You’ve built a company from scratch and you’re ready to sell it. That’s a good position to be in because you could stand to make a lot of money.
The catch is that you’ll need to familiarize yourself with startup exit strategies before you start looking for a buyer. You’ll need to know how to negotiate effectively and how to identify a poor offer if you receive one.
At NorthStar Venture Partners, we work with startup owners every day. Here’s what you need to know about negotiating and evaluating offers.
Tips for Negotiating
Let’s start with negotiations. The most important thing you need to know is that the party with more information will always come out on top of a negotiation. Your job, as a startup owner and seller, is to stay one step ahead of the buyer. That means understanding everything important about your company and having relevant facts and figures at your fingertips.
Here are some other tips and tricks to keep in mind.
- Get an accurate valuation of your company. You should know what your company is worth before you begin negotiations. Remember that you’ll need to know both the value of your company intrinsically as well as what it’s worth on the market. The market value may be higher or lower than what your valuation indicates.
- Let the buyer make the first offer. Being on the receiving end of an offer puts you in a position of power. It’s the equivalent of getting a sneak peak at someone else’s cards during a game of poker. However, keep in mind that the first offer may very well be a low-ball offer.
- Don’t be afraid to use negotiating tactics. For example, there’s nothing wrong with feigning shock at how low the initial offer is. There’s also nothing wrong with countering with an offer that’s higher than what you would be willing to take.
- Know your walk away point. There are a lot of elements that go into selling a company, but you should have a minimum price in mind. You shouldn’t let the other party know what it is, but you should have that number in mind.
- Keep a list of your “must have” concessions and fight for them. It’s helpful to know what you need from the buyer. You should also prioritize your needs, so that you know what’s most important to you.
You should be prepared for some back and forth. It’s the nature of negotiations to take time. Don’t get spooked. Try to relax and go with the flow of things.
The Qualities of a Bad Offer
What are the qualities of a bad offer? You need to know before you begin negotiations, so you can walk away if it becomes necessary.
The first quality of a bad offer is that the buyer isn’t offering enough money. If you have a walk away number in mind and a potential seller won’t meet it, that’s a bad sign. That said, if you have multiple offers that are all lower than your walking price, you may need to reevaluate what you’re asking.
The second indication that you’ve got a bad offer on the table is that the offer doesn’t include a transition plan for your clients and employees. Some examples might include:
- Who will tell your customers about the sale and when?
- What will happen to your employees after the sale?
- What your role, if any, will be after the sale of your company
- What will happen to in-progress inventory or client work
A good contract will spell these things out in detail.
Another issue to consider is whether you will be expected not to compete with the company that’s buying your startup. If there is a non-compete clause included, you should be compensated for it. That’s a price that should be above and beyond the value of your company.
Finally, you should look at the contingencies of the contract. For you to be protected, the contract should include verification of approved financing for the buyer, payment of earnest money by the buyer, and details about what will happen to ongoing leases and contracts.
When to Walk Away from an Offer
There’s no one hard-and-fast rule about when to walk away from a contract. You should walk away if a contract does not make adequate provisions for the transition after the sale goes through. Your specific expectations for the transition may not be the same as another startup owner’s, but you should know what you’re willing to live with and what you’re not.
You should also walk away if the offer is below your walk-away point or doesn’t offer you fair compensation for a non-compete clause. Other reasons to walk away might be a failure to take care of your employees or the buyer’s bad reputation.
The startup exit strategies we’ve listed here can help you differentiate between good and bad offers as you sell your company.
Need an M&A advisor to help you negotiate a deal for your startup? Click here to schedule an appointment with NorthStar Venture Partners!