Your startup is always for sale

It doesn't matter what the CEO said at the last all-hands – if your company raised capital, it’s always looking for or taking offers.

👋Hi, it’s Greg and Taylor. Welcome to our newsletter on everything you wish your CEO told you about how to get ahead.

When team members get 15 minutes with me, I’m often asked about Section’s exit strategy or if we’re trying to get acquired. The right answer is: We’re always for sale. Honest, but not great for anxiety.

At Section, we raised $37M from investors – and my job is to return that capital (and hopefully more!). So I’m always thinking about selling the company. At the same time, I think I could be running Section in 10 years (assuming I don’t get fired first – which happened when I was CEO of FirstUp, a company I founded and ran for 10+ years).

Both are true – we are building the company to be very valuable in the future, and we are always for sale. 

These days, most investor-backed businesses are in this same situation. And as an employee, it’s normal to wonder if and when your company will get acquired, and how the process works.

But the reality is that most employees won’t know their company is considering a sale until it’s already happened. So here’s what’s going on behind the scenes, and how your board and CEO are likely thinking about it. 

– Greg

The “always for sale” mindset

First of all, if your company raised capital from investors, they are always trying to be acquired. Only 54 companies IPOed in the US last year – and just 9 of those were tech companies. 

Going public is rare – and it’s becoming less common, which means acquisition is the only way the vast majority of investors can get a return of capital. So part of your CEO’s strategy is trying to make the company as valuable as possible to potential buyers at any time. 

Source: “Initial Public Offerings: VC-Backed IPO Statistics through 2023, University of Florida, April 2024.”

Here’s how they think about creating value for a potential buyer:

1. Can your product plug into a buyer's distribution or sales network and accelerate the buyer’s growth? In other words, do you have a product they’d rather buy than build?

2. Can the buyer leverage your product in their business within 12 months? With the exception of AI, there is little tolerance for speculative stuff anymore, so the product-market fit has to be there.

3. Are you close to break-even, or better? Acquirers don’t want to buy companies that are hemorrhaging capital, especially in today’s funding environment. They need the fundamentals to be working with a clear path to profitability.

How companies get acquired

As an employee, there’s little you can do to control whether your company is acquired. However, you can understand how the process works, and sometimes spot signs that the company might be considering a sale.

There are two scenarios that lead to a sale:

Scenario 1 – A formal sale process: A formal sale process occurs when the CEO or board hires an investment banker (or uses a lawyer/CFO) to run a 3-6 month process to solicit bids and sell the company.

This usually occurs for one of three reasons:

1. The company is running out of capital (often called a “fire sale”).

2. The founders or investors have lost patience (the founders are tired and want to do something else and/or the investors are retiring or their fund is dead or dying).

3. The CEO, founder, or investors have a feeling that it’s a good time to sell (maybe your product has a lot of demand, or a competitor was just bought, or the business is finally profitable) – either way, someone wants to run a formal process to test the market and see what price they can command.

Regardless of the reason it started, a formal sale process does not guarantee an acquisition. These days, about 3 in 5 formal sale processes never close.

Scenario 2 – An inbound offer. Sometimes, this leads the CEO or board to hire an investment banker and run a sale process to test the market and see if the offer is competitive. Other times, the offer is already at a great valuation with a short window to close and the CEO/board does not shop the company.

In this scenario, the sale is a surprise to everyone who isn’t in finance or actively involved in due diligence. Your company wasn’t for sale and suddenly it’s sold. 

In both scenarios, there’s typically a 30-60 day sprint to get the management team ready to make pitches to potential buyers, and then to handle all the questions that will come soon after. You might have a sense this is happening by some of these signs:

• You’re getting a lot of questions (more than usual) about the business – This happens when your management team is preparing for due diligence – they have to answer questions about margins, quality of revenue, CAC, HR issues, NDR, competitive revenue, etc. – so sometimes these questions get passed down to you.

• The product roadmap or major project list is getting straightened out – This usually means your CEO is aligning the roadmap with the company strategy and removing any distractions.

• They’re cleaning up some part of the house – This could mean getting rid of shitty customers (you should always be doing this), closing offices, or pulling sales out of certain markets or verticals.

Another tell-tale sign of a sale process is big meetings in the main conference room with a lot of people you don’t recognize – that’s what it was like when we all worked in the office. It’s harder to see that today, but when your CEO is considering a sale, they start consulting with new advisors – bankers and lawyers who sell companies. 

These are the hidden influencers, and some of their advice might make it down to your team or projects in the form of comments like, “the bankers want us to stop hiring for the next 90 days”.

Our advice

When an acquisition is a total surprise to employees, it’s easy to think your CEO is full of shit – especially if they’ve been talking about building for the long term. But all good startup CEOs are always doing two things at once – trying to build for the future and be as attractive as possible to potential buyers in the short term. At times, it comes across as inconsistency and indecisiveness, but they have to manage both options.

As a CEO, I know employees want certainty, but 3 in 5 potential deals never close. So your CEO has no incentive to share every potential sale or acquisition with the company. While it doesn’t hurt to ask your CEO about their exit plan, don’t expect a straight answer. Not because they’re withholding, but because there probably isn’t one. Managing that tension is why they get paid the big bucks.

The best thing you can do is be curious and manage your own anxiety. Seriously. You can’t control a company sale, but you can understand better what’s happening behind the scenes – so observe, learn, and participate if you can.

And if you think you’re in an active sales process, try to get close to the action – and dust your resume off.

To the next 10 years,

Greg and Taylor