How Startups Actually Get Bought

We're not in the business of selling our startup; we're in the business of making it something worth buying.

Contrary to popular belief, we don't just build a startup and have a bunch of big companies start calling on us to make offers. Yes, it's happened to some really incredible companies, and no, it probably won't happen to you (or me).

That's fine, so long as we understand how the process of selling our startups actually works in the real world. At Startups.com we looked at over 100 startups before we bought 6, and I can tell you from experience that 90% of Founders have no idea how this process works. Why would they?

Startups are Bought, Not Sold

The first thing to understand is that we actually don't have a ton of control over when our startup is sold. Sure, we can hire an investment bank to go shop our deal around, and we'll probably get some really awful offers from some private equity shops looking for a deal (PE shops are essentially the Pay Day Loans option of selling a startup). But that's not what most of us are looking for.

We're hoping for the perfect big company to swoop in and offer us a sweetheart deal. The challenge is that in order for this to happen, that company has to be ready to buy, and most companies are not. Instead, we're more likely waiting for the right chain of events to occur inside an organization that isn't ours.

Thus begins our dilemma, where selling our startup is really not up to us, it's up to whether a buyer is ready and able to do a deal. We can notify lots of potential prospects, but this isn't like selling a house where there is always an active market. For most of us, there are probably 2 or 3 people who would ever buy us, and who knows when they are ready to do it.

Mythical Multiples

It's fun to think about how much our startups could fetch on the open market. We begin making up fancy multiples like "We could probably get 20x our top-line revenue!" or "Our data alone would be invaluable to the right buyer."

So begins the creation of "mythical multiples" not based on what actual in-market buyers are using but what we would love to fantasize about. The problem with that imaginary math is that it's rarely orders of magnitude from what a real-world buyer would even consider.

While buyers will often vary in how they value our startup, they will almost certainly use things like our top-line revenue and net income growth as a yardstick. So no, our $1m startup earning $100k per year isn't going to fetch $10 million. We're probably looking at something closer to 5x net income, or $500k. Maybe if things go crazy, we strike some deal to earn out $1m by staying around for a couple of years.

How We Get Paid

What's even less understood about how we get valued is how we get paid. Theoretically, we just get one big fat check that's hilariously printed on a poster-board-sized document that we take pictures around. The reality is far less photogenic.

Many deal structures involve a few gotchas. The first is that the purchase price isn't always paid upfront but often includes either an "earn out" or payments over time, typically based on performance that rarely materializes. Either way, we're often stuck as the Founders jumping through hoops as an employee of our new buyer for years in hopes of squeezing those last dollars out.

The second is whether the team gets paid at all, particularly if we have investors who want their money out first (we get a full education in the world "preferences" and "preferred stock"!). If we don't have any investors and we make it through a sale, well, then, party on!

The reality is getting a startup from a point of value through an actual sale that yields real money back to us is really hard. But as long as our expectations are set accordingly, we can prepare for what will hopefully be a very happy ending.

In Case You Missed It

What We "Lose" When We Sell Our Startup There’s a huge emotional toll on Founders when they sell their business — but is there any way to prepare to become an ‘exited’ Founder?

Will Investors Fund Just an Idea? Startups get funded at all different stages, from the initial idea all the way up through proven traction. The problem is that the uninitiated don't quite understand what the difference is.

How Do I Get People to Take Me Seriously? (podcast). Join Wil and Ryan as they take a deep dive into why it takes so much work to be taken seriously as a new Founder and what we can do to thumb the scales in our favor. Remove