Photo from resources.microacquire
You’ve probably heard the phrase, “Most startups are bought, not sold.”
The wisdom being that if you create a good enough product, the likes of Google will show up one day with a fat check for you to sign. That’s the dream, right?
The problem is, it’s just that – a dream (for most founders, anyway).
Most startups are sold, and with great effort. Okay, your startup might be in the tiny percentage to get gobbled up by Google but do you really want to play those odds?
Selling your startup is a contact sport. You’ve got to throw your weight behind the process and anticipate buyer plays. Getting acquired is then simply a matter of closing the gap between your and the buyer’s expectations.
Once you identify your goals, prepare for and de-risk the acquisition for the buyer, you’ll receive more offers than a lifetime spent waiting for big tech to knock on the door.
#1 Be sure you want to sell
Are you ready to give up a business you’ve spent years – or a lifetime – building? If not, you’ll never put the work into receiving offers. Worse, when you prevaricate or start discussions unprepared, you waste buyers’ time, burning bridges you might need again down the line. Instead, ask yourself:
- Do you want to sell?
- Do you want to sell now?
- Will you do what it takes to sell?
Answering “yes” to all three and you’re good to go. Certainty and self-assurance simplify those early discussions, clearing the way to an offer. However, if you’re unsure, you’re better forgetting about acquisition for the moment and focusing on running your business. Your day will come.
#2 Ensure you have a sellable business
Got a great idea? Cool – but ideas aren’t businesses, unfortunately. Even if you’re pre-revenue, you still need to prove a viable business model before a buyer will consider acquiring your startup. It’s rare for a buyer to acquire technology alone unless you’ve built something they have a known (and proven) use for. Instead, you must prove your idea has product-market fit.
Likewise, getting acquired isn’t the solution to your revenue or profit woes. If either is declining, fix the underlying causes of these issues first. Your metrics are among the first things a buyer looks at so ensure the arrows point in the right direction. Oh, and misrepresenting these metrics nukes deals and relationships – don’t do it!
#3 Understand buyer motivations
Like you, buyers are people with goals they want to meet, and you’ll attract more offers when you know what motivates them. Every year, a new generation of entrepreneurs enters the acquisition market and you’re competing against them on product and attitude. Be open, honest, and collaborative if you want to stand out from the crowd.
For example, say from the outset if you’re open to offers, are willing to do financing, or would consider earn-outs or equity swaps. This helps buyers filter startup listings and isolate those that are both good investments and easy acquisitions. Remember: they don’t want to waste time or convince you to sell – prove you’re easy to work with from the start.
#4 Be prepared
All else being equal, your preparedness going into an acquisition could decide whether you get an offer. Buyers shouldn’t have to educate you on the acquisition process – it slows everything down and adds extra work to an already exhaustive itinerary. Instead, understand all facets of the acquisition process, including due diligence, deal structures, asset transfers, and so on.
Even better, prepare an acquisition plan in advance. This might include a breakdown of assets, who owns what, social and email accounts, team directory, and so on – essentially a manual for running your business once it changes hands. Also maintain a trailing P&L statement for 24 months so it’s ready to share at the first sign of buyer interest.
#5 Be transparent
Buyers make offers for businesses they understand. De-risking an acquisition is top of their priorities and if you’re frank about your weaknesses as well as your strengths, their job is easier. Don’t share everything in the early stages, just facts material to an offer.
Yes, you might wait longer to find the right buyer, but at least you’ll have avoided wasting anyone’s time. Everything comes out in due diligence so there’s no point in hiding things to attract offers now only for the deal to collapse later. Answer all the buyer’s questions, promptly and accurately, and they’ll have the confidence to make you an offer.
#6 Set a fair valuation
Before you obtain a professional valuation of your business, you need an estimate to attract potential buyers. Now, you might be certain of hitting your growth projections, but unless you underwrite your confidence with an earn-out, a fair valuation reflects your business now, not in a year or more’s time.
Buyers are usually experienced professionals. Yours might not be their first acquisition, and some might even acquire businesses for a living. When you overestimate, you give them reasons to ignore you. That said, buyer valuations aren’t gospel: if there’s a gap, ask how they derived their numbers and negotiate if you think it’s unfair.
#7 Be flexible on terms
Don’t be afraid to assert your acquisition expectations but prepare to compromise. Let the buyer know you’re flexible. Offer seller financing, earn-outs, or whatever else you need to close the gap. Neither you nor the buyer will end up with exactly what you want, but once you make peace with that, you’ll attract acquisition offers instead of stalling them.
Deal structures are ripe for negotiation. Do you want an all-cash or equity-cash mix? 50% down-payment and 50% financing? 75% upfront and 25% financing? 60% upfront and a 40% earn-out? There are countless ways to increase your buyer pool and de-risk the acquisition so buyers feel confident about making the first move.
#8 Point out opportunities
Consider what makes your startup special. What might it achieve with a little help, whether investment, expertise, or people? Identify these opportunities and highlight them to potential buyers so they know where the growth levers are.
You’ll attract a lot more offers when you explain how the buyer will make their return on investment. If you’ve spotted opportunities but haven’t the means or will to exploit them, let your buyer know – this might be enough to pull them off the fence and into making an offer.
#9 Help post-acquisition
One way of de-risking the acquisition is to stick around after the business changes hands. No-one knows the business like you do and it might make sense to stay on for a few months while the buyer finds their feet and can run the business independently.
The buyer might also pay you for the privilege, offering you a salary, consultant’s fee, or equity in the business. And if you’re retaining equity to stay on as advisor, you might also consider a lower purchase price, which further closes the gap between your and the buyer’s expectations.
#10 Don’t stop growing
Consider a flywheel: tough to get going but full of momentum when spinning. While selling can be a time-sucking distraction, don’t let it slow your momentum. Keep acquiring customers, stacking profits, and improving products until it’s time to sign the purchase agreement. Otherwise, it’ll be harder for the buyer to build upon your success and they won’t make an offer.
What does it take to sell a business? Hard work and perseverance – both of which start before you even list your startup on the market. The more prepared and flexible you are, the bigger your buyer pool, and consequently, the more offers you’ll receive.