A framework for When to sell your Business

I was in Boston this week and popped into Momentum Summit, an annual event that looks at how small startups turn into big businesses. At the end of the conference I sat down with a small group of people led by Founder Collective‘s Eric Paley. The topic? When to sell your business.

This is an important and emotional topic for all stakeholders in a startup. Founders and early investors might be happy with a wide range of outcomes. Later stage investors with large funds might push to hold out for “big” outcomes only. How do you reach a decision that works for everyone? How do you “know” if now is the right time to sell?

For example if you get an offer to sell for $100M and two years later that company was worth $1B was it right to sell? Was it the buyer who created that extra value or was that just the trajectory your business was on anyway? If only we had a crystal ball.

In our talk together Eric gave us a great framework for making this important decision. In his case, he sold his company pre-revenue. When he talked about why they took the deal he talked about the number of years of risk that were being offered up.

Say your company is worth $10M today. You’re early into goto market and starting to build some early momentum. A buyer comes along and offers you $50M. What do you do? Under Eric’s framework you would look at what your company is likely to be worth next year, the year after and the year after if you can see out that far. If you’re only being offered what you are presently worth or a premium to account for what you might achieve in the next 12 months, maybe you just keep going. But if a buyer is giving you a price that would take you 2 or more years to achieve on your own, perhaps you should take it. That’s the take away from Eric’s experience with Bronte Technologies.

There are of course many variables, both objective and subjective, that go into this decision. Just a few of the big ones include:

– Are you a 1st time founder? If so, getting $1M – $5M now can be life changing and hard to pass up.

– How big are your VCs? A large fund will hold out for large exits that can “move the needle”. Let’s say for example that a $500M fund invests $5M for 30% of your business. Two years later you have the chance to sell your company for $50M. You and your early angels and employees will net $35M. Jackpot! Your big VC will get $15M. They triple their money, but $15M is irrelevant to a fund of that size.

– Lifecycle of the funds: If a fund is near the end of its 10 year term (normal time for funds), they will want the exit even if they are leaving value on the table (in practice they will ask for 1 or 2 year extensions rather than lose value, but you get the point). If a fund is new, they are in no rush and will hold onto growing companies as long as possible.

– Economy: Some people worry that the tech market is experiencing a bubble. Others worry that the economy at large is vulnerable and that changes in oil supply, consumer debt or other key factors could cause problems. For these and many other reasons, some investors may take an exit when it comes rather than hope a bigger one comes later.

There are few decisions as life-changing for founders as when to sell your company. And rest assured, if and when you get to make that decision, you will have to weigh many factors and deal with multiple competing interests. I found Eric’s framework to be a useful tool in that process.  To learn more about it check out his excellent post on the topic here.

  • Great read. As a first time founder this really interested me. We have been approached by a few "bigger boys" about buying our oilfield tech we have developed since 06. Since this is my first entrepreneurial adventure I am eager to learn as much as possible to avoid some common mistakes of first timers. Luckily (strategically) I have surrounded myself with a great mentor group. I can see the future path for this company and it is extremely bright, I am hesitant to sell early as our projections look real positive. I don't know if I have sold emotionally yet, I guess I am sitting on the fence a little. Any other advice to a 27 year old entrepreneur?

    • There are many elements behind this decision so I cant give good advice here. If you have a clear vision and still have work to do to realize it then keep going. If you want some downside protection then consider selling a portion of your shares along the way to incent you to push for the home run.

  • Chris Arsenault

    Good points for any Entrepreneur to reflect-on Mark.

    Over time I came to realize that the only right-thing to do as an investor is to provide data sources, sound-boarding and guidance to any Entrepreneur considering to sell his company, early-on or not. Once an Entrepreneur has "emotionally" decided to sell, his mind is already a thousand miles away planning for the next things (whatever that may be). I recently had exit discussions with two entrepreneurs (one in our portfolio and the other CEO of a Company I wanted ti fund), in both cases i quickly realized that in their gestures, their responses the sparkle in their eyes that they had already "sold" the Company. Only left to do was find the buyer!

    The secret is in the amount of capital raised. A small exit can be valuable for all involved (founders, employees, angels, vc, partners…) as long as little funding was required to get there. Managing cash has always been the secret to any and all success! Its also interesting to realize that the more experience the entrepreneur is, the more his company growth ambitions are in-synch with the exit potential.

    I think Montreal is now poised to see its next generation of tech companies benefit form the experiences and market changes of the last 20 years, and witness a new breed of savvy emerging entrepreneurs, as well as second or third time entrepreneurs coming back to build their new companies (from scratch or via sector roll-ups) with more insight and ambition.

    • You are so right, Chris. If the entrepreneur has emotionally sold, then there is no choice but to sell. For sure.

      And yes, we need some more Nulmans and Bornsteins coming back to the plate with their next adventure!

  • I guess it's a little like reverse burn rate. It's an interesting framework.

    To be honest, I'm a little tired of hearing the "life-changing" $1-5 million point. If you think your company is a flash in the pan, by all means get out, and more power to you for finding a buyer. But if you're building a real business, a valuation of $5 million is just a starting point. You've presumably gotten the hardest part, seed funding and/or initial revenue, out of the way. If prospects look good, selling for $5 million rather than doubling down actually seems like something many founders will regret later. Good ideas combined with execution are rather rare. Why give it up for what will look like a song in retrospect?

    By the way, none of this is meant as a negative response to your post, Mark. I just think the startup community as a whole sometimes gives founders too much of a pass for flipping / chickening out early.

    • Hey Greg,

      Definitely agree with your viewpoint and as an investor would love for all the entrepreneurs we back to go for a big win. But human nature is rather consistent and so you will always find a large group of people who, justifiably – to be fair, will be tempted to sell "early". And just to be clear the $5M in my example is in the founder's pocket not total company value.

      I know many founders that are interested in selling early for their 1st startup then plan to come back and go big on the next one. I also know many of the longer standing VC firms have seen this pattern over time – where 2nd and 3rd time entrepreneurs go for much bigger outcomes. That is of course a function of experience. But the founder's financial means have to play a role as well.

  • michael m

    Hi Mark,

    Great post. FYI- the link to "Eric's framework in the last paragraph is dead 😉
    Please advise where I can read-on.