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March 11, 2022

Are you looking to sell your business as an exit plan? In this guide, we’ll teach you everything you need to know about selling a startup. You’ll learn how to value your business, negotiate a sale, and complete the transaction.

Plus, find out what happens after the deal is done. Let’s get started!

What happens if you sell your startup?

An acquisition is a complex and large-scale transaction that you are never fully prepared for. Many are most regretful that they didn’t get the right deal when selling a startup.

Whether you’re a founder or equity holder, there’s so much you need to know before you decide to sell startups.

When is it time to consider selling a startup?

There are four main reasons why you should consider selling startups.

  1. Things are not going well. I wouldn’t recommend selling unless you’re in a dire situation. I would do all I can to stabilize the situation and then reconsider.
  2. The company is doing extremely well. This is the best position to be in if you want to sell, but it’s also the time when the founders are least interested in selling the company. It would take an exceptional deal to give it the green light.
  3. Selling has become attractive due to external factors. Let’s say you find yourself running two companies at once. You may decide to sell the smaller company to concentrate on the bigger one.
  4. This is as far as you can go. This is often the reason why founders choose to sell startups. They see great opportunities down the road and decide that someone else can take much better advantage of these opportunities.

Most often, the decision is made to sell based on a combination or a combination of these factors.

 

3 different ways to sell a startup

There are three ways to acquire a startup business.

  1. Selling a startup to a bigger company. This is someone who is in your space or very close to it. They see your company as a breakthrough in innovation or a bunch of new customers.
  2. Selling a startup through private equity. These firms usually buy out all existing investors and owners. They may also put the company’s leadership on a profit plan to keep them motivated and engaged. These transactions are often done at high valuations, sometimes reaching the billions.
  3. Selling a startup to new investors. A transaction that involves the purchase of all current owners and investors by a new investor, or group of investors, can be made at lower valuations.

Discuss your options with your board, current investors and advisors before you decide to sell your company. Evaluate your negotiation position from strongest and most vulnerable.

At least one offer should be accepted or rejected in recent months. This is your strongest position, as it attracts more offers.

 

You should investigate at least one or more implied offers if you don’t have a firm offer. These clues and hints will come from customers, partners, competitors, investors, advisors, and even PE firms.

Selling a company if you don’t have any of these is going to be more difficult but not impossible. Acquisition is much like fundraising in this instance. You need to make connections and build relationships if you don’t have leads or offers.

This is basically pitching your idea to potential clients and then going door-to-door. You’ll lose a lot of equity value if you don’t have patience.

A fixer is someone who can take over as CEO and make your company more attractive to potential buyers. Although I rarely see this type of work, I have seen it work. You trade shares in the hope of increasing their value.

You might also find private money willing to buy your company. These transactions are often at lower valuations. It’s like a fire sale.

How to calculate the sale price of a company

There are three main ways to calculate your company’s sale price.

  1. A service-based business is typically valued at 1x-2x annual revenue. If the company is a mix of product and intellectual property that could be spun off, it can rise to 3x or even more.
  2. A product company is typically valued at 2x-10x annual revenue depending on its market, the protected unique differentiation, and a variety of other factors usually related to opportunity.
  3. A product company can be sold up to 50x if it is innovative and has extreme opportunities.

To sell your company, you must prove that you are worth the price and that you are legitimate.

If your company has $10 million in annual revenue and your valuation is 10x or $100 million, then you must be able show the acquirer how your company can reach $100 million in a three to five-year time period. You will get a better price if you can demonstrate that return objectively.

There are many ways to do this but spreadsheets and hockey-stick charts are not enough to open your checkbook.

You will need to do your due diligence to prove your company’s legitimacy and structural integrity. This means that you will need to:

  • Show a clean cap table with past, present, and future equity accounted for
  • Open your books for them to audit your financials.
  • Let lawyers of both parties discuss liability and risk and ensure that your intellectual property is properly protected.
  • Interview your management team and perform background checks to uncover any skeletons in the closet.

Before entering into any negotiation, write three things that will hold you firm and make it clear that you will walk away if those conditions are not met.

Timeline

Selling startups is similar to raising funding rounds. The timeline will be determined by the status of your company as well as your negotiation position.

 

It takes one to two months to find and prepare suitors, two to three months to get a solid offer, and one to two months to do your research. It’s not easy, but it shouldn’t take too long either.

Conclusion

Selling a startup can be a complicated process, but if you follow the steps in this guide, you’ll be able to get the right deal.

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