Many people start a business because they want to be their own bosses and spend their careers doing something they are passionate about, some try to bring a vision to reality, some others just saw an opportunity and took it. Regardless of how you became a Founder or a business owner, you should always have a rough idea of how you want to exit.
For high-growth companies, the target has traditionally been either an IPO or an acquisition. In this blog, we’re going to focus on the latter.
An acquisition means exactly what it sounds like: a company buying most – or all – of a company’s shares. You probably heard of high-profile mergers or acquisitions in the news, but, as Investopedia puts it “In reality, mergers and acquisitions (M&A) occur more regularly between small- to medium-size firms than between large companies.”
Selling: When & How
Compared to an IPO, a sale has the key advantage of being feasible at virtually any company stage and size, which is why it’s the most popular exit strategy among Founders. Not all sales are carefully planned, but it’s always best to plan for one. According to Joe Procopio, in most cases, the shareholders decide to sell a company because of a combinations of these four factors:
- Selling is a financial necessity – obviously, this is the most unfortunate case scenario: if the business is not delivering the necessary results for it to be sustainable on its own, selling to a third party may be the only way for shareholders to offset their lost investment and allow another company to run their business with lower fixed costs, if they intend on running it.
Needless to say, this is sort of a worst case scenario, and if things aren’t going your way you should make sure that a sale is your only option before you go for it.
- Selling is a great economic opportunity – If, on the other hand, things are going very well for your company, someone interested in your business might make you a very generous offer. Of course, that is the best time to negotiate a sale, as all the potential of your business is reflected by good performance and momentum, therefore a buyer will be willing to offer a premium for you to give up your shares. Because of these, many Founders would find it hard to sell in a moment of great performance: after all, that is the fun part!
- Selling is not connected to the business itself – Oftentimes, Founders decide to sell their company because of reasons that have more to do with their personal life than that of the business. On a lot of occasions, companies are sold because the owners want to move on to different ventures.
- Selling is what’s best for the business – Running a small company is hard enough, but running a big one is sometimes beyond the skills of the Founders. This is one of the most common reasons why Founders decide to exit a business: they realise that they grew it as much as they could, but a large corporate owner can really help their company thrive in the long term, with its resources and expertise.
Once you know you want to sell, you have to figure out how.
There are two main options when it comes to selling.
You can sell to a larger company that operates within the same sector, or in an adjacent one. These companies are interested in buying your company because they want something specific about it: its tech or intellectual property, its talent, its customers… It really depends on the industry you work in, but most times this will have to do with your USP and the competitive advantage that you’ve managed to create while running your business.
Alternatively, you can sell your company to a Private Equity firm, to one of your investors or to another third party that is interested in buying the business as a whole, keep the same company leadership and, occasionally, operate some sort of operational overhaul to cut costs and make the business profitable.
Depending on what combination of the above circumstances you are in, you will be in a more or less advantageous negotiating position. It’s in your best interest to make sure that you are able to negotiate with some bargaining power, unless you’re decided on selling your business for scrap!
Negotiating A Sale
Before we get to how you can enhance your bargaining power during a negotiation, it’s important that you understand where you are starting.
In order to do that, you should think about what the potential buyer is looking to gain by purchasing your company. That can be completely different depending on the industry, the buyer and what they plan on doing with the company. Let’s see an example.
Google paid $1.2bn for Waze back in 2013, when the company was barely making any revenue, but what Google wanted to get out of the acquisition was data, and features. It’s now been rumoured for several years that Google wants to shut down its navigation subsidiary, as they spent the 7 years since its acquisition integrating all of Waze’s features into Google Maps.
This shows how Waze was able to leverage its USP in order to obtain an off-the-charts revenue multiple of 1000x (if not more!) on their acquisition.
One more thing we can learn from the Waze acquisition is that the more offers you get in a sale, the higher price you can name for your company.
Before Google made its offer, Apple had proposed to buy Waze for $400m, but they refused, asking for $750m. Then Facebook came in with $1bn, it seemed like a done deal, but just a few weeks later Google had won the auction, and Waze’s price tag was now a whopping $1.2bn.
Larger companies interested in your technology, data, consumers or basically anything but your profits, will usually be willing to pay a premium to prevent their competitors to put their hands on whatever it is they want from you.
The moral of the story is: before you start considering a sale, make sure you have at least an offer on the table. If you already have one, then you should look for another one, which can serve as a backup in case the first one falls through, or as a way of driving up your price, if that’s what you’re looking to do.
Sourcing offers when they are not presenting themselves organically can be tricky, but just like a Funding Round, you have to leverage networking to create and nurture leads, pitch to strategic buyers and eventually you’ll find someone who’s interested. But this is only the beginning.
Preparing For A Sale
The sale itself consists in two key tasks:
- Agreeing on a valuation with the buyer;
- Carrying out the due diligence.
In the private market, company valuations are determined with various techniques, but the most widespread is to use a revenue multiple.
We wrote extensively about multiples for software businesses and how they are calculated, but in reality this has to be done on a case to case basis. Whatever the multiple you are targeting is you will need to justify it to your buyer, and obviously they will try and do the opposite to get a better deal.
At the end of the day, the multiple translates into the opportunity that the buyer is trying to seize with their purchase. Of course, it’s easier said than done, but all you have to do is show them they’re getting their money’s worth. Sometimes this means setting some performance targets as conditions of a certain sale price, or having the buyer monitor the company operation to demonstrate efficiency and expertise.
Separately, after an offer has been formalised, you’ll have to go through what’s known as due diligence. This is a process meant to demonstrate that your company is structurally sound and financially healthy. It includes, but it’s not limited to:
- Have all your financials audited;
- Have lawyers and IP experts from both parties examine potential risks and assessing that the relevant intellectual property is protected;
- Have the buyer assess the management team’s integrity;
- Go through the shareholding history of the company, reviewing its past, present and future cap tables.
It’s important that you are ready to go through due diligence by the time you go to market looking for a sale, you won’t have the chance of putting everything in order while you negotiate the sale, and the process will be long enough on its own that you really won’t want to, so be prepared!
In terms of time frame, a sale will take approximately the same amount of time as a Funding Round, as the processes are quite similar. If anything, a sale will take longer, as the due diligence should be much more detailed than it is for an investment. Be ready for up to six or even nine months, at the longest, and good luck!