Not every startup gets acquired for the eye-popping price tags of the mobile app WhatsApp ($19 billion), virtual reality startup Oculus VR ($2 billion) or high-tech thermostat maker Nest Labs ($3.2 billion). But for healthy internet firms, it’s very possible to win a deal in the millions, if you play things right.
And right now could be a good time for you to sell. In its second quarter report, BizBuySell.com, an online marketplace for small businesses, found that transactions, up 11% from the same period last year, had reached pre-recession levels. Both median asking and selling prices rose.
Nonetheless, BizBuySell noted it’s still a buyer’s market, with the average cash flow multiple of businesses that sold holding steady at 2.23. For general internet businesses, the average cash flow multiple was 3.02; the average revenue multiple was 1.97.
The key to maximizing your selling price at an internet business is positioning it long before a sale—something many entrepreneurs don’t do, says Jock Purtle, an internet business broker at Digital Exits in Austin, Texas.
Many owners rush to market because they have “entrepreneur’s syndrome,” he says. “You’ve got guys that are mainly sub-40. They spend three to five years building a business, then get bored. They find another project they’re more interested in, get excited—and decide to sell.”
But being impulsive can mean you’re leaving cash on the table and don’t get to drive away in a Ferrari. Want to speed off with millions when you sell a digital business? Make the most of the current demand. Here are some tips, based on a recent conversation Purtle and I had.
Become a planning geek: It will be hard to execute your exit strategy if it’s vague. Write it down. Outline the goals of the business, lists the firm’s assets, describe your compensation plan to reward key team members, explain how you will transfer the customer base and other aspects of the business to the new owner, and detail how involved you would like to be in the future. Not all of this is a DIY project. Get help from your professional advisors where you need it.
Create a profit-o-matic. There are two key steps you can take to get buyers excited about your business: increase its profitability and lower the risks of purchasing it, says Purtle. Profitability is more important than all other metrics of your business to a potential buyer, he says. Buff it up by getting rid of any discretionary personal expenses you run through the business. Then get your books in order and update your profit and loss statement.
Buyers often want to see audited financials—which can easily run you $20,000 or more—but the need to produce them depends on the size of the business and your buyer. Audited financials are not mandatory (or likely affordable) if you’re selling a business for $500,000, he says, but “the buyer of a $4 million business is going to demand an audit.”
Make sure buyers get The Memo. When you sell your business, buyers will expect to see an “information memorandum,” says Purtle. It’s the ultimate guide to your business, explaining what it is, how it works, the ways it makes money, and where it gets traffic. It should include details like a list of assets—such as domains and social network accounts you own, traffic data, and an operations manual.
If your business offers the candy buyers crave, let them know. Buyers like it when a business can show at least two years of earnings, an uptick in growth, diversified revenue sources, and evidence of repeat and loyal customers, according to Purtle. In an internet business, diversified traffic sources are also a draw. “People are really liking paid traffic at the moment,” he says.
Mind meld with your market. Buyers of small internet businesses are often former corporate execs who want to own a digital venture but don’t know how to start it on their own, says Purtle. The businesses that attract these folks are generally the ones that are thriving.
“The reasons they are getting higher valuations is they are making more cash,” says Purtle. “They have a longer history in business. There’s at least some type of defensibility behind the business. It’s not easy to replicate the business model.”
If your business is more of a fixer upper, do the repairs yourself. The more successful it is, the easier it will be to strike a great deal with someone who is likely a tad less risk-oriented than you are.
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