As many of you know we’re selling an online business over the next 3 months. The first part is probably the toughest: deciding when to sell. It’s important because you’ll need to set it up in a way that the buyer is interested and you no longer have interest in scaling the business. In addition, unless you’ve built a massive company, the payout needs to exceed the amount of time you’re spending on it (i.e opportunity cost). Our guess is the first sale is typically done incorrectly (as is the case when trying anything for the first time) and the skills acquired will be worth 100x in the future.
What to Do Before You Hit Sell
Step 1 – Have Something Else to Do: Funny enough, you better have a good idea of what to do after you sell before deciding to sell in the first place. This doesn’t make a lot of sense logically, since you’re trying to create an event. The problem is that you’ll be bored with a lot of money on your hands (a bad equation). We assume the typical person reading this blog is in their 20s to maximum of 40s which means they are not old enough to hit the “escape button” and move to an exotic island.
How do you create something to do? Quite simple, if you only have one business you need to create a second one that is scalable and profitable. It doesn’t necessarily need to be online, perhaps you also have a small real estate business or you run a few franchises in your city (you already know we would prefer two online businesses over anything else). This dynamic makes it a lot easier to sell your first business. You’re going to hit the exit button and immediately turn your attention to your other idea. In a perfect situation, your second idea is growing significantly faster and you see more upside in the other project. Since you were able to run two companies at the same time, there is no doubt that upside will be seen by dedicating more time to it. In short, the first and most important item on your list is “what will you do after”.
Step 2 – Leave a Strategy Untouched: If you run your operations perfectly, you will unlikely receive a lot of bidders. This seems illogical, but you have to put yourself in the seat of acquirer. Would you buy a business that is perfectly run? Of course not. If you can’t make it better then there is minimal upside for you in purchasing the asset. Maybe you used minimal paid traffic (only one source). Maybe you didn’t sell all the possible product lines related to your niche (easy for them to create one). Maybe your advertising effort wasn’t fully scaled. So on and so forth. While you should have parts of the operation run near-perfectly (otherwise you wouldn’t be making any meaningful amount of money anyway!) there should be “meat on the bone”. Without a carrot or reason to buy, you’re losing out on a large number of bidders.
Step 3 – Calculate the Outsource Cost: Now that you have a solid company that could be improved (not a major over haul improvement) you’ll have to calculate the maximum cash flow per year you can make by going hands off. This is not something that we can give to you, some people would prefer selling an asset for 4-5x income… others would prefer keeping it and reducing the income by say 30-50% by outsourcing all of the tasks. Remember, the implied assumption is that you can teach someone to run the business. We don’t know what type of Company you have, just see if the entire process can be outsourced/automated. If so then you’re going to come up with your own conclusion: sell or keep.
Step 4 – Hire a Contractor: If it is already clear that you’re going to sell, you can skip this step. If however, you’re still on the fence you can take a big risk. Hire a contractor (no employees) to try and fix one of the issues with the business. In step 2, there should be a couple of issues with the website so you’ll have a third party come in and fix it. This a material risk because you will impact your cash flows and if the person does not add enough net income to offset his cost… you’re in the red. We would recommend against this strategy but we have seen it work in the past. In short, you can roll the dice and maybe it does work but as you can see we have failed at this in the past!
Step 5 – Market Research: At this point, you should have a very good idea if you’re hitting the exit button, now we’re going to go into the “double checking” part of the equation. This means you’re going to see if there is any long-term opportunity that will be missed. In addition, it means you’re going to make assumptions about the growth rate of your industry (demographics, not third party research). Two complete opposing example would be diet pills and brain pills. The diet pill market is enormous and relatively stable from a growth rate perspective. People are not getting any thinner any time soon and they will look for a quick fix. Brain pills on the other hand… This is a newer concept and while the market is smaller it is growing pretty rapidly right now. The clear answer? If you’re still on the fence but you’re in the diet pill market with stable growth go ahead and sell (nothing will change) if you’re in the brain pill market… You got more work to do!
Step 6 – Market Share: Now that you have a good handle of the market you’ll have to decide if you’re a market leader or not. It is unlikely you’re #1 otherwise you’re making tons of money and are exiting to an eight figure pay day (enjoy the incline!). The important question is if you’re going to benefit from the growth of the overall industry by maintaining a #5 or #6 position. This part takes the most amount of work. If you were able to build a large following in a notable niche, the question is entirely around market share gains and your relative growth rate. If you think the market will consolidate to one or two providers… hit the alarm button and sell now. If you think it will remain fragmented… it is going to be tough to sell (your numbers will trend up in a steady state fashion). If you’ve gone through all five steps and land here with a niche market that is growing rapidly… we feel bad for you because it will be a headache of a decision to make.
Conclusion: The summary is quite simple: 1) make sure you have something to do after you sell – if the answer is nothing you shouldn’t sell yet, 2) leave part of the business run imperfectly, 3) calculate the return on a sale vs. the return on outsourcing and 4) triple check (quadruple check) market share and market growth rates. The fourth part is probably the most difficult. If you are still on the fence after step 3, we’d say a good “rule of thumb” is to sell an asset if it’s in a large market and only growing in-line and to *never* sell any asset outpacing the market growth. This could be for a niche market or a large market. As soon as you’re growing “in-line” with the industry, a sale can make a lot of sense.
What You Don’t Do
While the most important part is “what to do”, avoiding big mistakes is also part of winning. The good news is that several of the mistakes are easy to avoid (no skill), the last two take some time to learn (a good thing as you’ll make even more money in the future!). No doubt many people will still make the same mistakes, but we’ll try.
No Partnerships: Partnerships just don’t work. If someone bids on your asset with some sort of “profit sharing” agreement, just avoid it. It’s not worth the headache. You’re better off deciding with 100% confidence that the asset should be sold or kept. We have no doubt that some people have pulled this off, that said it’s typically for very small scale ideas. If you are ever in a partnership scenario with a large sum of money on the table, suddenly contracts, “friendships” and everything under the sun go… right out the window. Trying to decide who is “adding the most value” between two people is horrific to say the least.
Never Shut Down: This seems obvious but we’ve seen this happen before. If you’re “done” with the product, don’t let it bleed out and die. You’ve probably seen this 100x before. Someone has a website making $X thousand a month. Not a large amount but at least it is profitable. Then they decide one day “hey this isn’t worth my time I am just going to let it go to zero”. This results in less money 99.999% of the time. Just sell it. Don’t give up… just sell! Even if you get a low-end valuation, you’re going to make more money by selling. As an example…. If the asset typically sells for 3x earnings… your biz will probably dwindle to retrieve 2x earnings if you let it run to zero. Be smart. Sell it.
Don’t Sell to “Friends and Family”: If you’re already ultra rich, you can feel free to gift a Company to someone. We’re guessing this isn’t the case. The reason you don’t sell to any friends or family is you’ll inevitably give them a discount. We know this sounds “unemotional” but that’s the reality of business. You have a personal life and a business life. If you end up selling the asset for a fair price you’re better off just giving your friends and family money as a gift instead. Hopefully, you’ve read between the lines. If you sell to friends/family they will inevitably ask you to help them run it, ask you more questions and blame you for any issues. A lose, lose situation.
Don’t Appear to be *too* Intelligent: As usual, do the opposite. No one wants to buy anything from someone who appears to be extremely smart. Make it seem like you’ve stumbled onto a decent business and you’re leaving to do something else. If you come off as incredibly intelligent you’re going to scare off buyers. They will wonder “this guy seems like he is a genius why in the world is he selling?”, which is not a good set up. This is more of an art than a science and if you come off as an amicable guy who is moving onto another venture, the sale will be quite smooth.
Don’t sell after the “Knee”: This is the hardest one to get down right. If you’re used to flipping internet assets then it will be obvious… if it’s your first time… You’ll probably get it wrong. In short? You want to sell while numbers are going up and are about to plateau. This is a skill that you’ll acquire over 3-5 years or so. When you fix a website the revenue/profits go up in a rapid fashion making a “knee in the revenue curve”, this is when you want to hit the exit button. The numbers are going up (perfect set up for a sale) and if you sell before they plateau you’ll get the best multiple (earnings valuation). If you sell when they plateau… your multiple goes down in a big way.
Conclusion: These are really the big five mistakes that are made: 1) partnerships, 2) giving up/shutting down, 3) selling to friends/family, 4) appearing to be intelligent hurting the sales process and 5) not selling when the asset still has upside potential. Like anything in life, the first sale never goes perfectly, but you can easily avoid the first three since they require no thought (simply avoid!). In future posts we’ll begin walking down the sales process. If you have other comments be sure to leave them below and as usual no questions.
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