Selling your business is an emotional moment for any founder.
You’ve pumped blood, sweat, and copious amounts of tears into getting where you are today so the thought of parting ways or stepping back can feel overwhelming.
It’s not an easy choice to make emotionally but there are logistical difficulties involved as well.
So we called in the experts to help you understand what goes into selling your business and to provide a roadmap in order to navigate your options if you are thinking it's time to sell.
Laurits Just and Jan-Philipp Peters, are co-founders of BitsForDigits, the $100k+ startup acquisition marketplace, who provide owners of profitable online businesses with direct connection and communication to vetted acquirers.
Read on below to get their take on all things selling your business.
Thanks for talking to us today guys. Firstly, talk to us about BitsForDigits - who are you and why did you start the business?
It all started when we stumbled upon a podcast about Jeff Bezos buying a stake in a bootstrapped SaaS company, Basecamp.
One of the founders of Basecamp is David Heinemeier Hansson who’s a bit of a big deal. He not only co-founded Basecamp, HEY.com, and 37 Signals but he also created the web development framework Ruby-on-Rails. That framework has been used to build Shopify, AirBnB, and GitHub. He also graduated from the same university JP and I met at so we felt a bit of a connection to him because of that.
Anyway, we were intrigued by the Bezos deal so we reached out to him and managed to get on a call to get the inside scoop on the transaction he and his co-founder, Jason Fried, had made with the Amazon titan.
We came away from that conversation convinced we could build a platform that helps other bootstrapped internet entrepreneurs to explore liquidity events and achieve similar outcomes as David and Jason. Because not everyone has Jeff Bezos on speed dial!
This became the start of BitsForDigits, an online business acquisition marketplace for founders to broadcast their preferred transaction type and get offers from professional buyers. Founders can put both full and partial acquisitions on the table. Plus our platform makes it anonymous for them so they can advertise for free.
As you say, not everyone has Jeff on speed dial, so, what are some of the biggest challenges facing founders looking to sell their business?
Getting your business in front of serious buyers remains the hardest part of an acquisition and something we see business owners routinely struggle with. Historically, this is where you’d leverage your network and dedicate a lot of hard work.
Of course, some founders still choose to go with business brokers. But that course of action will cost them anywhere between 5-15% commission on the sale if they manage to find a buyer through their proprietary circles. And that’s a big if.
That’s why the anonymous platform approach makes sense. You’re able to reach thousands of potential buyers without disclosing identities of your business or yourself and without paying the commission.
Once you line up interested buyers, you’re faced with further challenges. You need to set up comprehensive data rooms, sign contracts (NDAs and LOIs), and negotiate terms and deal structure.
These challenges must lead to some acquisition mistakes being made. What should founders be wary of?
Valuations are probably the most common tripwire. We often see startups benchmarking their valuations against high-profile and headline grabbing acquisitions such as Figma and OpenAI.
Nothing scares off potential acquirers more than seeing an asking price of 5x revenue, let alone 50x. So being realistic and patient with your valuation is key.
We often find ourselves managing sellers' expectations. To combat this common mistake, we always encourage sellers to be open to offers rather than set too high of a starting price. This ensures there will be interest.
Ok so to avoid this mistake, how can founders accurately value their business?
They don’t. The market does. Most founders get that wrong. They think their business is objectively worth something. But it isn’t. The market values it at whatever the market price is.
That’s why getting your business in front of as many buyers as possible is important to get the maximum amount of offers and a greater chance of a satisfactory offer. If no offers are good enough, then you probably aren’t mentally prepared to sell.
But ask yourself the hard questions to make sure your priorities are straight and you actually want to part with full, or even just a portion of, ownership in your business.
Leaving your listing open to offers is the best option. But if you’re seeking inspiration for what price to settle on during negotiations, then the best thing to do is find past examples of business acquisitions.
However, private markets can be opaque and hard to find historic transactions through. Other than hiring a professional appraiser which is only worthwhile for sizeable businesses, you can use valuation calculators.
We have a free one on the platform. This takes your actual business performance data and uses it to produce a valuation range based on inputs, historic market data, and industry averages for your business type.
Do you have to sell your entire business or can you just sell a portion of it?
Yes you can do either. You can even leave it open to any type of acquisition.
Some buyers might want sellers to stay on in a supporting role with a minority stake. Other buyers might want to own a chunk of the business but not have a majority stake.
Selling a stake in an SMB through a secondary transaction can be a great way to gain personal liquidity and financial freedom.
Partial acquisitions come in two flavours. There’s minority sales where a founder decides to sell e.g. a 25% operating stake to an acquirer. That’s what David Heinemeier Hansson and Jason Fried did.
Then there’s majority sales. They’re typically done by founders who have a lot of conviction in the future of their business and wish to stay invested for the long haul.
This is often referred to as a “double dip” where sellers will sell a chunk now and the remaining ownership later. The sum total of these two separate transactions will, if things go as planned, be bigger than if they’d sold the entire business in one go.
So how do you prepare for a sale whether it be part or full?
It’s important to start the mental preparations early. Cover all eventualities. A good place to start is to think of scenarios that would be satisfactory for you and then work your way backwards to deal structures entailing either a full exit or a partial buyout. And for heaven’s sake, be realistic about it.
When you have your scenarios in place, it is time for the fun stuff. You need to prepare P&L statements and performance overviews that summarise your business in numbers and graphs.This will be a vital piece of the puzzle for acquirers.
Luckily, there are some great resources out there to help you get prepared.
Here’s a gentle plug. Head over to the BitsForDigits website and use our templates. There’s an NDA template for interested buyers who want access to sensitive information.
All the preparations in the world don’t guarantee a sale though. Are there any common characteristics of businesses that sell best?
In this economy where cash is king, profitability is essential. There are a few exceptions.
These exceptions are venture distressed startups pumped full of VC financing with an oversized, overspent budget and slim to no profit margins. These can be worth something if they have a strong brand and product offering.
But as a rule of thumb, buyers in the micro-private equity market look for healthy profit margins and some sort of competitive “moat” around their business.
In other words, customer loyalty or barriers of entry where new competitors are discouraged from entering the same market.
The hunger for vertical micro SaaS businesses in various market niches is unstoppable. Another staple business category is agencies, marketplaces and content businesses.
Does funding play a role in successfully selling a business?
Financing is often THE deciding factor in determining the success of an acquisition. Due to the perceived riskiness, banks often won’t provide loans to internet startups and SMBs.
This lack of access to funding can prevent you from attracting acquisition offers that meet your expectations. It’s a catch-22 that slows acquisitions and curbs entrepreneurship, often grinding both to a halt. Especially outside the United States where SBA loans are not as prevalent.
This is why the Uncapped and BitsForDigits partnership makes so much sense for both sellers and acquirers. No longer does financing have to stand in the way of making the deals happen!
Is there a best time to sell a business?
The best time to sell is dependent on the owner. Often it’s dictated by what is important in your life at that moment in time. You might want to sell to focus more on raising your family or seeking more time for other projects.
Aside from personal reasons, growth stagnation or decline tends to be the primary reason founders sell. And that tends to be the best time anyway as they grow increasingly tired of managing the day-to-day.
However, with the exception of personal reasons and with valuation in mind, the best time to sell tends to be when it's rapidly growing or just after it has stabilised a historic growth curve. That way you are more likely to secure attractive offers.
So my business is going great and I have decided to capitalise on the success and sell while it’s hot. What does the sales cycle look like from here? How long does it take?
An acquisition can take anywhere between 3 weeks and 3 months. It really depends on the due diligence and negotiation process. Generally it goes something like this:
- Start planning your exit and set acquisition goals
- Consider hiring a M&A advisor e.g. via our Advisor Directory to help with valuations etc
- Fix and close any gaps in the business to prepare it for scrutiny
- Set up a data room with P&L statements, performance metrics, etc.
- List your business on the marketplace to attract offers
- Apply and offer acquisition financing from non-dilutive loan providers like Uncapped
- Negotiate the terms of letters of intent with interested buyers
- Close financial gaps either via seller financing or earnout schemes
- Prepare for due diligence early by creating Q&As in advance
- Create an asset transfer plan or equity purchase scheme
Just the cool 10 steps then. Are there any post sale tasks?
Ha! Yes, simple hey?
Post sale, you’ll likely spend a bit of time with the acquirer post-acquisition to help them learn the ropes of the business, but demonstrating a tightly organised transfer plan will give the buyer confidence and will put less pressure on you after the deal closes.
Amazing. So to end, what parting advice do you have for business owners looking to sell?
Don’t be discouraged if you’re feeling a little overwhelmed by the process. Take one step at a time. The most important step is filling out the listing intake form and getting your business published on the marketplace. There literally isn’t a downside in having your company anonymously put in front of potential buyers on a platform like BitsForDigits.
From there, as things get more serious, you can allocate more time and effort to the process. Avoid listing on marketplaces where buyers are unvetted and less committed to acquisitions. It’s a waste of time if you’re serious about selling.
So there you have it. An expert’s guide to selling your business.
We know it isn’t an easy decision but preparation is key and that’s why the Uncapped x BitForDigits partnership makes so much sense.
For funding peace of mind leading up to the sale all the way to the finalised acquisition, Uncapped and BitsForDigits are here to help.
To find out more, get in touch with us today and let us help you to take the first steps towards making your exit goals a reality!