If you have a growing, profitable online business, you’ve probably thought at one point about what kind of profit you could make from selling it. That answer depends on many different factors, so make sure you give it some thought before putting up a listing.
In this article, we will take a look at 5 different questions that you need to ask yourself before taking the leap and deciding to sell.
1. Does Your Business Have Value?
This might be the most important question you need to answer before selling. If your business has no value, then you will have a very hard time finding a buyer. There are a few different areas we will look at to determine the value, and the first one will be the earnings.
Earnings
The best way to determine the value of an asset is to look at how much money it’s producing. Here at FE International, we typically value businesses at 2-3X yearly net profit based on the seller’s discretionary earnings (SDE). With that being said, our valuation process varies greatly depending on many factors such as the business model, financials, traffic, operations and more.
Ideally, your business should be making at least $500 per month in net profit and if it’s, we can likely help you sell your business. If your business is making below $500 per month, then you will be better off opting for a marketplace, such as Flippa. We’ll go into more detail about where you should sell your business in a minute.
Traffic
Traffic is the oxygen of any online business.
Which is why you need to confirm your online business has a sufficient amount of traffic before deciding to sell. Not only should you look at the amount of traffic, but you should also determine the quality of your traffic by tracking goals and conversions. Google Analytics makes doing this very straightforward and you can keep track of them under the “Conversions” tab.
The higher the quality of your traffic, the more favorably your business will be valued. A handy way to determine the quality of your traffic is to measure the revenue per user of the site.
Where your traffic is coming from also plays a large part in determining the quality. The more diversified and sustainable your traffic sources are, the better. If you rely on one traffic source for 95% of your total traffic, then you better make sure that the source is sustainable. If something were to happen to that one source and it stopped driving traffic, then your business would be practically worthless.
It is much more attractive to potential buyers when you have multiple sources of traffic to help diversify the risk.
At Least a 12-Month Track Record
Ideally, you’ll want to have at least 12 months’ worth of traffic and financial records for your business. The longer your business has been around and there is proof of it, the higher it will be valued. Potential buyers want to see a business with a proven track record, and 12 months is usually the minimum amount of time that fully proves that.
We have found that once you get into the 24- to 36-month range, you’ll start to see an increase in the value of your business. This is because at that point it becomes an established business and it will become more attractive for investors.
You should be keeping, at minimum, a simple profit and loss statement for your business on a monthly basis. You can use a service such as QuickBooks or FreshBooks to help you keep track of all of your financials.
Also, keep a record of all traffic coming to your site. Google Analytics is the best way to do this, and it’s also free. You should also have Google Search Console (formerly known as Webmaster Tools) set up as well. The more information that you have on your business, the better.
Having complete records of your businesses’ history will make it easier for it to be properly valued and it will help instill confidence in possible buyers.
Legal Considerations
Legalities such as copyright infringement and trademark issues can be a deal breaker. Ironing all of these issues out before selling your business will make your, and the buyer’s, life a lot easier. For further reading on this topic you can read our Advanced Legal Guide to Buying an Online Business.
2. Is Your Business Transferable?
Having a business with high earnings and growing traffic is great, but if you can’t transfer ownership to the new buyer it will be very hard to sell. This is an area whose importance is often underestimated by both sellers and buyers.
If your business is 100% reliant on you as the owner to make it run day in, and day out, then that will hurt the overall value of your business. One of your biggest goals before selling should be to make the ownership transfer as seamless and painless as possible.
There are a few factors which will affect the overall transferability of your current business and we will discuss them in detail below.
Amount of Work Required to Operate
Your daily work requirements as the owner will have a large impact on the value of your business. The less time that is needed from you to run the business the more of a buyer-friendly prospect it will be.
It’s reasonable to assume that the larger your business, the more responsibilities you will have on a daily basis. For example, if your business is making $500k a year and requires you to work 40-hour weeks, then possible buyers would understand as long as the return on investment makes sense to them. Check out what your hourly wage would be if you were the owner of this business.
On the other hand, if you’re still working the same 40-hour weeks but your business is only making $12k a year, that could be a problem. That would be off-putting for future buyers because the return on investment for their time is very low. Take a look at the hourly wages for this business compared to the first which was making $500k per year.
Here’s a calculator that helps you easily determine how much much money you earn on an hourly basis.
It is important that you are 100% up-front and honest when discussing the amount of daily work you put into the business. Underestimating the amount of daily work will only lengthen the entire process and cause problems later on.
Are Your Day-to-Day Operations Documented?
Before thinking about selling your business you need to have all of your day-to-day tasks documented. The more effort and detail you put into properly documenting your daily tasks the easier it will be to replace you as the owner.
The tasks that you do every day within your business as the owner may seem simple and easy to you, but this may not be the case for someone who’s brand new to the business. This is why you should document everything you do, even the smallest and simplest task so that new owner can transition as smoothly as possible.
If you are thinking about selling your business and you have not documented all of your operations, we suggest taking the time to do so. This will allow the buyer to more accurately see what taking over will entail, and it could also increase the value of your business if you’ve managed to build a passive, profitable operation.
If you need help with documenting your processes, we suggest using a tool such as SweetProcess to help you out.
Is Your Business Location Dependent?
One of the best things about most online businesses is that you can successfully run them from just about anywhere in the world, as long as you have an internet connection. However, this may not be the case for all online businesses, for a number of reasons.
If your operation depends on having a physical location, you might want to consider ways to remove that dependence.
Here are some things you can try to make your business location independent:
- Hire remote employees
- Automate and streamline as many of the tasks as possible
- Create a solid and reliable way of communicating among your team
- Document all standard operating procedures (SOPs)
There may not be anything you can do to change and if that’s the case, then you need to make that very clear when you go to sell. This will severely limit your pool of buyers and will make selling your business harder, but it’s better to have that fact known from the outset.
Special or Unique Skills
Do you possess a unique set of skills that help run your business? This could include things such as coding skills, personal relationships or expertise within an area. If so, this could damage the overall value of your business because, presumably, your replacement will need to have the same skills.
The best way around this is to provide a solution for the future buyer to overcome these problems. This could mean staying on board after the sale for 6 months to help with the transition, or offering to work on a contract basis in the future.
3. Why Are You Selling?
There are countless reasons for wanting to sell an online business. Maybe you want to start a new venture and need an influx of cash to get things started. Or maybe you are nearing retirement and would rather spend your time relaxing instead of running your business.
Whatever your reasons may be, it’s important to fully understand your own motivation behind selling. It’s not a good idea to make an impulsive or rushed decision. You should put some serious thought into it and weigh the pros and cons to make sure you are making the best possible decision.
Here are a few good reasons to sell your business:
- You’re ready to move on and the business can function without you
- You need time off for health or family related reasons
- You have another worthwhile opportunity to pursue full-time
- You believe another owner could help it grow
Whatever your reasons are, ask yourself if you might regret the decision a year from now, particularly if you’ve spent a lot of time building your business.
4. Is it the Optimal Time to Sell?
Timing is an important consideration when deciding whether to sell your business, because the work you do during exit planning, and even seasonality, can affect your valuation. Generally, an exit planning period allows for:
- Time to document operations, records and financials
- Opportunity to fix any issues that could decrease value
- An accurate valuation, because you were able to obtain everything needed
Especially for e-commerce businesses, seasonality could be a factor in the value of your business. Make sure your sales records clearly indicate any peak periods, slow periods, sales or promotions that might be the cause of any aberrations in income.
One tip to help maximize the value of your business is to sell it while it is growing or at the very least steady. Selling a declining business will have a large impact when it comes to the value. If needed, take 6-12 months to create a track record of growth and then revisit the idea of selling.
5. Where Should You Sell Your Online Business?
Once you have asked yourself all of the above questions and are ready to move forward with selling your business, there is one last question you need to ask yourself, “Where should I sell my online business?”
There are a handful of places where you can sell an online business, and some will be better suited for your business than others. One of the biggest factors in deciding where to sell should be how much money your business is making. There are two main tiers that your business could fall under, and knowing where you stand will help you decide.
Making Less Than $500 per Month
Your business falls under the first tier if it is making less than $500 per month. If your business falls under this category, then your best option would be to opt for a marketplace such as Flippa or FreeMarket.
Making Between $6k – $1m a Year in Profit
If your online business is making more than $500 per month, ideally in the $6k – $1m range, your best option would be to use a broker. A broker will be able to offer advice and support during the selling process and make everything as streamlined as possible. Selling a business can be very time-consuming, especially if you’re trying to go at it alone, and working with a broker will help you avoid those types of problems.
Along with making the entire selling process easier, a broker will also be able to get you the best price for your business. Here at FE International, we have a network of qualified, knowledgeable buyers who are interested in purchasing established businesses with potential for growth.
If you’re interested in selling your business with a broker, look for someone with experience. At FE International, we have the largest full-time team in the industry and have completed close to 400 deals in the past 6 years. If you are interested, you can fill out a free business valuation form and a member of our team will be in contact with you shortly.
Choosing how and where to sell your business is one the most important decision you will make throughout the whole selling process. Making the wrong decision could cost you thousands of dollars and a whole lot of your time. Hopefully, the advice given above will guide your decision and help you choose the best fit for you and your business.
Conclusion
Selling your business is a big deal and you need to make sure you, and your business, are fully prepared. By asking yourself the 5 above questions you should get a solid understanding of what you need to do to make the selling process as easy and as profitable as possible. Feel free to use our checklist which formats all of the above questions into an easy to digest checklist.
If you feel your business is ready to be sold, we’d love to help you make it happen. Fill out the free valuation form here and we will be in touch shortly.