Four (4) Things Founders Should Consider Before Selling (Other than the money)

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A 23-year-old founder was once accosted by the CEO of Meta, Mark Zuckerberg, to give up his startup for a whopping 3 billion dollars. That would be enough money to be set up for life. The young CEO turned down the mouth-watering offer, preferring to remain in control of his newly formed company. Today, his company is worth far more than what it was many years ago. That founder is Evan Spiegel and his company, Snapchat, was just 3 years old at the time the offer was made. 

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A Buyout is when an entity acquires a controlling interest in a company either by purchasing it in full or owning more than 50% of its shares. However, the term acquisition is most commonly used instead of buyout when talking about exit strategies. 

Spiegel’s decision might have paid off in the long run, but not all founders get so lucky. This is why the majority of founders exit their company at some point. Having an exit strategy is not a bad idea and sometimes, it is better to exit than not to. Although founders exit for many reasons, financial difficulties sit at the very top. When startup founders are cash-strapped and can’t raise funds, it makes sense to sell to a buyer who has the financial resources to keep the business running. This could be an individual or a company. However, there are key things founders must consider when deciding to sell. 

I’ll break it into four parts- When, Who, Why and What

Is it the right time?

Every entrepreneur understands the importance of timing. For example when launching a new product, if you do that too early, you risk being rejected by the market that may not be ready for that product. Launch too late and you risk being beaten by another competitor. It is the same when exiting. Timing can determine how much leverage you have during an acquisition. If you give up too early, you may not have enough leverage to negotiate better terms during an acquisition, but if you wait too long, your company may have past its peak phase and again, you lost your negotiating power. 

Who is making the offer?

When a company decides to acquire a startup, one of the biggest concerns is the fact that the more established company has a strong organizational culture. To the outside world, the deal may be too good to ignore. But founders have to think beyond the money offered. They need to consider if they are selling to the right entity, otherwise, there will be consequences. During an acquisition, key employees from the startup are often retained under the new management. But if there’s a marked difference in organizational culture, then the rate of employee turnover will likely increase.

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Organizational culture (also known as Corporation Culture) refers to the values, beliefs, and attitudes that govern employee interaction within an organization or company.

To avoid this, founders need to know who is making the offer. A quick research about the acquirer will tell you who they are and what they stand for. You can also talk to other founders or employees previously acquired by the company to get a better understanding of what the organization’s culture is like, and if it resonates with that of your startup. This will shed more light on who the acquirer is and the decision of accepting or rejecting the offer easier.

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Why are they interested in your company?

Acquisition happens for several reasons. Knowing just why another company is interested in your startup can be leveraged for better terms and conditions during acquisition. Here are four common reasons for an acquisition. 

A new product and niche customer base - this will be attractive to a major company looking to break into a new market. Rather than compete, it is both time-saving and cost-effective to acquire the startup. 

A new product but a similar customer base as the acquirer - breaking into a market with a new product puts a startup under the scope of companies operating in the market, especially since they share the same customer base. 

The same product and customer base - customer loyalty can be hard to earn. So when a startup wins over customers from major companies in the same industry, while selling similar products or services, they become a target for acquisition. 

A niche customer base but similar products/services - satisfying a niche group of customers within an industry means there is a market gap. Startups can often take advantage of this and if successfully done, it can become a good reason for an acquisition. 

Remember, any of these reasons is a strong leverage for the startup to negotiate for better terms and better pay. 

What to ask for during an acquisition

If you are satisfied with the Who and Why, the next thing to consider is what to ask for. This can be tricky since money is often the first thing on the table. But as I pointed out earlier, money is just one of many factors to be considered during an acquisition. Focusing solely on the money can be detrimental to the future of the acquisition. You don’t want everything crumbling down a few months or years after your startup has been acquired. The terms and conditions of the acquisition should be well negotiated using the “why”, as leverage. Key things to ask for are - Employee retention, employee pay, compensation, titles, and a new leadership structure. 

As a founder looking to exit through acquisition, ask yourself, Is this the right time? Is this the right company? What makes my company attractive? What can I get from this? These questions will guide you in making the right decisions on whether to sell or not.

In case you missed it, here’s what we talked about last week;

That’s all for now folks.

Until next time, stay inspired and keep chasing your dreams!!!

Cheers,

Alex