As you begin the process of readying your internet business for a smooth exit, if possible, don’t rush through the sales process. It’s generally best to ensure you have at least 6 to 12 months to thoroughly prepare your business for sale.
This process takes time, but generally your hard work and patience will be rewarded with a higher selling price. In fact, research has shown that business owners can fetch up to 200% more money when they efficiently plan their exit instead of opting for a quick sale.
Some examples of preparing your business for an optimal sale include:
- Strategically growing your business: Be strategic about your marketing and strive to increase your overall sales. Prospective buyers will want to see clear signs of strong revenue and growth potential.
- Cutting costs and reducing expenses: Potential buyers will focus on the last 12 months to determine the value of your business. So, concentrate on reducing any unnecessary expenses to increase your profit margins.
- Organising your financial records: If you don’t already have an accountant, consider hiring one. When buyers see clean and organised financial records for at least the last three years, it increases trust and paves the way for a smoother negotiation process.
An essential step of the selling process is determining an accurate value for your business. Research other online businesses that provide a similar service or product, and study the listings of internet businesses for sale to discern what the current market will sustain.
If you conduct thorough research, you’ll get a better idea of how much other internet businesses are worth, and you’ll be able to assess how their valuations stack up against your own online business.
Typically, most businesses that generate less than $1 million in yearly earnings are going to sell using a valuation method referred to as Seller’s Discretionary Earnings (SDE). To calculate your SDE, combine your business’s pretax profits with your own salary.
To determine how much your business is worth, potential buyers will usually multiply the SDE by a multiple anywhere between 1.5–3, with the multiple they use being dependent upon several of the following key factors:
- Growth and performance of your business over time
- Size of your market and future growth potential
- Organisation, structure, and size of your business
- Level of owner involvement in daily operations
- Profit margins and the capital required to sustain the business
This is where it pays off to keep clear, well-organised, and accurate financial records. If you can demonstrate consistent, steady growth, your business will be viewed as a better investment and could fetch a multiple of 3 in the valuation process.
On the flip side, if your financials are poorly organised, and your business has experienced a downward trend in revenue over the past several years, a lower multiple will typically be used in the valuation process.
Once you have established a value for your business, you will also need to add in the value of any assets and inventory that will be included in the sales price. For an online business, most inventory is included in the sales price because it’s usually essential for sustaining operations.
Enlisting the help of professionals
It’s recommended that you hire a reputable broker who will give you objective feedback about your business. Not only will they understand your business model and have a firm grasp on the current market, but they’ll also know what buyers will typically pay for your type of business.
In addition, a broker can help you determine how to improve your business to increase the multiple used in the valuation method. Plus, they can put your business in front of the right people, vet prospective buyers, and help you throughout the entire negotiation process.
Finally, they can assist you with contracts and escrow, making sure you are protected in the sale. Remember, though, that you will have to pay for their services.
Due diligence for sellers
Savvy buyers are going to require you to disclose vendor agreements, your bank and financial statements, tax returns, and all applicable accounting statements.
Make the due diligence process as smooth as possible by preparing a sales prospectus. This is an in-depth brochure that will quickly show vetted, serious buyers key metrics about your business.
Bottom line: Transparency is key during the sales process. Prospective buyers will appreciate having clear, easy-to-understand information about all aspects of your business. To ensure smoother negotiations, be as straightforward and honest as possible.
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