Selling your startup is one of the most difficult processes entrepreneurs go through, second only to launching.
Chuck Sharp, University of Utah alum, CEO and founder of Shoreline, and serial entrepreneur would know – he’s sold three of his companies since 2001. In the Lassonde for Life workshop, “Selling Your Business,” he details seven tips for a successful sale, from the decision to sell through closing.
Keep the end in mind
“If you’re in a business today that you’ll want to sell, start with the end in mind,” Sharp said. “Put people on your advisory board or board of directors who could potentially buy. Bring these people inside of your business early on.”
If you’re unable to build out your board – or you just don’t want to – networking with other heads of companies will also do you some good.
“Anyone who you think could buy you, who could be a good fit, get on their radar,” he said. “Nurture those relationships so down the road, they may be an option for you. Even if you’re not wanting to sell for five to seven years, you need to start laying down this groundwork now.”
It’s hard to sell a business, but it’s near impossible in obscurity, Sharp says. Outside of talking to other industry players, you need to tap into the media, too.
“You have to be in the press – people in general have to know you exist,” he said.
Flex your sales skills
Sharp says people want to buy, not be sold.
“It generally doesn’t work to initiate,” he said.
This, however, has to be gently balanced with a little aggression.
“Once you get one term sheet, try to get two more,” he said. “It’s the Rule of Threes: they’ll play off of each other, bidding, and you’ll end up being a better negotiator, more confident, and more likely to not only sell your business but sell for more.”
Consider the type and style of sale
Acquisitions generally occur in two types: an asset sale or an equity sale.
“What you want is the buyer to acquire your stock, not just your assets – an equity sale,” Sharp said. “If they buy just assets and liabilities, the shareholder is left out of the transaction.”
If you proceed with an equity sale, Sharp advises having this planned long before signing a deal – all the way back to the VC stages.
“How much money you raise in the very beginning can determine how a sale goes, even much further down the line,” he said. “In my last business, we had key competitors that each raised a lot of money: 3, 7, even $54 million. What happened is that those investors were only willing to sell their shares at a return that would be good for them, so those competitors passed up opportunities to sell their business multiple times.”
Sharp’s company, on the other hand, planned ahead.
“We didn’t raise a lot of money, so we were able to sell our business for less,” he said. “In the end, we were the only company in our group that was able to sell because we were smart about our VC strategy. Oftentimes, raising too much money is a detriment.”
It’s all in the timing
“Time kills deals,” Sharp said.
Even the most well-thought-out plan with the best possible acquirer can fall to pieces if not executed fast enough.
Once the term sheet is signed, the clock starts ticking in earnest.
“It’s risky to sign a term sheet because the acquirer can now spend a lot of time trying to poke holes in your business,” he said. “The sooner you can close, the less money you’ll spend on attorneys, and the likelier you are to avoid surprises.”
Be smart with who you bring on to your side to help navigate closing.
“Find attorneys who are fast and responsive,” Sharp said. “Everyone you hire should be very familiar with your space.”
Stay organized
After the term sheet is signed, due diligence begins. This is when the acquiring company will dig deep into your finances, requesting all kinds of information to analyze the health of your company.
“They’re going to ask about employees and staff, legal structure, benefits, company policies, org charts,” Sharp said. “You will feel like you’re going down useless rabbit holes, and sometimes, they are. You’ll have attorneys working for the acquiring business trying to bill as much as they can, lifting every rock because they’re getting paid by the hour. Learn what to push back on, but usually, give them what they want.”
This process can last for months and be emotionally and physically exhausting.
“You will now have your day job, which is running your business, along with a night job, which is closing this deal,” he said. “You have to continue to perform.”
To survive due diligence, you must stay organized.
“I recommend having a folder of all your key documents, keeping good data hygiene,” he said. “As CEO, it’s your job to make sure everything is accurate. You’ll be exhausted, but you have to be detail-oriented in order to get it right.”
Keep working
After the sale is over, the papers are signed, and the money has been transferred, you might think you’re in the clear. The truth is, Sharp says, now is when you prepare for it to start all over again.
“Once the sale is done, you’re just an employee,” he said. “The power was with you, but now HR and finance have more power over you. Now, it’s about developing relationships of trust. It’s a new skill set you have to establish, where you’re not a boss. It’s your responsibility to learn the new business – go to school on that business.”
Proving your value to a company at any level can help solidify your reputation – which will give you opportunities to build and sell again.
“It’s less about the actual businesses and more about the entrepreneur,” he said. “Investors invest in the entrepreneur first and the business second and purchasers buy good businesses from honest entrepreneurs.”
