Hey, mistakes happen. However, in the startup world, mistakes can be costly, time-consuming, and just flat-out embarrassing on a legendary scale (remember when Yahoo could have bought Google for just $1 million?). If you’re planning on selling, it can be tempting to rush into the process to get it over with as quickly as possible, since most startup founders describe the exit process as incredibly painful and extremely tedious.
When you are selling because you are tired, you are just ready to get out and can get sloppy with your decision making. And when you get a big offer you can see stars and skip red flags.
In that rush to sell, there are some offers that simply sound too good to be true. And according to experts, that’s because they are. Here are a few tips for sorting the real from the BS when it comes to selling your company:
You’re going to get some literally unbelievable offers
According to Justin Kan, founder of Twitch, you’re probably going to get some offers that aren’t necessarily on the up and up. It’s important to beware of folks from “corporate development” who pop up with offers to buy that will probably go nowhere.
“Most of the offers you will receive to buy your startup will be bullshit offers,” Kan writes for Atrium. “It costs a company exactly zero dollars to tell you: “we want to buy your startup.” In fact, companies employ teams of people, under the euphemism Corporate Development, to go around the Valley and repeat this phrase to founders.”
So here’s how to tell when an offer is genuine
How do you know when an offer is genuine? It helps to know what legitimate offers actually sound like. First of all, a serious offer will have an expiration date. This pressure, according to Kan, is to keep founders from shopping around for a better offer.
Secondly, you should be on the same page about valuation expectations from the beginning to keep the whole deal from falling apart:
“Before proceeding far into conversations with big acquirers, you should try to clarify valuation expectations (and other important consideration details, like retention packages) as quickly as possible,” Kan writes. “This strategy should help prevent you from having half a dozen meetings, only to find out the potential acquirer expects to pay $10 million for your rapidly growing startup that already has a term sheet for a $15 million A round.”
In order to make sure, don’t be a stranger
To save time and avoid getting sidetracked by BS offers, it’s important to have an exit strategy mapped out well before it comes time to seriously consider selling. If you’re meeting with potential buyers, they probably shouldn’t be strangers, but instead, industry insiders you’ve already forged some connection with.
When Eric Paley, managing partner at Founder Collective, was looking to sell his company, Brontes, which focused on mass-customization for the dental industry, he put out feelers for buyers years before he was actually interested in selling:
“These industry players knew us reasonably well,” Paley writes for TechCrunch. “We weren’t calling them cold to offer them an opportunity to invest in a company that they never heard of. While we were somewhat coy with senior folks from the industry, we had done a good job creating a positive reputation as a team building something that could be important to the future of the industry.”
Use the 20:6:3:1 rule
And putting out those feelers for just the right buyer requires a wide net. Jame Altucher, managing director of Formula Capital, has a pretty great strategy for reaching out to potential buyers. Start by calling 20 companies, which will probably yield about 6 follow-up meetings, and three subsequent “serious” meetings that can be narrowed down to one perfect offer. He used the strategy himself when selling a mental health facility, to great results:
“We identified 20 private equity firms, public companies, private rollups, and ancillary companies all interested in owning a mental health facility,” Altucher writes. “Out of that the ratio worked like magic. We got 6 follow-up meetings. Then three serious meetings, all of which led to offers. Then we took the highest offer (it was double the other offers) and sold the business for $41.5 million. For a company that had $1 million in EBITDA.”
Here’s the good news: not all your offers are going to be BS. If you put in the time to build relationships, they’re bound to pay off when it comes time to sell.