Great resources like Built To Sell recommend an exit cycle of at least 2-3 years. For an online business, I think this can be limited to 1-2 years for larger businesses. However the point of this comment is that pre-planning is essential. This article covers some of the elements of the exit process. 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.
Profit RulesFor 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 because it is the main metric that goes into valuation. Therefore is important that if you focus on just one thing, that one thing is profitability.
Sometimes entrepreneurs build brands around individuals or a personal name to 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, and 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 1) Right Channel radios who sell a range of CB Radios and 2) 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 it’s 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.