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Startup M&A Advisory

How to Sell Your Startup Without Leaving Money on the Table

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Almost every founder dreams of exiting their startup with a profitable sale so they can move on to their next venture. The decision to sell your startup is an important one that comes with many risks, but even more rewards. The key is knowing how the M&A process works as a founder on the sell-side. Having a strategy and understanding the process is crucial for getting the best deal possible.

 

At NorthStar Venture Partners, we understand what it’s like to sell a startup because we’ve done it ourselves. When you’re armed with the right information -- and an advisor who knows what it’s like to sell a business -- you can be sure that you won’t be leaving money on the table.

When is it Time to Sell Your Startup?

When is the right time to sell a startup? That’s a question we hear from a lot of founders, and it’s crucial because timing can have a huge impact on the transaction process. In fact, understanding when to sell your business should be a top priority if you want to plan a successful (and profitable) exit.

 

From our own personal experiences with exiting startups, we know the process can be confusing. While there’s no one formula that works for every company, there are some commonalities that can help you. Here are some questions to ask yourself to determine if it’s the right time to sell your startup.

  1. Do you have an accurate business valuation?

    There’s no point in selling your business if you don’t know what it’s worth. That’s a good way to wind up settling for less than you should. If you don’t know what your business is worth, you won’t know what represents a fair price.

    Valuing a business can be tricky at the best of times. We’ll provide you with some basics on this page, but you should consider hiring someone to value your business and decide if the time is right to sell.

  2. Does Your Business Have a Solid Reputation?

    Your business doesn’t necessarily need to be turning a huge profit to be sellable. In fact, sometimes a business’s reputation can be enough to make it worth buying even if sales (and profits) are down.

    In other words, if you’ve built a strong brand that people trust, it may be a good time to sell your business. Branding and reputation are intangibles that can add to the value of a company and make it attractive to buyers. If you haven’t spent much time building your company’s reputation and authority, it may not be time (yet) to sell.

  3. Is Your Business Poised for Growth?

    It’s not uncommon for someone to acquire a company despite financial troubles and lack of profitability, but the circumstances need to be right. Primarily, the prospective buyer needs to see the potential of profit in the future.

    If you’re poised for growth because you’ve got a product that’s taking off or the promise of big orders in the pipeline, it can indicate a good time to sell your business. Any potential buyers will take the likelihood of future profits into consideration when making an offer, and that can mean a profitable exit for you.

  4. Is the Market for Businesses Like Yours Hot?

    In any sales situation, the law of supply and demand applies. You might have a fantastic business, but if the market is stodgy, it’s unlikely that anybody will be willing to buy your company. Even if it looks great on paper.

    By contrast, in a frothy market, even companies that aren’t in great shape can sell at peak prices. The demand is high, which means you can ask a higher price than you might be able to in other conditions. Ignoring the market is a good way to miss out on a sale. Remember that markets are shifting constantly. A slow market now could turn into a favorable one tomorrow.

  5. Do You Have a Unique Product?

    Innovation is one of the biggest drivers of startup sales. Even in a less-than-ideal market, a business with a terrific product that people want can still grab a top price. 

    Sometimes, entrepreneurs can turn a significant profit even if they haven’t done much to build their business reputation or establish a strong brand. When that happens, it’s inevitably because they have a product that’s so innovative that investors can’t resist it — and they’re willing to overlook issues that might otherwise hinder a sale.

  6. Do You Have a Great Offer?

    Sometimes, the decision to sell is an easy one. There’s money on the table and it’s an offer that’s too good to turn down — a Godfather offer, as we like to call them

    We’d be the first ones to tell you that startup sales can be as much about luck as anything else. You may not have planned to sell your company, but if the right offer comes along you should consider it. After all, it may be an opportunity to turn a quick profit that you can sink into your next venture.

    There’s no magic formula to use to determine if you should sell, but answering these questions may help you determine when to sell your business.

Creating Your Startup Exit Strategy

Before you sell your startup, you need an exit strategy. Your strategy will help you determine the best way forward. There are multiple factors to consider, including what type of exit you want and how to achieve your goals.

The Differences Between IPOs and M&As

There are numerous routes founders can take when exiting their companies, with M&A and IPO being popular options. Determining which strategy is best for your company relies heavily on the current state of your startup and your future goals. 

There are some key differences between an IPO and M&A, and they may help you understand which exit strategy is best for your company.

  1.  M&A represents an ending for your company while an IPO is a beginning of sorts. If you opt to sell your company to another organization, you’re turning your company over to the buyer. With an IPO, you’re selling public shares based on the idea that you and your team will continue to run the company.
  2.  Acquisitions typically generate more revenue than IPOs. With an acquisition, you’re selling your business for a multiple of its revenue. IPOs are valued more conservatively. If you need to earn enough money to pay back your angel investors, then an acquisition is probably preferable to an IPO.
  3.  With an acquisition, you may have working capital left after repaying your investors to fund your next venture. That’s a plus for founders who already have their sights on their next big idea.
  4.  As a rule, acquisitions require less work than IPOs. With M&A, you’re negotiating with a buyer privately, with minimal requirements beyond registering the sale and paying taxes. IPOs are heavily regulated public transactions. You should expect to jump through a lot of hoops with an IPO and spend more money than you would with an M&A.
  5.  In addition to having ongoing responsibilities to your company after an IPO, you’ll also have the ability to generate additional funds and liquidity by releasing shares at a later date. By contrast, an M&A is a one-and-done transaction.

We would sum up the differences between IPOs and acquisitions like this. Acquisitions are clean, finite, and usually more profitable than IPOs. IPOs are more speculative than acquisitions and you’ll need to continue in your position at your company for a while after the initial public offering is complete.

Acquisition Pros

There are pros and cons of startup acquisitions. Let’s start with the pros:

  • Selling your business to another company puts you in a position of power because you have something that the other company wants.
  • If you handle the negotiations properly, your bargaining power may increase during the discovery process. The buyer’s 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.
  • You may 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
  • 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.

Acquisition Cons

There are 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. 
  • Even if there are several buyers, your bargaining power will diminish after a letter of intent is signed. 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. 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. 

Understanding the potential risks of M&A will protect you from making a bad deal.

 

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Tips for Deciding on an Exit Strategy

We’re M&A experts, so it won’t surprise you to know that we think that in most cases, an acquisition is a better exit strategy than an IPO. If you’re on the fence, here are some pointers to help you decide on the exit strategy that’s right for you.

  1. Ask yourself if you want to be involved in your company or product going forward. If the answer is yes, you may want to choose an IPO -- although you should also keep in mind that you can negotiate continued employment or an advisory role as part of a M&A transaction.

  2. Evaluate what you owe to investors and decide if you’re willing to take the risks associated with an IPO. What happens if your IPO doesn’t generate as much excitement and income as you’d hoped? On a related note, what will happen if your business is valued lower than you’d hoped?

  3. Do you have another venture you want to finance? An acquisition is a more reliable way to raise capital than an IPO.

  4. Are you prepared to cope with the regulatory requirements and scrutiny that come with an IPO? In addition to paperwork, you’ll need to prepare for intense public attention on you and your officers.

  5. If you do want to stay around after an acquisition, ask yourself if you can deal with the potential uncertainty surrounding your position. It’s not uncommon for acquiring companies to shut down the businesses they acquire or change plans dramatically.

               

The tips we’ve listed here can help you evaluate the pros and cons of each exit strategy to help you decide which one is best for you and your company. If you go the M&A route, we recommend getting an M&A advisor to work with you on selling your company. Our advisors at Northstar Venture Partners have been through the process of exiting their own startups,

Tips for Planning Your Exit Strategy

The key to a successful startup acquisition is knowing how to protect yourself. Here are some pointers.

  1. 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.
  2. 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.
  3. 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. 

M&A Glossary

Even for experienced people, some of the M&A terminology can be confusing. When you’re the seller, the stakes are high. That’s something we understand at NorthStar Venture Partners because we’ve been on both sides of the table. Here are the terms you  need to know before selling your startup.

 

Accretion: The growth of assets and earnings that occurs due to business expansion. This term usually applies to the buyer in M&As.

Acquiree: The person whose company is being acquired, also referred to as the Seller or the Target.

Acquirer: The person or organization doing the buying, also known as the Buyer or the Offeror.

Acquisition: The purchase of a controlling interest (at least 50%) in another company.

Adjusted Earnings: A way of assessing a company’s financial performance by compensating for profits and expenses, including capital gains, investments, loss revenues and tax liabilities, to arrive at a more accurate picture of the organization’s financial health.

Amalgamation: When two or more companies join together to form a larger organization with greater resources and impact than either individual entity had on its own.

Asset Deal: A type of acquisition that involves only the assets of the Acquiree, not its shares.

Backward Integration: When a company acquires a target that produces necessary raw materials or performs ancillary services for the Acquirer, with the goal of protecting the supply chain.

Base Year: The base year is the earliest year used to calculate a financial trend or set of trends.

Black Knight: Any company that makes an unwanted purchase offer (in other words, a hostile takeover) to a potential target.

Blue Sky: An excessively optimistic purchase price that exceeds the value of the company’s assets and good will.

Book Value: The calculated value of a company after subtracting its intangible assets and liabilities from its total assets.

Capital Asset Pricing Model: A model used by Acquirers to calculate the rate of return that makes acquiring a target worthwhile.

Cash Flow: A company’s net cash income less its net cash expenses.

Circular Merger: A merger in which a company buys another company in the same industry with the intention of diversifying its product offerings.

Compensation Manipulation: When an officer in a company seeks out mergers and acquisitions with the intention of using the company’s growth to increase their compensation.

Confidential Business Profile: A confidential marketing document distributed by the seller to potential buyers, usually after the buyers sign a non-disclosure agreement. Its intention is to provide an overview of the finances of the target company.

Covenant not to Compete: Also known as a non-compete clause, this is an agreement signed by the seller agreeing not to compete directly with the buyer of their company.

Crown Jewels: The most highly valued assets of a business and a common driver of acquisitions.

Deal Structure: A combination of assets to finance a deal which may include cash, consulting agreements, notes and stocks.

Due Diligence: The process of investigating a target’s assets prior to signing the acquisition agreement.

Earnout: A provision in the acquisition agreement requiring the Acquirer to make future payments based on the performance of the target.

Enterprise Value: The market capitalization of a target, plus the long-term debt minus any short-term investments and cash on hand, it represents the total an Acquirer must pay to take over a business.

Fair Market Value: The basis for an acquisition when the Acquirer and the Acquiree approach a sale from a position of knowledge and without pressure.

Godfather Offer: An offer too good to refuse.

Horizontal Merger: A merger between two entities in the same sector or industry.

Intrinsic Value: The value of a target as calculated by its financial assets rather than the market value.

Leveraged Buyout: An acquisition by the management team that uses an organization’s future revenue as collateral for a loan.

Merchant Banker: A financial institution that brokerages an acquisition.

Offer Price: The price per share offered by an Acquirer to an Acquiree.

Stock Consideration: The percentage of the purchase price given to the Acquiree as shares of the Acquirer’s stock.

Subsidiary: When an acquisition maintains a target company’s name to preserve their brand recognition, market share and other intangibles.

Transaction Close Date: The date when an acquisition is expected to be complete.

Vertical Integration: The acquisition of targets in a company’s supply chain.

White Knight: The opposite of a Black Knight — a buyer who swoops in to prevent a hostile takeover.

 

*Before entering any negotiation, you should know the terms that prospective buyers are likely to use. Studying this glossary will help you go in with your eyes open, fully prepared and ready to make the best deal possible.

 

What Is Your Business Worth?: Business Valuation Calculator

At NorthStar Venture Partners, one of the most common issues our clients face is a misunderstanding of the value of their startup.

  1. Cost-to-Duplicate. This first method is a good jumping-off point because it calculates the money spent to build your business. Using this method, you’ll need: The total you spent on physical assets, including inventory, office equipment and supplies, and any other physical assets you've acquired. The total you spent on research and development, including market research, product development, programming and testing.
  2. Market Multiple. Another option is to look at what companies like yours are selling for and using that as a guideline. There are many different models. For example, you might learn that startups in your sector are selling for a multiple of their annual revenue. You could use that as a basis for your business valuation. Keep in mind that this option may be tricky if there aren’t many companies like yours that have been sold.
  3. Valuation by Stage. This method is less about the specifics of your company and more about where it is in its development. For example, a business whose only asset is a great idea will be worth significantly less than one with a great idea, a successful product, and an established customer base. We like this method because it acknowledges the work and time entrepreneurs have put into their businesses even if sales aren’t reflecting the company’s potential value.
  4. Discounted Cash Flow. Sometimes, acquisition offers don’t match up to the owner’s projections of what the company can do in the future. The discounted cash flow method works by predicting future earnings and using them as the basis for a company’s value. It’s very rare for a company without an established product to use the DCF method to arrive at a value. 

    **As a rule, the less time and money you’ve put into a business, the less money it is worth. However, there are exceptions. A startup with a brilliant prototype could sell for far more than its Cost-to-Duplicate if the buyer believes they can make a killing on future sales.


 

 

Steps to Help You Properly Value Your Business

We can’t tell you which valuation method is best suited to your business, but if you’re not sure, here’s what we suggest, step by step.

  1. Start with the cost-to-duplicate method. It certainly doesn’t make sense to sell your business for less than you’ve put into it. If you don’t already have a handle on your expenditures, including time and money, now is the time to figure it out. Once you have a total, you can use it as a minimum baseline for your business valuation.
  2. Do some market research. Are there other companies like yours that have been acquired? If so, how much did they sell for? The more information you can gather, the better off you’ll be. We suggest organizing what you find in a spreadsheet so you can manipulate the data if you need to.
  3. If you have existing clients, calculate their future value to your business. You can do that by starting with their sales in the current year. Project future sales and assign probabilities that each client will fulfill their potential based on your projections. Then, add everything up and subtract your overhead expenses, including your salary and other items, to get an idea of your future revenue.

 

**Keep in mind that any projections you make about the future earnings for your company are just that — projections. We suggest coming up with a range with a conservative estimate on the low end and an optimistic estimate on the other end. The truth will probably be somewhere in the middle.
 
 
Of course, this method won’t work if you don’t have any existing sales. If that’s the case, take any market research you’ve done for your prototypes or patented products and do your best to estimate the market demand and future sales. It’s likely that any buyers will be conservative in their estimates, so keep that in mind when you do your calculations. 
 
Valuing a startup business is tricky at the best of times, since anything beyond a Cost-to-Duplicate calculation is going to involve some projections and guesswork. If you’re not sure where to start, check out our startup valuation calculator or hire a pro to value your company.

Tips for Negotiating the Best Deal

At NorthStar Venture Partners, we work every day with entrepreneurs like you. You want to know how to sell your company by negotiating a great deal and walking away with the money (and reputation) you deserve. Here are some tips to help you accomplish that goal.



Get Your House in Order

The first tip is to make sure that your financials are in order. That means:

  1. Auditing your financials to make sure they are accurate and up-to-date.
  2. If you’re required to, making sure that your accounting has been done in accordance with Generally Accepted Accounting Principles (GAAP). Even if you aren’t required to adhere to GAAP, you may want to consider using it if you think you may sell to a publicly traded company.
  3. Review all existing contracts, including clients, suppliers and employees, to ensure that everything is properly executed and in place.
These steps will minimize the risk of surprises during your negotiations.
 

Know What Your Business is Worth: The next step is to calculate your startup valuation. You should have your valuation completed by a professional, especially if you have intangible assets that you expect to be part of the negotiation.

Knowing the fair market value of your business will help you manage your expectations and develop a negotiation strategy for the acquisition.

 

Know Your Walk Away Number: One of the best pieces of advice we can give you is to know your boundaries when it comes to the purchase price of your company. Your walk away number is the bare minimum you’re willing to accept for your company.

You need to be realistic, but you also need to be firm. Accepting a price that’s less than your walk away number won’t serve you well in the long term. 

 

Talk to Multiple Buyers: You’ll almost always be able to negotiate a better price if there is more than one buyer interested in your company. You might not end up with a lucrative bidding war, but it helps for each buyer to know that there’s some competition in the arena.

You can attract multiple buyers through networking, or you can hire an M&A advisor who might be able to bring some unexpected players to the table.

 

Do Your Due Diligence: Any buyer is going to perform due diligence on you and your company before making an offer. You should do the same. Research will ensure you know who you’re dealing with and may turn up useful information to help you during negotiations.

Think of research as your ace in the hole. Anything you learn should be documented and brought with you into negotiations, where you can use it as needed to get the best deal possible.

 

Be Prepared to Make Strategic Concessions: Go into your negotiation with a list of strategic concessions you’re prepared to make. By strategic, we mean that you’re willing to give them up to facilitate the deal, and you’re prepared to sell their importance and value along the way.

Just as important as the concessions themselves, is being prepared to request concessions from the buyer. Remember, every concession is a favor that requires reciprocation. 

 

Consider Making the First Offer: Most negotiation experts will tell you never to make the first offer because you may inadvertently show the other party your hand — and lose out in the process.

However, we think there are some circumstances when it makes sense. There’s a cognitive bias known as anchoring. It happens when a consumer hears a price for a product or service, thus “anchoring” it in their mind as what the item being negotiated is worth. 

Use this tactic with caution, but if you’re confident that you can come up with an anchor price that will work, you may want to try it.

 

Don’t Settle for a Bad Deal: Another cognitive bias that can lead to less-than-ideal acquisitions is something called the Sunk Costs Fallacy. It’s a glitch that tells us that it’s a mistake to walk away when we’ve already made an investment of time or money.

You calculated your walk away price for a reason. If a buyer won’t give you what you know your company is worth, then you should walk away. Not every deal is worth taking.

 

Bring an M&A Advisor with You: Finally, consider hiring an M&A advisor to help you out during the negotiations. Specifically, look for someone who has more than one exit under their belt as a seller. Many M&A advisors only know the buyer’s side of things, and don’t understand the unique needs and concerns of founders. At NorthStar Venture Partners, we’ve been on your side of the table and we can help you negotiate a great deal.

 

Benefits of Hiring an M&A Advisory Firm: The process of selling your startup can be a whirlwind. From organizing your financials to negotiating with buyers, a lot goes into getting the best deal for your company. As a startup founder, you most likely aren’t prepared to navigate the selling process. That’s why we recommend working with an M&A advisory firm. Specifically, you need a firm run by people who understand what it’s like to be on your side of the deal. Here are some benefits of hiring an M&A advisory firm for the sale of your business.

 

You’ll Save Time: The first big benefit of hiring an M&A advisory firm is that they’ll coach you through the process so you don’t waste time trying to research everything on your own. Some firms even handle most of the back and forth of selling your company for you. You’ll still need to be involved and bring your advisor up to speed on the unique qualities of your business, but they’ll handle a lot of the legwork — leaving you free to run your business and explore your next venture.

 

They’ll Bring New Buyers to the Table: M&A advisors have a lot of contacts because most focus on connecting startup founders and buyers for these deals. Finding the right person to sell your startup to is crucial, which makes these connections invaluable for you. Buyers have usually acquired other companies in the past, so they often think they can negotiate the deal to be more in their favor. 

Your M&A advisor will help you find someone who won’t try to cheat you in the deal. They can pull from their contacts, access their network on your behalf, and connect you with people you wouldn’t have found on your own.

 

They Can Help You Overcome Common Obstacles to M&A: Mergers and acquisitions can happen quickly or slowly. When there are delays, they’re often due to some of the most common obstacles faced by both sellers and buyers, including:

  • Uncertainty in the global or US market
  • Delays in pending legislation 
  • Negotiation mistakes or missteps

One of the issues with founders who represent themselves while selling their startup is that they lack the experience to navigate the potential pitfalls along the way. Hiring an M&A advisory firm will allow you to sidestep those issues. An experienced advisor, particularly one who’s been on the selling side of an acquisition, will be able to help you predict, avoid and overcome obstacles that could inhibit the success of the transaction.

 

They Can Help You Negotiate a Better Price for Your Company: Even if you have completed a thorough business valuation and know your asking price and your walking-away point for negotiations, you still might end up leaving money on the table if you’re not careful. M&A advisory firms will help you strategize a plan for getting the deal you want. They’ll be able to look at your business, gauge the market interest and potential buyers’ interest, and work with you to negotiate the best possible sale price for your company.

 

They’ll Give You Peace of Mind: Let’s face it, selling your business can be stressful even if you’ve dotted all the I’s and crossed all the T’s. There’s a reason that people hire experts to do complicated deals — and after you account for the time and money you’ll save, you can see why it makes sense to have an expert negotiator in your corner to provide you with peace of mind during the negotiations.

Keep in mind that the best advisor to represent you is someone who’s got experience on your side of the table. Many M&A advisors represent buyers. They’ll represent you for a price, but it’s important to hire someone who has your best interests at heart.

If you’re planning to sell your startup, the smartest decision you make might be hiring a professional M&A advisory firm to represent you and get you the best deal possible.

Let's talk. Book a time with an M&A advisor.