As a founder, the decision to sell your company is one of the most significant choices you'll face in your entrepreneurial journey. It's a complex decision that requires careful consideration of various factors, including your personal goals, the company's growth trajectory, and market conditions.

While the idea of selling may seem daunting, it's essential to approach the process with a strategic mindset and a clear understanding of what it means for you and your business.

One of the most crucial aspects to consider when contemplating a sale is the timing. Many founders believe that the best time to sell is when the company has reached a plateau in growth. However, this notion is often misguided, particularly in the software sector. In fact, selling when your company is experiencing strong growth in revenues and userbase is likely the best strategy to optimize your exit value.

Why sell when I’m winning?

Selling your company during a period of robust growth offers several compelling benefits:

1. Higher Valuations: Buyers are willing to pay a premium for companies with a proven track record of growth. High-growth businesses command significantly larger multiples compared to slow-growing peers.

2. Milestone-Based Valuations: As software companies hit certain revenue milestones (e.g., $10M or $25M ARR), their valuations tend to experience a significant uptick. Selling shortly after achieving these milestones can maximize your exit value.

3. Attractive to Buyers: Buyers are keenly interested in acquiring companies with strong growth potential. Demonstrating consistent growth in revenues and user base makes your company a highly desirable acquisition target.

4. Mitigating Risk: Selling your company (or a stake in it) during a growth phase allows you to mitigate the risk of future uncertainties. Business performance can be affected by various factors beyond your control, such as market shifts, regulatory changes, or emerging competitors.

The Multiplier Effect

When valuing a company, buyers consider not only the current financial performance but also the expected future value. This is where the multiplier effect comes into play. The multiplier is based on factors such as growth rate and revenue milestones. By selling during a period of high growth, you can capitalize on these multipliers and achieve a higher valuation for your company.

Liquidity and Diversification

Another important consideration when deciding to sell is the opportunity to achieve liquidity and diversify your assets. As a founder, a significant portion of your personal wealth is likely tied up in your company. Selling allows you to unlock that value and reinvest in other ventures or personal pursuits.

Some founders attempt to address liquidity concerns by taking cash distributions from the business. However, this approach can be detrimental to the company's long-term value. A more effective solution is to bring on a capital partner through a partial or full sale, depending on your financial goals and desired level of involvement post-sale.

Beyond Financial Considerations

While financial factors are critical in the decision to sell, there are other reasons why founders may choose to exit their companies:

1. Skill Set Limitations: As the company grows, the founder's skill set may no longer align with the needs of the business, particularly in areas such as sales and marketing.

2. Personal Priorities: Family obligations, a divorce, health concerns, or a desire to pursue new opportunities may influence the decision to sell.

3. Industry Dynamics: Shifts in the competitive landscape or regulatory environment may make selling an attractive option.