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Steli Efti: Hey everybody, this is Steli Efti.

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Hiten Shah: And this is Hiten Shah.

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Steli Efti: And today on The Startup Chat we’re going to talk about mistakes to avoid when trying to sell your startup. So here’s the reason why I want to talk to you about this, Hiton. Well one, I think it’s compelling content and people are going to be interested in this. Lots of people that are running a startup might want to sell it one day. And currently it’s kind of part of my world because I have some friends that are in the process of selling their startup, and I’ve been very much involved in that and observing from the sidelines their approach and their strategies. And also, from my perspective, I’ve been observing a bunch of mistakes they’re making or have made. So I thought, and I know that you’ve helped a ton of people sell their startup, so I thought that we could provide some value to our listeners out there. So, let me start with asking you, if you think about the more recent examples, or maybe there’s just a top-of-mind. This is a big mistake most people make when they’re trying to sell their startup, and if there’s somebody that’s listening to us that’s going to be in this situation, this is the one mistake I’d like them to avoid. What comes to your mind immediately on this topic?

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Hiten Shah: Yeah, the typical thing is that companies are bought, not sold. So, you got to think about, why would someone need your company, why would they buy it? Even if you’re going through a banker or one of the firms that helps with that sort of opportunity of selling your company, you still need a reason why someone would buy it. And I think that’s my number one tip is, if you know that and you’re going to sell your company either way, whether people are coming to you or you have to use third party and go to them, you have to think about this idea that companies are bought, they’re not sold. So why would someone buy it? What impact are you and your business going to have for them? And that’s often not thought about enough in the right ways. Because the best buys are strategic, not because they’re going to buy you and acquihire you as they say, and then shut down whatever you’re working on.

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Steli Efti: That makes a ton of sense and that’s killer advice. I think the thing that’s top of mind for me when it comes to mistake to avoid what you’re trying to sell your startup, is … I mean, this is true in many different situations, but in this situation it’s very important. You need to know what your line in the sand is, and you need to know what you bring to the negotiation. And which you’re willing to lose and what you’re willing to gain for it. What’s your appetite for risk, how hard are you going to negotiate? What’s your position and leverage to even negotiate really hard? Because people are usually very confused when it comes to this. From a recent example, my friends are negotiating selling their company, there’s a new buyer that pops up that they culturally liked better than the main buyer that we’re talking to. They got very excited and they’re like, “This new buyer is offering us something that’s going to feel more exciting and more natural, and that it’s a partner that we’re more happier around selling our company to and working with closely.” But they are already super late in a situation where they’re about to run out of money. There’s all this pressure, they don’t really have much to negotiate with. And then they get this buyer that’s very interested and it’s very honest with them on why they would buy them and how much money, and what their possibilities are in terms of an acquisition. And then they’re talking to me and they’re like, “Well, how can we squeeze every dollar out of this deal?” And I go, “Well, do you guys want to really poker super high to get the maximum amount of money, or are you trying to get the fastest outcome possible? Because you’re a few weeks away from running out of money and you like this buy a lot, why would you want to tell them a number that’s three times higher than what you think they want to offer you to start a long drawn-out process to optimize on money, when it seems to me you might need to optimize for time. Unless you really don’t care, unless you’re in a situation where you go, ‘If we can’t get this amount of money, we’d rather just go bankrupt.'” And it’s those kinds of situations where people are confused. They’re like, “Let’s try to maximize for money.” Although they’re not in a situation to maximize for money. And what happened in that case is they gave that potential buyer a super high number, and their buyer came back and said, “No thanks. I don’t think this is going to work for us, but best of luck.” And it’s like, “Of course. You have days before bankruptcy and you’re playing high stakes poker, although you very much care about selling the business and you …” You need to know your risk appetite. You need to know what is the outcome you want to optimize for, and what’s the position you’re in. And if you’re not in a position to negotiate hard, don’t negotiate hard.

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Hiten Shah: Right, right.

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Steli Efti: Because if you’re not in a position where you have a lot of time, don’t act like you have a lot of time, optimize for time.

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Hiten Shah: That’s right.

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Steli Efti: Just be aware what the cards are that you have and what’s important to you in terms of outcome. I find that oftentimes people, they’re confused. They’re trying to get everything or they get overly excited and they’re like, “Oh, how we get as much money as possible?” When the reality of your situation is, you have very little time and you probably can’t optimize to get the maximum amount of money because that shouldn’t be your number one priority right now. So really knowing what your priorities are and what the cards are that you really have at the table, I think is important. It seems so obvious, but almost always when I see somebody struggling with [inaudible] it’s because of that.

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Hiten Shah: Yeah. I think, this has a lot to do with the idea of getting really excited about something. And it’s either excited about whoever’s going to buy you, or excited about what you can get out of them. But instead, think of it as a business transaction where there’s a value exchange, and that’s what you’re really aiming to do. So I think that excitement, that emotion, can really get in the way of getting a deal. Just because you get really anxious, you get nervous, you get excited, you get all these emotions when at the end of the day, the buying party is typically at some point going to treat you like a transaction. So don’t get hurt or disappointed when they do that, instead be prepared for that. There’s a friend of mine going through this right now, and it’s a pretty large acquisition and he’s fine. He knows how to deal with this high-level. But at the end of the day, this is a deal that the other company really wants to do. It’s very strategic for them, they’ve been wanting to do it. But at the end, at the last hour, they’re throwing things in that you have to negotiate. So the whole goal and key there is to not flinch. If there was something in there you need to negotiate, you figure out how to negotiate it and get it out of there. Or, figure out the give and take. And this is a deal that the other party, the buying party, wants to happen. It’s not a deal where they’re willing to let it go. And yet, they are throwing these things in there because to them it’s a transaction, and so to you it should be a transaction too.

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Steli Efti: Yeah. I think learning to disconnect your emotions and not attach yourself to the idea of the sale is really important, because any number of startups that have entered a negotiation to sell their company … I don’t know what the percentages are, honestly, I don’t think that anybody has true numbers on this. But my guess would be that it’s a high percentage, probably 60, 70, 80% of the time a negotiation doesn’t end up resulting in a sale.

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Hiten Shah: Right.

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Steli Efti: You just need to be passionate about trying to make it happen, but emotionally you need to assume this deal will not go through.

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Hiten Shah: Correct.

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Steli Efti: So you can be rational and you don’t attach yourself to the outcome. That’s very outside your hands and a low likely proposition in most situations. The other thing I’ll say is, communication. In this specific case, and I think this is something I’ve seen before as well. Sometimes there’s a lot that you will not communicate clearly enough to understand what their process is to buying you, and where in the process you are at any given time. And there’s a lot of guesswork. “Oh, we had three calls. They told us there’s just one more call or one more thing they need to do. We did that thing, we’ve been waiting for a week. We haven’t heard anything. We’re not sure what’s going on.” Taking it up on you to be very proactive with your communication at any step of the way to ask them, “Where in the process are we? How many more steps? Who are the stakeholders? What’s going to take to get us from where we are right now to a final decision and a transaction?” And to manage that process, to overcommunicate and force the buyer to communicate with you so you have real information to understand what’s going on, versus a lot of the time founders feel awkward asking those questions and so they’d rather assume, “Oh I think they’re going to make a decision soon.” Versus, “They told us they’re making a decision Wednesday morning at a board meeting, and so by 11:00 AM, we will know.” It’s two very different things. One is information the buyer is giving you, and the other one is something you are assuming or you are guessing or you are hoping based on some information, and then you adding a bunch of interpretation on top of that information. So make sure that you have real clarity on their process, and that you consistently check in if that process is still in play, if something has changed, and where in the process you are. And what it will take and who will be involved in all the steps necessary to make the transaction happen, so you don’t fly blind and you spend as little time possible in that sitting around waiting, hoping, thinking, interpreting, assuming stage. Which is where unfortunately I see a lot of founders spend most of the time when they’re in the process of selling their company.

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Hiten Shah: Yep. That makes sense. Yeah.

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Steli Efti: Cool.

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Hiten Shah: I think that’s a wrap on this one.

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Steli Efti: Yeah, I think so too.

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Hiten Shah: Lots of things about M and A, yeah.

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Steli Efti: Yeah. If you are in the process of selling a startup, or if you’re ever going to find yourself in negotiations with a potential buyer and you have never done this before, and you’re like, “Ah, I need some more experienced people in my corner, somebody to help me,” we’re always happy to help and be in your corner. You can always get in touch with us, hmshah@gmail.com, steli@close.com. We’re always happy to help. And, this is it for this episode. We’ll hear you very soon.

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Hiten Shah: See you.

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