Andrew Gazdecki (MicroAcquire): Busting the Myths of Selling Startups
The term “unicorn” is a very apt word for the tech startup industry. The companies and the deals necessary to acquire them are rare. They also take on a mythic quality where people assume things based on what they wish would happen, rather than what actually happens.
However, you only hear about the unicorns that get acquired. You don’t often hear about the ones that sell for under $80 million, which according to Andrew Gazdecki, make up almost 98 percent of all startups. And he knows his startups.
As a serial entrepreneur and current CEO of MicroAcquire, a founder-centric platform for selling startups, Andrew is uniquely qualified to bust these myths.
Andrew hopped onto the BUILD podcast with Blake Bartlett to give us a look behind the curtain at how startup acquisitions really develop.
The myths of selling a startup
Despite being immersed in tech for years, Andrew discovered that he knew shockingly little about the startup acquisition process the first time he tried to sell a company. And he wasn’t alone.
“When I sold BusinessApps,” Andrew recalls, “I literally had 10 friends of mine that are startup founders reach out to me. They’re like, ‘How did you sell your business? What happened? What’s the stock purchase agreement? How was due diligence?’”
“I thought I was the only one who didn’t know about this stuff,” Andrew said. The acquisition process can be murky to founders who have never experienced it before. Many times they also haven’t had the opportunity to learn from those who have done so successfully.
“As founders, we’re not trained to sell our businesses. We’re trained to go to the top of Mount Everest and go public.”
Let’s go into the common misconceptions people have about selling businesses.
Unicorn or bust
If all you know about acquisitions is what you read on TechCrunch, then you’ve probably got the wrong idea in your head. Big deals with billion dollar outcomes, according to Andrew, are rare and highly exceptional.
“You’re a statistical anomaly if you can sell a business for over a hundred million dollars,” Andrew says. “Same goes for building a unicorn startup.”
This fascination with large deals has had the side effect of trivializing smaller deals as “lifestyle businesses.” But statistically, 0.05 percent of startups raise venture capital, and out of that, only one percent reach unicorn status.
“Then there’s this long tail of other startups you never hear about,” said Andrew. “They’re operating profitably and sustainably. They’re building really great businesses and I think they should be celebrated more.”
Companies are bought not sold
There’s this scenario people envision where VCs chase founders waving money in the air—where buyers swarm like bees to honey. And that’s certainly true in some cases, but not for all startups.
This was not the case for Andrew. “I had built up a list of potential acquires. Everyone from strategic buyers to financial buyers. I kept in touch with all of those firms because I built the company with the specific purpose of selling in mind.”
“I had to map out buyers that I thought were a good fit,” he said. “I had to sell them on the opportunity. And so you’ve got to be prepared, you’ve got to be transparent. You’ve got to understand what a fair valuation for your startup is.”
In other words, founders have to work just as hard to sell companies as they do the product.
It’s a transaction
Some first-time founders may be among those that assume that buying a company is like buying a car. There’s some price negotiation and a walk-around, and in the end people sign a contract, shake hands, and walk away.
But there’s a lot more to it than that, says Andrew.
“People think it’s just like here’s the keys and I’m just going to walk away and go lay on the beach. But the majority of the time, who you sell to is almost as important as the price. Is this a reputable firm? Is this someone who sees potential in your company? Are they going to treat your company and its employees in a way that you’re comfortable with post-sale?”
There would also be some negotiation around how involved you’re going to be in the company after the sale (if at all). For example, you might be around after the deal to answer questions or provide insights—maybe even offer advice to the new owners.
How to get your startup acquired
Now that we’ve busted some of the more egregious myths, let’s discuss some tips on how to actually get your startup ready to sell.
Understand why you want to sell
“The number one thing I always say to start with is understand why you want to sell,” Andrew says. “What is your reason? It could be to cash out an asset that is valuable and you think could be in better hands. That’s probably the most common reason. Others are just to move on and work on another startup.”
“Having that story down is key, because it’s the first question everybody will ask. If your story isn’t rock solid, then buyers are going to wonder, ‘What am I not hearing? What are they not saying?’”
It’s all about being honest. If you play hard to get and quote a price, but then say you’re not for sale, that can be confusing and turn off potential buyers. Buyers need to know you’re serious.
Explore your options
According to Andrew, selling a startup can be a unique experience. “For the majority of startups, there’s really no clear path on how to sell your business. And that starts from meeting buyers or a clear path on ‘What is the process? What are some things I should be preparing for?’”
“If you’re selling a business that does, maybe a couple million in revenue, you’re typically going to be working with a business broker. They’ll charge about 15 percent commission for the success of that sale—and there’s very few of them.”
When Andrew sold BusinessApps, he took it to market and connected with some buyers that he’d met before to help run the buying process. Your approach will be different depending on your resources, your available network, and the specifics of your business.
Don’t count your chickens
It’s a common saying because it’s true. Counting chickens before they hatch can be a big source of disappointment.
For startup founders, however, it carries other dangers.
“I think the worst thing you can do as an entrepreneur is think you’re going to sell your business, and then stop growing when it doesn’t.”
“They weren’t mentally prepared for what happens if it doesn’t actually sell in reality,” Andrew says. “Counting chickens before they hatch can backfire.”
Being overly invested in a potential deal can lead to emotional backlash if the deal’s canceled. Unfortunately, it can severely affect your performance as a founder moving forward—which in turn hurts your future selling prospects.
Know what goes into an acquisition
“Tons of deals start, but they never finish,” says Andrew, because founders don’t know what goes into an acquisition, and they get bogged down and lose steam.
A founder should know what steps need to be followed and the different considerations that need to be taken into account.
- What is due diligence?
- What legal steps are required?
- What are common yellow flags?
The more the founder knows about the process, the more successful the sale will be.
Have a good business with people who know the business
“The number one way to sell your business is to just have a good business,” Andrew says.
This sounds simple but is deceptively difficult, as any CEO will tell you. But it really is your best selling strategy. Successful businesses naturally attract the right kind of attention. In these cases, your performance is doing the selling for you. But don’t let that fool you when you’re going through the process of selling. As a founder, your ability to sell is tied to how you see the potential future for the startup.
“This is an asset that you own and you know it better than anyone,” says Andrew. “You know, the potential opportunities that you haven’t executed on that maybe an acquire could run those plays and grow the company even further. Or things that need to be fixed, like easy wins sometimes. Surprisingly, having things that are maybe small bruises, like low-hanging fruit, can be attractive to some buyers because they see that and they say, ‘Hey, I’m an expert in that area and I’ll fix that.’”
Andrew also stresses the need for good people on your team—especially finance people. “Have a good, healthy business with good unit economics. Having a good VP of finance or CFO inside your business can create a lot of goodwill with buyers, as they’re evaluating your business.”
“As you go through due diligence, you’re going to get a lot of financial requests and data requests. Having someone on your team that can get that over quickly and accurately can really build trust with the buyer.”
Three key takeaways
- You can’t do a good deal with a bad person. This quote from Warren Buffett is just as true today as when he first said it over a decade ago. Pick your buyers wisely, and avoid getting dazzled by the dollar amounts.
- The person who wins the negotiation is the person that cares the least. You have to be willing to walk away from the deal if negotiations are not going your way, lest you be pressured into a disadvantageous situation.
- Every small deal is big to someone else. Don’t look down on small deals. A sale is a milestone to everyone, whether they’re worth a million or a billion.