July 14th, 2020
Entrepreneurship is full of extreme highs and extreme lows, and the thing you have to get used to is when they happen at the same time. Nowhere in your startup CEO journey will you find this more true than the process of selling your company. Startup CEO author Matt Blumberg explains how a CEO can mentally and emotionally prepare themself — and their family — for an exit.
This is a reprint of Chapter 49: Preparing yourself for an exit, from the second edition of Startup CEO.
This is a tricky question. There’s an old adage that “great companies are bought, not sold.” I don’t quite agree with that wording. Certainly, great companies, those “lightning in a bottle” rocket ships, are likely to attract proactive offers from strategic buyers early and often. And it’s also true that weak, financially unhealthy, or more run-of-the-mill companies may never attract a proactive offer. But sometimes great companies don’t have an obvious natural buyer, or the timing of wanting or needing to sell a company doesn’t line up with the needs of the market.
Regardless, the question stands — how do you know it’s time to sell your company? There are a few times that point to the answer of “could be now:”
You receive an inbound, unsolicited offer that is very exciting to you, your team, and your shareholders — either because the number is disproportionately large relative to where you believe the company should be valued today, or because the buyer and the opportunity of the combination of the two companies is exciting. Inbound offers are in some ways the easiest to get your arms around. My long time friend and Board member Fred Wilson always says, “at every price, you are either a buyer or a seller.” So if you get an unsolicited offer and you like the buyer, you are either deciding to sell the company at that price, or you are deciding that, at that price, you are willing to buy the company.
You believe the company is at its most likely high watermark of valuation within a 2+ year forward looking horizon. This isn’t necessarily a must-sell time, but in the world of “buy low, sell high,” it certainly could be. Examples of this might be when you think your market is starting to tap out over the next couple years; when you are staring down a massive amount of new investment or reinvention/transformation in order to maintain or expand your company’s market position and revenue; or when you have just completed some major internal house cleaning, whether of technology, staff, or something else. None of these times is necessarily a signal that the company is in trouble. There may well be a higher peak off in the future. But at a major inflection point like these, you owe it to yourself and your shareholders to consider whether it’s the right time to sell.
You have a major internal problem on your hands related to the cap table. For example, you might have a founder who owns a significant amount of stock who either needs liquidity or who you need to push out of the company. Or you might have a major institutional investor who requires liquidity for some reason. Neither of these is a must-sell situation — there are other ways to buy out individual shareholders or create an equity or debt financing event around that outcome. But again, this is a major inflection point at which it makes sense to consider a sale, especially if the cap table problem is large enough. A lack of alignment of financial interests around the board table, or around the management team, can slowly eat away at the leadership morale of the company (or even just you) if it’s not addressed.
If you sense that one of these situations is coming, it’s time to start preparing you and your company for an exit.
Just because it’s the right time for a sale of the business, or a sale is likely in the near future, doesn’t mean you automatically become mentally prepared for such a massive change to your own life. If you’re a founding entrepreneur who has led your company for several years, the odds are you have a significant amount of emotional investment in your company. For many entrepreneurs, the company is a deeply embedded part of their identities as a human — right or wrong, for better or for worse. The first thing to do when starting the personal, mental journey of selling your company, is to recognize these things, for yourself, but even to acknowledge them out loud to your significant others or close friends or members of your management team (more on them in a minute).
For me, one of my self-management tools discussed in the prior section of the book called “Taking Stock” came in very handy as I prepared myself to sell Return Path. Those four questions I ask myself at the end of every year:
Am I having fun at work?
Am I learning and growing as a professional?
Is my work financially rewarding enough, either in the short term or in the long term?
Am I having the impact I want to have on the world?
played a key role in my preparation. I realized that the answers to these questions weren’t as strong as they once were; and in fact, that the answer to some of them could be more emphatic if I were doing something else. Now that in and of itself isn’t a reason to sell a company of course, but for me that realization was a moment that reinforced my belief that the decision to sell the company was good for the business… and for me personally.
There’s a major component to your mental preparation that also revolves around answering the question “am I ready to let go.” Of course, there are many different types of company sale transactions, but invariably, all of them are likely to lead to a lot less control over the business. Even if you sell the company to a financial buyer and are still running it as CEO, you may find yourself with a lot less authority and autonomy than you did if you had a more diversified shareholder base and board, or of course if you had no institutional investors and simply founders and angel investors. Selling to a strategic buyer means your company might not even exist any more - even if it’s a business unit or a product line in a larger organization, it won’t be an independent company or even close.
So you need to think deeply about the different range of personal outcomes and get your head around what those outcomes would mean for you, whether or not you’d be interested in them, and why or under what circumstances. Some entrepreneurs I know have sold their companies to strategic buyers, gone on to be effectively product managers at larger companies, and are thrilled - thrilled that they are able to lighten their personal burdens mentally, thrilled that they can really see “their baby” grow up and thrive and succeed in a new environment, thrilled that they have more time in their lives beyond work. Some entrepreneurs I know have sold their companies to Private Equity firms and maintained their roles as CEO, delighted to have a single voice around the board table instead of five — and happy to have taken money off the table while still having a second bite at the proverbial apple.
But for every one of those two types of happy entrepreneurs, my guess is that there are two unhappy ones — or at least two who should be preparing themselves to leave their company after a transaction and not pretend that they’re going to be happy relinquishing that much control over their company and still being there to execute the vision or financial guidelines of other people. There’s nothing wrong with coming up with the answer of “I am not sure, but I’d like to give it a try.” But there is a problem — mostly for yourself, but it will spread to others as well — if you really don’t want to be at the company after a sale and a proper transition, but you force it for whatever reason. That will not end well for anyone.
There is no right or wrong answer here. But there probably is a right or wrong answer for YOU. That’s the most important thing to think through, deeply, at the early stages of working on selling your company.
Besides the mental preparation involved with thinking about life after a transaction, you also need to prepare yourself for the sale process itself. Even the easiest ones (and there’s no such thing as an easy one) take longer than you think, are more exhausting than you imagined possible, involve a lot of drama with buyers and lawyers, and invariably involve a large number of moments where you get bad news.
The bad news could be a potential buyer saying “No.” It could be a buyer re-trading the terms of a deal that you thought were settled. It could be mid-level people at a buyer nit-picking some area of your business to death with questions or concerns that don’t make sense to you. All of them will feel like a prospective client rejection or a prospective rejection. Your baby has been called ugly.
But regardless of the nature and volume of these, I can promise you they will happen and will be unpleasant. So buckle up!
At the advice of several friends, by the time we sold the company in 2019, I had already laid a lot of groundwork for that with my kids, who were 10, 11, and 12 at the time. The reality is that my kids were younger than Return Path, so to them, my identity and the company’s were completely fused together. Not only that, but kids don’t understand startup economics and equity, so the thought of “Daddy being unemployed” is scary to them. As my friends who had been through this process before advised me — contemplating a life transition like this might be hard for me, but it would be 10x more difficult for kids!
I started a dialog two years before we actually sold the company with the kids about how something like that would probably happen someday. Once we got past them being upset (and they were very upset for a while), they got more and more comfortable with the concept. When we were in the final deal process, they even started to get excited and ask me questions every night about how due diligence was going, and whether I was sure I was getting the best deal possible. Once the transaction closed, all the unhappiness and fear were gone, and they were able to be as excited as I was about it.
Matt was Chairman & CEO of Return Path, Inc., the company he founded in 1999, until its sale to Validity, Inc. in 2019. Matt was a co-founder and serves as Board Co-Chair of Path Forward, a non-profit that was spun out of Return Path in 2016. He is the author of Startup CEO: A field guide to scaling up your business, published by Wiley & Sons and based on his popular blog on entrepreneurship, Only Once.