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Best Practices for Preparing an Online Business for Sale
By Quiet Light
There’s a lot involved when it comes to selling your business! From organizing your financial documents to vetting potential buyers, each step must be well executed in order to close the deal. Therefore, to maximize your chances of a successful exit, it’s critical that you understand and implement the best practices for preparing an online business for sale.
In this article, we discuss:
- The key stages of preparing to sell your online business
- How to optimize your business and increase its value
- Best practices for navigating the selling process
- How to prepare for due diligence prior to selling your business
How to Get Your Business Ready to Sell
Understanding The Key Stages of Preparing to Sell Your Online Business
It is helpful to have an idea of the different stages you are likely to go through as you prepare to sell your business. These stages include:
- Finding an Advisor
- Getting a valuation
- Setting your goals
- Creating a plan
- Optimizing your business and maximizing value
- Creating your marketing package
Below, we review each of these stages to get an understanding of why they are important. In the next section, we explore in greater detail some of the ideas introduced below.
“Preparing your business for sale—listing it, finding a buyer, negotiating terms, completing due diligence, and closing the deal—is a complex process.”
Find an Advisor
You have two choices when it comes to selling your business. You can elect to go it alone, or you can work with an Advisor (i.e. business broker) to help navigate the process. Each has its own pros and cons, which we discuss below.
Preparing your business for sale—listing it, finding a buyer, negotiating terms, completing due diligence, and closing the deal—is a complex process. Along the way, you will have to analyze many different scenarios, negotiate complex deals, and navigate a series of difficult decisions.
Due to the breadth of topics that selling a business encompasses, the transaction process requires a large knowledge base on a wide range of subjects. From analyzing arcane financial statements to deciding the best way to negotiate a specific stance, selling a business brings complexity.
At the same time, how you navigate the selling process has a large impact on the final outcome. Since a significant portion of the value you derive from your business comes when you sell, it pays to get it right.
Many entrepreneurs choose to work with a qualified business Advisor to achieve a more favorable outcome.
The right Advisor can help you identify key elements to optimize in your business prior to selling. In addition, they can generate more demand among buyers, ultimately leading to a higher sale price and more favorable terms. Lastly, they help you navigate the many complexities of the transaction process, from negotiating to closing the deal.
If you decide to work with an Advisor, find one with whom you feel comfortable. They should have your best interests at heart, listen well, and be willing to work with you. At the same time, they should set realistic expectations throughout the process.
Get a valuation
Getting a valuation for your business establishes an estimate of the dollar amount you can expect to get for your company. In addition, a thorough valuation provides you with a clear understanding of the current health of your business.
Having an estimate of what your company is worth allows you to list your company at a price that attracts interested buyers while maximizing your payout. It also helps you to plan your business and personal finances looking ahead.
Perhaps the most important information you gain from your business valuation is getting an understanding of the strengths and weaknesses of your company. The valuation will go beyond simply assigning your company a number value. It will also help you understand the reasons why your business is valued the way it is. You and your Advisor can utilize this information to prepare and sell your online business wisely.
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Set your goals
It is helpful to have clear goals when it comes to selling your business. Think about how much you want to sell your company for and when you would like to sell it. In addition, you may want to set goals around what the selling process will look like. At the same time, it is important to understand that you don’t have full control over the process, and you may need to be flexible.
You may also want to consider the type of buyer you want to sell your company to and what your participation will look like after the sale is complete. Do you want a clean break from your company, or do you prefer to stay on board and help with operations for a period of time? What are your goals as far as payment structure and terms go?
When setting your goals, be bold but realistic. If you have specific goals around increasing the value of your business before you sell, don’t be afraid to think big. At the same time, make sure your goals are achievable and grounded in reality.
Create a plan
Setting goals without creating a plan to reach them is a recipe for failure. In tandem with your goal setting, be sure to create a plan to help you achieve each goal that you set.
Your plans will depend on what you hope to achieve and the information you gather from your valuation. The valuation process will identify the strengths and weaknesses of your business and provide you with a clear picture of the aspects of your business that can be improved.
Start with your goals and work backward. If you want to sell your business in 18 months, what do you need to do to get there? If you want to increase your business value by $100,000 in a year, what steps do you need to take to make it a reality?
As with goal setting, be realistic about what you can and cannot do. An unrealistic plan won’t get you anywhere.
By creating a cohesive plan and setting out specific steps, however, you can gradually work to reach your goals and create a successful exit.
Optimize your business and drive value
Once you have set your goals and created your optimization plan, it is time to implement and execute.
By optimizing your business prior to selling it, you can make it a more attractive option for prospective buyers. This can help to attract more interest, more offers, and more competition. More competition, in turn, translates into a higher sales price and better deal terms.
Depending on the state of your business, the optimization process takes time. For this reason, it is advised to get a valuation 12–24 months before you plan on selling your business. Once the valuation is complete, you can then make the changes necessary to maximize your business’s value.
Of course, there may be external factors that lead you to sell on shorter notice. Personal considerations, financial pressure, or new outside opportunities can all be compelling reasons to sell your business. In order to make the most of your exit, however, plan on leaving ample time to optimize and prepare your business to sell.
Depending on your approach, optimizing your business can be an in-depth process. We will go into more detail on business valuation and optimization in the next section.
“By optimizing your business prior to selling it, you can make it a more attractive option for prospective buyers.”
Create your marketing package
Once you have optimized your business to your satisfaction and are ready to sell it, the first step in bringing it to market is creating your marketing package.
Your marketing package is a document containing relevant information that prospective buyers are interested in knowing about your company. This includes performance metrics, financial data, and asking price. A good marketing package also often includes a written description of the business and an overview of what is required to run it.
Your business Advisor will help you create a professional marketing package. It should highlight the strengths of your business in a way that attracts potential buyers. At the same time, it should be truthful and transparent about all relevant business information.
Optimizing Your Business and Maximizing Value
Understanding the factors that drive business value and what you can do to optimize these factors is crucial to preparing your business for sale. Taking the time to optimize your business can mean the difference between a difficult sale and a hugely profitable exit.
In this section, we will discuss the SDE multiple method of business valuation, the most commonly used method for online businesses. We will then explore the underlying factors that drive value and what you can do to maximize these factors prior to selling your company.
“Taking the time to optimize your business can mean the difference between a difficult sale and a hugely profitable exit.”
SDE multiple method of valuation
The SDE multiple method of valuation is made up of two components: SDE and the multiple. SDE stands for seller’s discretionary earnings. The multiple is simply a number that is multiplied by the SDE to arrive at the total value of the company.
With the SDE multiple method, the value of a company = SDE x the multiple.
As its name implies, SDE is the total earnings available to the owner of the company. In other words, it is the total benefit that the company provides for the owner. SDE is the pretax, pre-interest earnings that a business produces before certain discretionary expenses are taken into account. These include:
- One-time investments
- Owner’s salary
- Noncash expenses
Some valuation methods use income or revenue in place of SDE; however, revenue and income figures can obscure the true money-generating capacity of a business. Because SDE includes discretionary expenses, it brings more clarity to cross-business comparisons of performance.
SDE is calculated by adding back all discretionary expenses to the company’s income. It is important to add back all allowable discretionary expenses when calculating SDE. If you fail to include one, you will undervalue your business and leave easy money on the table. If you include an expense that is not allowable, a potential buyer may question the accuracy of your valuation.
Knowing which expenses to include and which to forego can be challenging. Your business Advisor will help you navigate this process in order to create an accurate and defensible SDE calculation for your company.
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The value of your business rests on tangible and intangible factors. When calculated correctly, SDE figures provide a concrete picture of the business income available to you as the owner. However, it fails to capture other aspects of the value of your business.
The multiple serves to capture these tangible and intangible factors driving business value. As you can imagine, two companies with similar SDE figures may be worth different amounts. Variances in the multiple value explain this difference.
The value of your multiple depends on a wide variety of factors. Taken together, these factors can be grouped into four categories often called the Four Pillars of Value. These include:
Understanding how these four factors influence the value of your company will help you get a clearer idea of what you can do to optimize your business prior to selling it. Below, we discuss each factor’s role in driving business value.
Strong historic and current growth indicates to buyers that you run a successful online business and drives up the value of your company. If your business has plateaued or is in decline, the value will be negatively impacted. This is true regardless of your business structure, whether it be an ecommerce website, online store, Amazon FBA company, or SaaS business.
Buying a business represents a significant investment for most buyers. As with any investment, your buyer wants to realize a healthy return on their investment. The most promising way they can achieve a healthy return on investment is to purchase a company they can expect to grow into the future.
For this reason, interested buyers will be looking at your past and current growth trends in order to get an idea of what they can expect moving forward. In addition, they will look to see if there are any areas of untapped growth that can be easily accessed once they take over ownership.
Leave untapped potential for the next owner
You can significantly increase the value of your business by selling during a period of strong growth. If your business is not currently exhibiting strong growth, it may be advantageous to make the changes necessary to drive growth prior to selling.
There are several things you can do to create growth. For starters, you can optimize your marketing plan in order to create more sales of your existing products. Or, you could launch additional products to achieve the same result.
When presenting your business to potential buyers, highlight areas of your operations that could be optimized to drive growth. Any existing low-hanging growth opportunities can help to make your business more attractive to prospective buyers.
The growth trends of your industry, or the economy as a whole, can affect the overall value of your business. If your industry is experiencing strong growth, your company will be more valuable than when your industry is in decline, all other things being equal.
The more risk your company is perceived to have, the less valuable it will be. Risk influences the chances a prospective buyer has to realize a return on their investment when they purchase your business. All businesses entail some risk. When a business incurs greater risk, however, prospective buyers will be less attracted to it.
Risk comes in many forms. In general terms, if the success of a business relies on a single point of failure, risk increases. For example, let’s say your company is generating a high (and increasing) level of sales, but almost all of your sales are coming from Google Ads. If there was a sudden drastic change in the performance of your ads, your business would decline precipitously.
To address this, you can take steps to diversify your business operations in order to eliminate or minimize single points of failure. In the scenario above, gradually add more marketing channels. This may include social media marketing, content marketing, search engine optimization, affiliate marketing, email marketing, or other digital marketing channels. You may also consider implementing ads on other social media platforms.
If your company relies on a single product for the bulk of its revenue, consider launching a new product to your existing customer base to diversify your business income.
Another source of perceived risk is the age of your business. Many companies fail within the first few years. The younger a company is, the riskier it will be to potential buyers. By waiting to sell your company until it is at least a few years old you can help to reduce perceived risk and raise its value.
“All businesses entail some risk. When a business incurs greater risk, however, prospective buyers will be less attracted to it.”
Create clear documentation
A business that has clear documentation is more attractive to potential buyers than one that does not. This includes creating clear financial statements and standard operating procedures. It also requires you to document your supplier relationships and other business processes.
If you haven’t already, take the time to create professional documentation. For your financial records, this may require the help of an accountant.
Clear documentation will help prospective buyers more easily analyze your business to determine whether or not they wish to make an offer. It also helps to instill a sense of confidence in the buyer that you have run the company in a professional manner.
Your business is only valuable to a buyer if they can take over ownership of the company without negatively impacting its performance. This quality is known as transferability. The more easily transferable your company is, the more valuable it will be to a prospective buyer.
There are several factors that can impact transferability. For one, if your personality or image is tied to the business, a new owner may find it difficult to maintain success once you are no longer involved. By working to remove your personal image from the company prior to selling it, you can help to increase its transferability.
The easier it is for a new owner to run your company, the easier it will be to transfer. If all responsibilities of running the business land on your shoulders, it may be difficult for a new owner to step in. At the very least, they will have their work cut out for them once they do take over.
However, if you take some time to build out automated processes or teams to handle the workload, a new owner will find it much easier to successfully operate the business. For example, creating a customer service team to handle customer complaints or queries will reduce the workload required of a new owner.
By taking ample time to drive growth, reduce risk, prepare your documentation, and increase the transferability of your company, you can work to create a higher sales price and better deal terms when you do decide to sell.
The Best Marketing Practices to Sell Your Business
Once you finish optimizing your business and have created your marketing package, it is time to list your business for sale. There are several different marketing practices you can use to find interested buyers.
“A great way to market your business when selling is to tap into your professional and personal network to identify potential buyers.”
Listing your business for sale
There are a number of sites you can use to list your business for sale. Individuals who are thinking of buying a business use these business listing sites to find companies they may be interested in purchasing.
While this can be a way to expose your business to a large number of potential buyers, you may run into issues finding a truly qualified party. Often, people who use these sites may not have the funding or expertise to successfully purchase a business. One way around this, however, is to find a buyer who plans to utilize a Small Business Administration (SBA) loan or other financing option.
Utilize your network
A great way to market your business when selling is to tap into your professional and personal network to identify potential buyers. The advantage of this method is that you can choose to target potential buyers who you know are qualified. While this method won’t always yield results, it does have the potential to lead to a successful and profitable exit.
“More interested qualified buyers translates into more competition, a higher sales price, and better deal terms.”
Working with your business Advisor
Your Advisor will play an integral role in your marketing strategy. They will help spread the word about your company to their extensive network of qualified buyers. Since their professional focus is on helping individuals buy and sell businesses, they will have access to a large pool of serious prospective buyers. They can make introductions, gauge interest, and facilitate negotiations.
More interested qualified buyers translates into more competition, a higher sales price, and better deal terms.
Preparing for Due Diligence Prior to Selling Your Business
Due diligence is a phase of the transaction process that comes after the letter of intent (LOI) has been signed and before the asset purchase agreement (APA) is finalized. Preparing for due diligence ahead of time is crucial for creating a smooth and successful exit.
“By preparing your documentation beforehand, you can help the buyer more easily analyze the large amounts of information required during due diligence.”
Understanding due diligence
During due diligence, the buyer has the opportunity to go through all of your business records to verify the performance of your business. This includes all of your financial statements as well as third-party accounts.
The buyer will examine your company’s financial information, vendor and contractor relationships, legal documentation, and other key reports. They may also want to read communications between you and your suppliers.
Likewise, they will also want to independently verify your business income, expenses, and other financial information with records from your third-party vendors. (This could even include viewing your bank statements.) If you run an ecommerce business on Shopify, they will likely want to see your Shopify account information as well.
How to prepare for due diligence
Due diligence is an in-depth, complex, and time-consuming process. As the business owner, your job is to prepare and present all of the relevant information to the buyer in an organized manner.
By preparing your documentation beforehand, you can help the buyer more easily analyze the large amounts of information required during due diligence. Financial statements, supplier contracts, articles of incorporation, and other documents should be ready to go upon request.
By taking the time to plan your exit ahead of time, you can help to create a more profitable exit and better deal terms when you do decide to sell. This can set you up for success in the future, whether that means pursuing another business idea, spending more quality time with your loved ones, or ensuring your financial well-being.
Thinking of Selling Your Business?
Get a free, individually-tailored valuation and business-readiness assessment. Sell when you're ready. Not a minute before.