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Business Management
David Merz | Founding Partner
Zurich, June 17, 2024
Selling your startup is a significant milestone that involves careful consideration and strategic planning. This article explores the key aspects to keep in mind when planning your exit. We’ll discuss the various motivations behind selling your startup and delve into different exit strategies, such as corporate acquisitions, mergers, and IPOs.
Additionally, we’ll cover essential steps in the exit process, potential challenges you might face, and how partnering with experts like Nexova can help you achieve a profitable exit.
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Selling a startup is a significant decision that can be driven by various motivations. Many startup founders think about “the big exit” even before launching their company. Serial entrepreneurs often create and sell multiple startups throughout their careers.
They have a passion for building innovative businesses and generating creative ideas, rather than managing an established company for the long term. Additionally, the potential financial rewards of selling a successful startup early and moving on to the next big idea can be far greater than sticking with one business for the long haul.
Here are some good reasons to consider selling your startup:
It goes without saying that one of the primary motivations for selling a startup is the financial reward. Founders and early investors often seek to capitalize on their hard work and innovative ideas by selling the company early for a significant profit. Successful companies often see diminishing returns as they mature, meaning there is the most to gain from selling the company early rather than holding onto it for the slower growth it achieves as it enters maturation.
The benefit of selling your company for early financial gain is that it can provide the funds needed to start new ventures or pursue your personal goals.
You may have not even thought about selling your business until an attractive offer comes along that just feels too good to refuse. This situation can commonly occur with startups that show unique promise or quickly become a success on the market. Big corporations or investors take notice and see an opportunity to take over your company early before the real boom.
This can be a win-win situation if you are looking to cash out early and move onto your next business venture, while a large institution with the resources and capital needed to really scale your startup takes over.
However, don’t forget the stories of founders who sold their startups too early, and made peanuts compared to the multi-billion-dollar business that their idea eventually turned into (e.g., Instagram was sold to Facebook for $1 billion in 2012. While this was a substantial amount, Instagram’s valuation has skyrocketed since the acquisition and is now worth around $100 billion as of recent estimates, making it one of the most valuable social media platforms of all time)
Especially favorable market conditions can make it an opportune time to consider selling your startup. If the industry is experiencing high growth or if there is a surge in acquisitions within the sector, it might be the perfect moment to maximize your company’s valuation and secure a lucrative deal before conditions become less conducive.
Your personal situation and stage of life is constantly changing. You may simply decide it’s time to sell your startup for personal reasons such as the desire to retire, pursue other passions in life, or reduce the stress and workload that comes with running a business. Many entrepreneurs suffer from burnout, and selling the company can provide a much-needed break before moving onto new ventures or taking a different turn in life altogether.
At some point, startups that experience early success will look towards scaling and developing their business to reach wider audiences and gain a greater market share. This is the point where much greater capital, resources and expertise is required.
The original founders may not be interested in taking on this responsibility themselves and may lack the necessary resources to do so. Sometimes, a larger company may offer to acquire the startup because of strategic synergies and profit-making opportunities.
This can also be beneficial for the startup, allowing it to leverage the resources, distribution channels, and market presence of the acquiring company to grow far beyond what it could have achieved on its own.
At this point, founders may exit altogether for a profit, or sell a significant share of the business and continue to play a managerial or directorial role.
Startup founders typically have a creative streak and enjoy the process of generating and launching innovative ideas more than managing an established company. With this kind of temperament, it’s easy to get bored with your existing business and start looking into new avenues. At this point, it makes sense to sell your startup for a good profit and use the fresh capital to realize your next big idea.
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There are numerous ways to sell a startup. Choosing the right exit strategy for your specific situation and goals is essential for achieving your desired outcome. Here are some common exit strategies for startups:
It is becoming increasingly common for larger, established companies to purchase successful startups which align with their own strategic goals and can add value to their existing business model. This is known as an acquisition and is typically the most common exit strategy.
It can involve different payment structures such as cash transactions, stock swaps, or a combination of both. Acquisitions can provide immediate liquidity and can be strategically beneficial for both parties.
A merger involves combining the startup with another company to form an entirely new entity. Provided there are synergies between the two, this can help both companies expand their market reach, combine resources, and achieve greater efficiencies.
A merger on its own is not necessarily a true exit for the founders, as the shareholders of both companies A and B will receive proportional shares in the new merged entity (company C) that is created. However, a merger can be a good starting point for founders to exit their position.
For example, the founders of the original startup (company A) may be able to cease their management activities if the management of company B is willing to run the new company. They may also then be able to sell their shares in the new company more easily, leading to a successful exit.
A popular exit strategy is to sell the startup privately to an institutional investor such as a private equity fund. Each fund generally has its own particular investment strategy, and if your company falls within that scope, you may have the chance to make a trade sale.
This is why it’s important to do some research to familiarize yourself with the investment strategies of whichever private equity funds you are considering approaching, and only do so if your company aligns with their strategy. Equity funds may have specific criteria regarding the industry, development stage of the company, and the investment amount.
Most entrepreneurs dream about a successful IPO when they think about their big exit strategy. An IPO is the process through which a private company offers its shares to the public for the first time. This marks the company’s transition from a privately-held entity to a publicly traded one on the stock exchange.
A successful IPO is really seen as the ultimate payoff for founders of a startup. It can provide substantial capital and increase the company’s visibility and credibility. However, it requires significant preparation and compliance with regulatory requirements.
It is also only a viable option for established startups who have already had a taste of success in the market, as there needs to be significant traction and public interest for an IPO to work.
An IPO is not usually a complete exit for founders, as they can choose what portion of their shares to sell and often keep a significant holding, as well as potentially continuing to act in a managerial role.
As such, an IPO can often simply be a way for a company to gain additional capital, enable rapid expansion, and provide the founders with realized gains for their hard work and early success.
In a management buyout, the startup’s management team purchases the company from the current owners. This strategy can be appealing if the management team believes in the company’s potential and wants to maintain control, while the founding owners are looking for an exit.
Liquidation is the process of completely selling off the company’s assets to wind up the business and pay off outstanding debts. This is typically considered a last resort and is usually pursued when the company is not performing well or has significant liabilities that it is unable to meet.
Proper planning is essential for a successful exit. Here are some key points to keep in mind:
It seems a fairly obvious fact that you should be looking to maximize the value of your startup before sale or exit. It is therefore essential to focus on building value in your startup well before you wish to exit, both to attract potential buyers and to achieve maximum return on your time and investment.
To enhance your startup’s value, focus on increasing revenues, improving profit margins, and expanding your customer base. Keep in mind though that perceived value is often more important than actual sales at a given point in time.
Therefore, creating a strong brand, strengthening your intellectual property portfolio, and developing a robust business model that helps make a compelling argument as to your startup’s prospects are key factors in determining value.
Choosing the right time to exit is vital to ensure a successful sale. Monitor market trends, industry cycles, and the economic environment to determine the optimal moment to sell your startup.
It’s also important to consider the growth stage of your startup, as selling when the company is experiencing rapid growth can result in a higher valuation.
Opinions are somewhat divided on whether it’s best to try sell your startup early or to wait until it becomes more established:
Thorough preparation can make all the difference between a successful and a failed exit. Before negotiating with investors or implementing other exit strategies, be sure to prepare detailed financial statements, ensure legal and regulatory compliance, and create comprehensive documentation of all business processes.
It’s also highly recommended to engage with advisors such as investment bankers, lawyers, and accountants to guide you through the preparation process before going through the steps of selling your startup.
There are several steps in the process of exiting or selling your startup. These may vary depending on the specific exit strategy you adopt, but generally proceed as follows:
We have explored in detail the various reasons why you might consider selling your startup. Whatever your motivations may be, what’s most important is that you yourself are clear as to why you want to exit, how much time you are willing to allow, and the minimum return you are ready to accept.
Being clear and firm about these points will help you follow through with your exit strategy and have no regrets once it is all over.
Seek expert guidance to help determine the fair value of your startup. You may use various valuation methods such as revenue multiples, discounted cash flow analysis, or comparable company analysis. A realistic valuation is crucial for attracting serious buyers and negotiating a fair price.
While it’s tempting to save costs by personally handling the sale of your startup, and indeed this may work well when selling the business to a family member or trusted employee, in most cases you should look to hire a professional broker.
Company sales brokers are trained to negotiate the maximum price possible for their clients, as well as fulfilling other needs such as discretion and any other special terms their clients are after. The amount of additional profit you can get through a good broker can far exceed the commission you’ll have to pay them.
Before you even look to find a buyer and execute your sale, you need to ensure that all your financial statements, tax returns and other important documents are up-to-date and accurate. Gather all these records and have a professional accountant review them for you.
Along with this, prepare any other documents which may be helpful in the sales process, such as an inventory and equipment list, supplier and sales contact list, records of your current lease agreement, etc.
Arguably the most difficult and time-consuming part of selling your startup is finding the right buyer (in the context of an acquisition or private sale). The entire process of selling your startup can take anywhere from a few months to a few years, and this depends largely on how long it takes to attract investors/companies who are interested in buying your business. Identify potential buyers through networking, industry contacts, or by engaging with investment bankers or brokers. Target companies that can benefit strategically from acquiring your startup.
Once you have found your prospective buyer/buyers, it’s time to enter detailed negotiations to agree on the exact selling price and all the finer terms and conditions of the sale. It’s essential to have legal and financial advisors involved in the negotiation process to protect your interests and help you achieve the price and terms you are after.
Negotiations will include the sale price, payment structure (cash, stock, or a combination), and any contingencies or warranties. Allow some flexibility to negotiate but remain clear and firm on the final price that you are willing to accept, considering the worth of your company and the work you have put into it.
Before agreeing on the final price, the buyer will likely conduct a thorough investigation of your company’s financials, legal standing, and operations. Be prepared to provide all necessary documentation and answer questions promptly to facilitate a smooth due diligence process.
Once you have negotiated all the terms and due diligence is complete, it’s finally time to close the deal by signing the necessary agreements and transferring ownership. Ensure that all financial transactions are accurately recorded and that any legal requirements are met. Once again, it’s essential to hire a legal professional to help facilitate and finalize the sale process.
Congratulations! You put in the hard work to turn your business idea into a success and have made the big exit you always dreamed of. What’s left to do now? Well, the first thing is to fairly distribute the profits from the sale/exit in accordance with the share of ownership that each founder sold. Next comes the fun part of figuring out what to do with the profits you’ve made.
While it may be tempting to go on a bit of a spending spree with your newfound wealth, you are probably better off being more prudent and considering the various options and obligations you have when it comes to using your profits. Some of these include:
Selling a startup comes with its own set of challenges. Here are some common obstacles and how to overcome them:
Your startup may demonstrate a great deal of promise, and indeed many young innovative startups do get bought by adventurous investors; however, many corporate buyers and institutional investors are looking to invest in more established companies who have already proven themselves on the market. Equity funds and lenders may look at the historical profit figures of a company to decide whether to invest, and for young startups who lack sufficient evidence of historical profitability and stability, this can present a problem.
It’s common for buyers and sellers to have very different perspectives on the company’s value, which can lead to negotiation difficulties and even disputes. To help deal with this, ensure your valuation is backed by solid financial data and market comparisons. Getting an independent valuation by an expert can also help bridge the gap.
If you plan to sell your startup to an existing business, it’s crucial to ensure there is a good cultural fit between your startup and the acquiring company if you want your business to continue to thrive beyond the acquisition. Assess the cultural alignment during the negotiation phase and address any potential issues upfront.
Key employees in your startup might feel uncertain about their future during an acquisition or company sale. Communicate openly with your team about the process, the benefits of the acquisition and potential risks. Consider offering retention bonuses or incentives to keep critical staff on board.
Selling a startup involves many legal processes, and navigating all the regulatory requirements can be complex. It’s important to work closely with legal professionals to ensure compliance with all applicable laws and regulations during your exit process.
What many founders love most about running their own startup company is the freedom and flexibility it offers. They get to call all the shots and create their own ideal corporate culture and work environment. This can all quickly change if the startup gets bought up by a larger, established corporation with its own systems, strategies and culture in place. If you wish to continue to play a management role in the business, you’ll have to adapt to the new norms and structures of the acquiring company, which can be frustrating for creative founders who don’t always like to go “by the book”.
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Selling your startup can be many things: daunting, exciting, and quite emotional. Partnering with experienced advisors like Nexova can make a significant difference.
As the number one fiduciary and consulting firm to startups and SMEs in Switzerland, Nexova offers a wide range of services to help smoothen your journey to financial wellbeing. These include comprehensive exit planning services, from support with valuation and negotiation to due diligence and deal closure, as well as all the accounting and paperwork in between. Our team of experts will work closely with you to develop a tailored exit strategy that aligns with your goals and maximizes your returns.