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When to Sell Your Business Part 1: What Buyers Are Looking For

    
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Knowing when to sell your business is a delicate art. Not only does selling your business depend on the health and internal workings of your company, it also depends on external factors over which you have little to no control—macroeconomic trends, buyers’ attitudes toward M&A, and more.

Despite these challenges, the good news is that you can take steps to position yourself optimally for a future acquisition. By knowing what buyers are looking for at each stage, you’ll have a better understanding of the right time to sell your business.

1. Selling an early-stage startup

Businesses that sell in the early stages are few and far between, especially in the last several years.

The exception that proves the rule is the artificial intelligence field, where tech giants are racing to snap up early-stage startups in order to capture their intellectual property and talent. Between 2013 and 2018, the rate of AI-related acquisitions increased by more than 6 times.

Some of the recent AI startups to be acquired in the early stages include:

  • Israeli facial recognition company RealFace (acquired by Apple in 2017)

  • Montreal-based natural language understanding company Maluuba (acquired by Microsoft in 2017)

  • Chatbot tool developer Api.ai (acquired by Google in 2016)

These and other M&A deals in the early stages all have one thing in common: the company showed great promise for future revenue growth, as well as cutting-edge technology that set them apart from the pack. 

If your business has a “secret ingredient” that you believe will be irresistible for buyers, an early-stage acquisition may be possible for you as well. Otherwise, you’re better off focusing on growing revenue and acquiring new customers, so that you can be in the best position for a middle-stage acquisition.

2. Selling a middle-stage startup

Buyers who acquire middle-stage startups generally aren’t looking for the next killer app—rather, they’re looking to make a purchase that’s strategically sound for their own business.

Some reasons why buyers acquire mid-stage startups are:

  • Gaining market share by acquiring a smaller competitor.

  • Increasing the company’s geographic footprint.

  • Diversifying the company’s products and services.

  • Expanding into new verticals to have more control over the company’s supply chain.

At the middle stages of a startup, buyers are looking for factors such as:

  • Sustained revenue growth: While your revenue may not be growing as quickly as it used to, buyers want to see a continuous pattern of positive revenue growth before they consider an M&A deal. Above all, buyers want to avoid the risk of purchasing a stagnant business.

  • Positive EBITDA: Having a positive EBITDA (earnings before interest, taxes, depreciation, and amortization) for a prolonged period of time is a good indication that a company is financially healthy.

  • High gross margins: Gross margin (net revenue minus the cost of goods sold) is another good way to assess the financial health of a business—the higher, the better.

  • Customer acquisition costs: Your startup has its early adopters, but buyers want to see that you have a viable path to acquiring new customers as well. One important metric is customer acquisition cost (CAC) compared with a customer’s average lifetime value (LTV) for your business. A high CAC-LTV ratio indicates that new customers can be acquired relatively cheaply.

3. Selling a late-stage startup

Selling a company in the late stages isn’t necessarily more difficult—but it does require you to make a strong case about the health of your business. 

The factors that buyers will be looking for at this stage include:

  • Strong EBITDA margins: EBITDA margin is a profitability ratio that calculates your operating profit as a percentage of your revenue. This metric is often used in M&A as a relatively easy way to compare companies in the same industry, without having to consider accounting and tax issues.

  • Continued growth: The growth of your business at this stage will almost certainly have slowed down since its inception. Still, buyers want to see a pattern of continued growth to ensure that your business can remain on this upward trajectory after the deal. 

  • Established presence: As a late-stage startup, your business should have strong customer relationships and a suite of established products and services. You may also have valuable intellectual property or a deep talent pool that can be a selling point for potential buyers.

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