Selling a Startup or Small Business: 5 Things You Should Know

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Selling a Startup or Small Business: 5 Things You Should Know

In February 2018, the technology behemoth Amazon acquired home security company Ring for over $1 billion.  Last month, Google acquired the question and answer app Superpod for roughly $60 million.  Last week, Dropbox announced it was acquiring workflow startup HelloSign for $230 million.

With the economy on the rise and competition for marketplace innovation increasing, young companies are finding themselves in the midst of a Startup Boom.  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.

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 the potential buyers’ plans after the purchase.

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 startup 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 business 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.

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—it is as much an art as it is a science.  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’ worth is essential.

What’s your bottom line?

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

It is 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.

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.  

In 2017, the women-first dating app Bumble, only 3 years old at the time, turned down a $450 million offer from Match Group believing that it was being undervalued.  A year later, the company is said to be valued at over $1 billion – more than double what Match Group had initially offered.

However, visual search engine Qwiki wasn’t as successful.  In 2010, Qwiki won TechChrunch Distrupt competition.  Shortly thereafter, Google offered to purchase the company for $100-150 million.  Qwiki turned down the offer, instead raising $10 million from venture capitalists and by 2013 was named one of the top NYC startups to watch.  A few months later, due to troubles within the company and competition from Vine, the company was sold to Yahoo! for under $50 million and one year later, Yahoo! shut down Qwiki.

The market is ripe for startups and SMBs hoping to sell their businesses.  More than $2.5 trillion was spent on mergers in the first half of 2018.  Many experts expect the market to continue to grow. Deloitte’s M&A trends report found that 76% of M&A executives at US-headquartered corporations and 87% of M&A leaders at domestic private equity firms expect the number of deals their organizations will close over the next year to increase.

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

Notice

This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.

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