I’ve had firsthand experience with both buying and selling companies. Buying two companies and selling three were great learning opportunities. I know enough to be dangerous. If you are ready to start looking for the exit sign, I highly recommend the article on TechCrunch What every startup founder should know about exits by Benjamin Joffe and Cyril Ebersweller.
But the first question in this process is how do you know you are ready to sell the company? Surprisingly the article skips over this important step. There are several signals to listen to about selling your company. Selling the company is a CEO job, aided by your CFO, if you even have one! In my day every VC-backed company had to have a CFO – if only to watch over the millions of dollars in the startup’s checking account. But today?! Uber just hired their first CFO recently! One reason is that there are many CFO’s for hire, either through an agency or directly. So it shouldn’t be a problem for you to find one.
- Venture is out of cash, can’t raise any more and will have to shut the company down if you can’t sell it. This is the worst case, but not uncommon case.
- Need more capital to grow. Perhaps you are in a capital intensive business but one that investors are leery of. So if you don’t grow eventually you will have to sell or go under.
- You and your co-founders have been at it a very long time. You’re tired and worn out. Perhaps infighting and/or staff attrition are creating havoc. People want out.
- Venture is doing fine but you just were given an offer you can’t refuse. CEOs have a fiduciary responsibility to do what is best for the shareholders. So it’s your duty to bring this opportunity to your Board.
- You lack the capital to be an acquirer. By building strategic alliances in your market over several years you have seen that growth of companies in your market is largely through acquisitions. Since you lack the capital to be a buyer you will need to be a seller. Look for being acquired by a company that does acquisitions exceptionally well, like Cisco or Thomson Reuters, that you would enjoy working for after the sale is over.
There may well be other reasons, but as you can see from this list three out of five come from negative scenarios, only two from positive.
Ever heard of the Boy Scout’s motto? It’s Be Prepared! In the case of mergers and acquisitions that means from the day you incorporate your venture you should be prepared to be acquired. That does not mean your goal or purpose is to sell your company! However, it is a highly likely option. In 2016 97 percent of exits were M&As. And most happened before Series B.
As George Patterson, managing director at HSBC in New York said, “Good tech companies are bought, not sold. The question is thus: how to get bought?”
Patterson says it’s important to understand how mergers and acquisitions actually work; how to prepare a startup for an exit; and how to develop a “feel” for the market you’re exiting through and into.
There are five types of acquisitions according to Mark Suster, managing partner at Upfront Ventures:
- Talent hire ($1 million/dev as a rule of thumb — location matters)
- Product gap
- Revenue driver
- Strategic threat (avoid or delay disruption)
- Defensive move (can’t afford a competitor to own it)
As you can see, three out of five are driven by negative scenarios for the buyer! This is no coincidence. Evidence shows that most acquisitions fail. That’s a deep subject I won’t get into here. But if you are selling you are best off being a talent hire or revenue driver.
- Do everything by the book. Your CFO or freelance CFO must have experience in acquisitions! Your lawyer and CFO will make sure you do things that will make it easy to sell the company, like a clean capitalization table and incorporation as a Delaware C-Corp. Use of an accounting system that is set up correctly and maintained assiduously. NDAs with all employees and significant others.
- Make sure your IP is as clean as your cap table. That means that someone in the company on the operations side should be in charge of tracking all IP activity on your behalf (trademarks, copyright, patents) and that you are conforming to all Ts and Cs of any business arrangements your venture is part of, from your office lease to a distribution agreement. Buyers performing their due diligence will want easy access to a complete, well-organized set of all documents pertinent to your IP and that of others, such as software licenses.
- Manage expectations. Everyone in the company should know that the sale of the company is one of several possible scenarios. Keep in mind, “No surprises!” But you don’t want your staff looking over their shoulders constantly trying to spot the buyer, just as you don’t want them trying to figure out how much they will be worth in the event of an IPO.
- Know your market. You and your management team should get familiar with possible buyers through your business development or strategic alliance initiatives. In fact this is one of the best way to be bought, as you can date before you marry.
As I wrote about previously, in the post Why I don’t like hearing about exit strategies, …Your job is to build a great company. If you do that, the exit strategy will take care of itself. And if you don’t … the exit strategy will also take care of itself.” So don’t let the idea of an exit be a distraction to you or your team.
Mentorphile 