A VC once told me that “startups are bought, not sold.” Whatever the hell that means.
If you believe what you read in TechCrunch, you’d be reasonable to assume that a burplap bag full of money will appear in reception exactly 36 months following launch.
While that may be true for a fortunate few, for the rest of us the startup journey is more of a slog. That includes an exit.
There are tons of blog posts on how to begin the journey (fundraising, hiring, product development).
But if you’re in the 97% of businesses that don’t IPO or get acquired for a ton of money, how do you end the journey?
Here are the 12 steps to sell your startup::
1) Decide You’re Going to Sell
Stop “considering options” or “having conversations.” Either you’re going to sell it or you’re not. Approach this process with the same level of resolve that you applied to building your business. Give yourself a timeline and stick to it. Selling, much like raising money, is a full-time job.
2) Update Your Deck & Financials
Business sale decks are basically the same as fundraising pitch decks. Illustrate the opportunity, support it with data, and include slides on team, product, competition, growth, and financing. Just like your fundraising pitch, you’re telling a story about an opportunity for them to make a lot of money. Pageantry for sure, but no bullshit; every inconsistency found in your story is negotiating leverage for your buyer. Make sure your financials are clear, clean and understandable. Get a professional CFO to review them and be able to explain them if called upon.
3) *Maybe* Engage a Banker
If you honestly, truly believe that your business can be sold for greater than $5M, then it makes sense to engage a banker. A good banker will save you time, widen the pool of potential buyers, and *hopefully* negotiate better terms than you might be able to. They may get you a better valuation (they’ll certainly claim this) but it’s probably impossible to know. If you think the business will be sold for less than $5M then I would suggest running the process yourself. The fees bankers charge relative to the deal size make sub $5M deals unattractive for everyone.
4) Make a List of Buyers
Generally speaking there are four types of buyers::
#1 Strategics - these are businesses who see "1+1=3" value in acquiring your business. They will pay at least a market-comparable multiple for your business (and maybe a lot more) and see that valuation as a bargain relative to what your startup will contribute to their mission. Who are the strategics in your space? It’s impossible for me to say, but look for public companies (or very well capitalized private companies) that live at the top of your space (or adjacent spaces).
#2 Competitors. You know who they are. They know who you are. They may want your client list, your team, or simply to remove you from the market. These assets have knowable values so the pricing discussions are usually rational rather than based on any aspirational valuation. After all, they understand the unit economics of the business better than just about anyone. So don’t expect them to overpay by a penny.
#3 Acqui-Hire. These deals are harder to pull off than they used to be. It’s something to consider if you have a hot-shit engineering team with MIT/Carnegie/Stanford (et al) degrees with knowledge of the technology du jour (today, it’s AI). There articles here and here about what these deals might look like. Expect a three year employment contract and an agreement to dissolve your business.
#4 Private Equity. This is a relative new entrant to the pool of startup buyers. The strategies of these acquirers vary from financial (e.g. they want to buy the business, reduce expenses, and maximize revenue) to growth (e.g expand the business). There are lots of PE firms out hunting for opportunities; most won’t look at deals below $5M or $10M because their fund sizes are $100M+ and it’s just not efficient to do $3M deals. Try to find PE firms that are investing in and around your space, and whose explicit thesis aligns with your business. Like VCs, they will take meetings just to learn and you can end up wasting a lot of time with these guys.
5) Write a “Teaser” and Send it to Your Target Buyers
A teaser is a one-pager describing the business and the opportunity. Here’s a decent example of a teaser to work from. It needn’t be this ugly or dry, but the fundamentals are basically right. You might not want to send it to all of your targets at once; start with the most likely acquirers and work out from there.
6) Schedule Initial Calls to Weed Out “Tire Kickers”
Find out if the potential buyer has the capital, the intent, and the time to do a deal within your timeline. Momentum is the ultimate “tell,” so if they’re slow to respond and to schedule it’s sign they may not be truly interested. The opposite is equally true.
7) Get an NDA in Place
Use a templated NDA, or even one that the buyer provides. Don’t get caught up negotiating terms here - total waste of time.
8) Provide Your Financials, Product Overview & Pitch Deck
Make sure it’s clean and ready to go. You can use a data room. Or you can just use Dropbox. Set aside a half day to discuss everything in depth with each buyer. This is your chance to pitch the business and it’s future potential to the prospective acquirer.
9) Solicit LOIs with a Deadline
~2-3 weeks from the pitch meeting is a reasonable time frame. Make sure there is a close date on the LOI.
10) Call your M&A Lawyer
When the LOIs arrive, it’s time to get your lawyer engaged in the process. You want a transactional lawyer with experience executing smallish transactions. Stay away from big law firms; try to find a boutique shop with low overhead and reasonable hourly rates. I like Paradigm Counsel A sub $5M deal should be able to get done for less than $30k in legal fees, assuming the acquirer is pragmatic in their approach. Remember - the lawyer works for you. You are managing the process, not the lawyers. So don’t be shy about keeping your lawyer focused on the essentials needed to close.
11) Due Dilligence
Be prepared for extensive questions about your technology, team, assets, liabilities, and contracts. This part of the process is painful. You can prepare by gathering the materials in advance using a checklist like this. DD is a trying and usually highly frustrating experience. Do yourself a favor and keep your frustration contained under a big smile. These are your future partners; they don’t want to get in bed with a surly CEO who is hard to work with. Let me say it again: suck it up, smile, and focus on moving the deal forward.
12) Close
I have no good advice for this part of the process other than to make sure it happens.