Five Critical Mistakes to Avoid When Selling Your Online BusinessBy Joseph Carroll
You invested time, money and years of sweat equity into building a successful internet company, and now it’s finally time to sell.
You are only going to get one shot at this, and the stakes are high. A single mistake now could cost you tens of thousands of dollars, but making the right decisions could mean exiting with a big financial windfall and a smooth transition. So, how do you get the most out of all your hard work?
In this article I’ll answer this question by outlining the top five critical mistakes to avoid when selling an online business.
1. Getting the valuation wrong
Undervaluing a business and leaving money on the table is a concern for many, however, a more common mistake involves entrepreneurs who overvalue their business. This is often because they allow emotions to impair their ability to arrive at a more reasonable valuation backed by logical influencers such as financial performance, comparable sales, industry averages, etc.
Unfortunately, listing a business for sale with a radically inflated asking price is a sure way to lose credibility with potential investors, especially those with prior acquisition experience. Once you’ve lost buyer confidence, it’s hard to get it back, even with a substantial price reduction.
That said, it’s certainly okay to be passionate about your business, and it’s certainly okay to push for the highest possible valuation, but unless your valuation is grounded in reality there’s no sense wasting time and money pursuing a sale and hoping for a miracle.
So, what does it mean for a valuation to be grounded in reality? In general, the broad majority of small to medium sized internet companies sell for a multiple of 1x – 4x annual net income. If you are arriving at a valuation (or someone else has valued your company) far above this range, it’s likely one of two things are true: (1) your business appeals to strategic buyers, or (2) your business has been overvalued.
What is a strategic buyer? Strategic buyers are investors who acquire companies in order to integrate them with an existing venture to gain some net benefit. These buyers are known to value a business substantially higher than its intrinsic value, because the acquisition brings substantially more value to their existing venture. For example, the owner of a SaaS business who acquires their only viable competitor, and gains patented technology and an effective monopoly on the industry in the process.
Sadly, very few ‘unicorn businesses’ exist, and most small to medium sized web companies are unable to generate strategic buyer interest. Instead, unless there is something extraordinary about your business (major barriers to entry, proprietary technology nobody else has, etc.), it will generally fall within a standard valuation range.
How can you avoid overvaluing your business?
- Get a free professional online business valuation
- Educate yourself on legitimate online business valuation methods
- Find comparable sales
- Seek multiple professional opinions
- View the business objectively, leave your emotions at the door!
2. Selling after a dip in performance
It might seem like common sense, but selling your business on the back of a major decline in performance is a very poor strategy. This is because you introduce an element of risk and uncertainty in the eyes of potential acquirers.
Of course, for a business which has been slowly declining over many years but is otherwise relatively stable, it might make sense to pursue a sale. The justification is, things are unlikely to improve under your ownership, and investors can see a clear stable trend and adjust their valuations accordingly to account for the diminishing returns.
Where it would be unwise to sell a business on the decline, however, would be a situation where the business experiences a major downward swing over a short period of time, and then is immediately listed it for sale. In this scenario investors won’t be able to adjust their valuations rationally, because many questions will be left unanswered, forcing them to radically devalue your company to account for the increased risk and uncertainty.
If you find yourself in a situation where your business experiences a major unexpected decline, the more advisable route would be to hold off on a sale until you can stabilize performance and understand what caused the major decline.
What can you do to avoid a firesale?
- Avoid any major changes to your business with 6 months of planning to sell
- Give the business time to stabilize after any major declines in performance
- Find the root cause of a decline instead of running away from it
- Develop an exit plan so you are fully prepared to sell
3. Hiring the wrong person
Choosing appropriate representation for the sale of your business is an incredibly important decision. The best brokers and M&A advisors are patient and professional, with streamlined processes, transparent valuations, access to a large network of buyers and years of experience with successful sales to their credit.
On the flip side, if you end up hiring an under qualified website broker to represent the sale of your business, you could be in for a nightmarish experience. Inflated valuations, sloppy listing materials, and a limited number of qualified buyers are all hallmarks of the shady side of the industry few people like to acknowledge.
Recently, there seems to have been a major surge in these illegitimate brokers over the past couple of years. How are they getting clients? One common tactic they use is to contact business owners and tell them they have a buyer willing to offer well above market value. Once the business owner signs an agreement with the broker, the buyer never materializes, but the broker retains full exclusive rights to the sale of the business, effectively trapping the business owner.
In fact, at Dealflow we are regularly approached by business owners who have entered into an agreement with a “broker” who over promised and under delivered. Sometimes we are able to help them legally void their agreements, other times our hands are tied…
How to avoid hiring the wrong broker?
- Read online reviews and seek multiple opinions before entering any agreements
- Ask for references from former clients and request comparable sales
- Request a full valuation and get them to explain their methodology in detail
4. Failing to exit plan
Exit planning is the process of methodically preparing a business for sale in order to maximize its future sale potential. When done correctly, the exit planning process should help eliminate most of the “what ifs” experienced by sellers who rush into a sale without properly preparing. This is achieved by undertaking a range of activities aimed to improve the audit-ability, transferability and scalability of your business, as well as eliminating risks, and maximizing profits. The end goal is to help you sell your business for the top price and best deal terms, to avoid leaving hard earned money on the table.
Common exit planning activities include obtaining transferable written agreements from all suppliers, employees and any other key stakeholders. It may also include preparing detailed Standard Operating Procedure (SOP) documents to make it easier for new ownership to takeover without any impact on performance. Exit planning also covers basic things such ensuring the business is using best practice accounting methods and maintaining accurate financial records. Another key exit planning activity is identifying and actioning various growth strategies to improve profitability.
Every exit plan should begin with a full comprehensive valuation, which will give you an idea of what your business is worth today. Then, with this benchmark in mind, you should set a target exit price and explore various exit scenarios. This is your opportunity to decide not only what price you want to exit at, but what deal terms and acquisition structure is most appealing to you. You might want to seek a clean break with an all cash offer, or you may want to keep a small amount of equity in the business and stay on in an advisory role. The important thing is that you are clear on your goals, so that you can set action items and develop a roadmap to achieve them.
How can you get the most out of your exit plan?
- Get a free exit planning consultation
- Set simple and realistic exit goals
- Identify the key value drivers of your business
- Create action items aimed to increase business value over time
- Create performance metrics to track your progress
- Work with an advisor, mentor or business partner to hold you accountable
5. Underestimating the time and effort
Many business owners fail to realize just how much time, effort and resources are required to sell an online business. Owners are now faced with the challenge of running their business and selling it at the same time. Because owners fail to account for the amount of time they needed to dedicate to the sale, it’s very common to see dips in performance.
This presents a particularly difficult challenge for owner operators who are heavily involved in managing the day to day responsibilities of their business. For these entrepreneurs juggling the operation of their business along with the demands of a sale can be a recipe for disaster, sometimes ending with a failed exit and a suffering business.
Though it can vary widely depending on the size, structure, and complexity of the deal, the average lifecycle for a sale on Dealflow is typically 90 – 120 days. This covers valuation, listing preparation, soliciting interest, fielding inquiries, negotiating deal terms, drafting legal documents, transferring assets and closing in escrow. And that’s just if things go smoothly.
The truth is, it’s very rare for a sale to proceed without any hiccups. Listing preparation alone can be an arduous process if you haven’t kept accurate financial records. Once listed, you will have to answer dozens (if not hundreds) of questions and be available for conference calls. Reviewing legal contracts and negotiating deal terms can be very time intensive and take several weeks to finalize.
This is yet another reason why exit planning is always a good idea. It’s also a reason you may want to consider enlisting the help of a qualified M&A Advisor or broker to assist you with the sale. M&A Advisors will prep your business for sale with a proven process, they will get your business out to a large amount of qualified buyers quickly and efficiently, and they will handle most inquiries on your behalf.
As a result, working with a qualified professional M&A Advisor usually means less hiccups, a faster sale and a much higher rate of success. At Dealflow, for example, we have been able to achieve a 92% success rate for our clients by constantly working to improve and refine all aspects of our sales process. Of course, working with a qualified professional M&A Advisor doesn’t absolve you completely from being involved in the sale, but it will take a considerable amount of the leg work and pressure off of you so that your business doesn’t suffer.
How to avoid underestimating what it takes to sell your business?
- Know what you are getting into before you start the process
- Be prepared for unexpected hiccups
- Hold off selling until you can fully commit yourself to the process
- Consider hiring a professional M&A Advisor to facilitate the sale on your behalf
Can you think of any other major mistakes sellers of online businesses should avoid? Let us know in the comments below!