Are you beginning to think about an exit strategy for your startup? Perhaps you’re doing some future planning and aren’t entirely sure what a startup exit is, let alone how to go about conducting one. If you’re planning to sell your startup – now or in 5 years – it’s a good idea to understand the process.
Facilitating a company sale or acquisition is a significant undertaking with many legal considerations along the way, and being informed is the best place to begin. Let’s take a look at the basics: how to know when to sell, where to find a buyer, the legal steps in making the sale, and some tips on how to get the best possible deal for yourself and the company.
How do I know when it’s time to sell?
The first step is deciding to sell, but this is also an emotionally charged decision. Before you choose how to exit your startup, you’ll need to determine if you’re ready and if the timing is right.
If your company is struggling, this isn’t necessarily an indication that it’s time to sell. In fact, if you have the available resources, this can be the time to dig in and do the work for future success. All businesses have rough patches, and unless you’re essentially forced to sell, it’s better to focus on stabilising for continued growth.
On the flip side, perhaps things are going incredibly well. If the company has become wildly successful, you may find yourself (or other founders) tempted to sell for a hefty profit. If the deal offered is truly unique, maybe it’s worth considering. Juggling priorities (such as more than one business) can also create the temptation to sell and refine your priorities in the process. These two scenarios are very personal, and there’s not necessarily a correct answer.
The most common reason for selling a startup is when the founders have advanced the business as much as possible within their resources and skillsets. If there’s ample opportunity down the road, sometimes an acquisition can help the company continue its growth path.
How do I find potential buyers?
Okay, let’s say you’ve decided to sell. What next? You’ll need to find a buyer. Generally, larger companies operating in the same (or a similar) space are the best bet for an acquisition. Your startup is likely an attractive option full of innovation and customers to leverage for further growth.
Private equity acquisitions are also quite common for highly valued startups. These equity firms are known to buy out all owners and investors often while still offering an attractive profit plan to retain the current startup leadership. Along the same lines – and requiring less lofty valuations – some investor groups are willing to make a similar transaction by buying out the existing founders and investors. If you’re looking to stay involved and your startup is a star, this may be an option.
When thinking about how to sell your company, there are some new options on the table. You can, of course, go a more traditional route with a dedicated consultant or in-house team. There are also portals like Microacquire now available online, where you can essentially list your company on a marketplace and engage with interested buyers in a private space. It’s a quick way to get eyes on your company and is worth investigating as part of your sale planning.
How do I actually sell the company?
There’s a long process involved in selling a company, and it’s crucial to have a trusted legal team on your side, along with highly competent tax specialists and accountants.
This list provides a general idea of how your company will progress through the acquisition process:
- Solidify the company value: if you’re ready to sell, you already have this step complete. You know your company has value to offer via products, services, market share, intellectual property or other trade secrets.
- Develop a list of potential buyers: as mentioned above, these may be companies working in the same industry, investment groups, or acquisition firms. Connect with your network and develop a list of contacts.
- Buyer outreach and initial conversations: when engaging with potential buyers, beware how much information you’re offering. Keep things high level until there’s an NDA in place for further discussions.
- Confidential deep dives: once you’ve secured genuine interest, it’s time to bring out the NDA so you can sit down and get into the details. Here is when you’ll start to share the true value your startup can offer – everything from the financials to the product manufacturing process.
- First offer and negotiations: when entering this stage, try to stick with standard negotiating principles. Don’t state your preferred price lest you undercut your own sale. Don’t share financials that indicate you’re desperate to sell within a particular timeframe. Essentially, don’t give away your own leverage.
- Sharing the deal internally: once you have a verbal offer, you’ll need to wrap in your team. We recommend engaging HR for advice on how to proceed and to mitigate any staffing risks that may arise from this announcement.
- Terms sheets, negotiations, and due diligence: your legal team should have been involved in this process from day 1, but here is where things will start to get busy for them. You’ll be heavily involved in many legal negotiations, and extensive documentation is going to be required.
- Reaching the final agreement: similar to step 7, this is where you need your legal team in good shape. In many cases, extensive revisions and negotiations on both sides will be required, and it’s only once every detail has been ironed out that you can sign the deal.
- Closing the deal: Congratulations, you’ve sold your company! Now it’s time to mop up the mess. Supplier contracts, payroll systems, outstanding accounts payable and receivable, tax payments…there’s a long list of final tasks for you and your lawyers.
While there’s no set of rules for deciding when to sell or exit your startup, there is a well-defined process your lawyers or legal team will move through to ensure an organized and successful sale.
At UX Law, we provide startups and entrepreneurs with practical legal solutions to protect and empower their business. Book a free consultation to explore how we can help your startup.