Guest Post by Max Lapit, Empire Flippers - the marketplace where you can Buy & Sell Quality Online Businesses.
If you own an online business, then you’re potentially sitting on a pile of capital.
That’s because, in recent years, buying and selling online businesses has exploded in popularity. The number of businesses sold on our marketplace alone increased 11% year-on-year to 301, and average sales multiples are up almost across the board.
This means that for the first time in a while, we’re entering a seller’s market. The benefit of this is that the market is more liquid than ever with hundreds, if not thousands, of high-net-worth individuals looking to acquire online businesses—everything from websites to SaaS businesses.
This increase in popularity has created a liquid market, and with the right access to this market, you can sell your business for a lump sum of around two to four times your average annual net profit. The best part is that a deal can happen a lot quicker than you might think, providing you with quick, no strings attached capital.
How to Value an Online Business
To find out how much capital you stand to receive, you first need to understand how valuation works for an online business.
The formula for calculating valuation is as follows:
12-months average net profit x Multiple (Typically 20–60+)
The multiple is made up of all the positives and negatives associated with the business. In this case, we’re using a monthly multiple. There’s a lot that goes into generating the multiple, including growth trends, business age, and other monetization-specific factors.This is why it’s important to get your valuation from an expert source. At Empire Flippers, our valuation tool takes a few minutes to fill out and gives you an accurate estimate of how much your business is worth on the open market. There’s also the option to connect with someone from our team who will give you free exit planning advice.
Who’s Going to Buy Your Business?
The main difference between selling on the open market and taking the venture capital route is that you’re turning the tables. You don’t need to pitch to anyone; instead, interested investors see your listing and reach out to you.
These investors are individuals and private equity firms who have built up a large amount of capital through offline and online investing. Each investor should have their funds verified before they show interest in your business, so you know you’re only dealing with serious buyers.
The open market is different because these buyers aren’t looking for a unicorn. They’d much rather acquire a stable business that’s bringing in a steady cash flow. Even if you have a modest cash flow of $1K–10K of monthly recurring revenue (MRR), there is still a hunger for SaaS businesses of this size.
In fact, investors love to see MRR, which is why SaaS businesses receive some of the highest valuation multiples for any online business. However, appealing to these buyers will be different from attracting traditional funding, and there are a few tips you can implement now to receive a higher valuation.
How to Sell to These Buyers
While there are a high number of buyers in the market, you must understand that the majority of them are going to be non-technical buyers. It’s unlikely that they’ll know how to code, and they’ll want some reassurance when it comes to operating your business.
To provide this, set up operating procedures for all the major tasks, so a buyer can refer back to them should they get stuck. Also, consider building a team of developers that will transfer over with the sale of the business. This doesn’t have to include a full-time employee, but there should at least be a contractor or agency that is familiar with your business. By lowering its dependence on you and making your business more passive, it becomes a much more attractive prospect for buyers.
To help with the transfer, it’s common to offer some sort of post-sale support. This usually takes the form of email support and video calls over a 30-day period. To make your business even more enticing, consider extending this to 60 days. For the most part, buyers won’t need that much time, but it reassures them that you’re there should they need you.
Another thing to note is that these buyers are more concerned with net profit than revenue. There have been some notable businesses, such as Uber, that have virtually never turned a profit yet are valued at billions of dollars. These are unicorns and are not representative of the business model most buyers on the open market are after.
You should have a profit and loss statement compiled that shows your revenue and net profit. This is one of the first things buyers will consult when they start their due diligence, so it’s important to get it right. You’ll also want to know your customer retention metrics, including the customer churn rate, lifetime value, and customer acquisition cost.
When this is completed, go over everything and identify any dips or spikes. Investigate why they may have occurred, as this is one of the first questions a buyer will ask. Maybe you optimized your paid ads, which lowered your customer acquisition cost, or maybe your developer worked more hours that week to build a new feature, so your expenses went up. Whatever it is, transparency is always best.
Buying, Improving, and Selling
If you already have some capital built up from a business, then consider using it to buy another. The idea of spending money when trying to accrue more capital might seem counterintuitive, but the scalability of online businesses makes it possible to flip them for profit.
This is something we like to call the asset flywheel, which is a tactic we’ve seen many entrepreneurs use to quickly build wealth. It takes the money you already have, or the money you earn from a sale, to buy more assets. The idea is to find something you can use your skills to fix up, increase the monthly net profit, and then sell it for even more profit. This keeps compounding; one asset turns into two, two turns into three, and ultimately your wealth scales up at a rate that isn’t available with many other investments.
We’re not saying that this is easy to do; as with any high-yield investment, there is a risk associated with the volatility of the investment. However, it does offer the opportunity to quickly build up capital over the space of five to ten years instead of the 15–20 years more traditional investments tend to take.
Why Would I Sell My Business?
The capital you receive from a sale is all yours to do with as you see fit. It could help you purchase real estate, or it could be used to fund more businesses.
Most entrepreneurs have more than one business venture on the go or at least have other ideas. Imagine what you could do with thousands of dollars to boost the other assets that you own. Holding all the chips means there’s no need for financiers or outside parties; you make the call on where your investment goes.
It can be a significant investment too, considering that you’ll receive a lump sum that can be upwards of two to four times what you’re making a year. That amount of capital can open up doors to a whole host of possibilities, and it all begins with selling your business.
Empire Flippers - the marketplace where you can Buy & Sell Quality Online Businesses.