Timing for every business is key. Five years ago, when my co-founders and I were raising funds for our Series A, we were given an acquisition offer and took it instead of finishing our funding round because it was the right timing. If you are an entrepreneur that’s been running an online business for 5-10 years and have a new venture that’s outperforming the older business – this is also a great example of a good time to sell, which is more common. I’ve discussed the time to sell a business with dozens of high 7 figure business operators and the most common trait with selling is “the time is right.”
Timing could be personal, market based, or even bank account balance related. The most common I’ve heard has been personal life changes which drives all small businesses.
Developing an SOP
In larger acquisitions like the business I started in 2014 and exited in 2015, there are normally dedicated teams of people to onboard your team into the company and provide resources for a transition. This type of transition is not possible for all small businesses being sold online so it’s important to have Standard Operating Procedure (SOP) documents.
This simple document can be organized in different ways but the best is by team member. For example, if you have 10 people on your team running the business on a day to day basis your SOP should have each person’s task breakdown. Businesses of all sizes in all industries have these documents for many different reasons but for selling a business it is extremely important.
How Much Do I Sell My Business For?
This is a really complex topic and varies depending on the industry, growth, and business category you’re in but there are some consistent measurements investors and buyers use. The most conservative numbers are a multiple of cash flow (profit) at 2x or 3x.
Business A
Monthly gross revenue = $10k
2x annual multiple of monthly gross revenue = $240k
Business B
Monthly net profit = $5k
2x annual multiple of monthly profit = $120k
The delta between these business examples with growth potential on top is where you can play with valuation. If your business is growing by 100% month over month and you have a new partnership ready to launch, it’s safe to say you can create your terms with gross revenue and growth potential on top.
Many online business investors who I know will strictly measure the valuation of a company with the yearly profit at a 1.5x to 2x multiple depending on the growth of the business. Also, lots of investors may just be looking for a long-term consistent stream of income so a slow growth rate but consistent profit makes it worth a 2.5x to 3x multiple.
Fortunately, if you have an online business of any size, this is all done for you with the Flippa valuation tool.
When I first started on Flippa years ago, I struggled to figure out how much businesses were worth and the entire process has definitely improved. It only takes a few minutes and you can value your business based on the cash flow for listing on the marketplace for buyers.
Time Investment for Buyers
Every buyer is different, but there are some important strategies to use when discussing time investment. Ultimately, time is the most valuable asset we cannot buy more of so it’s important to manage and maintain your time investments closely. I learned early on is that it’s perfectly reasonable to sacrifice some monthly profit by hiring someone to manage the business to save your time.
If your online business is requiring more than 10-20 hours per week to operate, it may be time to bring someone in to manage if you want to treat the business as a passive income stream. When a buyer begins their diligence process one of the main questions will be time investment on the business every week. This can be discovered by looking through your SOP but upfront its important to be transparent with the time investment for a new owner to take over.
Two great tactics I’ve seen sellers do to close on the sale of their online business is to provide support or hire someone from Upwork to help decrease the initial time investment. Offering support gives the new owner a chance to get familiarized with the tools and SOP. If you are selling a business it’s important to think from the buyer’s perspective when going into a transaction. If you have strong cash flow and wiggle room in the profit margin it’s a great advantage to offer to hire a project manager or virtual assistant to manage parts of the business. Depending on the buyer’s investment strategy this could be a powerful selling point.
If your business has a 50% profit margin each month and you provide a contractor hired from Upwork to make the business 100% passive but move to a 40% profit margin, most investors will be happy with that. Sacrificing profit for time is one of the most important compromises to be closely monitored and updated with online businesses.
Contractors to Save Time Investment
Hiring contractors from sites like Upwork or Freelancer as part of the deal to close with a potential buyer is becoming more and more popular tactic. This not only provides an unbiased 3rd party to help with the transfer but streamlines the adoption of the SOP you provide. Of course, there will always be a counter party risk of selling a business so maintaining a good relationship with contractors with the right skillsets is important.
Takeaways
The most important takeaways for preparing a business for an exit are creating the SOP for a new owner to make the transfer easier and share your time investment.
If you can manage to polish your SOP document and make it simple with hired contractors to transfer the asset over to the buyer while offering a way to lower overall time investment you have a winning transaction.
Sacrifice profit for time investment.
