There are many obvious reasons for selling a business, such as retirement or other business interests getting in the way. If you have seen rapid growth in your online business over the past two or three years, I would suggest this is a good time to consider an exit. The bigger a business gets, the more capital required to drive sales and growth, and if you’re not careful you could face a squeeze at a critical point in your journey.
If you are fortunate enough to plan your exit, then investing even a small amount of time carefully preparing for the sale will pay dividends later. Here's my guide to facilitating a sale, and although I focus on online businesses, many of the tips highlighted below can be applied to the successful sale of any type of business.
Preparing to sell
1. Trim the fat
No matter what type of business you're selling, take a long hard look at your expenses and operating position. There may be plenty of unnecessary fat in the business, which you can trim to show a more profitable trading position pre-sale. This includes any owner operator costs which are not essential - so try to cut these out when you can.
2. Invest in accounts
Unfortunately, pulling a profit and loss sheet from Xero or Quickbooks isn’t sufficient to perform due diligence on your business. If you can afford it, invest in having your accountant provide quarterly or even bi-annual management accounts so your buyer has a true picture of your business.
Delegate as much of your workload as possible. If you are doing the social media and email marketing, can you use the gig economy to find a third-party freelancer to do this for you? It may eat into your profits, but a business that's less reliant on the owner will drive a greater multiple.
If you're selling an online business, then you'll also want to update your website and the way it looks to make it as sharp as possible. This is your shop front to potential buyers, and first impressions count. Simple housekeeping such as renewing your domain name will instil confidence in buyers and provide longevity and security.
5. Revisit agreements
If you use third-party integrations (email/ecommerce etc.) or even produce some of your own code, review these to ensure they are functioning properly, you know when the supplier agreement ends and exactly what the liabilities (costs) are. Serious buyers will want this level of detail if buying an online business.
6. Data is key
It’s also essential to have robust and easily accessible data. With an online business, data is your view of the past and the key to unlocking the future. The easier it is for a buyer to unlock the future, the faster you will sell your online business and the greater sale price you’ll achieve.
How to value an online business
The valuation of an online business is actually more of a science than an art, predominantly down to the volume of data available to prospective purchasers when looking to buy an online business.
The most obvious route to value an online business would be Seller's Discretionary Earnings (SDE). This method uses the net profits generated by the business, with the owners associated costs added back. In the UK, this is often known as 'Adjusted Net Profit'. Once you have this figure, a buyer would add a multiplier based on numerous other factors to arrive at a value.
Another, more intense way of valuing an online business can be through Discounted Cashflow Analysis (DCA). This involves forecasting the free cash flows of an online business and discounting the weighted average cost of capital. This approach is more viable for larger online business valuations than the typical small online business.
There are numerous factors which can impact the value of an online business, including:
1. The markets you operate in
This can be geographic operations, or sector specific operations. If you are in a sector or region which is strategically beneficial to a larger acquiring business, you can expect a premium.
2. The robustness of your business model
Consider how well your business can withstand external economic pressures or new competitors coming into the market.
3. The growth trajectory
Provide a clear view of both the growth trajectory and performance on the multiples paid. This is because the data available can clearly show the trajectory of growth, and more importantly the 'opportunity' is widely available. This often means an acquirer will pay a premium knowing how much more trade exists.
Google Analytics performance can be a strong indicator to the health of your online business and its potential, as well as other performance related tools (such as ahrefs), which can compare competitor progress/growth to buyers.
4. The level of involvement of the owner
If you are integral to your business operating today, your business will be worth less than if you could take a two-week holiday tomorrow and not worry about how it would impact trading.
5. The profitability of your online business
If you can justify certain expenses are investments in future growth (SEO/SMO etc.) then you can likely drive a better multiple. Like all businesses, buyers want profit, not just the promise of profit.
6. The competitor landscape
If you time it right, when competitors or companies with obvious synergies are on the acquisition trail, you will drive a much greater sale value. Keep an eye on the market and competition and make your move when you see any action in your sector.
How to maintain confidentiality
Confidentiality and discretion are of utmost importance to vendors. You can ensure confidentiality by only digressing key information around sector and financials in your advertising. Ensure buyers sign a non-disclosure agreement prior to the release of any confidential business information.
Don’t be afraid to ask questions before you disclose any confidential information. Ask who they are, what they’ve done and if they have the cash. They will want to know your finer details, and it's only fair that you feel secure with who you’re dealing with.
Selling an Amazon, Shopify, Etsy business?
One of the huge successes over recent years has been the growth of Amazon and other online fulfilment sites, providing a huge audience to small online businesses. If your business is predominantly built using one of these online platforms, the multiple paid will usually be lower than an online business with its own traffic and customer base.
That said, it's more common than ever to sell an Amazon business. Moreover, given the robustness of their business model, business buyers find comfort in its longevity and therefore in acquiring your business.
Who will manage the sale of your business?
The first option would be to look at managing the sale of your business yourself. As a small business owner, you will already have assumed responsibility for most functions of your business, and nobody knows the business better than you. This should give you confidence in your ability to sell the business, whilst saving fortunes in the process.
It's worth looking into online platforms, such as Bizdaq, which provide all the tools, knowledge and support needed to be successful in selling a business. There are also many classified/listing sites which can assist you with producing buyer enquiries. You can also enlist the help of a business transfer agent to advise and help you with the sale.
Helping with the transition
Even once your business is sold, you will no doubt want to see the new owners flourish. By offering a transition period (often compensated) you will provide buyers with confidence that you won’t be disappearing on completion.
Transition periods typically last from 3-12 months, and the level of input required can vary from being onsite once a week, to just being on the end of the phone on a needs-based agreement.
Finally, due to the somewhat technical and bespoke arrangements of an online business sale, it’s imperative that you’re prepared to be on hand post-sale for a smooth transition.
About the Author
Sean Mallon is the CEO and founder of Bizdaq, an online platform for the buying and selling of businesses. He is an expert in the subject of buying and selling businesses, having helped sell over £250 million worth of businesses from cafes to corporates.