What questions should founders be asking before selling a startup?
Eventually, unless you fold first, the odds are overwhelming that you will eventually end up selling your startup. Even if you never planned to do so.
So, what are some of the top reasons that entrepreneurs end up selling their companies? What different methods of selling a startup are there? What questions should you be asking before committing and signing on the line?
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
Why Sell Your Startup?
There’s more than one reason to sell your business. Knowing your why is important, and will guide everything else throughout the process of finding a buyer, negotiations, deal structure, and what you do next.
These are among the most common reasons that startups are sold.
Startups and even the largest companies run into crises for a wide variety of reasons. Running out of money is typically the most common reason. At least nearly all failures can be tied back to this in one way or another.
The other major reason to sell during a crisis is that the economy and industry and world just may have changed dramatically. At least for a substantial amount of time. So, much so that your business has become redundant, or its potential has been severely capped. Although there are ways to keep going, they may not be appetizing to you.
Once startups mature, they are often sold on to new owners. New owners that are happy to keep going with slow growth and to simply extract the cash flow. If you love going fast, innovating, and creating, and the growth potential just isn’t there, it may be time to cash out.
This scenario often ends in an acquisition by a financial buyer or going public.
Ease Of Growth
Selling your startup may just make growth easier, more efficient, and profitable.
Why do it the hard way, when it can come much easier by integrating your company, product, or technology with a larger, more established, and better-capitalized company that can grow sales, expand distribution, and operate more profitably with ease?
For example; selling your tech startup to Google, Apple, or Microsoft. These are where the giant leaps can come, without much more effort of your own. It’s working smarter, not harder.
To Reach Your Company’s Full Potential
If you are mission-focused, and really want to achieve your full potential, and that of your venture and its potential impact, then selling your startup often becomes the best thing to do.
You may be capable of doing this yourself in another two decades, and with several more giant financing rounds. Though that also may bring far more challenges and risk than is necessary to take on. You can learn more about how financing rounds work in the video below.
There may be others with more experience, resources, and capabilities that can better execute on the big mission. It may require being humble about this, but the wise will see the sense in it.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
You Want To Do Something Else
Either you may have become bored working on this project, have lost your belief in your original thesis, or you have just become inspired and more passionate about something else.
If you don’t love what you are doing, it will probably just wither and die slowly. It’s probably smarter to sell, recapitalize, and then dedicate yourself to what you most want to work on now.
Any funds you receive from this sale can enable you to self-fund your next venture, go faster, and do things better than you did last time.
You Get An Offer You Can’t Refuse
If you are doing things well, then eventually you will receive inbound offers. Sometimes they come in a lot sooner than you think. With some good negotiation strategy, it’s quite possible you’ll receive offers for far more than you expected.
When those offers are life-changing for those with equity in your company, and it may be best for the business, it may be foolish to be stubborn and try to hold out. Even if you can say no legally.
The Competition Is Closing In
If you are doing things well and are showing some success, then others are going to want in on that. Larger and better-funded organizations are going to want to replicate it or to put you out of business to protect themselves. Other opportunists will want to launch new lean startups to try and undercut you and get a piece of the action.
Selling to someone instead of them recreating what you are doing may make sense for both of you. Or maybe merging with your competitors to build a more formidable and defendable organization is the best way to go.
It’s In The Best Interests Of The Company
Once you are a business owner your legal responsibilities really become to what is in the best interests of the company. It is no longer about your personal interests and wants. If selling becomes the best thing to do for the company, then that is what you need to do.
Even if you don’t agree, your shareholders may outvote you anyway. This is another reason to carefully structure your stock, equity, investors, and voting rights well in advance, with this in mind.
Ways To Sell A Startup
There is more than one way to sell a startup, structure an M&A deal, or to execute on an exit.
These may be some of your options.
This is all about a financial buyer acquiring your startup for purely financial reasons. This often comes in the form of private equity funds or larger corporate conglomerates which want the ROI, cash flow, and metrics you have on their books.
A financial acquisition relies on good accounting, strong financials, and is often a likely outcome in more mature startups.
In an asset sale, you may sell all or specific assets. You may be able to retain some assets to spinoff a new company and venture. Or simply sell some technology and assets you don’t need, and use those funds to recapitalize, pivot, and zone in on emerging and bigger opportunities.
See How I Can Help You With Your Fundraising Or Acquisition Efforts
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- Materials: our team creates epic pitch decks and financial models.
- Investor and Buyer Access: connect with the right investors or buyers for your business and close them.
A strategic acquisition is all about a strategic opportunity for the buyer. These buyers are often willing to pay more for your startup, as they see the bigger results that can be had by combining your organizations and assets.
They are often less focused on profitability and more on what your company and assets can do to help them grow and support their own metrics. They may do it for your growth metrics, to acquire your talent or user base, to harness your technology, or to diversify and expand into new areas. As well as to simply improve efficiency and unit economics in their business buy securing more of the supply chain.
Instead of outright selling your company it may be merged with others. It may be a merger of equals to combine strengths, or to a larger company while retaining some ownership, stock in the new company, and some degree of promised autonomy and control.
While different from simply selling your company, some may consider this a form of selling as you are selling a lot more of your company. You may receive a lot more liquidity and capital, but also see extreme dilution in ownership. Operating a public company is far different than a privately owned startup. Some entrepreneurs see this as the natural progression and logical outcome of building a successful company. Many don’t want to stay on in this environment, and will quickly move on to a new startup to build something else from scratch.
Questions To Ask Before Selling Your Startup
There are many things to consider when selling your startup. These are among the most important questions you should be asking.
Is This The Best Or Only Move?
Just because you receive an attractive inbound offer doesn’t mean it is the best move. It shows you have something of value. Can you keep building or hold out for an even better and more lucrative offer?
Is This The Best Time?
Is this really the best time to sell your startup? Is the economy and market ideal for selling? Will another year or two yield far greater returns on selling your company? Is there new technology or breakthroughs in the works that could soon dramatically increase the value of your business?
Are All The Shareholders Onboard?
In order to be able to sell your startup, you have to have enough votes to do so. You may not alone hold enough voting power to authorize the sale. So, know how many of your shareholders you need onboard, and who they are. Well before this, you should have been positioning this outcome, and ensure you are all on the same page as to when the right time to sell is, and what the magic number is.
Who Is The Ideal Buyer?
Just because you receive a high offer for your company doesn’t mean it is the right buyer. Just like starting a new venture, money is often a distant second to everything else. So, who is the right type of buyer for your business? What boxes should they check? Their reputation for how they treat customers, operate, and have treated other founders in previous acquisitions are all significant factors.
Is The Documentation Optimized To Sell
The vast majority of buyers are going through a lot of digging and due diligence on your company. This comes after the offer, and before the closing. You not only need to be able to back up your numbers but also have all the right legal paperwork in order.
So, can you survive this? Do you have the paper trail? Are your contracts all in order? Do you have your IP filed and protected? Is your accounting clean and organized? Are you going to be able to keep up your growth and metrics until a closing which may be months away?
Who will be crafting your new pitch book and memorandum to make sure you are getting the most out of the selling opportunity?
How Do I Find A Buyer I can Trust In The Process?
It’s not uncommon for competing businesses and their investment bankers to simply be hunting for more intel on your company. You don’t want to give away all of your secret sauce, only to end up with no deal, and having given your competition the edge.
Is Raising Another Round An Option Instead?
Will raising another round of funding to be an option? Could more capital give you the fuel to grow more on your own, and keep control or add value for a larger M&A deal later on? Get to know the state of the market.
Will I Be Willing To Work For The New Buyer?
How long can you stomach working for your acquirer? How much of the sales price are you willing to risk on that?
What Will Happen To My Team?
For some entrepreneurs, the future of their team, and the financial outcome for them is far more important than their personal gain. Make sure you know how to protect and take care of them in this process.
How Will My Customers Be Treated?
For some entrepreneurs what happens to their customers is very important. Especially if you started this business to really help them. Sadly many others may not care about your customers at all. They may look to abuse them at every opportunity for every penny they can get.
What Do I Need To Learn To Ace This?
There is a lot to learn to navigate the M&A process. A lot if at stake. Even a line or two can make all the difference in the net outcome. You can never start learning to early. Knowing how you will exit even before you start is important. So, do you need to brush up on deal payout structures and earnouts, how to create the best pitch book, or how something else? What resources are available to learn that.
Who Can Help?
Where can you find trusted help, that will have your interests in mind? Is it in-house through your existing investors and legal counsel, an investment banker, or an M&A expert?
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.