Is it time to sell your company? Preparing to exit your startup can be an emotional process, filled with ups and downs – and that’s even before you hire a banker!
That’s why I’ve joined my former teammate at Techstars, Jessica Ford, the Director and publisher of Startup Digest to write a weekly email to help founders prepare for the exit process.
Subscribe to the reading list.
I was fortunate to get to work with Jessica when I was at UP Global (Startup Weekend + Startup America) before we sold the company to Techstars in 2015 (which was my ninth transaction). Jessica has been with “the digest” since 2010. Startup Digest delivers event emails to 100’s of startup cities every week – it’s a curated list of upcoming events in your city. Reading lists represent topics of interest for Startup Communities, health, blockchain as an example of the 65 lists. Prepping for Exit is just the newest reading list.
What do you want to know about “Prepping for Exit?” Drop me an email and if I can’t help, I’ll find some resources that can.
Also, I’ll introduce my partner Mark Upson and his firm, Next Path Advisors. Though we still run different companies, we work together helping companies in the process. Mark is also a former Founder that has exited a number of companies before entering advisory services.
I’ll be interviewing other service providers to create a list of resources, best practices and of course some of the lessons learned from things that may not have gone well in the process!
For many founders, exiting your company well is a culmination of years of work and effort to increase the enterprise value of the idea you’ve curated. Exits can be emotional (good and bad) for founders. The highs are very high and the lows can be devastatingly low – not to mention understanding your identity after your exit the company that has been part of your personal brand for years.
Startup Exits is a Startup Digest reading list and blog post that helps founders through the process of exiting their companies.
You can find the posts here on DKParker Blog as well as Startup Digest and Medium. Here are some of the topics:
- Preparing for Exit – an overview
- Product Market Fit and your Exit – building and showing momentum
- Sales Price – matching expectations and reality
- Buyers Profiles – Strategic vs Financial Buyers
- Valuation Process – trailing 12 months of future 12 months
- Who’s motivated to sell and why – understanding your investor motivations
- The Exit Process – what are the steps in the process
- Building Relationships with Buyers – the Business Development Process
- Choosing a Broker/Banker/Advisor – stage-appropriate professionals
- Legal Prep for your Startup’s Exit – managing the legal team and the expense
- Data Rooms – mostly mechanics, but what can go wrong
- Due Diligence – helping yourself in the process
- The Closing – what mistakes to avoid
- Life after the Close – should you stay or go?
Valuing a Startup company is difficult. A typical valuation for a company starts with internal data revenue, cashflow and assets. With that information, you add the external data from similar or “comparables” (comps) companies. Valuation firms can then look at the data to address similar markets (vertical or geographic), size of business, cashflows and investments/exit data. Think of this as a real-estate appraisal. Without a comp, it’s hard to pick a number because your startup is standing by itself without much traditional financial data.
If you hire a valuation firm, they will look at the following three factors.
- Asset Approach – what are the assets of the company
- Income Approach – based on discounted cashflows
- Market Approach – guidelines for public company data or private sales
Startups generally lack a number of those factors.
Let me also add that “wishing” for a big number won’t impact your valuation either. It’s a bit like selling a car you love, it’s worth a lot more to you than the buyer.
Why and when to do a valuation? Typically, Founders are looking for valuations at four times in the business lifecycle.
- Fundraising – you’re thinking about raising a round of capital and you’re looking to understand what your pre-money price should be
- In a fundraising round, you’re looking for what the company is worth immediately before the next round of funding is deposited into the bank account.
- You don’t need a formal valuation for this process (or the expense of the effort), but you’ll still want to find some comps to help rationalize the price.
- Sales – you’re looking to sell the company and need to know if the price is a fair market value (FMV)
- Team member exit – you have a Founder who wants to exit the company and wants to be bought out
- This one is hard because no new money is coming in, but someone wants money to go out. This means that the price won’t be at a premium, but likely at a discount (cash out vs. cash in lowers the price).
- Annual 409A valuation plus quarterly reviews for Employee Stock Options
- Because of the tax implication, it’s important to know the valuation of your stock pricing for option grants.
- You can read a great interview here with Ben Straughan from Perkins Coie about 409A valuations.
Many factors impact the valuation, here are some things to consider:
- If you have <6 months of cash – this likely means the price is going to go down in the upcoming weeks. Be aware that you’re likely to get ground down on price as the deal gets closer if you’re that close to running out of cash
- State of your direct competitors – if one just raised cash or exited, your timing is likely good
- Buyer profile:
- Strategic buyer/investor – the strategic value will give a premium in the pricing; the goal is adding your product to their customer base, it’s the goal of 1+1=3
- Financial buyer/investor – is going to look for a cash on cash return
The process of selling a company is like any major transaction. You have an asking price and a bid price and sometimes they are far apart. Each party wants the other to state their price first. Usually, the Startup assumes that the buyer has more insight than the seller – because they have the cash/stock to make a purchase, but that’s not really the case.
Asset approach, Income approach, Market approach. This comment is about some beholders seeing more beauty than others. With the Asset Approach and Income approaches, isn’t there sometimes a positive value premium / negative risk discount from seeking funding from enterprises that invest in start ups (e.g. Intel Capital) and whose primary franchise stands to benefit directly from investing. Example: my firm assets amplify their franchise’s asset value or my firm’s solutions amplifies their firm’s income or market access.