Every entrepreneur has dreamed of striking it rich by selling their company for millions or even billions of dollars. From Facebook’s purchase of WhatsApp for a mind-blowing $19 billion, to Microsoft’s $7.5 billion buy of GitHub, the tech industry is full of startup success stories.
In reality, however, achieving your startup goals will require a great deal of forethought and strategic planning. Just as buildings need to have well-built, clearly defined exits, startup founders need to establish a well-built, clearly defined exit strategy for their company—whether that means going public in an IPO, or selling the company in an M&A deal.
Along the way, you’ll need to bust some of the common misconceptions surrounding M&A opportunities. In this article, we’ll discuss the realities behind 6 of the most common exit strategy myths.
1. “We can always sell the company in an acqui-hire”
Acqui-hires are a recent M&A phenomenon, largely in the tech industry, in which the buyer purchases a company mainly for its staff and expertise, rather than its products and services. While acqui-hires are a quick way to gain access to a deeper talent pool, buyers also often struggle with retention problems as employees grow dissatisfied with the company’s new management.
Regardless of the wisdom of doing so, acqui-hires are an even rarer event than standard M&A deals (which only happen to 16 percent of startups). Betting on an acqui-hire should never be the backup plan for your business when nothing else works out.
2. “Big tech companies routinely buy startups”
News of major acquisitions like WhatsApp and GitHub get lots of attention and clicks, so those deals tend to show up in the headlines. Yet for all the cash they have on hand, big tech companies like Facebook and Microsoft actually don’t purchase startups all that often.
One major reason why: it’s often cheaper for big tech companies to build technology in-house than to integrate products and services that have already been built.
3. “Buyers and investors will value the company the same way”
Buyers and investors are two completely different groups of people with different ways of looking at and valuing your company. Whereas investors are interested in your company’s financial value, such as profits and cash flow, buyers may also be interested in your company’s strategic value for their own business (such as helping them retain talent or expand into a new vertical).
For this reason, don’t assume that interest in M&A deals will easily translate into interest in an IPO, or vice versa.
4. “Startups should be for sale from day one”
Selling your startup is a tricky art that involves finding exactly the right timing. The best time to sell your startup is at an “inflection point,” when your growth and momentum are at their peaks. Just because you should always be planning your exit strategy doesn’t mean that you should be planning to exit before your company has even gotten off the ground.
This means that you need to be very strategic when talking to potential buyers who approach you too early in your startup’s lifecycle. Explaining that you are “creating value quickly,” while expressing interest in “exploring partnership opportunities,” is a good way to respond to these premature inbound inquiries.
5. “I should play hardball and stall a promising buyer while I shop the company”
Headlines about multi-billion-dollar acquisitions have put unrealistic fantasies in many startup founders’ heads. If a strategic buyer shows up and they want to pay a premium for your startup, fighting them off or trying to play games is counterproductive and can backfire quickly.
Taking prospective buyers seriously will give you the greatest chance of actually selling your startup for a number that’s amenable to all parties. In most cases, serious buyers and sellers can settle on a fair price during the finance and diligence stages of the M&A process.
6. “Companies are bought, not sold”
This is a popular adage—perhaps because it lets founders sit back and wait for buyers to approach them—but experience has proven it false. It’s not always true that you’ll get the best M&A deal from a buyer who approaches you unsolicited.
Even if you believe it’s too early to sell, you can still lay the groundwork by building your network and reaching out to interested parties. If you do nothing but sit around and passively wait for buyers to nibble on your line, you’ll be leaving a lot of money on the table.
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