Lots of exciting activity is taking place on the Dallas startup scene right now. The tech and startup communities are thriving. The job market is booming. And Dallas’s very first Startup Week will be held March 2 through 6. If you’re an entrepreneur, investor or someone who is a working professional and haven’t signed up to attend this free event, then you’re making a huge mistake. This event is a must-attend for all Dallas residents.
As part of the startup scene, many entrepreneurs may find themselves at the juncture of selling their companies at one point or another. I never thought it would happen to me, but last year, I sold my company Blue Track Media to Karlani Capital, and although it was one of the most frightening times of my life, the experience turned out to be extremely educational and fun. Here, I’ve put together some tips for fellow entrepreneurs who may be thinking of exiting their companies.
Why are you selling?
When considering selling a company, think about why you want to sell. Do you want to start a new business or venture? Do you want to spend more time with your family? Is the move borne out of exhaustion or desperation? Your reasons for selling the company can impact the sale’s outcome, the business’s worth, and your long-term satisfaction and confidence. So, it’s important to consider the reasons for selling your company. I sold my business because I was ready to take both myself and the company to the next level of success by surrounding myself with an all-star caliber team that has a solid track record, and as a result, I’m happy to be where I am today. However, just selling the company doesn’t mean the hard work is over. If anything, it only increases due to growth and accountability.
Is your company ready for an exit?
So, you’re thinking about selling your company. But what if you decided not to sell and kept growing the company revenues for another year or so? You could possibly get a higher valuation. Many founders tend to sell too early and have big regrets later on as they see massive growth and realize they could have gotten a better valuation. The opportunity to sell Blue Track Media presented itself for the first time three years ago and although it was very enticing, I decided against selling and kept growing the company. That resulted in another buyout offer two years later at a seven times higher valuation. Looking back, the decision to decline what seemed like a lot of money at that time was the right decision. Patience pays dividends.
Preparation is everything
Take a critical look at your company. Tie loose ends. You need to be in top shape when considering an exit. Evaluate company finances; be able to show company growth over the past several years, and explain any losses adequately. Review company structure; let go of processes or procedures that haven’t been efficient. Take a look at your business and marketing plans, and update them accordingly. Also consider putting some thought into what kind of buyer you’d like to sell to, and find out their vision for your company after they acquire it.
Valuation, Valuation, Valuation!
Before you start looking for buyers, you should know what your company is worth. Get a few different firms to assess and evaluate your company. The valuation process will also help you pinpoint any excess fat that could be trimmed, help reduce the overhead and bring the company to higher efficiency. The buyer is likely to build a financial model that helps them come up with their own valuation for your company. Most of the time it’s going to be lower than what you expect. That’s okay, be transparent and justify why you think your company is worth more. Open communication is key. Successful buyouts occur when both sides feel that the valuation is fair and neither side is getting gypped.
Your role after company exit
You’ll probably have to remain on board of the company for a certain amount of time, usually a couple years. The sale could be structured in a way perhaps for you to take on a management or advisory role if you’re no longer interested in running the company. This could also help sweeten the deal and retain the buyer’s interest. After I sold my company to Karlani Capital, an opportunity arose where I was invited to become a managing partner while still retaining the CEO position of Blue Track Media. I initially envisioned an opportunity to become an investor much later in life, but luckily it came much earlier and there was no way I could pass it up.
Keep an eye on industry trends
You can’t predict the best time to sell your company, but you can certainly determine a favorable time to sell. One of the indicators that encourages a company’s exit is how the industry is doing – whether it’s looking up and what kind of growth potential there is in the industry over the next five to ten years. Have your competitors sold or are on the verge of selling? Bigger companies are usually watching which one of their competitors are acquiring smaller companies. Competitors tend to make similar acquisitions so that they can still compete at the same level. This helps you know which companies you should pitch the sale to and what valuations to expect if that information is public. Also, consider both the local and national economy and job market. Those indicators can play an important role in getting the buyer in a confident mood about the deal.