Selling your startup is a full-time job. As someone who\u2019s sold two businesses already, I know how easy it is to be overwhelmed. You\u2019re facing a tidal wave of due diligence, financial audits, and legal wrangling. Add the pressure of maintaining your business and you\u2019ve got the perfect storm with no guarantees your boat will make it home.<\/p>\n\n\n\n
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\u2019ll go, leaving you financially, operationally, and psychologically stronger during negotiations.<\/p>\n\n\n\n
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 \u2013 running my business.<\/p>\n\n\n\n
Successful entrepreneurship is recognizing your limits and selling while the going is good. I sold Bizness Apps<\/a> because I\u2019d taken it as far as I could. If I\u2019d waited, I might never have found a buyer at all, leaving me stuck in an entrepreneurial dead end.<\/p>\n\n\n\n So if you want to cleave a safe path to exit and learn how to sell your startup<\/a>, it\u2019s worth considering the advice below.<\/p>\n\n\n\n Negotiate everything<\/strong><\/p>\n\n\n\n I don\u2019t 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 \u2013 and I mean every<\/em> stage \u2013 is a negotiation. From the exclusivity period to the purchase price, keep your goals in mind and don\u2019t give way unless you\u2019re absolutely comfortable with doing so.<\/p>\n\n\n\n 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\u2019t watertight, or challenge your financials to push the purchase price down.<\/p>\n\n\n\n Speak to other founders<\/strong><\/p>\n\n\n\n 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 \u2013 what\u2019s 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\u2019d be surprised how many entrepreneurs would be honored to be asked and only too glad to help. <\/p>\n\n\n\n That said, keep in mind that no two startup acquisitions are alike. Don\u2019t fall back on someone else\u2019s 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\u2019s possible, however, can help you identify when to push or give way during negotiations.<\/p>\n\n\n\n Know your numbers<\/strong><\/p>\n\n\n\n STOP.<\/p>\n\n\n\n Don\u2019t skim this section. <\/p>\n\n\n\n Financial metrics can make or break an acquisition so it\u2019s critical you understand them well. <\/p>\n\n\n\n Think of financial metrics as your startup\u2019s 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. <\/p>\n<\/blockquote>\n\n\n\n Before you even consider entering an acquisition discussion, you must first know your numbers<\/em> and how they impact the buyer\u2019s perception of your business. <\/p>\n\n\n\n The key growth<\/strong> 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\u2019ll get one.<\/p>\n\n\n\n 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\u2019re 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The key operational<\/strong> metrics you shouldn\u2019t ignore are churn rate, LTV, and CAC. Viewed in tandem, these give your buyer a deep understanding of your market position, competitiveness, and efficiency:<\/p>\n\n\n\n The rate at which you lose customers over a period of time. If you\u2019re 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. <\/p>\n\n\n\n LTV measures the revenue customers generate over their lifetime. Viewed against the CAC, LTV can be an important sign of profitability<\/strong> \u2013 current or potential. A high LTV can offset a high CAC, so it\u2019s important to understand how these two metrics interact, and the story behind them. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Profit is conspicuously absent here. Many startups don\u2019t 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.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n That said, if the buyer\u2019s ROI is conditional on your business being profitable, it\u2019ll help the acquisition if you\u2019re already in a profitable state. <\/p>\n\n\n\n You must also tell the story behind your numbers. How they interconnect, their changes over time, projections for the future \u2013 all of this feeds into a bigger picture, a story that your buyer wants to know. <\/p>\n<\/blockquote>\n\n\n\n As you\u2019ll see in the next section, understanding what your buyer really wants from the sale will help you determine where your strengths lie. <\/p>\n\n\n\n Find out what your buyer (really) wants<\/strong><\/p>\n\n\n\n Let\u2019s state the obvious: your buyer wants a return on investment (ROI). <\/p>\n\n\n\n Understanding the method in which the buyer believes they will obtain that ROI, however, is key to your negotiations. <\/p>\n\n\n\n For example, if you own a SaaS startup, your buyer might be making a calculation as to whether it\u2019s cheaper to buy your IP or duplicate it. <\/p>\n\n\n\n Or, if you\u2019ve got a strong brand, it might be cheaper for a competitor to acquire your startup than to elevate their brand above yours. <\/p>\n\n\n\n Or perhaps your distribution model or demographic is particularly valuable and a buyer wants to claim greater market share. <\/p>\n\n\n\n There are many, many<\/em> reasons a buyer might want to acquire your startup, and understanding that reason will reveal your leverage. Look at their past acquisitions \u2013 what did they buy and why? Speak to founders who\u2019ve sold to them in the past. Learn about the buyer from publicly available information. <\/p>\n<\/blockquote>\n\n\n\n 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.<\/p>\n\n\n\n Get your teams behind you<\/strong><\/p>\n\n\n\n Just because someone is interested in buying your startup doesn\u2019t 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 \u2013 growing your startup and selling it \u2013 and unless you\u2019re a superhero who never sleeps, it will be impossible to do so without the help of your employees. <\/p>\n\n\n\n As soon as negotiations get serious, it\u2019s 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\u2019ll need all the help you can get.<\/p>\n<\/blockquote>\n\n\n\n Speaking of which, don\u2019t 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 \u201cLetter of Intent\u201d for startups<\/a> which goes over general terms of the deal and then the larger agreement is a \u201cStock Purchase Agreement\u201d or \u201cAsset Purchase Agreement\u201d. CPA firms, M&A lawyers, and valuation services do come at a premium, but their experience can cut timelines and unnecessary work. <\/p>\n\n\n\n\n
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