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How did you know it was time to sell your start-up instead of using financing to grow it further?

Jeff Andrews's Profile

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Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Its all about the relative growth prospects of the start up, and the next start up you have planned. Once the business concept has been proved and risk reduced to one of execution, I believe that the rate of value growth will slow down, and the challenges of dealing with working capital funding, distribution networks , etc. will become different to those of technology development. At this point, selling a currently proven start up and using the proceeds to fund a new one may make economic sense, however you will be taking on all the start up frustrations and headaches all over again. Are you ready for that?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I have met many a Start-Up Entrepreneur whose interest wanes as the Company builds toward maturity.

There's something about a company that is part wild-west; so if that's you, you have your answer.

In other words, a serial Entrepreneur will only thrive in the Start-Up phase.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

Unless you need to sell because you think things are going rapidly downhill, you are much better off spending your energy to increase value in your company and letting someone find you and buy you versus trying to engineer an exit. The outcome is going to be better if you are bought versus if you sell.

Scott Cadora
Title: Vice President
Company: Pinnacle Business Solutions, Inc.
LinkedIn Profile
(Vice President, Pinnacle Business Solutions, Inc.) |

To me this question comes down to four key issues - technology, customer base, cash flow & opportunity cost.

Technology: If your startup is technology based, then most likely the value is derived by the uniqueness of that technology. Have you developed a silver bullet technological advance that other firms will pay a premium to acquire? If so, then you probably can command a high price. In that case you likely should sell if a more established firm can deploy the technology better than your startup can.

Customer Base: An alternative strategy is if you have a large customer base, where the customer base provides the value for a larger company. This is the strategy that Instagram used when they sold to Facebook. If you're good enough to develop this kind of startup then you already know when to sell it.

Cash Flow: Assuming that you have a run of the mill start-up, then your value is defined by your cash flow. Assuming that you have positive cash flow, which is arguably rare in a startup, then the value is determined by the multiple that you can secure. The rule of thumb is 3 to 4 times annual cash flow but it can be lower or higher depending upon the industry. If you think that you are unable to add more cash flow in the short term, then you likely have maximized your startup's value and should sell for the best multiple you can obtain.

Opportunity Cost: Finally, if you have a decent startup now but have an idea for an even better startup, then you have to consider the opportunity cost of staying with your current project when you could focus on a better opportunity. But this is an obviously subjective issue. Who knows how good your new idea is? There are a variety of business methodologies to evaluate a startup idea's effectiveness but until you actually start working on the idea, it's all just speculation. The classic bird in the hand vs. 2 in the bush dilemma.

In the end, I think it comes down to this: Do the math on the quantitative issues (cash flow, expansion & deployment costs & customer acquisition) and then use your best judgement on the qualitative issues (primarily opportunity cost).

(Agent, JKS Solutions, Inc.) |

The question you ask is geared to a personal answer based on what your personal life goals are. If this is a million dollar enterprise and you are tired of the business you may want an easy exit. Its rare that founders who do the inventing last past the transition to professional management.

Regardless of how you choose to exit, you need a well developed strategy that is put together with your legal advisors so that you end up on the winning end of the exit. After all you worked hard to get where you are and you should be able to coast a ways before you have to startup again.

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