Stages of the Startup Journey - #10: Exit this way
Stage 10: Exiting with a win
You’ve worked hard to build your company to a point where someone is interested in buying it. That is really GREAT WORK! Now you’re wondering how to craft the right kind of exit, at the right time, and maximize the return on your (and potentially your investors’) investment, right? Let’s dive in.
When to exit
Deciding when your company is ready to sell and you are ready to exit comes first. If you sell or exit too early, you’ll likely do so for less money than you probably should. However, it is possible to miss the market timing and sell too late, which can have the same impact. You want to be keeping an eye on your competitors, other sales and exits within your industry, and what the market trends in general are within your industry. There’s an old phrase, “Strike while the iron is hot,” which describes this very situation. You want to be exiting on an upswing, making your company worth as much as possible and as attractive as possible to potential buyers.
Prep for sale
Prepping your company for sale involves cleaning up as much of the inefficiency as possible. Are there processes which put undue burden on employees or customers? Are there tools you’ve been “getting by with” that could be fixed or upgraded to make systems or processes run better? You should know what the warts on your company are, and if you don’t, you should spend time talking with your employees to find out what they are. Then fix them! The same way that a house is staged and cleaned before being put on the market, you want your business to gleam to attract the best potential buyers possible.
There are also a ton of other types of tasks required to prep your company for sale, including legal and financial/accounting tasks. When you’re at this stage, it is necessary and worth it to hire qualified professionals to make sure you dot all of your i’s and cross all of your t’s!
How much should you sell for?
Valuation is as much art as science, and maybe even more so. Most companies that conduct valuation exercises look at a few things to figure out a proper valuation for a company being offered for sale:
Other sales in your market or industry
Other sales of companies with similar products or similar types of products
Annual revenue, usually compared in a formula with profit and expenses
Sometimes a valuation can be a simple multiplier against annual revenue, and there may be a trend in the market for this in your area. For example, many SaaS businesses are valued by looking at the annual revenue times a market-rate multiplier, which in the current market seems to be 5-10 times annual revenue. This multiplier can vary GREATLY based on a whole host of factors, and is less scientific than the process a valuation company would conduct. However, it can be useful for getting a ballpark estimate to start conversations with buyers.
Contrast this with a service-based company, which is usually lucky to get a 2- or 3-times annual revenue valuation and is more likely to be judged at 2- to 3-times average annual profit. This is because service-based businesses are often very tightly tied to the reputation of the people conducting the business, and the margins are much smaller and do not scale well without an associated increase in expenses.
Who you sell to matters
It’s tempting to just take the highest offer and laugh all the way to the bank, but seller beware: If you have worked for years to build this thing, and if you have employees who will be working for someone new, you may not want to see it sold for parts or see your employees who provided years of loyal service treated poorly. Who you sell to is just as important as how much you sell for and when. This is a great time to practice listening to your “gut” (or intuition) and take your time when working through a deal. If something doesn’t feel right, dig into why and be honest with yourself about the pros and cons of any offer. And you can ALWAYS take an extra day to sleep on it before making a big decision. If your buyer doesn’t like or respect that, that can be a sign, too.
What do you do the morning after you sell… and beyond?
Congratulations! You’ve spent years of your life building this thing to get it to the point where you have a successful exit.. Now what? It’s likely you’ll enjoy a week or two of traveling, playing with your dogs, or even doing nothing before you wake up one morning and realize you’re bored. That just means you’re an entrepreneur!
If this happens to you, there are lots of great options for what comes next:
Start another company! It’s likely you’ve got lots of great ideas, so try a few out and see what sticks.
Invest in other peoples’ ideas and companies. It’s very likely you have a nice pile of cash and could play the picky investor role and support someone else’s journey.
Advise, consult and mentor. You’ve got something a lot of new entrepreneurs want: experience! Use it to help support other people in overcoming their own challenges and getting to their goals.
Become a co-founder. Find a person with a great idea who you are compatible with and join in their journey. Bring your expertise and skills in exchange for equity and a role in building something new.
Whatever you do post-exit, remember that every new idea, every new product, every new venture should follow the Stages of the Startup Journey!