You may have heard the old saying “companies are bought, not sold” and I tend to agree even if Bruce Milne doesn’t. There comes a time in almost every successful entrepreneur’s life when she will receive an unsolicited offer to buy her startup. This is the moment of truth. Should you take a bird in the hand or let it ride to see if you can build that billion dollar company your investors expect? In this post I’ll assume you’ve decided to sell and give you the benefit of a few of my experiences.
First, you need to realize that there is a very real possibility that at the end of the sale process you’ll still own your company. Most deals fall through for a number of reasons, most of which are out of your control. Especially in hot sectors, there are lots of companies who will want to conduct ‘undue’ diligence to better understand how you’re able to succeed where they’ve struggled.
Second, get ready to put your life and company on hold for months. Depending on how you decide to conduct your sale process it could easily take 4-6 months to conclude. During that time don’t expect to get anything done. Your metrics will likely go flat as the entire organization focuses on the exit and not the business.
Third, protect your interests as much as possible. In early stage startup sales breakup fees are unusual, but that doesn’t mean that you shouldn’t ask for one. You can run the sales process however you see fit and you alone can make the rules (assuming you’re being bought and not sold). Here is the process I recommend:
- Courting period. Exchange of basic information to determine interest on both sides. Get a basic understanding of ballpark value of the transaction. I recommend this period lasting no more than 2 weeks. Cut the buyer off after this point. They need to make an offer or move on to another target.
- Letter of Intent. The buyer will deliver you an LOI outlining the terms of the transaction. Assuming the consideration is acceptable you should put some teeth into the LOI. I’d recommend having the buyer pay any and all legal and accounting bills you will incur during the diligence process – usually around $10-20K – if he ultimately decides not to move forward with the transaction. This is a tiny sum and will weed out almost all tire kickers. I recommend negotiating the LOI for a period last no more than 1 week.
- Due Diligence. The buyer will conduct extensive legal and financial diligence. Give the buyer no more than 4 weeks to complete his diligence.
- Firm Deal Term Sheet. You should have the buyer reiterate the deal terms he outlined in the LOI and get him to agree to cover your legal and accounting costs as well as a small breakup fee ($100K for early stage startups) if they fail to close within a reasonable amount of time. I would recommend setting a 30 day time limit.
- Purchase Agreement and Close. Negotiation of the PA and subsequent close should only take 30 days.
This schedule is very aggressive, but very doable. If you’re in a hot space and have a great startup you should demand/expect this sort of timeline and process – 3 months is completely reasonable. The consideration of $100K plus costs is STILL a horrible deal for you if the buyer fails to close. You’ve surrendered 3 months of progress – $100K won’t come close to covering your costs, but may save you from wasting time with a non-serious buyer. Good luck!