You sell a business because you know you have reached a point where a fresh look (and more funds) is urgently needed to push the business in a new direction, so it survives (against bigger players and constant changes in the industry) for a longer time, and/or you have had your run, and now want rest or a change of scenery.
It is best to quit while you are ahead. You can always start a new company in future, using money from the sale proceeds and learnings from the experience.
However, many buyers may want the original owner to stay around, lest customers and staff (and suppliers) become restless, or your guidance is needed to train the newcomers, and steer the ship as things settle down.
Three main ways people buy businesses:
1. Take the cash and be on your way. (most preferred method for the entrepreneur).
2. Get shares in parent company. (This is common in tech company purchases. But make sure the shares are liquid - you can sell them after a while. The preferred method is a mix of some upfront cash and shares for the rest.)
3. Earn out: This happens on purchases of professional services firms, which are built on a person's name and trust. The original owner continues to get a cut out of the business while it is being run by the new owner.
Things that make a business valuable
- Profits: That is, a track record of profits.
- Potential: Will the profits continue to grow?
- People: Are the employees so good at their jobs that they don't the owner's interference and supervision all the time?
- Office: Is the real estate value of your office/s more than what your business is valued at? This is Gordon Gekko material, boss. Make sure the buyer doesn't want to gut your company, sell the valuable parts and lay off everyone. Is this what you want?
- Intellectual property: Valuable patents, copyrights, registered trademarks etc that you own.
- Loyal customers: Your business has low customer churn and some big ones have been around for a while.
- Reputation: You are an established brand in your industry.
- Market position: People are willing to pay more for your product/service, and/or you are one of the top 3 players in your industry.
- Location: Your software company office is located near to a technical university. Silicon valley, I presume? Or, your warehouses are located in heart of the wholesale markets.
- 'Needs fit': Your company fits the particular needs of a buyer - a competitor who will use your product/service to fill a gap in her/his range of offering, or someone who just wants to buy out the competition and establish a monopoly over the market.
How to find a buyer
Putting up a huge 'for sale sign' or a big 'for sale' ad in the papers will only hurt your prospects, as people will think the company is seeing bad days and you are desperate.
Do it on the quiet, using your professional and personal network - Experts/consultants you work with, industry people you meet at events or know from prior business engagement, and then there are people who find buyers for a fee.
Thinking outside the box: Ask senior people in your company to buy you out (a management buyout, it is called). In B2B businesses, big customers often buy companies they are dealing with. Many enterprise software companies get bought this way.
Option other than buying: Merge companies
We already talked about it above ('Needs fit'). We are talking about synergies and stuff here - two companies joining forces, complementing each others' strengths (and plugging weaknesses) to emerge a stronger player in the industry. This tactic is used to survive in a rapidly changing industry, but to survive in the long run, it is very necessary for the combined forces to be innovative and fast on their feet. But this is management talk for some other time.
Tips for selling websites/apps
- Generally, websites/apps are valued and sold based on their profits.
- They are valued at around seven times annual profit. Established companies such as Google are valued in the stock market at 25-35 times their profits.
- If the online property is less than a year old, they are valued at around 18-30 times their monthly profits.
- You can sell directly at sites such as Flippa, but you won't get a fair value. The, you also don't need to show profits, just show your traffic and user numbers. You will also need to promote the sale on other sites and forums.
- You can also sell through a broker (Google 'website sale broker') but they take a fee.
Thank you for reading.
This guide is from The Success Manual, which contains 200+ guides to succeeding in business, career and personal life. Get the pdf ebook for $12 only.