Andrew Gazdecki is the Founder of MicroAcquire. Former CEO & Founder of Bizness Apps and Altcoin (both acquired).
You’ve probably heard the phrase, “Most startups are bought, not sold.” In other words, if you create a good enough product, the likes of Google will show up with a fat check for you to sign. The problem is, for most founders, it’s a dream.
Startups are sold — and with great effort. OK, you might be in the tiny percentage to get gobbled up by Google, but do you want to play those odds?
Identify your goals, prepare for and derisk the acquisition for the buyer, and 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 sell a business you’ve spent years building? When you prevaricate or enter 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?
Certainty simplifies early discussions, clearing the way to an offer. But if you’re doubtful, forget about acquisition and focus on running your business. Your day will come.
2. Ensure you have a sellable business.
Even if you’re pre-revenue, you 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 use for. Instead, prove your idea has a product-market fit.
Likewise, getting acquired isn’t the solution to revenue or profit woes. If either is declining, fix the underlying causes 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. You attract more offers when you know what motivates them. Every year, a new generation of entrepreneurs gets ready to exit, and you’re competing on product and attitude. Be open, honest and collaborative if you want to stand out from the crowd.
For example, tell buyers 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.
4. Be prepared.
Offers go to the prepared. Study the acquisition process, including due diligence, deal structures, asset transfers and so on. Buyers don’t want to educate you on acquisitions — it slows everything down and adds work to an already exhaustive itinerary.
Even better, prepare an acquisition plan in advance, including assets, ownership rights, social and email accounts, team directories and so on. 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. Derisking an acquisition is at the top of their priorities, so be frank about your weaknesses as well as your strengths. Don’t share everything in the early stages — just facts material to a potential offer.
Everything comes out in due diligence, so there’s no point in hiding things to attract offers 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, 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.
When you overestimate, you give buyers reason to ignore you. That said, buyer valuations aren’t gospel. If there’s a gap, ask how they derived their figure 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. Offer seller financing, earn-outs or whatever else you need to close the gap.
Deal structures, for example, are ripe for negotiation. Do you want an all-cash or equity-cash mix? 50% down-payment and 50% financing? 75% upfront and 25% earn-out? There are countless ways to increase your buyer pool and derisk the acquisition so buyers feel confident about making the first move.
8. Point out opportunities.
What might your startup achieve with a little investment, expertise or people? You’ll attract more offers when you explain which growth levers to pull. When you spot these opportunities but lack 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 derisking the acquisition is to stick around after the business changes hands. No one knows the business as 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 growing, earning and improving 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.