Businesses are bought, not sold.
Over the past few months I have been receiving a lot of questions for guidance on helping first-time founders and entrepreneurs prepare an exit plan. Instead of writing the same short answer over and over again, I’ve decided to invest the time to write a more detailed post about this and simply include additional thoughts based on each case.
Back when I was at Bentley University for my undergraduate degree I had taken an Entrepreneurship class in which our most important assignment for the semester was to complete a business plan. The section I remember struggling with the most was the “exit strategy” of the venture. Today, prior to launching a new business many founders/entrepreneurs still feel this unnecessary burden and obsess over a potential exit. In my opinion, a founder’s time is better spent focusing on how he will sell his product to his first 1000 users rather than selling a business.
In today’s ecosystem, start-ups must constantly evolve (and sometimes pivot) until they find a product-market fit. Until then, founders must test different strategies to understand how their product can best fill a gap in the market and how they can most effectively market their product. It is only after a business finds product-market fit that the founder should scout for potential buyers. I used the noun “buyers” because this brings me to my next point: Businesses are bought, not sold. The motivation to form an exit is typically coming from who is interested in buying you not just because you feel like “selling”. Think about it, would you buy a house as an investment property just because the owner really wants to sell it to you? Sure, the seller’s willingness helps, but the way most successful acquisitions happen is that a buyer expresses some level of interest in your business, then things escalate, not the other way around. It is therefore important for a founder to remember to first build a solid product and a loyal follower-base (and I don’t mean social media followers “liking” posts, I mean actual users). It is only once you have these two that you can keep a buyer motivated to have your start-up as part of their portfolio.
So how can founders generate buyer interest for their start-up? Often times from someone they already have an existing business relationship with such as an investor, a supplier, or a sales channel. That is why finding the product-market fit through the right sales channels is so critical (and the right way) for eventually being able to prepare an exit plan. The aforementioned stakeholders will have already done a bulk of the necessary due diligence prior to agreeing to work with you. If you have impressed them by delivering impressive results throughout your engagement period, chances are you are already on their radar. So rather than thinking of an acquisition as this miraculous event where a buyer approaches you out of the blue (which in some exceptional cases it happens), try partnering up with as many right people/companies as possible as early as possible, then organically start nurturing your relationship with them. Having an existing relationship with your potential acquirer will also allow you to understand their product roadmap and motivations.
In short, the path to an exit for a start-up founder doesn’t start with picking-up the phone a few months before you run out of cash and cold-calling a company like Google or Uber to tell them “I want to sell my business to you”. It starts with finding people and/or companies that you can work with, and expressing your interest to work with them on same basic capacity first, and then using that as an inroad to build a relationship with the key stakeholders there.
(This post originally appeared on https://www.borahamamcioglu.com/post/businesses-are-bought-not-sold)