have the funds to pay the type of employees who at this point should be driving your business, it may be time for you to consider merging with another company who has the resources to build things up from the foundation you created.
Things are going very well – If you’ve built your startup into a well-oiled machine with a strong management team who honestly don’t even really need you around, then there can be a feeling of being redundant. And that’s actually a good thing because it means you did your job by picking the right people to run the company and providing the means for them to work to their potential. If things are going that well, then your company would probably have a high valuation and that might make it worth selling.
Things are going poorly – While most startups end up folding because of lack of funding or other issues, that doesn’t mean the survivors all turn into heavyweights. Entrepreneur Kevin Ryan, founder of Gilt advises, “If your company is not getting the traction it needs to be really successful, the faster you can move on, the better for everyone involved.”
Preparing to sell
Do you have an offer? - First things first, right? Has someone made you an offer and is it serious? It’s important to consider that if your company received an offer, your competition probably did, too. Before you take things further, it’s a good idea to sign a nondisclosure agreement and then start negotiations.
Preparing your team - Before your company gets sold, you need to know if your founders and investors are onboard. Hold a meeting with your board, investors, executive team and any advisors to make sure everyone is aligned and understands what to expect and agrees to the move.
Valuation - Depending on the type of startup and the level of innovation and opportunity it offers, your startup will be valued at anything from 1-50x its annual revenue. That’s a huge spread and there are a lot of factors that will go into whether or not your company will be given the value it’s worth.
Fixers - If your startup has managed to survive, but isn’t in great shape, you could consider hiring a fixer, a temporary CEO who comes in to clean up the startup’s major problems in order to get it in better shape for selling. They will usually work in exchange for equity in the hopes that they’ll be able to turn things around and increase the company’s valuation.
Valuation assessment - When you have a buyer and a valuation has been established, you will probably need to go through a process of proving that your company is worth that valuation. To accomplish this, you may need to conduct projects that isolate the company’s core profit-generation vs. costs factors or provide in-depth analysis that predicts long term growth. Investors will want to know they’re getting their money’s worth and your ability to competently show that can make a huge difference in the number on the check you walk away with.
Due diligence - After you’ve gone through any valuation assessment processes required by the buyer, you’ll have to go through a due diligence that will include a books audit, liability and risk assessment and divulgence of all company equity.
Second thoughts - Ask anyone who’s sold a company and they are likely to tell you that they had doubts before selling it. Doubts, second thoughts and separation anxiety are all part of the process. You’ve worked hard for that company, believed in it and saw it through its initial stages. Now, you’re going to let it all go? It can be challenging to navigate this time emotionally, but in the end, hopefully you will have enough clarity to know whether or not it’s the right thing to do for you and the company.
What to expect after you sell
It doesn’t happen to everyone who sells their company, but, it happens often enough that you should be prepared for it: some entrepreneurs fall into post-sale blues. Your company had become part of your identity and now that part is gone. It’s common to take some time off to figure out your next steps after selling a company. Don’t worry, the feeling will pass eventually, and you’ll be back in the game looking for a cushy VP job or getting ready to set up another startup venture and begin the whole process all over again;)
22nd September 2020