Often times, there is a prevalent misconception regarding startup businesses: that selling means you somehow failed. Clearly though cases such as when Trello got purchased for 425 million after only raising 10 million in funding, blow this myth away.
I am almost certain that the people who are still holding on to this misguided perspective are people who have never worked in the startup world. Mergers and acquisitions are a healthy and necessary part of the business lifecycle for small business development or early-stage startups.
A Step Further
To take it a step further, there are plenty of entrepreneurs who founded startups for the sole purpose of making them attractive enough to sell to a larger conglomerate player at the right time. And, for a lot of small to medium-sized business owners, getting an offer to have their company absorbed or acquired by a bigger company or group is an immensely gratifying moment.
So even if you didn’t craft your original business plan with the end goal of selling your business, there may be a number of events or circumstances that bring you to a point where it becomes the most favorable option to move forward. Leaving the startup phase of your company can be a little bittersweet.
Make sure you are well-informed, prepared and advantageously positioned when engaging in acquisition talks, to help make the whole experience as positive and lucrative as possible. Here are a few tips on how you can make that happen.
Planning in Advance is Key
The best way to be in a strong position of power going into selling your startup business is to know that this the direction your company is headed in and that your business and the people within it prepare accordingly.
As a general rule of thumb, you should give yourself about 18 months in advance to get ready. This can entail starting to develop relationships with executives at companies who you think might be possible buyers, as well as putting in as much effort as you can into making your business strong.
Booming businesses on the rise, that have uniques products or technologies, like those in growing markets, are usually some of the qualities that companies are looking to acquire, not flailing startups who are about to go out of business.
Do a Corporate Cleanup
Most startups are complete messes. Of course, this creates plenty of doubt when buyers are considering a deal.
Your financial statements are the key to determining the value of your company. However, many businesses have financials that are a hot mess, making them less credible. So you really need to get your accounting books in order, your contracts in order, your IP in order, your cap table in order and so on.
If you have > $5 million in revenue, get the last two years of your financial statements audited.
Smaller startups should have their financials reviewed by a reputable accounting firm. This can also point out weaknesses in your company’s financial operations/controls, giving you time to correct any issues.
You should set up a data room, such as with Box or Dropbox. This means organizing your company’s information in folders, which can make the due diligence process much faster. Oh, and it will impress potential buyers.
The 20:6:3:1 Rule
When it gets to the time to actually start fielding offers, this ratio is nice guide to use for the pitching process: call a big meeting with say 20 companies who you believe would potentially be interested in acquiring your business.
Out of that, watch the ratio unfold, - you’re likely to get around 6 follow up meetings, from which you’ll probably see 3 more serious meetings, hopefully resulting in at least one solid offer. Remember, however the numbers eventually work out, the point does not change: cast a wide net and the ones who are truly interested will rise to the top.
Make Wooing Your Life
Once you have started the process of bids and negotiations with the most serious acquirers, you should immerse yourself fully into it. You use tactics such as taking them out to dinner, be their friend; wooing or courting a potential buyer for your business is a lot like when you were looking for initial investors.
These decisions often come down to a gut feeling on the part of the buyer - so now is a good time to go above and beyond to make their gut feel favorably about you as a smart, capable and likeable business person.
The midst of scheduling meetings and negotiating potential offers with possible buyers is about more than just crunching the numbers. This is the time to show them the kind of innovative foresight and proactive business savvy you bring to a team.
Because quite often, having your business absorbed by a bigger company doesn’t mean that you will be doing a significantly different job, but it can mean you may now go on to work at the new company and be doing your job in a slightly different context, to serve a new bottom line.
Sometimes tech companies such Google or Facebook will sometimes acquire small startups more for their talented team members than their products and services. So you should show buyers you understand their company and have an energetic vision for how you and your company can work with and for their company.
Their job as a company who acquires smaller startups is to have an eye for identifying companies who are either:
Are going to benefit them the most
- the businesses actually have some synergies and combining them is theoretically value-accretive
Therefore, your job isn’t just to sit back and hope you appear to fit the bill; your job is to speak up and tell them exactly how you do. Think about what your startup can do for the acquirer and start creating a product/integration plan for post-acquisition.
Any acquirer would be interested to know where you can take your company in the next five years without any investment.
Don’t Stop Innovating Your Business
Navigating all the meetings, research, and follow-up required in nurturing a successful sale of your company is obviously time-consuming. Even still, don’t ever forget that you still have a business to run. Any prospective buyer is going to look closely at the growth potential of your startup.
Therefore, prior to and during an M&A process, it makes strategic sense to grow your sales efforts, which may mean hiring additional sales reps and increasing your overall investment in growth initiatives. Nothing will stop a sale in its tracks faster than a slowdown in your business’ innovation, productivity or revenue growth.
During the sales process, your company itself becomes a product – if you don’t keep it in pristine working order, no one is going to end up taking it home.
Consider alternatives to M&A
Selling your company is only one of many ways to achieve a liquid event. Alternatives to M&A include venture capital, partial liquidation (pulling some chips off the table, but continuing to build for a larger buyout), or raising mezzanine or bridge financing (typically in the form of a loan with some equity; payback terms are most often tied to an eventual sale).
If you want to sell your company because you don’t feel that you are ready to take it to the next level, you can always hire an alternative CEO and take a more advisory role.
If You’re an Ecommerce Startup There are Marketplaces for Selling
If you have built an ecommerce startup business and are looking to sell it, there is another option available. Now you may not be the next Jet.com with proprietary technology that got them acquired for 3 billion from Walmart, but don’t freak out, all hope is not completely lost.
Recently there has been quite a few new ecommerce marketplaces where people or businesses can buy and sell websites. There are full-service brokers to oversee the entire process, vetting the parties, determining market value, and ensuring secure transactions. There are also free and low-cost boards for buyers and sellers to find each other, perform due diligence, and complete the transaction on their own.
One is called Flippa which is a marketplace for buying and selling web businesses, domain names, and apps, which was one of the first companies in the space, According to Flippa, every month over $5 million worth of businesses are sold.
Another one that was recently launched is Shopify’s new marketplace called Exchange, which allows Shopify website owners offer their ecommerce sites for sale. It does not seem to matter if the sites are brand new or established.
Businesses on Exchange are Shopify stores that the owners listed using the official Exchange app. According to Shopify, they automatically generate the listing based on the store’s actual data. The current shop owner can’t edit revenue or traffic information.
Selling a business is a process that is executed with a long view and years of preparation. It’s important to get to know buyers well before a company is interested in selling and build mutual respect over time.
Businesses may be bought in a moment, but they are sold over time.
If you are trying to build a product that will gain market share of a larger player, and ultimately get you on their M&A radar? Then try to bring a different value proposition to your market. In general, it seems that products that are built upon disruptive technologies are typically cheaper, simpler, smaller, and more convenient to use.
If you’re startup that ranks well online, you may see a competitor make a bid to buy you just to increase their search engine result's traffic, like when the real estate company Zillow purchased Trulia as way to continue their growth trajectory, through acquisition.
As the CEO of Atlassian said “All companies fit into one of two buckets: either becoming a software company or being disrupted by one. Every industry is being fundamentally altered by software.”