How to Sell a Startup
It has never been easier to sell a project you create, but the task is daunting when you first start planning. Many entrepreneurs get discouraged at the process, but once you know the rhythm of the selling process, it makes the entire thing much easier.
Here's the process of turning a business generating 16K a month into a million-dollar acquisition.
At a minimum, you need at least some revenue to show that users are willing to pay for your project, but even a few hundred dollars MRR (Monthly Recurring Revenue) starts to become interesting as typically you can sell things at a multiple of your ARR (Annual Recurring Revenue).
That means a business that is generating $300 per month in MRR is at $3.6k ARR ($300 x 12 months).
SaaS businesses typically sell at that range for 2x - 3.5x ARR (depending on growth, customer count, margin, luck, and other factors), which means at the high end your business would be valued at $12,600. Not bad for something generating only $300 per month today!
The opportunity gets more interesting when you start to hit $10K MRR as the multiples you can sell for tend to increase a bit.
At $10K MRR, you may be able to sell for a 5x ARR multiple which means you could potentially sell for $600K! And if you’re doing the math, you know that means - you need to hit $16.6K MRR to sell for $1m.
So it makes a lot of sense to try to create side projects and sell them or leave your full-time job to pursue a project you're passionate about creating.
You don’t have to be a developer to do it either. While I can knock together a basic front end today, I built and sold my first project using only WordPress years before nocode had the support it has today, so don’t get discouraged if coding isn’t your thing.
However, as you sell larger projects, you’ll notice the process changes. What can be essentially a handshake agreement and a simple escrow service for small projects turns into a much larger and expensive affair when you start to sell a project for 6 or 7 figures.
Here are a couple of things you’ll need to be prepared for:
- Taxes: Depending on where you’re located you can prepare to lose between 27% and 45% of the acquisition price to taxes (I am not an accountant, your experiences may differ).
- Expenses: Be prepared to spend a minimum of $2,000 for a lawyer and a similar amount for a CPA. It will likely be more expensive than that and if the deal doesn’t close, those costs will be coming out of your business or your pocket. Despite that, you should not skimp on these costs. The CPA will pay for itself with guidance on taxes alone.
- Mental exhaustion: You will be working your full-time job, dealing with lawyers, accountants, due diligence requests, and trying to continue building your project in the meantime. This process will likely last a month if you’re lucky and it will be incredibly draining.
So where do you find someone to buy your project? There are plenty of options today. I’ve sold two through marketplaces and one came to me directly. I’ve had direct offers from other businesses as well and those tend to be more lucrative than listing on a marketplace. If you’re being acquihired into a company, you can expect the multiple you receive to be much higher than what you could get on a marketplace.
Something that not many people talk about but I’ve seen be very effective is actually reaching out to larger competition and initiating a relationship with them. If you’re in a new space and they’re interested in picking up a project, they may start the conversation with you when they begin the acquisition since they already have a running dialoge.
Once you have been approached by a buyer and decided to sell the real work begins.
You will likely do very early negotiation over email or over a call where a price will be set. This is a great time to start trying to source a lawyer. Make sure to negotiate that price up a bit!
This likely is your last chance to do it.
Once you agree to the price, don’t drop your guard or celebrate too early because it’s just getting started. You want to also make sure you have a few non-negotiables in the air early.
That means along with agreeing on the price you will want to also have things that are important to you included and agreed upon in the conversation. Run these by your counsel and make sure they understand what’s important to you so they can best represent your interests.
A few things you may want to think about including:
- Revenue share: If you’re acquihired do you still retain a portion of the revenue?
- Equity: In the acquiring company or even retaining some of the company you sold.
- Earnouts: This is where certain amounts of money will be unlocked based on your business’ performance
- Location flexibility: If you will be working at the acquiring company, will you have to move?
- Team: What happens to your customers and any contractors you have post-purchase?
Try to get these points agreed to during the price talks as they’ll be difficult to negotiate later on.
If you have managed to get a price and some basic terms agreed on, the next step is the LOI or Letter of Intent.
This is a short contract that stipulates both parties will attempt to close the deal in good faith over the next X period of days. It may also contain some of the above terms you’ve negotiated and will likely also contain terms you had not expected. Surprise!
The buyer is trying to protect themselves also. Get a copy over to your lawyer as soon as you receive it.
As you’re reviewing the LOI the item that will probably catch you off guard the most is called a “holdback amount”.
This is an amount of money, typically 5 to 15 percent of the total purchase price that the buyer will “holdback” for a period of time, typically 18 months, as insurance against any potential liability they might incur as a result of the transaction. On the plus side, you don’t pay taxes on that amount till it hits the bank account (I am not an accountant, your tax situation may differ).
If the lawyer gives the "all good" and you like the terms of the LOI, then the real work begins.
You will enter a period of DD (Due Diligence) that will likely be painful regardless of how well organized you are. This is about the time you’ll realize you should have hired that accountant ages ago.
Be prepared to answer questions and have over information on:
- Customer count + details
- Stripe information
- Recurring costs
- Acquisition channels
- Retention, Engagement, and every other metric you can think of (LTV, CAC, ARPU)
Things that will help with this process:
- Having one payment processor
- Using ProfitWell, ChartMogul, or Baremetrics to verify data and make it easy to hand over as a source of truth
- Using accounting software such as Zoho Books or Quickbooks to manage expenses
- Patience. This will seem like a never-ending process.
Expect 2 to 3 weeks of DD, but it can last for much longer and rarely less time. You will likely be interacting with several different parties on the buyer’s side as well, so this would be an ideal time to take some time off work at the day job.
Keep in mind as you’re finishing DD, nothing has been finalized yet. You or the other party can still pull out so keep the champagne corked for a little longer.
After DD is complete, you’ll get the purchase agreement which will be a much longer document and likely contain Schedules (declaring debts, existing deals with third parties, etc. - these will vary) that need to be completed. There may also be addendums in addition to this so keep your eyes peeled for any and all changes that come down the pipe.
Don’t be surprised to get a 30-page long purchase agreement. This is when the legal costs really start to add up. Your lawyer will be billing hourly and is likely part of a team, so keep an eye out for an eye-watering legal bill at the end.
Try to find a few key points you want to make sure are changed and write them down or even better, add them to a Kanban board and keep track of their status.
Now the lawyers will get to work. You will be communicating to the buyer mostly via each other's counsel at this point and this is where things will slow way down. I recommend opening a backchannel with a key person on the buyer side in case things seem like they’re grinding to a halt due to counsel getting hung up.
After you’ve finished the negotiation and you’re happy with the final document, you can sign and send it off. Wait till you have the countersigned copy then pop that champagne! You certainly earned it.
Keep in mind wires can take a while and you may not see the funds land in your bank account for a few days after the contract has been sent. That period of time increases with international wires. You can also use a tool like escrow.com for managing the payment transfer.
Despite the amount of content out there about growing a startup, I haven't seen much on actually selling it. If you're looking for more information, this article from Paul Grahman was a great primer for me when I was just getting started, then this article from Justin Kan has a few important points as well.
Best of luck building and selling your company. Give a shout on Twitter if this article was helpful.