Nov 18, 2024 12:15:00

What went well and what surprised you when you sold the hardware company that you founded and ran for four years?

TinyPilot , a company that develops a system to remotely control PCs using Raspberry Pi, was sold for $598,000 (approximately 92 million yen) in April 2024. Michael Lynch, founder and former owner of TinyPilot, has summarized in his blog what went well in the sale of the company, what he would like to improve in the future, and what surprised him.

Lessons from my First Exit · mtlynch.io
https://mtlynch.io/lessons-from-my-first-exit/

Lynch cited investment in documentation as one of the measures that worked well. According to Lynch, he created a playbook in the Notion workspace to systematize the procedures for team onboarding and daily work. This made the handover to the new owner extremely smooth, and only about 25 hours of the planned 80 hours of consulting time were actually required. Lynch also said that cooperation with the brokerage firm was key to success. Although the commission was high at 15% of the sale price, he said that it was valuable assistance in finding the right buyer and facilitating the transaction.

In addition, Lynch said that it was also a wise decision to avoid paying the sale price in installments. He was advised by a business owner he knew that if he accepted installment payments, he would essentially be working for the buyer, which would make it difficult to legally collect if he defaulted on his loans. Lynch also cited the fact that he did not have the tools or experience to collect on the loan if he defaulted on it.

However, Lynch also found many areas that could have been improved. For example, he reflected that the company should have offered incentives to buyers who chose to pay in cash up front, as the due diligence process took three months and took time away from focusing on the business.

Lynch also said that key contract clauses should have been negotiated before due diligence began, and that the first draft of the contract was only seen five weeks after due diligence began, leaving the company with less negotiating power after a significant time investment.

Another issue was informing the team about the sale. Lynch notified the team when he signed with the broker, six months before closing , but this created some management challenges. 'If there's a next time, I think we should wait to notify them until the sale is certain,' Lynch said.

And Lynch shares some rather negative experiences with Google: While TinyPilot used Google Cloud Platform (GCP) for some of its services, these were set up as dedicated projects in Lynch's personal Google account.

There was a 'Migrate' button on the GCP project settings page, but when I actually clicked it, I found that I couldn't migrate the project. Even after checking Google's official documentation, the project migration procedure was complicated and contained inaccurate information. In the end, I found that both the new owner and the project owner had to create paid Google Workspace accounts and go through a complicated migration process. The same problem occurred with documents and notes stored in Google Drive.

In the end, the new owners decided that the formal migration process was too cumbersome and decided to export what they could and delete the rest. From this experience, Lynch emphasizes that we should further reduce our reliance on Google, both personally and professionally.

Lynch said that one thing that surprised him about selling a company was the amount of work involved in due diligence. He had to submit bank statements and create various reports while protecting customer data, and it was a stressful task with no room for error.

He was also surprised to learn that all expenditures are effectively quadrupled in the preparation stage for the sale. For example, if a similar company has annual profits of $100,000 and is sold for three times the annual profit, the sale price of the company will be about $300,000. If you pay employee bonuses totaling $10,000, the annual profit will fall to $90,000 and the company value will fall to $270,000.

And there were important learnings around non-compete clauses and limitations of liability, Lynch said.

Unlike regular employment contracts, courts tend to be stricter in non-compete clauses in contracts for the sale of a company because the seller is considered to have sufficient negotiating power and awareness of the contract contents. Therefore, Lynch carefully reviewed the contract with his lawyer and limited the scope of the non-compete to a specific field and did not extend to software or technology in general.

Also, when it comes to liability limitations, typically when you operate a business as an LLC, your losses are limited to the value of the business. But when you sell your business, you lose this limited liability protection, and unless you put in place appropriate limitations, you could be sued by the buyer for more than the sale price. In Lynch's case, the buyer's lawyer initially wanted no liability cap, but after Lynch's lawyer strongly opposed it, they agreed to a cap of the sale price.

Lynch said, 'I hope that by sharing my experience, other founders can benefit from the limited information available on selling small businesses,' and introduced various books and podcasts that helped him. He also said that conversations with other founders were very beneficial, and even if he didn't know them personally, he had the opportunity to talk to people who had sold companies through friends, which he said gave him a lot of practical insight.