We recently discussed the taxes involved in selling an online business. Following on from this, this post discusses other important timing considerations around a successful exit.
Arguably one of the most important aspects in selling your business is when to exit. While as a seller you may have emotionally checked-out of the business by the time you approach a broker to sell your business, there are important timing considerations to factor in to a successful exit.
The Business Lifecycle
Irrespective of the type of business, each and every business has a lifecycle. This follows 4 distinct stages: inception; growth; maturity and decline. Decline can be halted by diversification.
It is important to highlight where your business is in this cycle as this will have a great impact on how sellable the business is. There is no “perfect” time to sell a business, however, knowing the precise stage of the business on these charts will help ascertain the correct valuation and build a convincing sales pitch.
Let’s look at these two example businesses:
Assuming things are equal, these two businesses could have vastly different valuations.
In these examples, Business A is either in, or nearing, the mature stage of its lifecycle. It has 5 years of trading history and has a linear growth pattern with a compound annual growth rate (CAGR) of 50% over the first five years of trading. Business B is in either the start-up or growth phase (likely the latter) and also has a linear growth pattern, but with a CAGR of 400%.
As shown, based on these basic metrics (and with a large grain of salt), Business B should outperform Business A over time and, thus is more valuable long term.
Does this necessarily translate to a higher market value? Absolutely not. Depending on the type of buyers attracted to the business, value may be weighted on many different attributes.
Focusing specifically on the lifecycle, Business B may be seen as higher risk and the valuation may suffer. Business A may have a continuous source of new products allowing for the highly desirable linear revenue profile. This may be hard to achieve in Business B. A strategic would likely be more attracted to Business A than B for this very reason.
There are many factors to consider and knowing where the business is will help you decide whether you are ready to sell. A high growth, infant business (less than 1 year) may need a little more time to move towards the mature stage and a business well into the mature stage might need diversification in order to increase its value and appeal to a wider buyer pool.
Is it the Right Time of Year to Sell Your Business?
Seasonality of a business is often overlooked when timing the sale of a business. Sticking with the example of e-commerce businesses, most see a notable rise in sales around busy shopping periods (October – January). For some e-commerce sites, this can account for over 50% of the annual revenue of the business in the space of four months.
A natural time to sell the business for the owner might be after this lucrative period, but would a buyer want to acquire a business in February and then wait until October to start seeing real returns? Likely not. This will materially impact the value a buyer is willing to pay and, if not, at least the amount a buyer would be willing to pay as cash consideration.
Seasonality is an important factor to consider and timing an exit around these periods is key.
Note: provided the business has over 3 years of history, it is relatively easy to prove out seasonal trends and remove any valuation downside, should your business suffer from seasonality.
Launching new products can be a great way to extend the business lifecycle. A buyer will almost always look at this in a favourable light as it will road-test the business for new launches and provide clear (and current) ROI data for taking on such an event.
However, is there value beyond the return of that one product?
This business completed its sale in 2014 through FE International in the high 6-figure range. The fundamentals of this business were strong and though it was in the mature stage of the business lifecycle, it was still growing organically with monthly profits rising over the period to its sale.
This business saw a record number of enquiries at FE International due to its strong revenue base, diverse traffic sources (including successful paid traffic campaigns) and its growth potential when factoring in the amount of new products that could be added over time. The seller of the business had a product ready for launch which had taken 3 months of work to bring to market.
Stick or twist? Based on the seller’s best estimates, the new product would bring $50K-$100K in additional revenues in month 1 of launch (assuming heavy discounts and affiliate promotion) and then a conservative $5K per month in new revenues going forwards.
Our advice to this seller was the hold on to the product and offer it as a carrot for a buyer during negotiations. The value of a one-off high month of high earnings would make it onto the P&L, but would be heavily discounted in terms of valuation unless it could be proven that there was a scalable and established way of reproducing these results. With the knowledgeable and experienced seller leaving the business, this was not a certainty for the new owner. The additional monthly revenues would also not be classed as sustainable as the product was new and ongoing revenues would be an unknown (or best guess).
The business owner had not been releasing new products periodically and as such, this exercise would not add that much value beyond the $50K-$100K in his pocket in month 1. Further, it may have actually harmed the sale of the business as a buyer may have seen this move as a “pump and dump”, leaving any buyer having to wait a period of time before launching new products to see similar results.
In the end, the seller (correctly) used the new product as a negotiating chip in the sale of the business, receiving a cash offer at the asking price, plus an earn-out over the first year of the product’s launch. This overall far outweighed the possible gains from the new launch and made the business ultimately more sellable.
Once the right time to sell has been established vis-a-vis the business lifecycle, product lifecycle and annual revenue profile, consulting industry data is the next (and last) move before setting a firm date for selling your business.
Sales data and information in the online brokerage space is limited, so as part of FEI’s commitment to transparency and educating the market, we will be opening our books and sharing some key industry data and analysis to help you form the last piece of this decision making process. Given our leading position in the industry in terms of sales volume (300+ transactions over the past 5 years), the data provided is likely to be highly representative of the market. The information due for release has never been shared by FE International or another online broker to date. Stay tuned for this upcoming release.
The Right Decision for the Business
Timing is vital to any successful sale. There are many factors at play and as such, it is important to be selling for the right reasons, at the right time. Selling a business quickly or under duress will almost always lead to a lower sale price. Generally speaking, the longer you can hold onto a business the more likely the business is to have complete a comprehensive exit plan and achieve maximum value upon sale.
Following the above points you should be able to identify the optimal time to sell a business and how much can be gained/lost from the timing considerations. This issue of course magnifies with the size of the business: a 10% discount on a $50K business for selling at the wrong time is far less impacting (on an absolute basis) than a 10% discount on a $500K business. The appetite of the selling party will ultimately dictate what course of action takes place.
Stay tuned for FEI’s exit planning guide for more information of this and other relevant topics.
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