Top Two Ways to Make Your Startup Buyable
March 4, 2015
Do You Want to Exit Your Startup At a Financial Gain?
First, Create a Product that Generates a Profit.
There is enough about that elsewhere on the Internet so I will move on.
Second, Keep Clean Books and Files for Your Startup.
Any variation of a company purchase is going to go through a period of due diligence and due diligence is increasingly sophisticated, timely, and expensive. Due diligence is typically the period where someone has expressed an interest in a company and the various parties are investigating each other. Hopefully the Austin startup is investigating the buyer as much as the buyer is investigating your company.
During a due diligence period, a purchaser will typically start by looking at the following categories of a company for sale:
Financial records. They will start with as payroll, bank records, expense reports, accounts payable records, accounts receivable records, and loan records. • Inventory systems. This applies to service and web-based companies too. In addition to tracking physical assets, your company’s intellectual property and trade secrets should have systems that categorize and protect them from loss or leakage too. You also need to inventory all the computers, phones, and office equipment the company owns with care taken not to include personal assets employees may use for business purposes.
The Company Books. This includes your organizational documents, meeting minutes, and filings with the secretary of state.
Tax Records. Keep all your tax records organized and check in with a tax accountant to ensure that you are filing all the right documents in all the right states.
Intangible Assets. These may be things like agreements with other companies, licenses, permits, letters of consent, articles that show good will, client references that show integrity, domains owned, testing results that may lead to new products, and resumes that show quality.
Building Maintenance Records. If nothing else, this shows that you are an organized and proactive company. Many companies have regulated chemicals, like bleach, and must ensure compliance with OSHA standards and general safety standards. Other things like engineering reports and occasional inspections are important too, particularly if the building or a long-term lease will be considered in the sale.
Contracts with vendors and suppliers. A buyer will want to make sure you have not over or under committed the company in a way that will inhibit their future ability to make a profit. • Personnel matters. Make sure your employee records are complete and clean. Have a good and professional handbook for employees and the proof that you stick to the rules it describes. Disclose any pending threats or suspicions of employee discontent and what you are doing to mitigate the situation in an organized fashion.
Patents, Copyrights, Work-for-hire agreements. A buyer will want to know what rights they are buying with the company so they can estimate how much they can leverage into future profit.
Legal Documents. If you have engaged in any legal disputes of any type, have these organized and presentable so a buyer can feel comfortable that you have presented them with all the threats. Also include all the templates you use to do business with your clients or engage with employees, such as a service sales agreement or non-compete agreements. Many startups feel overwhelmed by requirements of due diligence even though they have been hoping to sell their business since inception. The cheat-list above is nothing more than a call for organization and, annoying though it might be, a company must be organized. None of the items listed above must be done in an overly formal or expensive way but organization must be maintained consistently. For example, company-meeting minutes can be done on Word to briefly document the reasons a single person company decided to operate the company in a particular way. Financial records can be maintained in Excel. This is about function over form and functional record keeping accurately reports the affairs of the company quickly to forensic investigators conducting due diligence. And quick due diligence is cheap due diligence….buyers like that.
If your company is actively on the market for sale, organize the materials you believe will be reviewed in advance. You could use the list above as a table of contents. Keep in mind that you will want to organize things in a way that is easily updated. Also know that a buyer will always ask for something more than you provided. If you keep your company affairs organized the phase of due diligence will be cheaper and less stressful for all parties involved. Cheap, organized, lower-stress due diligence is a recipe for a successful buyout at a higher purchase price.
Want your startup to be buyable? Start worrying about the above from the very first day.