Startups

8 Questions to Ask Before Selling Your Startup

Here we tell you how, exits can be victorious, Glamorous and profitable at the same time if planned mindfully
8 Questions to Ask Before Selling Your Startup
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Writer, Tech Panda
7 min read
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Flipkart has been an Indian startup’s hero for some time now. Since, its sale to Walmart in May this year for a staggering USD 16 billion, the deal has set an example for startups, showing them a glorious exit strategy. However, there is of course more to it. Here’s eight questions a startup can ponder before deciding to sell their company.

Do you have an offer in your hand?

First of all, it is important to know that an offer rarely comes. Not every startup is recognised in the market for its work. Cristian Rennella CEO and Co-founder of ElMejorTrato, who experienced selling his company two years ago says a startup is not sold, it is bought.

“You cannot sell your company when you want. You cannot go out and simply find a buyer. If you are lucky enough to find one, the price will be low. A startup is bought when another company wants your startup. This opportunity may be the first of many, but it also can be the last,” he says.

This can easily decide the question of when to sell, because you can only sell if you have an offer. From there, you can decide further.

What are your strengths?

Before putting your cards on the table, know your strengths. Have you built access to a large loyal customer base within your product’s space? Or is your product well-known in the market with very weak competition? Knowing why the offer is even on the table will help you negotiate.

The fact that Amazon and Walmart were vying for a share in Flipkart and were willing to offer up to USD 20 billion was an admission on Amazon’s part that they weren’t successful in the competition for the Indian e-commerce retail market. As for Walmart, buying Flipkart was its entry into the market.

If a successful organisation makes an offer, it means the startup has something that can benefit the bigger company. Recently, Byju has bought Math Adventure to boost its product offering for the upcoming lower grade (K-3) learning programmes.

How big is the buying organisation?

A few days back, Paytm acquired a Bengaluru-based fintech app, Balance. A name like Paytm can be motivation enough to sell. Devashish Mamgain, CEO of chat bot startup, Applozic says, “If the startup can join hands with a big organisation, like Google, or as in Flipkart’s case, Walmart, it should. When a successful organisation offers to take your product to the next level, I don’t think there is any harm in that.”

Cristian Rennella says the ideal time to sell a startup is when the offer is life changing. A Google or a Microsoft can make such as an offer.

Is the deal fair?

A startup must evaluate the fairness of the offer. Is the offer worth changing their life for? Saying yes to an offer can change a lot. You can choose to start another business in a completely different field, or relax for some time, or even go back to being employed.

“If you are lucky that someone noticed you and proposed to buy you out, evaluate whether what they are paying is fair and how the buyout will change your life. I would only say yes after considering these factors,” Rennella says.

For example, Flipkart’s co-founder and former CEO, Sachin Bansal, decided to quit after gaining the sweet deal of USD 1 billion from it. According to speculation, he now wants to raise funds for investing in AI startups.

Are the founders and the investors in sync?

When making a decision to sell, the two major stakeholders in a startup are the founders and the investors. Both points of view must align to arrive at the same decision. Leo Lax, Executive MD, L-SPARK, Canada’s leading accelerator for SaaS companies says, “From a founder’s point of view, the right time to sell is when the proceeds received from the sale meet their personal objectives. First-time founders tend to sell early, and use the proceeds to build their next company. Serial entrepreneurs, with their second or third startup, will go for the home run.”

Flipkart had constant losses, despite a higher GMV (Gross Merchandise Value) than its competitor, Amazon. As such, the founders must have considered the solid financial support that Walmart was offering.

On the other hand, an investor views a sale as an opportunity to gain from their investment ahead of time, time which is unpredictable and uncertain. Thus, unless the startup is reaching a point that is beyond support, only a considerably high price will induce an investor to sell.

“From an investor’s point of view any offer to sell is an exit, and any exit at less than thrice the invested cost would be considered only if the company was no longer considered worth supporting,” Lax explains.

For example, SoftBank, which had a USD 2.5 billion investment in Flipkart, exited with USD 4 billion and Naspers got USD 2.2 billion.

Will foreign investment hurt the ecosystem?

Experts said the Flipkart-Walmart deal was India’s failure to retain a local champion, an area in which China has succeeded with Alibaba. Is it always a loss for an ecosystem when foreign investment is high in startups? What does it mean for the startup? Lax says foreign investment isn’t always bad.

“Foreign investment can provide a wider network of customers, partners, and investors for the company and diversify the investor base. For the ecosystem, it is a major plus, since this increases the investor base for the entire eco-system,” he says.

When shouldn’t you sell?

Having analysed the situations when a startup should sell, there are also times when a startup should refrain from selling. What if the startup has faith in its ability to take the company to the next level on their own?

“It’s of course the best thing to happen if the founders can take the company to the next level by themselves. However, if that isn’t likely, it’s always good to handover to someone who can take it to the next level,” Mamgain says.

If the startup is at scale with a committed team and the only way to go is up, selling might be the wrong decision. “When a company receives an offer, it should evaluate the offer in the context of its future prospects. It is a risk vs. rewards decision,” Lax says.

Why not go IPO?

Flipkart’s story not only reveals India as a hot spot for global business players, but it also proves that rushing into an IPO is not always the way to go. If you have a market-disrupting product and refuse to give away the market share you have gained, you can choose a glorious exit over going IPO. Lax says that the decision must be based on the growth opportunity for the company.

“An IPO is an opportunity to fund the company for aggressive growth, and if the company is gaining momentum in the market, and growing rapidly, only then does the IPO provide the best outcome for shareholders,” he says.

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