Selling your startup is a full-time job. As someone who’s sold two businesses already, I know how easy it is to be overwhelmed. You’re facing a tidal wave of due diligence, financial audits, and legal wrangling. Add the pressure of maintaining your business and you’ve got the perfect storm with no guarantees your boat will make it home.
But as any old sea dog will tell you, perilous waters are only dangerous to the uninitiated. The better prepared you are for an acquisition, the smoother it’ll go, leaving you financially, operationally, and psychologically stronger during negotiations.
I sold my biggest company to a private equity firm. It was a long, complex, and expensive process that took me away from what I loved most – running my business.
Successful entrepreneurship is recognizing your limits and selling while the going is good. I sold Bizness Apps because I’d taken it as far as I could. If I’d waited, I might never have found a buyer at all, leaving me stuck in an entrepreneurial dead end.
So if you want to cleave a safe path to exit and learn how to sell your startup, it’s worth considering the advice below.
I don’t want to pour salt in your coffee, but whether your buyer is a personal hero, a private equity hotshot, or the kindest person since Mr Rogers, remember their goals may clash with yours. Every stage of the startup acquisition process – and I mean every stage – is a negotiation. From the exclusivity period to the purchase price, keep your goals in mind and don’t give way unless you’re absolutely comfortable with doing so.
I recommend hiring a lawyer to help you, too. Your buyer will have at least consulted with one before negotiations and some, particularly those who can afford teams of M&A specialists, might use counsel as a weapon against you. For example, they might argue a longer survival period and larger cap if your IP isn’t watertight, or challenge your financials to push the purchase price down.
Speak to other founders
Talking to other founders can give you a sense of the market. Their experiences help shape your expectations and give insight into the startup acquisition process – what’s required of you, things to avoid, things to include, and so on. If you can, find someone you know and trust to mentor you through your first acquisition. You’d be surprised how many entrepreneurs would be honored to be asked and only too glad to help.
That said, keep in mind that no two startup acquisitions are alike. Don’t fall back on someone else’s experience in lieu of preparation. Think of other acquisition stories as case studies within a spectrum of possibilities. How well you negotiate, the needs of your buyer, and the specifics of your business will determine the nature of your acquisition. Knowing what’s possible, however, can help you identify when to push or give way during negotiations.
Know your numbers
Don’t skim this section.
Financial metrics can make or break an acquisition so it’s critical you understand them well.
Think of financial metrics as your startup’s vital signs. They can indicate strength, agility, and resilience. Equally, they can indicate a failing business, falling interest in your product or service, and a myriad of other problems, subtle or obvious.
Before you even consider entering an acquisition discussion, you must first know your numbers and how they impact the buyer’s perception of your business.
The key growth metrics that indicate the top level health of your startup are MRR and ARR. A shrinking business is seldom an attractive prospect unless the buyer wants your people or technology. Your buyer is looking for a return on investment and a healthy MRR/ARR is the first sign they’ll get one.
- Monthly Recurring Revenue (MRR)
An obvious but important SaaS metric, especially if your customers are on monthly contracts. This tells the buyer how much revenue you generate per month from subscriptions, and should be increasing over time. If you’re running a smaller business (say under $1M ARR), or have fewer years under your belt, your buyer might favor MRR over its annual equivalent for a more nuanced view of growth.
- Annual Recurring Revenue (ARR)
ARR gives an overview of the size and scale of your business. This is ideal if your subscriptions are yearly, but you can also estimate ARR by multiplying MRR by 12. In either case, ARR should increase over time to again demonstrate a growing, scalable business. Buyers may judge larger, older businesses ($5M ARR+) on LTM (last twelve months) revenue to get the big picture view.
The key operational metrics you shouldn’t ignore are churn rate, LTV, and CAC. Viewed in tandem, these give your buyer a deep understanding of your market position, competitiveness, and efficiency:
The rate at which you lose customers over a period of time. If you’re losing more customers than you replace, this number will be high. But if you can acquire new customers, or generate enough revenue from existing customers to offset losses and downgrades, churn might be negative. In any case, growth should outpace churn, but churn of 20% or more could signal a deeper problem with your product or service.
- Lifetime Value of Customer (LTV)
LTV measures the revenue customers generate over their lifetime. Viewed against the CAC, LTV can be an important sign of profitability – current or potential. A high LTV can offset a high CAC, so it’s important to understand how these two metrics interact, and the story behind them.
- Customer Acquisition Cost (CAC)
CAC measures the cost to acquire new customers. The lower this is, the better, but it may increase over time as you exhaust different channels and markets. You may justify a higher CAC if your LTV is high, but to demonstrate optimal efficiency, you should regularly review your acquisition strategy to reduce CAC.
Profit is conspicuously absent here. Many startups don’t make a profit in their early years, some intentionally sacrifice it for the sake of growth (Amazon), and some others (Uber, for example) have yet to make one.
Also, your buyer might prioritize other metrics. If your growth and operational metrics look good, for example, your buyer might have the experience and expertise to make your business profitable after the purchase.
That said, if the buyer’s ROI is conditional on your business being profitable, it’ll help the acquisition if you’re already in a profitable state.
You must also tell the story behind your numbers. How they interconnect, their changes over time, projections for the future – all of this feeds into a bigger picture, a story that your buyer wants to know.
As you’ll see in the next section, understanding what your buyer really wants from the sale will help you determine where your strengths lie.
Find out what your buyer (really) wants
Let’s state the obvious: your buyer wants a return on investment (ROI).
Understanding the method in which the buyer believes they will obtain that ROI, however, is key to your negotiations.
For example, if you own a SaaS startup, your buyer might be making a calculation as to whether it’s cheaper to buy your IP or duplicate it.
Or, if you’ve got a strong brand, it might be cheaper for a competitor to acquire your startup than to elevate their brand above yours.
Or perhaps your distribution model or demographic is particularly valuable and a buyer wants to claim greater market share.
There are many, many reasons a buyer might want to acquire your startup, and understanding that reason will reveal your leverage. Look at their past acquisitions – what did they buy and why? Speak to founders who’ve sold to them in the past. Learn about the buyer from publicly available information.
What reasons did the buyer give themselves? Were they realistic and plausible? There might be a metanarrative to the acquisition that will give you the upper hand so do your homework in advance.
Get your teams behind you
Just because someone is interested in buying your startup doesn’t mean they will. You need to keep your company moving towards its goals right up until the end. Yes, that means doing two jobs at once – growing your startup and selling it – and unless you’re a superhero who never sleeps, it will be impossible to do so without the help of your employees.
As soon as negotiations get serious, it’s time to let your teams in on the news. One, it gives them time to prepare for any impact on their personal and professional lives. And two, they can assist you with due diligence and work to keep the company growing while you prepare to hand the reins to a new owner. Trust me, you’ll need all the help you can get.
Speaking of which, don’t be afraid to splash out on expert assistance. In fact, I immediately recommend bringing in outside expertise at the earliest sign that a serious buyer has come to the table. This usually comes in the form of a “Letter of Intent” for startups which goes over general terms of the deal and then the larger agreement is a “Stock Purchase Agreement” or “Asset Purchase Agreement”. CPA firms, M&A lawyers, and valuation services do come at a premium, but their experience can cut timelines and unnecessary work.
Figure out what you want
I’m not just talking about the purchase price. Understanding why you want to sell and what you’ll do afterwards is critical to avoid disappointment. Think carefully about what it means to give up your business, beyond the money. Do you have another business idea to pursue? Are you taking a break to focus on family and friends? Are you moving to a tropical island to write that novel you’ve been planning for the last decade?
I’m deadly serious here. Understanding what you want from this sale will determine its success, can help you know where to bend and stand your ground in negotiations. What’s the buyer going to do with your company? Are your employees in safe hands? Do you want to be involved after the acquisition, and if so, how? Answer these questions before you set foot in the negotiation room and you’ll walk away without regrets.
You’d be surprised how emotional a startup acquisition process can be. I can guarantee you a few tears and sleepless nights. But I’ve never regretted an acquisition yet and don’t intend to. And like me, if you follow the advice above, you’ll find the acquisition journey just as rewarding. Good luck to you.
Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes Wall Street Journal, Inc. Magazine, and Entrepreneur Magazine, as well as prominent industry blogs such as Mashable, TechCrunch and VentureBeat.