Selling your online business is a complex endeavor. Variables like timing, market conditions, business model, growth, profitability and defensibility all play a role in the exit value of a company. That is why it is important to pre plan the sale of your business.
Great resources like Built To Sell recommend an exit cycle of at least 2-3 years. For an online business, this can be limited to 1-2 years for larger businesses. The point of this comment is that pre-planning is essential. For a more detailed analysis that is specified to your business checkout this valuation service from our website broker team where you can learn what your business is worth, what it may sell for and advice on what you need to work on to get your company ready for sale. The following five factors are all things that you need to consider to exit for maximum value.
For any business to exit for maximum value, the metric a buyer looks at is EBIDTA, which basically calculates the profitability of a business. A buyer will typically forecast the ability of the company to generate cash in the next three to five years. It is important to consider your business cash flow—and particularly profit—when planning a sale. These cash flows are then discounted to determine the current valuation of the business. For example, annual revenue of $300,000 to $400,000 would be deemed sufficient enough to get about a million dollar valuation from a serious buyer.
That is why profit rules. It is the main metric that goes into valuation, therefore you should prioritize focusing on it.
Sometimes entrepreneurs build brands around individuals or a personal name to such an extent that it becomes difficult for buyers to recognize the businesses without the face of these people. These tightly woven brands make it exceedingly difficult to sell the business at a better premium because they have to also consider rebranding, restructuring and the reliance that the business has on one person. Personal brands are very hard to sell, that is why it is important that you brand your business away from your personal name.
Drop Shipping vs. Ecommerce
Let's take these two businesses Right Channel Radios who sell a range of CB Radios and Beard Brand, which sells a range of beard oil. Now, both these businesses have decent brands. However, the difference is that Beard Brand has a stronger brand because they make and manufacturer their own products. There is brand loyalty from customers to their unique product. On the other hand, Right Channel Radios has its own unique brand; however, they are leveraging other brands because they are drop-shipping their product. As you can see from the above graph, drop-ship style businesses generally sell for less money than ecommerce businesses that have their own product and unique branding.
Similarly transferability is an important factor. Transferability is the ease that assets can be transferred from the seller to the buyer. This means domains, content, customer lists, payments, merchant facilities, etc. An example of challenges that businesses have is with payment processing. Sometimes, for example, PayPal subscriptions are linked to a particular PayPal account for a business and that account cannot be transferred. So when setting up your business, it is good to have this in mind.
Most analysts and potential buyers love to focus on the history of any potential purchase they make. Historical trends basically highlight the growth patterns of the business over the past few years or could even look as far back as when the company was first started. Website businesses that can demonstrate consistent upward growth over the years are more likely to attract a higher selling price. The period that is usually focused on is between 3 to 5 years.
Buyers are going to be most interested in looking for a number of items on the financial statements like revenues, profits, administration expenses or assets. A consistent positive historical pattern, in all aspects of your business over the last few years, will result in a higher selling price. Keep in mind, the more growth options your company has, the more it is going to be worth to potential buyers. So although your goal may be focused on increasing revenues and traffic, you should always watch for opportunities that could help your business grow and expand.
Good Financial Record Keeping
Some online businesses may focus on increasing revenues, visibility and other aspects of the company, but then don’t keep good financial records. Understanding how the figures add up is very crucial in developing, growing and getting a good price for an online business. Most buyers are attracted and will pay more money for meticulous financial records. Also having up-to-date financials will help speed up the sales process, specifically due diligence. The main thing buyers will be reviewing is the profit and loss statements of a business.