Season 2 - Episode 1: Positioning Your Startup for Acquisition
From the outside looking in, getting your company acquired is pretty mysterious. Basically all founders want this, but they don’t really know how they’ll get there. In part one of a four part series, we’re going to go into how you actually get your company in a position to be acquired. We’ll discuss our real world experience of selling our company, and compare it with data on when and how most startups are sold.
Background Story
Chris had two childhood dreams. He wanted to be the starting quarterback for the Buffalo Bills or sell a software company for a million bucks. Josh Allen seems to have the former pretty locked in - but in reality, selling a software company was actually much more important. Chris’ love of computer built a passion that lead to startup success. He spent days working on on computer stuff as a kid with our brother Mike.
Outline
Don’t Build a Business to Sell It. There’s some nuance here, but your mission can’t be to sell.
Having a well run business will put you in a great position to be profitable and sets you up for a great acquisition process.
You also have to get a bit lucky. But it’s not random - you can be in a position to get a big “return on luck”.
Busted Myth
Myth: You should be building your business for the purpose of selling it.
It’s psychology (or philosophy) versus operations - Built to Sell by John Warrillow, a novel-esk take on starting a business to get sold, covers this well. On the one hand, you want to structure your company for acquisition - that is, it’s not dependent on you - however, we suggest that don’t want your company mission to be to sell. Structuring your company well is just good business, not really building to sell.
If your explicit purpose is to sell, that’s a pretty crummy mission. Staff, investors, customers, won’t buy it.
Learnings
Business valuations are often a multiple of EBITDA. But if you run your business solely focused on maximizing EBITDA, are you actually doing right by your customers? Are you stifling your own growth because you’re not reinvesting enough back into the business?
Having a well run business (points below) will put you in a great position to be profitable, but also sets you up for a great acquisition process:
Having your financials very organized.
Your tech stack is solid, minimal tech debt, a great team.
Customer service that is second to none.
Profit vs debt. TCV was shocked we had like no debt.
Systems and processes that can be replicated and maintained without founders.
Acquirers don’t want to buy a business that’s a dumpster fire. They’re trading cash for recurring revenue and a growth trajectory.
There is some serious luck involved. You may have a great business, but if there isn’t anyone who wants to buy it, then you’re not going to be able to sell.
Consider return on luck - preparation and opportunity = luck. You need to be in a position to be lucky. Every founder on How I Built This with Guy Raz mentions the importance of luck.
Summary
Our advice is to focus on building a profitable business with happy customers and a great team of employees. If the opportunity comes along for an acquisition, then you’ll be in a great position to consider it.
Put yourself in a position to be desirable, but don’t push for explicitly being acquired. Even if you’re not acquired you can simply keep running your business and enjoying the ride.
Data And References
Built to Sell: Creating a Business That Can Thrive Without You
by John Warrillow, First Published - Feb 1 2024