In 2012, I was asked to share my formula for successfully starting, scaling and exiting a company to a group of successful entrepreneurs at MIT. Four years prior, we had closed on the sale of our publicly traded company just a month before the Lehman crisis hit.
I’d like to claim I was a genius at predicting the future, but the truth is, I was guided by past wounds. In the 90s, we started an internet service provider that quickly became the largest independent provider in Canada and was considered one of the fastest-growing companies for two consecutive years.
The company went public in 1998, and we decided to merge with a private cable company while applying for a wireless license. The stock skyrocketed, surpassing $1 billion in market value. But then, in March 2000, it was announced that Microsoft would be broken up, and the Nasdaq plummeted from 5,000 to 4,000. We decided to pull our $50 million offering, waiting for the market to rebound.
3 Tips to Successfully Sell a Startup
- Get the timing right.
- Find the right buyer.
- Maximize your startup’s value by aligning operations with KPIs, letting the business run independently and establishing trust with key decision-makers.
The rest is history. The dot-com crash unfolded, taking down many companies, including ours. Fast-forward 18 months, and I sold that once $19 stock for a mere 6 cents per share.
Bad things do happen.
Just look at GameStop in 2021, whose stock price soared to $483 from $2.57 per share in just nine months, and NFTs. In the few years since then, we’ve experienced the crypto crash, tech wreck, war and hurricanes.
Knowing when to sell a company isn’t an exact science, and these are the scars that develop when you try to build, grow and sell companies. But these scars have also shaped my strategy, leading to almost a dozen successful multi-million-dollar exits and the genesis of my book Start. Scale. Exit. Repeat. Here are a few lessons I’ve learned for how to successfully sell your startup.
3 Tips to Successfully Sell Your Startup
1. Get the Timing Right
Timing is crucial, sometimes more than half of a company’s value is tied to it. Take for instance, the S&P Global E-Commerce Ecosystem Index fell by over 50 percent between July 2021 and July 2022. Many industries saw their business valuations plummet. Clearly it’s time to buy, or build. Not time to sell.
Stay tuned to the market, monitor interest rates closely and watch for a rebound in IPO activity before considering selling again.
2. Find the Right Buyer
Timing can play a big role in valuation but who you sell to can also have a significant impact. There are three types of buyers: cash flow buyers, competitors and strategic buyers. Make a list of all your potential buyers and categorize them into these three groups.
Focus first on the strategic buyers. Why? Because they will pay you considerably more than a cash flow buyer or competitor. Strategic buyers look at how the acquisition can lift their valuation. If your tech or distribution can help them, they will give you a premium for your company.
When we sold .CLUB Domains to GoDaddy Registry, we secured a premium because they could leverage our domain extension and sell it through a broader distribution channel. They valued our company more than we valued it.
If you can’t make a sale to a strategic buyer, the next best option is selling to a competitor. By doing so, they can eliminate duplicative costs, which often results in a premium for the seller. The downside is that you won’t recognize your company post sale. What you built will be assimilated into the new organization. Often employees lose their jobs and the name that you put on your business might also disappear.
Yes, the money feels good, but seeing your lifelong project change in ways most acquirers don’t appreciate can be tough
If neither strategic buyers nor competitors show interest, consider selling to a cash flow buyer. However, be cautious with this route. Many private equity firms use leverage to acquire assets, and in today’s high interest rate environment, valuation multiples tend to decrease significantly. A cash flow buyer can be multiples lower in valuation than competitors or strategic buyers.
I’ve seen too many zombie companies bought by private equity firms whose only mission is to make monthly interest payments. It can be very demotivating for your team.
3. Maximizing Value
Now that we have covered when to sell and who to sell to, let’s talk about how to maximize the value of your company upon sale.
Consider these three ways to increase your valuation upon exit:
Align Operations With Key Performance Indicators (KPIs)
Identify the KPIs that matter most in your industry and build a plan around operations to maximize these metrics one-to-two years before exit. If buyers are focused on earnings multiples, look for ways to do more with less. Cut unnecessary expenses, from subscriptions to office costs. If they prioritize growth, focus on short-term growth initiatives. Remember, however, that market expectations can shift rapidly. In 2021, eCommerce acquirers emphasized growth and profitability paths, but by 2023, valuations shifted to earnings multiples.
Let the Business Run Independently
Check your ego at the door. A business dependent on its owner is less valuable. Buyers want a self-sustaining “Swiss clock” operation, not one reliant on the founder’s presence. Consider stepping back and letting your team take the reins, highlighting their talent can become one of your strongest assets in the sale. Also, if you’re selling based on earnings multiples, consider reducing or eliminating your salary, but only if you’re genuinely stepping back.
Establish Trust With the Key Decision-Maker
Brokers and lawyers play a role, but they can also hinder progress. Identify and build rapport with the key decision-maker at the acquiring company. For example, during a prior IPO, I connected with the head of a lead institution who was hesitant due to cost. We negotiated directly, lowered the price, and ended up with an oversubscribed offering. Developing these personal connections can make all the difference in closing a deal.
When considering selling your business, there are many factors to weigh. Just don’t be the one selling your “tulip bulbs” for pennies on the dollar. Look for the signs of market froth, and remember: we’ve been through these cycles for decades. Today we may be in a dark winter; however, the ice will begin to thaw, and when it does, we should focus on finding the right buyer and taking the right steps to maximize the value upon exit.
