Exit? How to Get the Best Terms when Selling Your Startup

For most founders, selling their startup is a life-altering event for which they receive little preparation. Similar to acquiring capital, the ideal time to sell your startup is when you neither need nor want to. When there is a lack of traction, fierce competition, or trouble fundraising, many founders choose to sell their firm as a plan C. This will likely result in a small number of bidders and reduced negotiating power for those who do submit offers.

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The best time to sell your startup is when you have several options.  These possibilities do not have to all be acquisition proposals; they might simply be term sheets for your next venture round. You may even be operating profitably and be in the enviable position of being able to comfortably decline an offer. Generally, you will have these options because your firm is gaining traction; counterintuitively, the ideal strategy to develop to flip is the same as establishing a successful business.

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Here is how you value your firm, generate interest in it, and negotiate the purchase process.

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Beginning acquisition discussions

Do not engage in acquisition discussions unless you are prepared to sell your business. Negotiating an acquisition is the most distracting thing you can do in a startup: going through a merger and acquisition is an order of magnitude more work than obtaining money. During that period, your capacity to manage the day-to-day operations of your business will be compromised. You should only initiate an acquisition process if 1) you are confident you want to sell the company and 2) you are likely to receive an acceptable price. Do not follow this path out of curiosity.

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Valuing your startup

Companies are valued by investors based on either their financial or strategic value. The financial value of a corporation depends on its profitability and projected future cash flows. For many tech startups, it is much more likely that your firm will be valued depending on how it fits into the strategy of the acquiring corporation. These are some unexpectedly common reasons why your startup has strategic value to an acquirer:

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The CEO finds it intriguing or desires to protect it from a rival.

Your company grants the acquirer access to a valuable audience or market share.

A competitor of the acquirer is outperforming, and you can assist the acquirer in becoming more effective.

The acquirer lacks expertise in a field where you have personnel.

Your firms have synergies, and theoretically, integrating them is value-adding.

The acquirer operates a comparable firm, but you execute far better. They are terrified of you.

There is just the price that can be negotiated when it comes to pricing a business; there is no ideal price. Management teams, investment bankers, and corporate development personnel will utilize a variety of measures, such as cost per user, to justify a number. But, the clearing price for a business ultimately depends on what can be justified to the market (past comparable acquisitions, for example) and the sale price that you and your investors agree upon.

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Rarely is a potential acquirer's initial offer its best offer. Don't be afraid to say no. There are numerous negotiation methods, but in order to extract the greatest value, you must be willing to walk away and launch a competitive bidding process.

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Receiving offers

The ideal method for soliciting acquisition offers is to have continual conversations with possible acquirers about ways you can collaborate. Within a large organization, these conversations typically include a number of individuals; you won't receive an offer unless a sufficiently senior decision maker is convinced that purchasing you is preferable to working with you. When you receive an offer, the following step is to determine your alternative possibilities. You can accomplish this by informing other potential acquirers (including larger organizations you have associated with and/or the acquirer's competitors) that you have received a term sheet from an acquirer and are considering selling yourself, but would prefer a longer-term future with their company (find a reason). Now is also an excellent time to contact the venture capitalists with whom you have been communicating and request a term sheet for your next round. A cooling-off period may occasionally be required in an agreement by a company with which you are in a crucial business development collaboration. This is the time you must wait after receiving an acquisition offer before you may sign (for your partner to theoretically prepare a better counter offer). Once you have received a first term sheet, cool-down provisions can actually work to your advantage as a means of obtaining future offers.

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Eliminating undesirable offers

Most of the proposals to purchase your startup will be fraudulent. It costs a firm nothing to inform you that it wants to acquire your startup. These incentives can lull you into a false sense of security, which is harmful.

How do you detect these? One major red flag is the absence of an expiration date and/or a guarantee of term sheet delivery within a day or two. When a sufficiently senior decision maker agrees to acquire your startup, they will seek to meet with you frequently and apply time pressure to prevent you from shopping the deal and obtaining a better offer. The absence of this activity suggests that the other corporation is not serious about acquiring your company.

The expectations of entrepreneurs and corporate development personnel frequently disagree. Prior to engaging in lengthy discussions with large acquirers, attempt to define value expectations (and other crucial consideration elements, such as retention compensation) as soon as possible. This technique should avoid you from having six meetings only to learn that the possible acquirer expects to pay $10 million for your quickly growing firm, despite the fact that you already have a term sheet for a $15 million Series A deal.

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Hiring a banker

Investment banking, like venture capital, is dominated by a limited number of well connected, analytical, and experienced individuals. Investment bankers often charge one to two percent of the overall deal value. You may not require an investment banker unless your selling price is in the mid-millions or above, and possibly not even then.

Nevertheless, the correct ones can help you gain a full insight of the competitive landscape, navigate decision-makers at each possible acquirer, and know which buttons to push to optimize your transaction worth.

Likewise, keep in mind that the people you are bargaining with in corporate growth are expert negotiators. Their responsibility is to negotiate the best deal for their company. It might be quite beneficial to have a skilled negotiator on your side.

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Pre-term sheet diligence

If you are committed to going through an acquisition process, you should be quite forthcoming with your firm data (under a nondisclosure agreement), as it is preferable for the acquirer to discover any red flags before you sign a term sheet and enter the closing process.

Yet, if the possible acquirer requests to interview your team, you should not agree (unless you are going through an acqui-hire and have no other options). Allowing a possible acquisition to interview your staff is tremendously distracting for the team and signals to the acquirer that you are willing to concede to its conditions.

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Term sheet signature

After gathering all of your term sheets, you should be prepared to sign. But, prior to doing so, you should negotiate the business and legal points as thoroughly as possible. Feel free to resist exploding offer deadlines and other urgent pressure to sign. After signing, you can anticipate that all issues not previously agreed will have language in favor of the acquirer.

Until you sign a term sheet, you have complete leverage as the startup. Once you sign, a lot of that disappears since you have committed to selling the deal to yourself, your staff, and your investors.

You will begin to readily agree to terms that you wouldn't have considered at the term-sheet stage once you experience negotiating weariness, and possibly even before that. In addition, after you have signed a term sheet, you are prohibited from shopping your company to other acquirers. If your sale falls through, other acquirers may have lost interest or believe the deal failed for other reasons.

While negotiating a term sheet, advocate for the shortest possible closing period (target 30 days) to avoid deal weariness and to put pressure on the acquirer (however regulatory issues can sometimes dictate the closing date, which is out of everyone's control). A brief closing period can also help you limit distractions from your primary responsibility: running your startup.

Remember that just because you signed a term sheet does not mean that your agreement is complete. In fact, there is a chance that it will not proceed. Companies sometimes alter their thoughts during the diligence process despite their promise to strive to close.

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Closing

The period between deciding to sell and the actual transaction is the most perilous part of the acquisition process. But be ready to ask yourself:

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What occurs if the acquirer changes the overall deal value?

What happens if the acquirer changes its mind and you're forced to start over?

What happens if, after speaking with your senior management, the acquirer determines that your team is insufficient?

What happens if you run out of cash before the deal closes because it took twice as long as anticipated to negotiate the deal documents?

These events occur. You should be prepared to walk away from any contract until the moment where you are watching your bank account for the acquirer's wire transfer.

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The process of closure is mostly governed by attorneys and bankers. The topics to be negotiated are often divided into legal, financials, and business points; the attorneys will resolve the legal aspects, bankers the financial ones, while you are expected to handle the business difficulties. You are ultimately responsible for the outcome, so be prepared for the time and work this process will require.

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