Neil Patel

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How to decide when to sell your startup? Whether planned from the beginning or not, most startups will end up in some form of exit, unless they fail first.

This is the pinnacle of the journey. While most entrepreneurs don’t realize it until well into their company, it is the exit that is really the thing that will often be remembered. It’s the barometer of the success of this venture.

Others, of course, have jumped on the trend of getting into startups for the purpose of a big exit. Some do it again and again.

Still, today there is so much disparity in valuations and how much companies sell for or go public at, and polar opposite outcomes of various exits.

As I share in my latest book, Selling Your Startup, it is certainly worth pondering when the best time to sell your startup is. These are some of the factors to consider, and indicators that might suggest the time is right.

When You Get An Offer To Buy Your Company

The most obvious time you may decide to sell your company is when you begin receiving inbound offers. Sometimes they will start coming in a lot sooner than you think, and well before you are ready and prepared to sell.

Unless you are the sole shareholder, then you have a responsibility to address these offers. However, that doesn’t mean you should just take the first bid you get.

Often this opening bid will get much higher if you hold out. Though being too greedy in the face of a great offer can prove to be equally foolish as selling out too fast.

Spin them up into the best offer you can get by soliciting competing bids. However, make sure you are paying attention to the paperwork.

In some cases, you may either be prohibited from or obliged to circulate your company for other offers. Don’t sign anything until you understand these clauses.

When Your Growth Has Peaked

Early-stage startups are expected to go really fast. Traction will be one of your main data points. Then you may pop again when you move into scale mode.

However, sooner or later, as companies get bigger, their rate of growth tends to slow down. If you want to know how to decide when to sell your startup, exiting before the slow down would be preferable.

That’s not the type of data that your startup investors want to see. It is usually their signal to get out and put the company in someone else’s hands.

Whether that is a different type of fund or corporation or the public. Any amateur individual investor can see that companies seem to go IPO or more recently be acquired in a SPAC deal when they have matured to this point.

There can be ways to extend your rate of growth if you need to carry the company through to another moment when the market for selling your company is better.

If you want an acquisition memorandum template you can use for free the one I created below which has been used already by thousands of entrepreneurs to have their companies acquired for millions. With this template you will be able to show your startup in the best light, boost its value to potential acquirers and avoid kicking yourself later for not optimizing your exit. 

When The Market Has Peaked In This Cycle

Not only will your own company’s growth likely peak and slow at some point, but there are also other external factors. These facets affect the rate of growth of a business. Or at least potential acquirer’s perspective and outlook on growth ahead.

Each industry has its own cycle. You may still be a scrappy young Seed or Series A round startup. But if the industry has hit a seven-year peak, and may take a number of years to begin growing again, that can definitely impact when the ideal time is to exit your startup.

The national and foreign economies all go through their own cycles as well. So, will the M&A space. Make sure you are factoring these cycles into your timing too.

When The Shareholders Are Ready

If you have other shareholders, owners, and board members with voting rights, you may no longer have the control to accept or deny acquisition offers. You may not even have the right to an opinion about it.

In these cases, any reasonable inbound offers should go to the board first before you can comment, or indicate how you feel about it.

This is one of the reasons that entrepreneurs really need to invest in learning about fundraising and M&A early. Then be sure you are managing your investors well, and have them prepped and onboard for the right moment to sell.

Unfortunately, many boards have said no to great offers, and they have ended up selling at a loss later. Don’t be one of those stories. Knowing how to decide when to sell your startup is critical.

Before You Have To Fold

Even in a crisis, selling the company can be an option. This can be a stock or asset sale.

On the Dealmakers Podcast, there have been many examples of entrepreneurs whose startups didn’t pan out as planned. Yet, they were able to still sell their companies and achieve a positive exit.

Even if you are ready to throw in the towel, or think bankruptcy and just closing the doors is your only option, you should explore other potential exits. There could still be billions of dollars on the table.

When It Is The Best Thing For The Company

The right time to sell your startup really all comes down to when it is best for the company. This is actually the only factor that really matters. If it is the best thing for the company, then the board is legally obligated to vote for it. So, are you.

At some point, your startup may outgrow you. Its ongoing solvency and performance and ability to achieve the mission may be best in someone else’s hands.

When you arrive at that point, don’t be the one holding the company back.

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When It Is A Bad Time For Fundraising

If you’ve already raised outside money, sooner or later you will need another capital injection. If the private markets aren’t in a good place to raise, then raising from the public through an IPO, or selling to a larger company may be the best solution.

Sometimes private markets are spooked. In other cases, major participants are in the wrong part of their own fund cycles.

The terms may just not be attractive. Weigh the pros and cons of all your options before trying to force another fundraising round that may not be in the best interest of the company.

When Your Heart Is Set On Something Else

Eventually, you may lose the passion for this venture and yearn to throw yourself into something else full time. If you’ve been wondering how to decide when to sell your startup, this is a good indication.

This can happen because you are burned out, and failed to give yourself enough balance on the journey. Or you may have already been toying with another startup, and find your mind consumed with that.

Though often entrepreneurs find they just love starting things, and lose passion for it once it becomes very corporate and much like the competitors they struck out to disrupt in the first place.

When It Will Have A Life-Changing Impact For Your Team

Some serial startup founders have found that the best reward for them is the impact that a strong exit can have on their employees.

Being able to sell a company and give game-changing sums to all of those involved in making it happen can be very rewarding.

You can change the direction of their family’s lives for generations with just one check. You can set them and their kids up to go on to create amazing contributions to the world and future because of this freedom you can afford them.

This may not be the first checkbox on your list, and it may not always be a deciding factor you can use if you owe other investors. Though when you can. It can outweigh all of the other benefits put together.

An essential aspect of knowing the right time to exit the venture is knowing how to value your company. If you need more information on how that’s done, check out this video I have created. You’re sure to find it helpful.

When The Competition Is Too Strong

This may feel like quitting, folding, and giving up at first. Though it does happen. There can be situations when your startup simply doesn’t stand a chance against large and connected competitors.

These companies could be set on taking you out or dominating this space. Merging with or selling to them may be in everyone’s best interest.

Try to check your ego, and be objective from the perspective of what is right for your company, investors, staff, customers, and the world.

Consider the penalties for being overly stubborn when there is nothing to gain. Will they just bleed you to death over the next few years? Could they just tie you up in lawsuits and court cases for years?

When You Are Prepared

Getting from the interest in buying your company to a fruitful closing can be a journey in itself. How prepared you are for this process can make a massive difference in what that outcome actually looks like.

This may look far, far different than the initial discussions and letter of interest. Having your paperwork and accounting organized and optimized and maximized will be absolutely pivotal in the final terms and details.

Think of it as selling a car. You might post the best picture of your car with an edited filter on it online. Everyone is going to be interested. Especially if the price is right.

Though, if once they show up the interior is torn up, it smells, you don’t have a clear title or the track record of maintenance, then the buyer is going to cut their offer by a lot, right?

The same principle applies here. You can imagine the difference if you kept immaculate records, just had the car detailed and touched up any defects.

Be sure you are ahead of the game here. And, when you need tips on how to decide when to sell your startup, one of the checkboxes should be the paperwork.

When Your Advisors Recommend It

While we haven’t covered all of the factors yet, we have already covered quite a lot of things that may be new to you as a startup entrepreneur and business owner.

Trying to track all of these things in addition to the daily running and growing of your business can be a lot. This is where you should really be leaning on your advisors.

Especially those who are heavily involved in this side of the industry on a regular basis. They can see all of these items in motion and from behind the scenes of the market, where you don’t have access.

When You Can Get The Right Terms

Selling a startup business is not at all like selling a soda, car, or probably your regular product. There is a lot more to it. There are many more working parts.

Going through major fundraising rounds may have helped get you somewhat familiar with some of this, but there is a lot more. Factors that will greatly impact the real net exit and how it affects everyone involved.

This can include whether your employees will be let go or kept on, how many years you may have to stay on to earn your payout, and how the new owner of your startup will treat your customers.

The terms and clauses can be far more important than the topline price or valuation.

Alternatives To Selling Your Startup

There are other alternatives to selling your startup too.

This may include:

  • Raising another round of outside funding to grow the business privately
  • Going public with a traditional IPO
  • A SPAC deal that takes you public through an already public company
  • Merging with or buying other companies, smaller or larger than yours

Summary

How to decide when to sell your startup? These are some of the indicators of the best time to sell your startup. As well as the factors which may influence your decision and the outcome.

Make sure you are investing in your knowledge of this process now. It will make all the difference in how it ends.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.

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Neil Patel

I hope you enjoy reading this blog post.

If you want me to help you with your fundraising, just book a call.

Book a Call