This post was originally featured on Mike Rogers website.
You’re a CEO of a VC backed tech company. You’re company is going along pretty well. But what do you do long term?
Do you continue your drive to an IPO or do you consider selling?
If you consider selling, how do you know when to sell?
Or asked another way, when do you know it’s the right time to sell the company?
I’ve been part of the executive team that has taken 4 small companies, created a new growth strategy, made some acquisitions, and eventually sold them. We never simply woke up and decided to sell the company. In each case the sale was the outcome of our strategy. We didn’t sell each company at its peak valuation. We sold one a little too late and one just right. The timing on the other 2 are still debatable.
The subquestion is then how do you know it’s the right time or the right offer?
Bought not Sold
The old adage is that the best companies are bought, not sold. So ideally you’re building a great company that is getting noticed and someone will approach you with an interest in acquiring your company. This may even happen on a regular basis.
In this scenario the decision is largely based on the company and the offer. Is it a company that would be a good fit for your solution and does the offer meet or exceed your Magic Number? Or is the offer at least good enough to pursue? If either or both of these conditions are not met, you’re probably not going to sell.
But often there are other factors to consider, like how long your investors have been in, will you have to raise more money, or will you have to undertake a major renovation to upgrade the product?
Acting not Reacting
So let’s look at the scenario where you’re not reacting to an offer, where you’re considering taking action to sell the company, maybe hire an investment bank.
A lot of advice on this issue is centered around moving from an Entrepreneur/Startup to a Business, as if you get tired and it’s time to move on. But my experience is that’s a little shallow. After all, the Board could simply find a new CEO if you’re ready to move on to something else.
No, I find that it’s more of a group-think event. A lot of people have to agree that selling is the right thing to do and it can’t be because one person got tired.
You want to sell when things are going good. That’s when you’ll get the best price. If things are going good, the forecast will look strong and the buyer will be willing to pay a premium.
If things aren’t going so good, say you missed a quarter or two, you can still sell the company. But if you have the time and can turnaround the company, get it growing again and hitting your numbers, then you should hold on and sell at some point in the future.
Sell on Anticipation
If you need a major refresh to the product or you need to raise money, it’s better to do so before the task is complete. These are separate but related answers. In both cases you need to undertake the task to create interest. Let me explain.
In a major refresh a buyer is going to know it needs to happen. It won’t want to take on the project and if it does it will result in a lower valuation for the company. In this case it’s best to admit the refresh needs to happen, start the work, get it near completion, but sell before it’s launched, if you can. Here you’re selling on anticipation and you can generate a higher valuation. If the product is launched before you sell then the buyer is going to wait to see how it is received, which means months of delay and the risk that it won’t be well received resulting in an even lower valuation.
Yes, a well received product will result in a higher valuation but it is probably going to be in the range of what you could have gotten based on anticipation before the product was launched. The success of the launch would have been baked into the price already. So you would have saved a lot of time selling earlier.
The same is true if you’re raising money. You need to start the process to get buyers interested. This will create a sense of urgency and competition. It’s nice to have several bidders but this isn’t always the case. So you can create your own competition.
Selling before you close your financing round will allow the buyer to purchase the company at a lower valuation but will likely return a greater amount to the investors than after a round closes.
Once you raise the funds the bar for selling increases because everyone wants a good return on that recent investment. You can do it but it is much better to sell on anticipation than take the risk of time and everything that goes with it.
Always be Open to Selling
The fact of the matter is you should always be open to selling. In fact you should be cultivating acquirers from the day your product launches. Being acquired is the outcome of 95% of every business. This is a primary role of the CEO and it can’t be neglected.