Selling a startup or small business:  5 things you should knowBy: Josh Wueller and Rose Massary

On April 23, 2014, tech marketplace Grand St. announced that it was being acquired by New York city-based E-commerce website Etsy.  One week earlier, Twitter revealed it was purchasing social data provider Gnip.  Last month, Facebook bought the virtual reality business Oculus VR for $2 billion.

With the economy on the rise and competition for marketplace innovation increasing, young companies are finding themselves in the midst of a “Startup Gold Rush.”  Many early-stage companies and startups are receptive to the idea of a sale.  If selling your business has crossed your mind, answer these 5 questions first. 

1)      Small business vs. Startup: Is your company already implementing a business model, or still searching for one?

Is your business still in the startup phase, or can it be classified as a small- or mid-sized business (SMB)?

Startup companies are those still searching for the right business model to deliver their products or services to customers.  They haven’t started generating sustainable profits yet, but startups usually have an innovative idea that they’re eager to exploit.  On the other hand, early-stage companies like SMBs are already executing their business model.  With revenue flowing in, these ventures start turning their focus to scaling up in size.

Prospective buyers will want to know exactly how much your burgeoning business has grown.  As discussed below, that might influence their plans after the purchase.

2)      Is it a deal breaker if your business is acqui-hired instead of acquired?

While some purchasers want to acquire the target company in its entirety, others are only interested in buying the business’s talented employees (a process referred to as getting acqui-hired) or intellectual property and assimilating those people and assets into their own business models.  Buying only assets (instead of the entire business) could lead to more favorable tax treatment for the buyer or less risk of encountering preexisting debts or lawsuits down the road.

If your business hasn’t found its business model yet, the acquiring company might want to repurpose the startup to fit its current structure.  However, if your SMB is already churning out profits and building valuable customer relationships, a buyer might be more interested in keeping the whole shebang intact.  As they say—if it ain’t broke, don’t fix it.

Decide ahead of time whether you could handle seeing your initial business plan jettisoned or “sold for scrap.”  If keeping your startup or SMB on a particular track is important to you, make sure to get it in writing.

3)      What does your business bring to the table?

If you’re thinking about selling an early-stage business, one of the biggest challenges might be figuring out how much it’s worth.  Startup and small business owners should be sure of what they’re selling.

Valuing pre-revenue companies is notoriously difficult—perhaps even an art form.  Before making an offer, buyers will take a close look at a variety of the business’s qualities, such as:

      • the reputation, experience and “domain expertise” of the founding team;
      • expected earnings;
      • how much your business has (or hasn’t) grown;
      • the market that exists for your product or service; and
      • the competition in the marketplace.

When trying to decide whether an offer is reasonable or not, having a good idea of your business’s worth is essential.

4)      What’s your bottom line?

After you understand what you’re selling, ask yourself what you’re willing to accept in return.  You might have a dollar figure in mind, but what if the buyer offers other incentives as well?

It’s not uncommon for prospective purchasers to offer to buy a business with some combination of cash and equity (ownership) in the buyer’s business, such as stock.  The buyer might offer other incentives as well, such as a particular position of employment with the buyer’s business.

Some sellers are willing to pass on a more valuable cash-and-equity deal because of the extra flexibility and security that comes with an all-cash buyout.

5)      What are your alternatives?  What would happen if the deal fell through? 

Sometimes, the best deal you make is the one you don’t do.  If you’ve given the offer a professional assessment and determined that it isn’t right for your business, stay the course and turn your focus back to your company’s success.

Photo messaging app Snapchat, only 2 years old at the time, turned heads everywhere when it rejected Facebook’s $3 billion cash offer last November.  For founders Bobby Murphy and Evan Spiegel, the nearly $750 million each would have earned from the deal “isn’t very interesting” when compared to Snapchat’s mission “to upend the social media hierarchy.”  The app has gone on to outperform Facebook’s Poke app.

However, French startup Zlio’s experience wasn’t as successful.  After Zlio grew impatient and turned down a purchase offer from Google that the small business initially found acceptable, its good fortune went south.  The tech company shut its doors in 2011 after its online traffic tanked by 65%.

The market is ripe for startups and SMBs hoping to sell their businesses.  Third-quarter small business deals in 2013 were up by 41.7% from those in 2012, and more and more buyers have access to affordable financing.  Many experts expect the market to continue to grow.

Before you consider entertaining a buyout offer, make sure you’re asking the right questions.

Would you sell your business if the price and terms were right? 

Josh - EXT

Josh Wueller

Senior Law Clerk

(212) 865-9848

Email Josh

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Rose - EXT

Rose Massary

Associate Attorney

(212) 865-9848

Email Rose

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