How to sell your company

Over the weekend, an entrepreneur called me for advice.  He's a doctor by training who built up a big business over the last few years.

He said private equity and other suitors were starting to call and he was debating whether to keep building, raise another round, or to sell the company.

He asked for my advice and learnings.  Here is what I told him.

There are two ways to answer this question.

One is whether or not it makes strategic sense.  Think about if you're Instagram and you’re talking with Facebook who will try to crush you if you don't sell.

Or at Ampush. Initially, Facebook ads were unique and clients were okay with us focusing on that, but as it became a more commoditized offering, clients wanted to go to one place for their Amazon, Google, and Facebook ads.

Strategy is important… and it’s rarely conclusive.  For every Instagram that sells for "strategic reasons," there's a Snapchat who said, "No" to a $3BN offer and is now an $18BN public company! (I hardly knew they existed.)

Founders like to be intellectual and think "strategy" or run "scenarios," but that isn't conclusive NOR is it HARD.

So what is hard?

The emotional decision.  As this founder started talking pros and cons and telling me about his industry, I interrupted him:

"Dude, what do YOU want?"

He fell silent.  It got uncomfortable.  He started trying to answer but then caught himself and said "You know what, I actually haven't thought about that."

The second way to answer the question is the hard way.  What do you actually want?  Do you want to keep running the business?  Are you ready to cash in your chips?  Are you tired or energized?  These questions come along with guilt, sadness, fear, and everything in between, and worse still, no one can answer them for you.

3 Decision-Making Frameworks

So what do you do?

I have a few approaches:

1) "Regret Minimization"

I think there are some rare entrepreneurs like Zuckerberg who can walk away from a billion-dollar offer and keep building.

But for most of us, I pose the question: Say you sold today for $10M, and in 3 years, the company was worth $25M.  Would you be super sad/mad?  Maybe but probably not.

You have more money than 99.9% of people and have had time to do new things.

What about the opposite?  You don't sell and for some reason in 3 years, the company ends up being worth zero (before you say, that's not possible, think about how many companies went under during Covid.). Then how would you feel?

There's an old adage in trading: "You don't go broke taking a profit."

If you are feeling tired and maybe a little burnt out and you are under 60, you will have many more years to build new businesses.  It might be worth it to take the $ and reset.

2) "Feel the Scenarios"

Rather than intellectualizing scenarios, write them down on pieces of paper (Scenario A: Go for the Moon, Scenario B: Sell the Whole Thing) and project yourself out a couple of years.

Then stand on the pieces of paper and FEEL which one brings energy and which one doesn't.  This can be an incredibly helpful exercise to follow your intuition.

3) "What would you do if you weren't Afraid?"

I've seen people sell their businesses out of fear and I've seen people NOT sell their businesses out of fear.  Fear is different for all of us.  If you can imagine you're not afraid (or you were advising a friend), what would you do?

This often brings immense clarity.

Try it!

OK, I decided to sell, now what?

This was the next part of the question.

First, get smart on valuation.  I send this infographic Bob Glazer made to EVERYONE I know.  It's about agencies but can be applied to most companies.

The key variables are growth, profitability, scale, and then "risk" (or the lack thereof).  More contracted clients, better diversity, and more established systems for sales and talent all make the company less risky and therefore more valuable.

Investment Bankers

My next piece of advice is, unless you are contemplating a $500M+ transaction, go find the 3-4 niche investment bankers in your category.

They often know the market way better, see more deals, and can give you a great sense of valuation and how the market works.  They are like real estate agents for your local neighborhood.

I also never wanted to be a brand-name investment bank’s smallest client.  There is some debate around investment banks, especially in VC categories, but for Bootstrapped Giants I recommend getting a bank.

Benefits of an investment bank

1) Competition drives valuation

Outside of the fundamental factors, 2-3 suitors will drive up your price.  The challenge is getting 2-3 offers AT THE SAME TIME.

This is where bankers help. They run a very organized, structured process whereby each stage happens in a sequence so that on the same date, buyers must submit offers.  Without a bank, it’s very hard to do this, both from a time/resources standpoint and for how you show up in the deal, which is the 2nd reason.

2) They can say things you can't

Selling your company is an emotional process.  For you, it's letting go of your baby. For the person on the other side, it’s "falling in love."

Well, it's not very romantic for you to tell a buyer: "I love you but I only want a 1-year earn out."  It ruins the mood.  Enter the banker.  They can be your bad cop.

3) Getting the deal done

These processes are insanely fickle.  Deals seem like they die many, many times before they get done.  Bankers are great at keeping momentum, picking up emergent work, and maintaining collaborative mindsets from all parties (especially the lawyers!).

So even though bankers are expensive (e.g., for a $100M deal, they are taking $1-2M home), they earn it by improving the price, increasing the likelihood of a close, and closing the deal you want.

So what is the process, Jesse?

All in, I advise budgeting a year for the process.

Roughly it looks like this:

3-6 Months - Preparation

This includes cleaning up your books, and making sure your "walls are painted and carpets are cleaned."  It includes things like dealing with any weird employment or tax issues, tightening up your accounting, and improving client contracts.

Then, it involves creating marketing materials, preparing for due diligence, and building a buyer list.

3 Months - Marketing

This involves sending your deal out to buyers, taking initial management meetings, and starting to widdle the list from 50+ suitors (both strategics and private equity) down to 1-5 actual buyers.

This usually involves an initial meeting, several follow-ups with more interested parties, and maybe even some data disclosures.  It ends with a bid deadline for buyers (which they hate but is critical to create competition).

1 Month - Negotiation & LOI

Depending on a number of parties and other factors, there's a ton of back and forth in finalizing a "letter of intent" with your favorite buyer.

The more competition you have, the better leverage you enjoy to get the terms you want.  This stage is critical because almost EVERY buyer will require an exclusivity period before closing.  So once you sign that LOI, you lose all your leverage.

I like to negotiate as much in the LOI as possible before signing so the closing process is cleaner and I'm not waiting until I have no leverage.

Closing 3-6 Months

At Ampush, we closed in 60 days.

I like to push for short periods but always good to prepare for something longer.

The buyer won't spend much money on diligence, legal, and their internal resources until they know you have agreed on a price/terms and they have exclusivity.

So in some ways, this is really the most important step.  This is where they turn over every stone and try to find all your skeletons. (Again, I prefer to disclose skeletons in the previous stage so I don't kill the deal later.) This is where it's critical to be buttoned up.

Things that come across as disorganized or false spook the buyer and kill the deal.  A good banker will help you clean this up ahead of time.

The other huge part of this process is legal.  For an 8 figure deal, both parties will spend low six figures in legal!  It’s nuts.

But there are a ton of risks both sides are managing for a huge document called an "asset purchase agreement" you're trying to negotiate.

Terms like "representations and warranties" take time/energy to understand and align on.  Noncompete clauses come up.  And several other areas. (I could write a whole email on this!)

So there you have it… a summary of my weekend call with a fellow entrepreneur.

What other questions do you have?

-jesse