How to sell your company when you're at the end of your runway

It takes 6-18 months to run a proper process to sell a company. If you have that much time, or could get it by doing layoffs or other cost controls, and you do want to sell–then do that. I’ll write a post on that later. This post is about what to do if you don’t have that luxury.

Face the music

I spoke with a YC founder and good friend when he was down to his last 4 or 5 months of cash. The market had dried up for more funding, and though he had seemingly found PMF they were not generating anywhere near the revenue they needed to to either operate at breakeven or raise more money. They only had 3 people, 2 of whom founders, so there was no way to cost-cut their way to extending runway.

He was still scrambling to raise, and getting 100% rejection. He had a bridge to nowhere from insiders, but eventually they decided against that. It was a tough time.

I was the guy who told him he needed to think about ending it. That it was time to stop talking to VCs, and either talk to acquirers or shut down.

It’s a hard thing to tell someone, and an even harder thing to hear. I went through CEO coaching (my wife called it CEO therapy) and it took a year of work to realize that my well being is not related to my company’s continued existence. Sometimes shutting down or selling is actually better for you. I’m not saying reading this post is going to get you there, but maybe consider it.

Once you’ve faced the music…

You have choices. Maybe. If you’re down to your last month or two, you probably need to start the shut down process. It costs money and takes time. There are severe penalties for not paying employees which may hold management personally liable, at least in states like California.

Generally budget $100k to run a shut down process with professionals. Depending on the professionals you use, it could cost less, but there’s no more money coming in so be safe. If you have any debt, SAFEs, leases, etc. you’ll probably use a process called an Assignment for the Benefit of Creditors, or ABC. If you’re at that stage it’s worth learning about.

Lets say you have time, money or both. Do you want to sell? I met a tier 1 VC partner the day he after shut down his startup. It had seemed great–thousands of paying subscribers, some PMF, etc.–and an offer of some kind to be acquihired and go work at Facebook. But he didn’t want that, he wanted to focus on VC. So he said no and shut it down. It’s taken me years to understand that decision. I get it now. There’s nothing wrong with shutting down–you can totally have better options than $20 million to work at Facebook for 4 years (that $20 mil would now be worth ~$400 mil, but I digress).

Let’s say you prefer to sell. The goal in almost all M&A processes is 3 good, competing offers. This gives you both a clear understanding of the “market” for your company, and people to play off each other so that you can get the best deal. More than that tends to be too much work to manage, and 2 is risky. 1 is better than no offers, but at that point you lack leverage (and they’ll sense this).

You need to plan out your timing and process. If you are at less than 3 months, and can’t create more time, this will be a rushed, imperfect process and you will not get a great outcome. But you might get something. It takes 1 month to get offers and 2 months to close a transaction, bare minimum. Don’t let perfect be the enemy of the good–just get going.

If you have more than 3 months, or can cut costs or manage cash to extend to 6, you can run a proper process. That’s for another post. You’d have a lot more options.

Let’s assume you have 3 months, you’ve built something of value, and came up with a list of companies who might value it. First, you’ll want to leverage your connections to start conversations with those companies. Then, you’ll want to get offers. Finally, you’ll want to close the deal. Lets talk each in order.

Leverage your connections

Your board, investors, maybe executives–even friendly investment bankers–can be helpful at the start to connect you with those companies who might value what you’ve built. Preferably their CEOs, but functional leaders such as CPOs or CTOs can be great. The head of corp dev is also ok–that person will at least look, because it’s their job–but they are the least likely to get excited, rushing a deal through or even overpaying. Your best shot is always with the CEO.

Investment bankers might be able to help make introductions. They won’t take you on as a client because of both a lack of time, and a lack of fees, but they might point you towards companies who are interested in what you’ve built, and maybe even make an intro. They do this for two reasons. First, sending over a bargain-bin deal ups their value to that contact. Second, most are in it for the long game, and expect this won’t be your last company. Maybe next time you sell it’ll be a big exit, and you’ll remember their help.

It is also a great idea to get an advisor to help you run the process, even if bankers are out of reach. Your lawyer can help, but most will not provide business advice (just legal advice; you supply the business terms). That leaves a big gap for you in negotiating and strategizing. Board members have their own motivations and fiduciary responsibilities, so they are not a fit. Some angel investors might be experienced, and might set aside their self interest, but there will be decisions where your interests are opposed. Larger angels can also kill deals, and they know that. An advisor is someone without a horse in the race, who is in your corner. I’m an example of that sort of person, there are others (ask around).

Get an offer 

An offer is also known as a Letter of Intent or LOI. You need this with at least 2 months to spare, to have time to close the deal. You might talk through terms on a call, or in email, but in these processes there is no substitute for a formal LOI. Even if it is a true “Acquihire” there will be an LOI. Settle for nothing less. Specifically do not agree to present anything less to your board, as leverage to get that actual LOI. Note whenever I say “offer” below I mean, specifically, a signed LOI.

How do you get an offer? That’s the tricky part. Ideally you can get a preemptive offer. If you’ve built relationships, you can generate this yourself. Your board or investors may be able to help. In my case, I was running low on money and still struggling with PMF. I was catching up with the founder/CEO of a competitor who just settled a big lawsuit and closed a Series B. He said that he raised a lot to acquire companies–would we be interested? I told him I was reluctant, but I’d hear him out–even though I wanted nothing more than to sell at that point. We had an LOI 3 weeks later.

Talk to the CEOs, or other contacts, to get them to make a decision. It takes at least 2-4 weeks from a cold start to sending you an offer. If you get on a first call and say you expect an LOI from them by that Friday, they will simply pass. Be reasonable.

The best approach is to ask questions. Just because you think they “should” value your company does not mean they do–or will reach that conclusion in time to meet your timeline. There might be things they value that you didn’t realize were valuable. You are helping them figure out if they want to buy it. You are not pushing a sale. But you are very clear on the urgency and timeline. Be reasonable but firm.

Be careful not to delude yourself with what you think should happen or want to happen. If with 6 weeks cash left they are still talking, but have not sent you an LOI, you will not get one in time and should start to shut down. No harm in telling them that, maybe that creates the urgency. Probably not.

Be careful also to be very honest–they will find out all the dirty laundry in diligence, so hiding things is not productive and will not change the outcome in a positive way (but people will definitely walk if they catch a whiff of dishonesty). Hiding that you run out of cash on a certain date is a missed opportunity to create urgency. No need to volunteer things that will be dealbreakers, but if they ask don’t lie or obfuscate. They’re asking for a reason. If they can’t get comfortable, the default is: no offer.

If you do get an offer, or look like you’re going to get one, you can then reach out to others to say that you are expecting (or have) an offer. This creates more urgency, FOMO, and to a degree third party validation. People who passed might reconsider. But don’t lie here; people will sense it (or directly find out). People act subtly differently when they have an actual offer vs when they are pretending.

If you cannot get a preemptive offer, then you’ll have to run a process. It does help to have a BATNA. If you can get an inside bridge round lined up, that will help you (assuming you’re willing to keep going–be honest with yourself). But if you tried and cannot, I find it’s best to reach out to the ideal buyers with the truth. They’ll find it out as soon as they start diligence, and it will create focus and urgency where trying to be clever will accomplish neither.

I suggest a very short, simple email. “Hi { CEO }, We’re very low on cash, and expect to have to make a decision in the next 3 months. Your company is my top choice for where we would end up because { something specific, real and concise like “our engineering-focused cultures are so similar” }. Do you have 30 min to discuss in the next couple of days? - { your name }”

If you get more than one interested, you can still run a competitive process. It is unlikely, however, that if you tell people you are up against a wall they will dramatically overpay. So, use your judgement. And if you can, get good advice on your specific situation.

At this point you should have a very simple data room, with the basics. A pitch deck, information on your team, and summary financial information. A summary cap table (no names) can also help an acquirer understand what they have to pay to make the investors ok with a deal. It is reasonable to sign an NDA before letting someone into this kind of data room. Less is more at this stage, don’t dump everything in here because you want people to make a quick decision on offer/no offer. More information is not going to make any offers higher.

Ideally, you have 3-5 companies who are interested and after answering some questions and perhaps providing further diligence, 3 of them send you signed LOIs.

Land the plane

Just because you got one or more LOIs does not mean the deal is done. First, you will negotiate the LOI(s). Then, you will close the deal aka land the plane!! That means turning the LOI into definitive documents, getting all of the signatures that are needed, them getting approvals that are needed, actually doing the wires, starting employment at the acquirer, etc.

This process can take 2 months on its own–or longer. It really depends. Don’t expect it to take a week. That is not a thing, and you will be viewed as either unreasonable or uninformed.

Also, your closing date will slip. It always does. Plan on it. Under no circumstance should you get a loan from your acquirer if it can be avoided. Some VCs think this is ok. It is never a good idea. Though it is better than having to shut down before closing the deal, it is only marginally better. So. Many. Reasons. Just don’t do it. Manage your cash carefully. The only thing you really need to pay during this process is employee payroll, and (maybe) debt servicing (including rent). Everything else can be settled at closing.

Other thoughts

This post became very long even though I tried to keep it to a tight topic. Selling your company is complicated, even the short, quick way.

If there is one thing to take away, it’s the need to face the music. Be honest with yourself first. It’s ok that your startup isn’t the next Facebook. Only once you’ve admitted it didn’t work can you begin the process of moving on.

If there’s a second thing to take away, it’s that trying to sell your company is worth doing–but you need time. Give yourself that time, any way you can. That way, even if you fail, you’ll look back feeling like you did all you could. You’ll also be far better prepared when you start your next company.

That YC founder I mentioned earlier did get very far with a potential acquirer, but didn’t get an offer. But with ~1 year of distance now he felt good about the process. There’s connection with other founders and CEOs that you meet through this, and a recognition that nearly everyone who is successful has one of these experiences in their past. They don’t talk about it much, but it’s a key part of who they are today. As it is a key part of who he is today.

Hopefully that helps.

PS I’m not a lawyer. This is not legal advice. Just entertainment. Hope you were entertained 🙂 

If you are interested in learning more about this general subject please reply and tell me what you’re looking to learn. I’m thinking of putting together a workshop or live event, and would love your feedback on what would be useful.