Many founders launch their startups without having potential acquisition in mind. Others think of selling from the very beginning of their entrepreneurial journey. Regardless of the intentions you’ve set for your startup, market conditions and internal highs and lows might drive you to consider this option. Let’s discuss how to sell your business and get acquired, from networking with peers to preparing all the paperwork.
Signs It’s Time to Sell Your Startup
Most successful founders have reached a point when startup acquisition becomes a conversation with board members, investors, or friends. But how do you know if your startup should go down that road? Internal company matters and external industry factors can influence your decision to sell your business, such as business-related goals changing or market fluctuations.
Personal reasons may also impact decision-making. For example, you might want to change direction and take a minor role in the company instead. Or, perhaps you’d like to leave your startup altogether to embark on new projects. Either way, selling should benefit both you and the business.
A stagnant company can also be another reason to sell: You may have reached a point where growth is necessary, but you lack the resources or motivation to push it forward. So, selling it to someone with the expertise and investment to grow the business is a good call.
The opposite could also happen. Maybe your startup is doing so well that investors make outrageous offers you can’t pass up on. Although this success means you’re less interested in letting the business go, another company could sway you into a mergers and acquisitions (M&A) deal, meaning you’ll either merge to become one company or be acquired by a bigger one. This is an exciting prospect on both sides: The larger, established company can expect fresh ideas from the trailblazing businesses, while the startups have added financial safety.
One final tip: Ensure that your team is on board if you decide to sell. This will make for a smooth acquisition and transition process. Hostile acquisitions, where key players disagree with the decision, can ultimately harm the well-being of your startup.
3 Popular Ways Your Startup Can Be Acquired
Once you’ve made a decision, it’s time to know how to sell your business. An option that’s been hot lately is M&As. As an example, take us! BRP Group is an independent insurance and risk management firm that was looking to acquire like-minded companies. Founder Shield’s startup-focused insurance aligns with their vision; thus, this acquisition has allowed us to expand in the industry, thanks to the infusion of venture capital.
By August 2022, deals of this kind were worth a combined $1.73 trillion. And though deal amounts were lower than in 2021 (with startups willing to sell low), plenty of dry powder has given big companies the leisure to merge with and acquire smaller ones.
But if this doesn’t sound like the winning option to you, there are two more alternatives for startup acquisitions:
- Private equity (PE): These are firms composed of many investors, meaning they’re stocked up with cash and ready to invest. Usually, PE firms will buy the current owners and investors of companies going through hard times and reshape them so they grow in value. For example, the tech startup scene is losing financial value after a strong 2021, and some say PE firms are ready to make industry investments to boost it in 2023.
- An investment round: This option is suitable if your company’s value is still growing. Here, one or more investors buy out a portion of a business.
Prepare Your Company for an Acquisition
In Q3 2022, PE acquisitions in the US amassed $280 billion, and companies closed 22,000 M&A deals. Those who sold their startup had to go through preparation stages to make their businesses more appealing to buyers, polishing and refining wherever needed.
First, connect with your industry by starting conversations with like-minded founders at conferences and events. This is a perfect opportunity to deliver an elevator pitch that will leave them thinking about you.
Then, it’s time to get financial paperwork lined up: A clean cap table. This means having records of all financial transactions, equity ownership, any debt and investor rankings. Moreover, investors might want to interview your team to understand the company dynamics better.
When you’ve got to this point, sit down with legal consultants and identify potential risks and liabilities from both your side and the buyer’s end. Investors will want to know if your intellectual property is protected and that every service or product is legitimate.
According to Cornerstone Research, post-acquisition issues, like litigation, in the past two years have generated record-setting losses. To avoid this, consider representations & warranties insurance (R&W), which covers certain indemnifications for buyers and sellers. This insurance is advantageous for both parties as it makes the acquisition process much easier.
Roll Up Your Sleeves: It’s Time To Go to Market
Once you’re ready to put up your “for sale” sign, start talking to industry peers to connect with possible investors — there’s always someone who knows someone. Ultimately, startup acquisitions are all about word of mouth and networking.
Once you start getting offers, you should also know where you’ll draw the line when negotiating. What will your trade-offs be? Make sure to outline this with your team to see a win-win for everyone involved.
An unfailing piece of advice is to be patient after your first offer. Don’t say yes to the very first deal that comes up. That could be a fear response speaking. Receiving deals at all means you have some power as a seller, and with time the right investors will show up.
It all boils down to the synergy between companies and stakeholders, and you’ll know who the right match is. Buckle up; the startup acquisition process is a long one. It takes between two to seven months.
Lastly, world-renowned singer Cher once said: “Do you believe in life after love?” In line with that, after selling your much-loved business, you must consider what you’d like to do next and how you will continue growing. Will you stick around in a minor role or set sail to test different waters? You might want to catch a break after such an exhausting process, or maybe the situation inspired you to keep grinding away.
Selling your business can be challenging, but the more prepared you are, the fewer hiccups you’ll have along the way. Make sure you put in some elbow grease with financial paperwork and have your team on board — the rest will follow with some networking and patience.
Understanding the coverage needed when selling your company will also make for an easier acquisition. Founder Shield specializes in knowing the risks of this process in your industry and will ensure you have adequate protection. Feel free to explore our R&D insurance and reach out to us, we can walk you through the best coverage for you.