How to get your startup or private business sold and acquired by a larger company
Do you have a profitable small business or startup that you would like to sell and get a financial return to retire or move on to a new venture? Selling a privately held small business is a complex venture that involves several considerations. It can require that you enlist an M&A banker / broker, accountant, and/or attorney as you proceed. Whether you profit will depend on the reason for the sale, the timing of the sale, the strength of the business’s operation, and its structure. A Forbes article on this topic stated that “selling a business requires a lot of planning. As you begin the process, it’s important to focus on the step you’re in and the long-term objective. Otherwise, you may end up making short-term decisions that go against your ultimate plan.” If you are a software product startup business with a scalable technology offering then you should be looking at larger competitors where your product or team can integrate with their products or solution offerings.
Some Key takeaways
- Preparing for the sale at least a year or more in advance is recommended, as it gives you time to improve your financial records, customer base, and other factors that can make the business more successful
- Organize your financial statements and tax returns dating back a few years and go over the details with an accountant.
- Putting the right investors on your board can make all the difference in an exit. More than just bringing expertise and money to the table, they can make the right connections to secure your exit
- Layout a roadmap of where this acquisition can take your company, the products, the integration and how your foundational assets will create value for an acquirer
- Create a bidding war, competition helps to create interest, adds motivation, increases what companies are willing to pay and makes the offers stickier
Get organized and know your numbers
Another Forbes contributor suggests that the 1st step is to get your business financials in order. Clean up QuickBooks, prepare financial statements, projections, and ready key metrics for your industry. Understand the numbers. What is the financial position of the business? Outstanding liabilities? Relative growth in gross sales and net income? The number of customers and relative size? Alignment with your forward projections?
Again, this is why it’s best to start as early as possible, so you have time to make adjustments. Perhaps you use cash to refinance, pay down debt, or cash out minority shareholders. Even if you don’t need to make any substantive changes, messy or incomplete books can kill the deal before it even gets started. It may also be worth considering an independent audit of your financials to help give buyers confidence.
Start getting your team of advisors assembled
When selling a business, having a team of trusted advisors around you is crucial. Here’s why: chances are you haven’t sold a business before and likely won’t again. We don’t know what we don’t know…and you only have one shot to get this right.
In planning for the sale, get your team of business and personal advisors in place ahead of time.
Your business advisory team may consist of: a business broker/investment banker, valuation expert, accountant, tax advisor, and transaction/M&A attorney. On the personal side, your financial advisor, estate planning attorney, and CPA/tax advisor should be involved throughout the process.
There’s a lot of complexity to consider: structure of the deal, ways to retain key employees, tax planning, cash flow planning post-close, etc., so it’s really important to work with a team of specialists that can help you navigate your options.
What’s your business worth?
Forbes contributor Kristina Mckenna writes that to get a true understanding of the real-world value of your business in the current market is best achieved by working with:
- a valuation expert,
- business broker,
- or investment banker
When wondering how to sell your business, ask what buyers would be willing to pay today?
It may be helpful to discuss different estimated valuations under various sale structures too. For example, the valuation of the company if sold using an employee stock ownership plan (ESOP) likely wouldn’t be as high if the business was sold to a competitor. Similarly, selling a non-controlling stake in the business would be less desirable than a full acquisition.
As you and your advisory team consider the best approach to selling your business, it’s helpful to consider how the deal structure can affect valuation. Forbes contributor Alejandro Cremades stated that “M&A experts specialize in building interest, value and excitement, and gaining momentum in selling your business.”
They can also prove invaluable in negotiating some of the finer points. Leverage their time and knowledge, so that you can stay focused on what you do best while achieving a larger exit.
You also want to remove yourself from discussions around price. The reason behind this is that you want to always stay on the good side. Bankers could play the role of bad cops which ultimately helps with increasing the overall outcome of the deal.
There are probably three types of acquisitions:
- Acquihire (want team, not business or product) acquihire is nothing but just a subset of acquisition. Where acquisition happens to buy the whole company, acquihire is carried out for buying a company just for their skilled workforce. In 2017 Servicenow acquired Telepathy a design studio, to bring in their talented team to build better customer experiences on their software.
- Product/“Trade Sale” (want the product or to repurpose the product, the acquirer has distribution, in 2020 Google acquired Looker, a unified platform for business intelligence, data applications, and embedded analytics, so they could integrate it into their suite of software products for enterprise customers.
- Business “left-alone” (give existing business more resources to grow faster), in 2006 IAC, acquired the video platform Vimeo and it owned it letting it grow and mature.
Seek the Right Type of Acquirers
While there are some exceptions, getting acquired is typically a process that requires meeting, getting to know, and developing a relationship with key dealmakers. That’s going to mean a lot of wasted time and resources if you aren’t spending it with the right players.
As a CEO you have an obligation to get the most out of what you’ve got, and no one has time to waste. There are two main types of possible buyers of businesses.
The first type is the strategic acquirers who are looking to add something to their existing business. For example, product, growth, revenues, profitability, efficiency, or new demographics.
Then there are the financial buyers who are purely buying your business to add a cash flow money-making investment to their portfolio of companies.
Strategic buyers have been known to make acquisitions of startups without revenues, and sometimes without a finished product and honed business model. Financial buyers on the other hand, are looking for proven cash flow and returns.
Getting to Know Potential Buyers in Advance
A serial entrepreneur and now investor Alex Rampell, who has sold a few startups explained on Twitter, especially for Acquihires and Product-oriented sales, you need to get to know your prospective “buyers” *far in advance* of “needing” or wanting to sell your company. Two independent variables exist: when they can/want to buy, and when you want to sell…rarely do they align!
Does it Fill in a Gap or Weakness of Larger Companies?
The serial startup entrepreneurs who seem to be best at consistently launching and selling ventures for big sums are those who start out building a solution that solves the weaknesses of larger players in their space.
Buyers aren’t companies, they’re *people at companies*, and generally people with P&L responsibility. Often somebody climbing the corporate ladder who wants to make a big splash and is anxious to ship something taking way too long internally. Or a new VP who needs a team ASAP.
Take for example when the enterprise design software company Adobe, announced a 20 billion acquisition of a popular collaborative design tool called Figma. According to Seeking Alpha, Adobe knew that Figma was a threat and was investing in collaborative tools, but quickly shifting its core offerings toward a real-time collaborative environment proved to be more difficult than expected. The acquisition of Figma is not an acquisition of an Adobe XD competitor, but more so of a whole new strategy to collaborate, which is where the industry is shifting.
Mr Rampell also points out that almost every large company has a corporate development person/team. Their job is to close deals, not to ideate – once you are “bought” you’re not working for the VP of Corp Dev. You’re working for whatever division and whatever person wanted your product. Focus on GMs/PMs/VPs.
Layout a Roadmap for Them
Potential buyers aren’t going to make you and offer if they can’t see the value and how compatible your ventures is. If you are serious about selling, you may have to help them see that path and vision.
Layout a roadmap of where this acquisition can take your company, the products, the integration and how your foundational assets will create value for an acquirer.
Focusing on product/trade-sales: the key thing is to figure out where 1+1=3, or how your product might fit within the org. Mr Rampell explained at his own startup, TrialPay “we showed ads around transactions — what if PayPal could stick our ads in every purchase receipt? Would generate >$1B…that was our pitch.”
Work Your Plan B, Like it’s Your Plan A
Your main goal right now may be to get this company sold. Yet, that may be much more likely to happen, and at the best possible price, if you clearly have other options, and don’t need to sell. Relationships matter. You can’t start this process with 3 months of cash. You should be thinking about this even if you plan to conquer the world — get to know key decision makers/GMs at every potential acquirer because…you never know.
As a founder, you need to be unattached to the outcome.
If you can, bootstrap and get profitable with real revenues. You can always raise money if you have a proven business that can produce consistent cash flow and returns.
Finding a Buyer and Closing a Deal
Finding a buyer is a huge undertaking that could stretch out several years. Once a good buyer is found, there are a series of financial screenings and other steps that need to be taken to keep the process moving. It usually takes between 3-12 months to close a deal. While an active deal is in process, it’s important for the business to operate as planned. Selling a business is time-consuming for business owners, even when they have an advisory team. But during this time it’s essential to ensure you hit revenue projections, profitability goals, and other key financial metrics. Other considerations to consider:
- Get potential buyers to sign a non-disclosure agreement
- Work with your business advisory team to make sure you’re not disclosing more than you should early in the process
- A letter of intent (LOI) is a mostly non-binding document outlining the proposed terms of the deal. The purchase is still far from completion!
- Time is your enemy – changes inside the business (departure of key employees) or outside (regulatory risks, industry shifts) can kill the deal
- Work with your M&A attorney and CPA to discuss the tax implications of different deal structures and your possible tax liability (examples: asset vs stock purchase, Section 1202 gain exclusion, state tax implications)
What to do with the money from the sale of your business?
If you close the deal and successfully sell your business, what to do with the money from the sale of your business? You’ll also want to consider other aspects of your situation, such as estate planning, gifting, trusts, and asset protection. Whether you plan to fully retire, start a new company, or something in between, you’ll want to get a plan in place to maximize the value of the proceeds. Take some time—at least a few months—before spending the profits from the sale. Create a plan outlining your financial goals, and learn about any tax consequences associated with the sudden wealth. Speak with a financial professional to determine how you want to invest the money and focus on long-term benefits, such as getting out of debt and saving for retirement.
When you own a business, your net worth is highly concentrated in one asset. Selling gives you the opportunity to diversify your investments and create an income stream for retirement. If your company was producing significant cash flow, it’ll be critical for you to assess whether the sale proceeds will allow you to maintain that lifestyle.
A sale of a business is a highly complex matter from a legal and tax perspective. Don’t proceed without getting expert advice beforehand. Working with a CPA professional can help you navigate some of the complex scenarios and find a strategy that can help to reduce the amount you owe in taxes. If you have any questions feel free to reach out for a free consultation.