A common question that I get asked every now and then is about the value somebody’s company has. People show me classic formulas, theoretical models, market multiples and historical deal values. This is all very good when you are in a market where capital and buyers are abundant.
For 99.9% of the startups in the world, this is not quite the case. So, what are the important points to observe when you begin thinking about selling your business? And how you can improve your chances of getting sold by a fair value that will cover your incorporation costs and will still compensate you for all the time and effort invested in the operation?
Price agreement is something very hard to achieve between an interested and qualified buyer and a seller. It will be more difficult to an extent when you have your documentation and track record less organized than if you have all of it nicely structured in your files.
Also, different visions about the near future and the long-term industry sector performance affect the perceived values for both parties, besides internal metrics and numbers and the two sides perspectives.
If you want to optimize your valuable time building up momentum and negotiating a fair deal, pay attention to these value drivers:
- Accomplished and ambitious founders
Many buyers or investors see in the management and founder teams one of the key assets of any potential acquisition. If those teams are not ambitious and methodical, the probability any buyer will make you an offer will be low.
Would you consider buying a business or part of a company that would take 10 years to return your investment? Or would you rather buy a company that in 3 to 5 years will have repaid your investment?
- Income Predictability
Here we are considering income quality and income visibility. Income quality has to do with how recurring and mitigated your income is. Example: if you have 2 clients generating 70% of your revenue in one company and 200 clients generating the same 70% income in a second company, the business with more income quality will be the second one.
Income visibility refers to the recurring contractual revenue that your company has. This usually attracts buyers as they know that the minute that they get the company, there is some guaranteed cashflow happening and this will certainly give your valuation a few multiples.
- Barriers to entry
A barrier to entry will always protect your company from competition and from market oscillations. Contrary to popular belief, getting into a highly regulated market is good, as only few manage to insert their companies in those kinds of market – regulation working as a barrier to entry.
First mover or pioneer advantage is a too often underrated barrier to entry. Nobody can take from you the title of first in the market and usually this gives your brand a special place in the pantheon of options that a more mature market will offer its audience.
Long term contracts also play an important role as they give your startup more visible income, as well as a broader user base gives you a more qualified income.
- Strategic synergies
Strategically speaking, when you sell your startup to another company that already has a distribution network that carries more capillarity than yours, you are willing to give away part of your control in the company in order to get accelerated sales and revenues.
This is also the case when different acquirers get in the operation in the same or in different moments, bringing each one advantage. Classical examples are distribution networks, infrastructure or platforms, cashflow and user/client base.
- Avoid under-valuations – don’t sell it too early
It is always better to have your business model fully validated and with one to three years of repeatable operations before you sell your startup partially or entirely. The more you stay on the road successfully on your own – as long as you can and a strategic alliance would not accelerate your growth – the better your valuation will be when you prepare for sale.
- Organize your track record files
All your files should be in order: accountancy, human resources, legal records, financial demonstrations, product development roadmaps, CRM systems and so on. This helps sustaining your side of the negotiation and must be the factual base for your convincing arguments after the main thematic discussions.
Proper acquisition preparation can help even on your daily routine and is never too much.
- Manage possible post-acquisition expectations before you sell
What will be the responsibilities and expectations of each one in the acquired company? What are the operational roles that will suffer cuts or that will have the burdens increased? Will your team and employees remain all in the company or some may be going to the buyer company? What about your services and products portfolio: does it get shut off or does it continue with same brand and offer? Do your products get integrated in the buyer company portfolio?
What if the acquirer gets acquired? Do you have a compensation clause in your sale contract? You should pay attention to this, as it happens earlier and more often than we would have imagined 5 years ago.
- More cash in the bank will help your valuation grow
One of the most frequent reasons that early-stage exits fail is the fact that traditional due diligence concentrates on the startup financials. Cash in the bank account, some reserves to burn in emergencies and low debt are basic points that may be demanded by your buyer and may make your valuation higher.
Obviously low debt history and good cash reserves demonstrate a startup that is healthy financially and which management is prudent. This will reflect on the multiple you can get over your annual turnover.
- Exercise due diligence systematically
Last but not least, practice due diligence systematically in your company. This will give you a flavor of the current status and insights on points that must be stronger for a buyer to consider acquiring your business.
Make sure to clean up and correct mistakes that keep being repeated for one reason or another and never tolerate good enough practices, as buyers are always looking for best in their classes and not just another moderately good startup.