Great Companies are Sold not Bought

David Circle

David Rubin

We’ve all heard the cliché: “Great companies are bought not sold.”  Inevitably, this statement is repeated by venture capitalists in the context of their search for the next home run.  The VCs’ definition of “great” is multi-billion dollar exits that get splashed all over the front pages – think YouTube, Instagram, and most recently WhatsApp as prime examples. Yet over 99% of the tech companies that get acquired in any given year will be sold for under $500M.  Here’s why bootstrapped entrepreneurs should ignore the cliché and sell their businesses at a time of their choosing:

Most companies valued at under $500M will not be known to the vast majority of potential acquirers

Potential acquirers can’t “buy” a company that they don’t know exists. When selling ProfitFuel, we had built the largest SEO company in the U.S. with over 12,000 clients and had been in business for 9 years. However, the reality was that most of the potential acquirers in our industry (including the company that ultimately bought us) had never heard of us.

Timing is critical for maximizing value

Most bootstrapped startups and the industries they compete in go through cycles. The ideal time to sell your company is when your current and forecasted KPIs are peaking. Waiting for a buyer to call you puts the timing in their hands, not yours, which can be disadvantageous when it comes to negotiating the valuation.

Multiple buyers in the process can drive up the valuation

Even with existing interest from a potential acquirer, additional competition can significantly drive up valuation. It is unlikely that waiting around for inbound interest will result in a bidding process with several competitive parties.

The appearance of desperation has more to do with the state of the company than the act of pursuing a buyer

Often times, defenders of the cliché like to point out that selling your company can appear desperate. In reality, however, there are many legitimate reasons why bootstrapped founders want to sell their companies. In our case, ProfitFuel needed a significant increase in product development in order to maintain our 100%+ yearly growth. As a result, we were looking to raise a round from VCs or merge with a company that already had a portfolio of innovative products.  Companies we talked to could see from our financials that we were growing fast and were quite profitable – the perception of desperation was not a factor.

 A “great” exit for a VC (that has put in $50M to a startup and needs a 20x multiple to make up for the fund’s losers) is very different from what is “great” for  entrepreneurs who have built their business over a number of years with limited or no outside investors.  Entrepreneurs who are considering a sale of their business for $20M – $200M did not get their company in that position by sitting around and hoping something good would happen – they make things happen. It certainly doesn’t make sense to change that strategy when the opportune time to exit arrives.