6 Ways To Maximize Your Online Business Valuation
Everyone wants to get the most amount of money and sell their business in the fastest possible time frame when they are looking to exit. Unfortunately short time frames and extracting massive value don’t normally go hand in hand. That is why it is important to think about an exit strategy early on.
If you read the book “Built to Sell” by John Warrilow, which I highly recommend. He talks about a 1-2 year exit process. While this is necessary for larger companies, it isn’t always necessary for online businesses. However I do recommend you start thinking about an exit 6-12 months before selling.
To get the highest selling price do these things:
Extract the owner
When a business owner is the linchpin to any business, what a buyer is essentially purchasing is a job. Without the owner, the business would likely not operate, or operate poorly. It is a fact that the more automated the business the higher the multiple. See: What makes up a million dollar online business for more tips on extracting the owner. This is because larger business, rely more on staff and systems than smaller businesses and generally they take the role of what the owner used to do when the business was in it’s early stages.
Extracting yourself as the business owner from the day-to-day operations is the key to obtaining a higher multiple when you sell your business.
Strive to improve profit and cash flow
Buyers are more enthusiastic about buying a business that is growing. When there is upside potential people generally get emotional about the deal, and emotion is what drives buying decisions.
Not only that, but a larger profit produces a larger multiple. Let’s say you are making $200,000 in net earnings per year and a buyer offers a 3X multiple (3 times the yearly net profit) that is an offer of $600,000.
If you can squeeze 10% more margin out of your business and improve profits to $220,000. That same offer then goes from $600,000 to $660,000 at $60,000 improvement.
We had a client that came to us with a business that was on a slight decline. It was in the technology niche. The site at it’s peak had done $60k in revenue however the month they were looking to sell it did $25k. Now if they sold the site at that time they would have receive about $400k for the business. However waiting 4 months to improve the earnings they ended up receiving $585,000 for the business, a $185,000 dollar difference.
Look for what’s recurring
In most cases the value of a business is based on what’s recurring. This can either mean recurring customers, or it can mean what the likelihood of future earnings is going to be for the business.
It is smart to identify any recurring element in your business and then highlight that in the sales process to prospective buyers. You will maximize the value of your business like this.
Standardized systems and processes
An investor see’s a business as a set of standard systems and processes that produce a product or service that is then sold for a value exchange (money), which then generates a profit for the owner.
It’s not a hobby or a job, it is a cash-generating asset. Buyers place higher value on companies that run themselves and spit out cash.
I was at a conference recently and Shark Tank investor Kevin O’Leary was talking about the best performing stocks on the stock market, are those that produce a dividend. This goes to show if you can get the systems in place to produce profit consistently you will attract higher end buyers and investors.
Get your financials in order
Haven’t finished that tax return? Still have bills overdue? Now is the time to get all that in order. Clean and orderly financials firstly make it easy to put together information when you are thinking of selling and secondly show’s the buyer how much the business is earning. The main method for valuation for an online business is a multiple of earnings, hence being able to prove profitability and higher profitability will equate to a higher sale price when selling.
Get external advice
Let’s preface this, I provide third party brokerage services so I am going to be bias. However logic says you use an accountant for your taxes and a lawyer for your legal work, a realtor for your real estate then you should probably be using a website broker or exit advisor when valuing and/or selling your company.
(Also see: Sell with a website broker) It is generally going to be easier and more profitable if you hire a third party service to advise on your online businesses value.