The following is a guest post by my friend Jock Purtle, President of Digital Exits, a small cap digital Mergers and Acquisitions advisory firm that helps to deal with buying and selling online business.
There will be a time when you want to sell your online business. The process of selling your business is complex, which is why we have asked the brokers from Digital Exits to contribute this post on the selling process. The success of selling your business will largely depend on the reason for the sale, the timing of the sale, your business model, growth of the business, market and business operations.
The following 6 things are the main elements you need to think about before putting your online business up for sale.
Profitability
The most attractive thing to online business buyers is profit. Therefore the main metric that you want to concentrate on is to make your business as profitable as possible. This can come in a combination of increasing revenues and decreasing expenses.
Generally the longer that your business has been making income the higher price it sells for. Alternatively the more profit that it makes the higher it sells for. Let’s take some data we analyzed from recent online business sales in 2013.
- $75,000 to $200,000 sites sold (monthly profit between $4k & $10k) sold for a multiple of 2.0X
- $1m to $2m sites sold (monthly profit between $40k & $80k) sold for a multiple of 2.9X
- $2 to $5m sites sold (monthly profit between $80k & $200k) sold for a multiple of 3.5X
For clarification 2.0X means 2.0 times the yearly net profit. For example if your site makes $100,000 per year in profit then it will sell for 2 times $100,000 = $200,000. As you can see the larger and older your online business the more money that it makes.
Growth Trends
While traffic and income fluctuates for many online ventures, it is wise to put yours up for sale when there is a steady upward growth. Buyers will better appreciate stats for three years or more, as it is the best way for them to weigh revenue generated and future potential and will allow you to fetch a higher multiple. Buyers will see the growth trend and assume that it will continue in the future and base their projections off that equaling a higher selling price.
Competition
Online businesses are more valuable if there is little competition and hard for competitors to replicate your business. Those who intend to sell a website for millions must be creative and create a site that brings unique services and/or products to the market. Because it is so easy to replicate a business it is rare that you find a truly unique business.
Let’s analyze this sales data for a better understanding of competition:
Let’s take the above graph from our recent valuation report. The point I want to make with this graph is that you can see that drop ship based sites sell for a lower price point because of the competition. A real world example is if the owner of this business that sells trolling motors were to sell they would receive a lower price that this business that sells beard oils. The reason being is that the first business is purely a drop ship business and it is relatively easy to start a competing business.
However the second business manufactures their own product out of a warehouse and also sells to retail stores themselves.
Transferable Business
Any business can be sold but some are easier to transfer than others are. Branding defines a business but when it is time to sell, buyers opt for brands that are not so closely associated with the owner. This is because a personalized branding is much more difficult to restructure and people would rather pay more than have to do all of the work of rebranding and rebuilding. So ensure that you build your business to make the overall sale as easy as possible. This also includes ease of transferability of other assets like subscriptions for a business.
We have had many times in the past were PayPal subscriptions were linked to a personal account and the business could not be transferred.
Multiple Traffic Streams
Google is the primary source of traffic for a lot of websites but if you want to ensure the success of your business, you can’t rely on only one traffic source. Dependency on one channel might de value your website and puts it at risk, since everyone is subject to constantly changing algorithms and updates. There was a whole subset of Internet businesses that were wiped out because of the Google updates in 2011.
Millions of dollars in businesses were wiped off the map.
That is why it is important to focus on multiple traffic streams to increase the defensibility of your web business.
Great Record Keeping
Poor record keeping causes a lot of problems in Due diligence when selling a business. We have had multiple deals that have fallen over because of this.
Good financial records also save time during the trade, as you do not have to fix any loopholes or confusion before proceeding with the deal. Establish proper record keeping practices if you want buyers to close quickly. It is preferential that you submit tax returns for just one business and have one bank accountant and keep one set of online books per business.
What tips do you have for selling an online business?
