- How to Know When It’s Time to Sell Your Startup
- When Is My Startup Desirable to Buyers?
- Questionnaire for When to Sell Your Startup
- When It’s Time To Sell Your Business, Choose Acquire.com
Like many founders, you might wonder when to sell your startup from the moment you acquire your first customers. And if not, you probably should.
In most cases, startups either get sold or die.
That may seem controversial the first time you hear it, but it’s often true. If you’re one of the fortunate few to create a successful business, you might pass it to your family (News Corporation) or an executive board (Microsoft).
But most businesses either get acquired or run out of money and fail.
Does that mean you need to look for sellers for your business from day one? Not necessarily. But it does mean you should constantly reassess whether you’d be willing to sell your business and if buyers would be interested in acquiring it.
We see people selling their startups at all stages for hundreds of reasons and we talk with them about it too. We’ve compiled information from around the web and stories from our customers to help you decide when is the best time to sell your startup.
How to Know When It’s Time to Sell Your Startup
You might sell your startup for any number of reasons. However, the four most common reasons we see from founders are:
- You get an offer you can’t refuse.
- You see insurmountable difficulties down the road.
- You’re ready to move on.
- You’re building to sell.
Let’s discuss each of these.
You Get an Offer You Can’t Refuse
No matter how pure your motives are, businesses are ultimately for-profit, and everyone has a price. In 2023, private equity (PE) has its hands on roughly $585 billion in unallocated raised capital – more than enough to make even the most committed founder interested in a sale.
In our sister publication, Bootstrappers, we frequently interview entrepreneurs who’ve received unsolicited acquisition offers once their startups were doing well. The word is out about recurring revenue tech startups being great long-term investments. VCs (venture capitalists) are eagerly searching for new businesses to add to their portfolios.
One former Bootstrappers founder, Tibo Louis-Lucas, sold two of his apps, Tweethunter and Taplio, in a multimillion-dollar deal through connections on social media. After regularly posting about his progress on Twitter, he began to receive offers for his businesses from individual investors and VC funds.
At the same time, Tibo contacted an old friend from middle school who specialized in building SaaS businesses. After advising Tibo on how to build his apps, his friend sent the Tweethunter team a multimillion-dollar counter-offer that included an earnout – see below.
This deal was enough incentive to convince Tibo and one of his cofounders to become technical “employees” for their buyer for two years. And while Tibo wasn’t actively looking to sell, this deal structure was appealing to him because it let him:
- Keep working on his apps.
- Realize a direct financial reward for all of his efforts.
- Access his buyer’s technical expertise.
Always remember, especially for larger deals, you don’t need to feel tied down to a simple cash-for-assets sale. You’re free to structure your acquisition in almost any way and can leverage it to incentivize future work and even mentorship from your buyer.
You See Insurmountable Difficulties Down the Road
Some years are harder than others for startups and knowing when to sell your business before times get bad can save you from stress down the line.
Take recent history, for example. Negative funding sentiment forced tech companies to cut 60,000 jobs in 2022. Investors encouraged their portfolio startups to sell at nearly breakeven rather than face a loss. Bluetooth tracking app Tile, for example, sold to Life360 for about $250 million after raising $150 million in funding. Considering most VCs aim to at least 20X any investment, $250 million is a relatively modest exit price.
Available funding might not matter to you – especially if you plan to bootstrap your business (grow without raising capital). But you might also encounter problems like:
- Labor shortages making it difficult to hire new staff.
- Major global events (like COVID) making your customers less willing to spend or raising your inventory prices.
- Huge scaling expenses required for profitability. For example, you might need to hire a sales team to compete against a large incumbent competitor.
- Sudden competition from another business with plenty of cash and resources.
- Government legislation targeted at your industry.
- Other events on the horizon that may hurt or devalue your company for the foreseeable future.
Global events that negatively affect your business are hard to predict. You might be better off selling your startup when things are going well and you can assure a high sale price. When you see problems on the horizon, it may already be too late to sell at the price you want.
You’re Ready to Move On
The most common reason for startup sales? Founders who are simply ready to move on to other things.
Life or business changes make you tire of running a company. Many startup founders are obsessed with the excitement and energy of the early stages but not so much in the later stages.
Jessica Lessin of The Information reported in 2022 that most founders she spoke to wanted to sell because they were exhausted or frustrated. Most ran businesses that were between five and six years old.
“They feel that the leadership challenges they confront in this moment (haggling over days in the office, tending to employees uneasy about a wide range of issues) aren’t what they signed up for. So they are reevaluating – big-time,” she says.
The changes that make you ready to move on might not even be at your startup, you might also need to change directions due to personal events like:
- A death in the family.
- A recent large expense.
- Starting a family.
- A divorce.
- A fallout with cofounders.
In our How I Got Acquire’d series, we interviewed Fortuna Burke, who sold her ecommerce business after burning out. She started her business expecting a four-hour workweek but got much more than she bargained for when it became an overnight hit. She found an interested buyer on Acquire.com who could put the hours in she could not.
You’re Building to Sell
Finally, many founders build businesses with an eventual sale always in mind. This is especially true for most venture capital and private equity-backed enterprises. PE generally backs companies hoping to sell through an IPO, stock purchase, or asset acquisition.
Businesses that choose to raise funding through PE are significantly more likely to be acquired the more fundraising they’ve pursued. We broke down that information in this article: Know Your Exits: When Your Startup is Most Likely to Be Acquired.
While the small number of startups that make it to Series E funding may sell on more favorable terms, VC-backed startups usually collapse before they reach those later stages. Even if they reach series E and beyond, they rarely decide when they get to sell. When you have investors, a sale becomes an ongoing negotiation with shareholders who want a return.
Some founders today build startups to sell even without VC backing. In one How I Got Acquire’d article, serial founder Muhammad Taimoor Hassan shared his process for building multiple startups and selling them for just a couple thousand dollars each. He hoped to use the earnings from his exits to back even bigger projects and exits.
When Is My Startup Desirable to Buyers?
Typically, acquisitions happen for two reasons:
Strategic reasons: A strategic acquisition increases the buyer’s revenue or helps them enter an emerging market quickly. A company or buyer will see the strategic value in absorbing a startup when its technologies, teams, customers, or all of the above benefit their business.
One example of a strategic acquisition was when the widely-trusted dog food marketplace, Dog Food Advisor, was acquired by pet owner super app, Wag!, for $9 million in 2022. Wag! was already active in a bunch of other fields like dog walking and grooming and wanted to use Dog Food Advisor to expand into the massive dog food industry.
Financial reasons: Financial buyers are often PE firms with the capital and strategies to grow a company and raise its value. Their ultimate goal is to build it to an IPO, sell its share, or sell the company at a higher value in the future.
But today it’s not just PE firms that are interested in flipping startups. In our blog, How to Flip a SaaS on Acquire.com, we referenced tweets from one Acquire.com buyer who took out a loan to acquire a startup, worked on it, then sold it for a profit.
In either scenario, buyers tend to look for three things:
- Product-market fit: Buyers like to see that you already have customers purchasing your product and that the number of customers increases over time. That’s a sure sign you’ve done that hard legwork to create a business that won’t simply collapse overnight after a sale. It’s an even bigger bonus if your customers make repeat purchases or subscribe to your service. That shows you have something they truly value.
- Predictable cash flow: Hand-in-hand with product-market fit, buyers want to be sure your product makes predictable sales. You might have high revenues one year because you’ve been selling lifetime memberships, but that means your customers won’t be paying again. This is why annual and monthly recurring revenue (ARR and MRR) are so important to the sale price.
- A high-growth niche: Just because you have many customers now doesn’t necessarily mean you’ll have all of them later. Maybe your startup relies on an API subscription that suddenly increases overnight and drastically increases your overhead. Maybe your business is an ecommerce store selling merch related to a recent online trend that could go away overnight. Buyers are always looking for businesses that scale with little effort.
- Well-built systems: Buyers usually don’t want to build your business from scratch when they purchase it. Most will love it if you already have things like a responsive customer service system that doesn’t require them to check their email every two hours. They’ll also like it if you’ve created organic marketing channels like search-engine-optimized blog content referring customers to your service consistently.
- Automation: If you automate busywork, you leave more time for buyers to scale your business, which makes it more attractive. Automate simple processes like email campaigns, calendars, payment reminders, and more.
Finally, if you’re running a bootstrapped startup you should also be aware of the correct valuation models for your business and industry as you won’t have a PE firm double-checking for you.
How Buyers Find Businesses to Acquire
As non-disclosure agreements (NDAs) blog the details regarding many acquisitions, it’s rare to hear about how founders attract offers. However, through our own experiences and stories from founders, the most commonly heard ways are:
- Through partnerships – Eventual buyers often begin their relationship with the companies they’ll acquire by paying for their service. They may decide later that making your business part of their business is a good financial investment.
- Cold outreach – As mentioned earlier, today many venture funds are eager to acquire a startup with consistently high earnings. People at these firms are paid to find small startups that might be interested in an acquisition. You’ll likely increase the odds of cold outreach from buyers if you regularly post about your startup on social media.
- Through startup marketplaces like Acquire.com – Today founders can easily reach potential buyers at any stage of their journey by listing on M&A marketplaces like Acquire.com. These platforms help them easily reach large numbers of potential buyers quickly.
- Investment banks and business brokers – Traditionally, one of the most common ways for-sale businesses connected with buyers was through institutions like brokers and banks. These institutions usually have access to vast networks of interested buyers, many with high net worth.
Questionnaire for When to Sell Your Startup
Selling is a big decision, but it should feel natural if you ask yourself the right questions. We suggest you regularly sit down and ask yourself the following about your business:
- How do you feel about your startup? Optimistic or Gloomy? Does the thought of free time make you feel significantly happier?
- What offer would be large enough for you and your partners to justify an exit? Does your startup’s performance reflect that number? Could you justify it to a buyer?
- Have you received any organic buyer interest? Do these seem like serious offers?
- Do you see any large hurdles coming for your startup? Will it be possible to raise capital via equity or debt to navigate them?
- Have you partnered with any large enterprises? Would they be interested in buying your business down the line?
- Has something changed in your personal life that has made working on your startup much more difficult? Is something going to change soon?
Each one of these questions weighs differently for every founder and it’s on you to decide if any one of these is enough to sell your business. If you answer yes to many of these questions, you may want to seriously consider a sale.
When It’s Time To Sell Your Business, Choose Acquire.com
Until recently, searching for a buyer as a bootstrapped seller was a confounding process. Traditional acquisition channels like banks and brokers would have yielded few buyers willing to buy an early-stage startup just reaching profitability – but no longer.
We created Acquire.com to make it simple for founders like you to source buyers whenever you decide to sell. Once you’ve created a seller account on our marketplace, you immediately access a network of over 120,000 individual buyers. All are searching for startups of all sizes and revenue amounts for acquisition.
Signing up on Acquire.com is free and easy. And you can choose to sell your startup either with zero fees or with the help of a broker for a small percentage of the total sale price.
Come check out our marketplace and see what founders like you are selling today.
At What Price Should You Sell Your Business?
According to the Acquire.com 2022 multiples report:
- Ecommerce businesses sell at between one to two times their annual revenue.
- SaaS businesses can sell for as much as two to five times their annual revenue.
- Marketplaces sell from one to three times their annual revenue.
- Agencies sell for one times annual revenue (and two to three times their annual profit)
Pre-revenue businesses are a little more difficult to price. You’ll likely want to recoup some of your startup costs with a sale, but if these add up to a high sale price you’ll have trouble finding buyers. If your business doesn’t fit neatly into a revenue multiple, make sure you’re ready to explain in detail why your business deserves a higher price.
How Much Capital Gains Will I Pay When I Sell My Business?
As a US citizen, you will need to pay capital gains based on your income tax when you sell your business (usually around 15 percent) with some exceptions. As of 2023, you pay zero percent if you make less than $41,675 as a single-family household.
Also, the taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum rate of 28 percent.
Your gain from a sale is in addition to any other capital gains you make for the year. If you purchased your business the same year you sold your business, you’d get to subtract the price of the acquisition from the resulting sale price.
Is Private Equity the Only Place to Sell My Startup?
No, it is not. At Acquire.com, we’re a marketplace where you can sell startups of all sizes to both private equity and individual buyers. You can always sell your business through private channels though these can become more complicated when selling larger, more established businesses.
Do Founders Stay After Acquisition?
Depending on the deal structure, founders may or may not stay in charge of their companies after acquisition. As in our example in this article, an acquiring business might ask the founder to offer transition services with additional payouts for growth milestones met.
Should I Tell My Team I’m Selling My Startup?
Telling the team about selling your business is usually at your discretion. Many founders choose not to tell their teams as mass resignations due to uncertainty can hurt final sale prices. However, if your team members own equity in your business, they might be motivated by a sale.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.