Questions You Need to Ask Yourself Before Selling Your Startup
It’s hard to overlook the fact that the high-tech industry is being conquered by the ‘Big Fish’. Recently, Yahoo! purchased 25% of Taboola, and this is just the tip of the iceberg. Big startups buying (relatively) small startups has become a commonplace scenario. Facebook owns Whatsapp and Instagram, Google bought Waze and Youtube… the list goes on. Let’s face the facts: Today’s world lives by the saying ‘If you can’t beat them, buy them’. With that said, if your startup has potential, expect investors to express interest in purchasing it. But how can you tell if and when selling your startup is right for you?
I am Ofir Bar, a veteran investor with a special interest in entrepreneurship and innovation. I noticed that when entrepreneurs get to the point where they are offered a deal to sell a substantial portion of their companies, they sometimes get confused and concerned. I believe this is because they don’t know how to estimate whether this deal is worthwhile for them in the long run or not. After all, no one wants others to get rich over their own labor. For this reason, I dedicate this blog post to things you may want to ask yourself before making this call.
What’s in it for them?
Think of a young entrepreneur trying to explain to an angel investor why they should invest in their startup. Before you try to get money for something, whether you’re selling or trying to acquire initial equity, you have to be coherent and clear about the WIIFM (‘what’s in it for me’). You have to be sure as to what would the other party benefit from this deal, and why you want to sell your company. Is it because things are going really well? Or because things are going really poorly? Maybe you have another reason?
All these reasons are legitimate, but some are definitely better than others. Selling your business thanks to its success surely makes sense. However, founders of a prosperous startup are usually reluctant to sell it. Therefore, the deal you sign has to be highly worthwhile to justify such a move.
Selling because things aren’t going well for your startup is somewhat problematic. I don’t recommend offering a faulty business. If I were in your shoes, I would do my best to stabilize the startup before ‘putting it on display’.
You may be looking for a buyer because you are handling multiple businesses at the same time, and wish to let go of one or more. That totally makes sense. I would recommend, though, giving up on the least promising venture that you operate — but only if it’s in a good condition.
There’s another reason for selling a successful entrepreneurial effort: You don’t feel that you possess the tools or will to take it to the next level. Of course, I wouldn’t recommend underestimating yourself. If you consider selling because of this reason, you should do it in a ‘choose your battles’ mindset, and not a defeatist one.
Are you ready, Daniel-san?
Even if it truly is a good idea to sell your startup — timing is key. Two factors determine whether this is the right moment to offer your company to potential buyers:
- If your startup is ready for expansion and has expansion potential.
- If the economy is showing clear signs of long-term optimism (this is likely to strengthen the interest of investors).
The company’s independent operation is another major factor that can determine how attractive it will be in the eyes of potential buyers. Most investors, when looking for businesses to purchase, strive to get their hands on startups that are ‘well-done’, meaning they are independent and don’t need outside intervention to be profitable and prosperous. So, if the company can’t function without you, or it doesn’t have the right crew and fully-functioning systems to operate independently and lead to growth, it’s not really ready to be sold.
Another question to ask yourself is whether selling only a portion of your business is a possibility. Not all entrepreneurs want to completely let go of their life’s work, and that’s completely understandable. By doing so, you can keep to yourself some ‘say’ in the company’s conduct, alongside freeing yourself to other initiatives.
Feeling whole with letting go
Letting go of a business you started is rarely emotionally easy. So, do you feel whole with the idea of selling your company, or a part of it? At the end of the day, this is THE question to ask yourself. If you are unsure, you may want to consult with a financial advisor or other entrepreneurs. Doing so may not only help you to decide whether it’s a good idea to sell your business or not, but also assist you in making the most profitable deal.