Selling a startup company is a big decision, and one you shouldn’t undertake lightly. Even if you founded your company with the intention of selling it quickly, it’s still important to understand everything that goes into the startup acquisition process — especially the risks and benefits. Unlike a lot of M&A advisors, we’ve been on the seller’s side of the table. That means we’ve got a deep understanding of the stakes at hand when you’re looking to sell your company. Here’s what you need to know:
Startup Acquisition Pros
Let’s begin with the pros of startup acquisition for founders like you.
- Selling your business to another company puts you in a position of power because you have something that the other company wants. You’ll be in a position to negotiate a top price because you’ll have the upper hand — especially if your company is in good shape financially.
- If you handle the negotiations properly, your bargaining power may actually increase during the discovery process. You are essentially marketing your business to potential buyers. This means a lot of their perception of what your business is worth is in your hands.
- A successful startup acquisition can cement you as a mover and shaker, someone who knows how to get things done. Building your reputation can add to the value of any future businesses you launch or deals you make.
- In some cases, you may even be able to negotiate what happens after the acquisition. For example, we know founders who have negotiated:
- Ongoing employment contracts for key employees
- Advisory roles for themselves
- Stock options if they feel that shares of the acquiring company are worth having
- Royalties for future product sales
- Finally, a successful acquisition can get you the working capital you need to fund your next venture, save for early retirement, and achieve any other financial goals you have.
The bottom line is that if you handle a startup acquisition properly, with help from a professional M&A advisor, the advantages to you can be (and will be) significant.
Startup Acquisition Cons
While the advantages of startup acquisition for business founders can be worthwhile, we’d be remiss if we didn’t also warn you about some potential downsides of selling your business to another company. Here they are.
- In the event that you have only one company interested in your startup acquisition, you will not have the same bargaining power you would have if you had several buyers competing for your attention. At least some of the perception of your company’s value will be market driven — and if there’s only one buyer in the market, you won’t have the same leverage you might otherwise have.
- Even if there are several buyers, your bargaining power will diminish after a letter of intent is signed. Why? Because the company that signed the letter will understand at that point that they are the preferred buyer — and the leverage shifts as a result.
- If you’re an inexperienced seller, you will need to be on guard because some unscrupulous buyers may try to outmaneuver you. Remember that large companies that acquire startups regularly are likely to have a dedicated M&A department at their disposal as well as a team of high-priced lawyers. Their goal is going to be to buy your company for the lowest price possible.
The cons listed above are just a few of the things we wish we’d before we sold our companies.
What Can You Do to Protect Yourself During a Startup Acquisition?
The key to a successful startup acquisition is knowing how to protect yourself. Here are some pointers.
- Understand what your company is worth. Business valuation can be tricky for startups, so we suggest hiring a pro to assess your business and help you understand what you can reasonably expect to be paid for it.
- Do your own research before talking to buyers. Hiring a professional to value your business doesn’t absolve you of doing the due diligence necessary to protect yourself. Make sure you understand what’s happening in the market and how people perceive your company before you move into negotiations.
- Hire a professional M&A advisor with experience on the seller’s side of the table to represent you. We can’t overstate this enough. We talk to entrepreneurs every day. They’re smart and savvy, but they’re not M&A experts. You need a pro in your corner.
The last tip is the one we want to drive home. NorthStar Venture Partners was founded because we want founders like you to exit your startups successfully and without leaving money on the table.
Ready to sell your startup? Let’s talk. Click here to learn more about how NorthStar Venture Partners can help.