A lesson in business from Snapchat: When is the right time to cash out?

Sabrina Parsons is the CEO of Palo Alto Software.

Recently, Snapchat CEO Evan Spiegel revealed why he turned down a $3 billion cash acquisition offer from Facebook late last year. Spiegel claimed short-term gain wasn’t worth giving up the business he built. Of course this is all from the perspective of a very young entrepreneur, and a very young business. Besides raising many eyebrows, this news raises an interesting question for business owners everywhere: If presented with an offer, when is the right time to cash out and sell?

It’s both a blessing and a curse for small business owners and startups to be presented with an offer. On one hand, you have an opportunity to make money by selling your business and acknowledging it as a success. On the other hand, it’s your business, and relinquishing even a portion of ownership can be a tough call. This is definitely not a decision to be made quickly. It’s a process that requires negotiation, value determination, and of course, evaluating the terms and conditions of a deal for both you and your current employees.

As an entrepreneur who has helped start businesses that have considered big offers and a mentor who often coaches small businesses owners who are contemplating offers, I’ve found the following guidelines helpful in determining whether it’s time to sell or continue to grow.

What to consider

When first presented with an offer, there are a few key points to consider before moving forward with valuation. If a business is at all in a position to be bought, it’s a good gauge on how well the company is doing. It’s important to realize that this isn’t something that happens with every startup or small business. If it happens, consider yourself lucky and take a moment to reflect on your success as an entrepreneur. You may or may not want to sell, and you may disagree with the valuation (as the Snapchat founders did). But the mere fact that someone is offering to buy your business is what my father would call a “high class problem.”

But once you are in this position, it’s also important to evaluate time constraints. Will there be a defined amount of time before you can access your stock, or are you required to spend a certain amount of time as an employee before you are granted access? If so, how much time is going to be required to commit to this business as an employee? Are you looking to invest time in a new company, or are you ready for a clean break? Is it a cash deal? A stock deal? Or an “earn out”? Additionally, your entire management team might be required to commit time as employees post acquisition. If there is a “golden handcuffs” clause in the agreement that will prevent employees from leaving the company, you’ll want to determine how this will impact your current team. It’s easy to look past these details when a good offer is on the table, but answering them from the get-go could save you from a misguided decision.

Due diligence works both ways

After asking the right questions for your own business, it’s time to do your due diligence learning about the company that has made an offer. It’s important to evaluate their values, mission, and overall success as a company. Is this a company you will want to come on board with and work with for a few years? Is it worth the money to be tied to this organization? How do they do business? If you’re required to spend time as an employee once the buyout is made, it is worth it to research the company culture and leadership style to make sure it is something you’re comfortable with. Unfortunately, there are no simple answers to any of these questions. Companies vary in every aspect, but by taking time to fully analyze both their interests and yours, you’ll have more leverage going into negotiations.

Stay on top of valuation

The company interested in making an offer will evaluate your current and past financials, number of employees, and investments, as well as the future potential of the company, to accurately set a price. The problem that businesses run into more often than not is that they will be valued months before the purchase is finalized.

In the case that your business has been valued, but it takes seven or eight months to finalize the deal, it may be in your best interest to request another valuation. Your business could have grown even further by that point and could be valued at a higher price. Or you may just want to make sure that you are getting valuation for future revenue, based on past performance. That way, as long as your numbers match your forecast, the valuation should consider and count this future revenue and not just value your business on past performance.

Valuation could also come at a pivotal time for your business. Are you about to take off? If you wait until after you take off, you could have a higher value, but sometimes you will have to give up other options in order to get there. Can you get to that next step on your own? Or do you need additional investment, one that the acquiring company is willing to make? If someone is actively courting you, you may have other options if you slow things down a bit and perhaps bring on someone to help you shop the opportunity (carefully and discretely) to other buyers. If the business is going strong, just consider that slowing down the process may only help get you a better deal, or more players courting you to give you more options.

Make your decision

At this point, it’s time to ask the hard questions. If I don’t sell this business, what does it mean? Can the projected revenue continue to sustain the business, or if I don’t take this money do I have to find investors? A lot of times, companies turn down a deal and then spend a huge portion of their time fundraising, which can become an exhausting practice. Also think about what you have built, where you want it to go, and what the value you are being offered for it is.

In the case of Snapchat, many successful entrepreneurs argue that turning down the $3 billion offer was a mistake. Spiegel argued that he didn’t want to give up what he had worked so hard to build, but if he had taken into consideration the questions and concerns I’ve outlined above, I think he would have made a different decision. Facebook’s offer came at the peak of Snapchat’s hype, and I am sure that the company has already lost value after the recent security issues. Spiegel is only 23 years old and could have gained the respect of veteran entrepreneurs had he made a different decision in this situation.

But when it comes down to it, this is your business, and despite advice others may give you, it’s really a matter of feeling it out, doing research, talking to experts, and then coming to your own conclusion. Although you may be wholeheartedly dedicated to the company you built, sometimes it’s in your best interests to sell. Other times, you’re better moving forward on your own. Whatever your decision, make sure to answer the important questions before you jump.

Sabrina Parsons has served as CEO of Palo Alto Software since 2007. She and her husband, Noah, founded a UK software distribution company in 2001 that was acquired by Palo Alto Software in 2002. As CEO, Sabrina is a staunch supporter of entrepreneurs and entrepreneurial organizations.