Thinking of selling your online business? Here's why so many entrepreneurs simply fail to make it happen.
This is a guest post from Jock Purtle of DigitalExits. Jock is an expert on valuations of high growth internet companies, website valuations, and website brokerage. He and his team have sold $26 million worth of businesses in the past few years, so if you'd like a valuation of your online business, head over to the DigitalExits site.
Many online entrepreneurs dream about the day they can list their business for sale and make a hugely profitable exit.
However, for some, the days of making a profitable exit never come. Their business gets listed for sale, and then nothing happens -- investors aren’t willing to submit offers and, if they do, those offers are far lower than what the entrepreneur believes their business is worth.
To help increase the chances of making a profitable exit, you’re going to need to understand why so many online businesses simply fail to sell altogether, and then examine your own business to ensure you’re not making the same costly mistakes.
#1 Your business is overly dependent
If there’s one factor that will instantly put investors off, it’s when your business is overly dependent on one person or supplier.
To give you an idea how it affects the possibility of making a sale, look at the scenario from your own point of view. If your business has been built around a single supplier, and that supplier decides to change your terms or even goes out of business, your business goes with them, right?
Investors are going to look at it the same way. If they see that your business’ survival is largely dependent on a single supplier, a single employee, or even a single customer, they’re going to assume that the supplier, employee, or customer could leave you one day.
When that happens, they are left holding the bag and have to rebuild the business or risk essentially holding onto a worthless operation.
To avoid making this mistake, avoid putting more than 10% of your reliance on a single supplier or customer, and make sure that you have multiple employees in the business that can shift and be molded into other positions should one of them decide to leave the company.
#2 You haven’t factored in growth
Investors buy businesses that have a clear path for growth in the future.
As an entrepreneur, you should remain proactive in figuring out where new growth opportunities are for your business, and how the next owner may be able to capitalize on those opportunities.
If you haven’t done this while you still own the business, you’re going to want to go through your market and identify those opportunities before you decide to list the business for sale.
You’ll want to look for other, smaller businesses that you may be able to acquire. You’ll want to look for new products or services you can launch. You’ll also want to look for new customer or market segments that you can target with your advertising.
Make sure that you’re able to show an investor what resources you already have in place to help them handle the increased demand that targeting these new opportunities will bring to the business.
If you can avoid simply telling them that it’s possible and instead give them a growth map, investors are going to be far more likely to increase their offer based on the potential that is still left in the business.
Studies have shown that businesses that have the plans in place to handle a substantially increased demand once a new investor takes over could be worth 4x to 5x as much as they would without these plans.
#3 You’ve left the company strapped for cash
The offers that you receive from investors wanting to buy the business are going to be based on how much profit the business is generating from month to month. The more profits the business generates, the more it is worth.
On the flip side of this same token, if the business is strapped for profits, it’s going to be hard to convince an investor that something drastic will change once they take over the business.
Whenever investors decide to purchase a business, they are actually writing two different checks: one to you, to purchase the business, and another for the capital required to grow the business once they take it over.
If they have to devote a large amount of money to growing the business they aren’t going to be nearly as likely to cut you a big check, too. If the situation is bad enough, they’ll simply move onto the next business that’s being listed and ignore yours completely.
There are two different ways you can increase the profit margins in your business, and you’ll want to focus on them long before you actually list the business for sale. You can charge higher prices for your products and services, or you can decrease expenses.
In general, the best route to take is to eliminate unnecessary expenses instead of raising the prices on your goods and services. You can also attempt to negotiate better terms with your vendors so you increase your profit margins.
#4 You’re missing recurring revenue options
While not having recurring revenue isn’t necessarily a death sentence for every business, it can create problems when you’re trying to sell. This is especially true for investors that are highly interested in subscription-based profits.
If your business does have recurring revenue in it, the amount you can ask for goes up substantially. Having repeat customers for products and services that get consumed over a set period of time is an ideal situation for investors.
For businesses that have been built without a focus on recurring revenue, you may not necessarily be able to spot these opportunities. However, that doesn’t mean you shouldn’t keep an eye out for them.
On the contrary; if you can identify these opportunities long before you sell the business, you can profit from the opportunity before you list the business for sale, and then make the offer even more attractive to your investors.
To give you an idea how a business that isn’t typically known for recurring revenue began implementing the model into their business, take a look at Michelin Tires. They implemented a pay-per-mile model that helped them establish long-term, recurring customers.
#5 Your business is commoditized
If your business isn’t different from everyone else in your industry, an investor can come in behind you, build the same business, and even go as far as pushing you out of the marketplace.
This is a real problem with many online businesses, because so many entrepreneurs fail to innovate and seem the follow the crowd and build their business around what they see being successful for other, similar business owners.
If there’s one rule you should follow when you are building your business, it’s that you should build both deep, and wide. You want to target specific segments of your audience, while also expanding the net that you cast over the entire market.
To know if your business is heavily commoditized, think about how you have priced your products and services. Are you competing with other businesses based on price tag alone?
If you are competing on price alone, your business has become commoditized, and can easily be replicated by another entrepreneur or investor -- which will decrease your market reach.
#6 The business would fail without you
Whenever you’re thinking about making an exit from the business you’ve built, investors are going to spend less time with you and more time digging into how well your team is able to manage the day-to-day operations of the business.
To get the highest value possible from the sale, you’re going to need to prove that you have competent teams in place that cannot simply sustain the business, but also continue growing it once the investor has taken over.
Since the investor will have a significant learning curve ahead of them before they’re able to achieve the same success that you saw, having a team in place that can sustain and grow the business while the investor moves into their new role is critical.
If you are the key person in your business, investors may be hesitant about making an offer because once you’re replaced the business could lose a large portion of revenue or customers.
Here are some questions that you can expect to receive from investors, that you should have answers for:
- How many customers and sales were generated because of you, personally, and is their continued satisfaction reliant on you being present?
If you’ve answered that a majority of your sales happened because of you, then you need to start working on separating yourself from your customers and put people in place to handle the ongoing relationship with those customers.
- How often do you have employees reaching out to you with problems that you, personally, have to solve for them? Are they presenting you with new ideas, or do they require approval to implement their ideas?
If your team members aren’t confident in being able to make decisions on their own and have you stand behind those decisions, then you either don’t have the right people in place, or you are injecting yourself into too much of the process and need to help your team work on building their confidence.
- How often are you able to take a vacation, and is the performance of the business negatively impacted while you are on vacation?
If you aren’t able to take a vacation without worrying about the business dropping or taking a hit during your time off, you need to start focusing on which parts of the business are affected during your absence, and either automate those processes or put new people in place.
What about you?
How many of these mistakes are you making?
All of the mistakes that entrepreneurs make that prevent them from being able to sell their business can be avoided, as long as they understand what those mistakes are, and how investors are looking at the business when they’re thinking about buying it.
If you have found yourself making any, or even all, of these mistakes, you need to take a step back and start thinking like an investor.
Address each of the areas in your business long before you decide to sell so that the changes have time to stabilize and you can show sustained growth whenever you’re putting the business in front of investors.
The end result will be you keeping yourself out of the ring of entrepreneurs that wanted to make an exit, but failed to build a business that was actually attractive to investors.
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