If you’re interested in selling your business, here are some things to keep in mind.
A couple of questions on Quora about whether there’s a “buyer wanted” listing service for startup owners who want to sell their businesses prompted me to write this post. To my knowledge, there isn’t one (yet), but the questions got me thinking: what can entrepreneurs do to increase the appeal of their startups for potential acquirers?
People start businesses for many reasons. Hopefully visions of a huge payout at exit aren’t the primary motivator to pursue entrepreneurship. But given that planning for an eventual startup exit is something founders should address from day one, and since most exits are through acquisitions, it makes sense to keep that possibility in mind and to avoid any obvious blunders that could close off a possible route. Below are a few ways to think about startup acquisition from the very beginning.
Pick the Right Market
Target a market that has significant growth prospects in a field with existing competitors and/or potential entrants. Not only is it extremely unlikely to find a market where no competitors exist, but if you happen to stumble across one, chances are that no one’s playing there for a reason (i.e., it has limited profit potential). Just make sure the market you choose isn’t too crowded with large entrenched competitors that will be difficult to outmaneuver.
Choose the Right Team
In the early days when you’re short of funds, it can be hard to attract the right talent. But from a business and funding perspective, it matters — a lot. Many investors view the startup management team and their track records as the number one or number two factor on their list of funding criteria.
Other than your cofounder(s) and other critical talent like developers, you should outsource as much as you can for as long as you can. Once you start to show traction and have some cash coming in, you’ll have a better chance at attracting the right in-house talent. And that just might get the attention of a potential acquirer.
Focus on Execution
This should be obvious, but be good at what you do. That means your business addresses a key pain point with a unique and clear value proposition. Successfully execute your milestones in terms of attracting customers and growing your market share, as well as showing traction on your key financial metrics.
Run a Tight Financial Ship
Your accounting records should be in order, prepared in accordance with generally accepted accounting principles (GAAP). Your corporate governance, legal records, HR and employee documentation should also be organized and easily shareable.
Keep Your Capital Structure Clean
Though it might seem like overkill to document things from day one, it’s impossible to anticipate what will happen in the future. Allocate and document how founders’ shares will be split when you first incorporate, and have a lawyer draft a written agreement spelling out what would happen in a sale, founder exit (voluntary or involuntary) or another scenario.
And don’t take on lots of small investors or create too many different classes of stock. It’s a nightmare to sort out and could greatly restrict your flexibility whether you’re trying to raise funding, sell the company or make an acquisition.
Protect Your IP
If technology is your key differentiator, make sure you lock yours down. That means having clear documentation as to ownership and registering your IP, among other things.
You’ll notice that all the actions above are the same ones that will build a sound and successful business, which, if you’ve chosen to enter the startup arena, should be your primary focus. Planning for an exit is hugely important, but it shouldn’t drive your decision-making. It’s just too tough and risky to be an entrepreneur without having real passion or commitment. If you lack those motivators, your worry won’t be about attracting an acquirer for your startup. It will be about how to stay in business.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.