If you are a startup founder or employee, you may dream of the day when you can exit your venture and cash in on your hard work and vision. But how do you ensure that you get the best deal possible when negotiating with potential buyers or investors? Here are some tips to help you maximize your startup's value in exit negotiations.
Before you enter any exit talks, you need to have a clear and realistic idea of how much your startup is worth. This means doing your homework and researching the market, the competition, the industry trends, and the potential growth opportunities. You also need to prepare a solid financial model that shows your current and projected revenue, costs, margins, and profitability. Having a strong valuation based on data and evidence will give you more leverage and confidence in exit negotiations.
I recommend getting a valuation from a certified valuation company - that ideally has valued companies in your industry or similar. And of course, do your own research as well. But the certified valuation firms have access to databases for comps that many don't have access to. Make sure they use comps for both publicly and privately traded companies. They will ask for both financial and non-financial data to do the valuation. They will provide a range of values (low to hi) and conditions under which each might apply, based on risk factors. When all is done, interview the valuation company and identify what the levers/variables that are in your company that influence valuation up or down. This will help you allocate resources going forward.
Know *your* worth. As in, what's your number? Know how much money *you* want to make out of the exit. And whatever number that is think of a bigger one as you'll have to take into account tax, fees and most importantly the acquirer trying to beat down the exit price.
Timing is everything when it comes to exit negotiations. You want to strike when the iron is hot, meaning when your startup is showing strong traction, growth, and momentum. You also want to avoid waiting too long, as your startup may lose its edge, face new challenges, or become irrelevant. Ideally, you want to initiate or respond to exit offers when you have multiple options and interest from different parties. This will create a sense of urgency and competition among the buyers or investors, and drive up your valuation.
Identify timing that is best for you (ideally) based on seasonal factors (retailers won't sell during Nov/Dec), personal factors, new initiatives that you are implementing (wait until they mature). As importantly, any new prospect you meet - you can ask them 'if we were to consummate a deal with you, when it the best time for you to close'. And then ask why. This will give you an indicate of their desire and how soft or hard they will need to negotiate if they have a hard stop to close by a certain time (e.g. they are planning an IOP). You may not be able to pick your time to close perfectly but good to know the playing field.
Sure, try and choose your timing but like timing any market don't think you can be too precise. Markets go in cycles of course so have a think about where you are in the economic cycle, pick a 2 year window and think about the momentum of the economy -- better to sell when things are still going up than when there's a risk they'll turn against you during your window of opportunity.
Exit negotiations are not only about numbers and terms, but also about people and trust. You need to build rapport and credibility with the potential buyers or investors, and show them that you are passionate, committed, and knowledgeable about your startup. You also need to understand their goals, motivations, and expectations, and align your vision and values with theirs. By building strong relationships, you can increase your chances of getting a favorable outcome and a smooth transition.
From the very beginning, make sure you and your team are straightforward and authentic. No one wants to do business or buy a company from people they don't like. Trust will develop over time as they see how you operate and communicate. Trust is a key factor in whether they will negotiate hard or soft, or be willing to walk away.
Sure, make people away of you and get to know people in the space but the best motivation for an acquirer to buy a company is that the little upstart poses an existential threat to the incumbent. That doesn't need cosiness or friendships.
Exit negotiations are a complex and delicate process that requires skill, patience, and flexibility. You need to be prepared for multiple rounds of discussions, due diligence, and legal formalities. You also need to be aware of the common pitfalls and challenges that may arise, such as valuation gaps, deal terms, confidentiality issues, and cultural clashes. You need to negotiate smartly and strategically, and avoid being too greedy, emotional, or rigid. You also need to seek professional advice from lawyers, accountants, and advisors who can help you navigate the process and protect your interests.
Clearly articulate the unique value proposition, showcase growth potential, and strategically leverage competitive interest. Balancing assertiveness with flexibility and demonstrating a comprehensive understanding of your startup's strengths positions you for optimal terms.
If you don't have negotiating experience then get some. Take a course (online live or recorded) and then practice over and over again with colleagues or family. It is a complex topic that can be learned with time and practice. We negotiate every day with our family, colleagues, super market manager, etc. This is obviously a critical transaction (compared to those) but the skill can be learned. The most important aspect is learning how to be calm, not reactive, and create as many creative options as possible. Don't turn negotiating into a 'split the pie' situation. That means someone will always lose, and many times both parties lose. Turn it into an 'expand the pie', and win-win scenario.
Finally, you need to plan for the future of your startup and yourself after the exit. You need to consider what will happen to your team, your product, your customers, and your culture after the deal is closed. You also need to think about what you want to do next, whether it is joining the new entity, starting a new venture, or taking a break. You need to have a clear vision and a roadmap for the post-exit scenario, and communicate it effectively to all the stakeholders involved.
Once you're on your way out of there by selling the company you have to accept that the acquirer will change the culture. They might sack your favourite employees or even shut down the business unit. If you don't want that to happen then don't sell. And don't do too much planning - things can always fall apart.... i.e. don't choose the colour of your Porsche until the money's in the bank ;-)
This is something you can think about now - even before you put the company on the market. How will you spend your personal time. What will your legacy be at the company after you leave. Do you still want to participate in some way with the company. What funds will you have available to you after taxes. We ALWAYS recommend that owners consider an ESOP (Employee Stock Ownership Plan), since it allows you to retain control, drive taxes on proceeds to 0, and have company taxes go to 0 as well. Plus of course you get to stay on and govern as usual, and employees get to have stock in the in the company - which is very motivating.
Pick and choose your team wisely. Attorneys, accountants, valuation companies, consultants, etc. may have something to lose when you pursue a deal. Their client (you) may go away. Map out considerations that don't show up in the valuation of your company. For example, what are your growth initiatives? Short and long term. This shows potential to the buyer - and they will love that. Do a mock due diligence with a professional consultant to ensure you identify everything you will need at that time you have a real buyer. Don't get caught missing information or having to explain something during DD. Iron out all of those issues now. Don’t get surprised. This is the most important transaction for most business owners. Let experts guide you.