Selling your online business is a serious decision for any owner and the process of seeing a sale through to completion can be intimidating for first-time and experienced sellers alike. Hiring an M&A advisor is a good step in helping to ease the effort but as with any major endeavor, it pays to be well prepared from the outset. Having successfully sold over 1,000 online businesses, we’ve put together some guidance on how sellers of SaaS, e-commerce and content businesses should best prepare for the sale process.
Specific Advice for SaaS Business Owners
Specific Advice for E-commerce Business Owners
Specific Advice for Content/Affiliate Business Owners
Know Your Numbers
Understanding the financials of your online business from the outset is vital to the successful sale of your business. Before you initiate a sale process you should be clear on every aspect of your site including all sources of revenue, cost(s) of sales and operating expenses. You need to be in a position to compile an accurate profit and loss statement for your online business as this will form the basis of prospective buyers’ valuation methodology and due diligence. Your business’ valuation will be calculated after reviewing various factors specific to your type of business. Here are some things to think about. Note that some of the following may not be relevant to your site:
- Sources of revenue – Annual recurring revenues, AdSense, Affiliate programs, Direct ads, Direct sales, AdSense, Monthly recurring revenues, etc.
- Cost of sales – Advertising & promotion, COGS, Credit card processing fees, Outside services, Shipping & delivery, etc.
- Operating expenses – Content creation, Employees, Hosting, Outsourcing, Refunds/Chargebacks, Subscriptions, etc.
Record Keeping
As part of the above you should be looking to collate all the financial and supporting documentation to prove the financial performance of your online business. Not only will this verify the numbers you provide at the outset but FE International will audit the financials and this will be the starting point for the buyer’s due diligence process. As part of the preparation for sale, pull these files together in one place. You will want to gather monthly bank statements, credit card statements, merchant processor statements and monthly invoices.
Regardless of the type of online business you are planning to exit, we recommend that you have a separate bank account for your business, as this will speed up the audit process and reduce the amount of time that you as the seller will need to spend. You likely will want to maintain a separate account for personal expenses and other expenses not related to the business you will be divesting of.
While on the subject of documentation, standard operating procedures (SOPs) are valuable when managing a business but are even more critical when taking on a new business and getting oriented to new processes. Help the new owner(s) of your business get acquainted by providing them with detailed SOPs. To do so, you will want to review and modify your already existing SOPs and create new ones as needed. Chances are, as your business has grown, new processes were added and you may not have gotten around to writing detailed guides for all of these yet. Now is a good time to write them.
Security and Compliance
Security is now more important than ever before. An Accenture/Ponemon Institute study reported that a majority (68%) of business leaders believe their cybersecurity risks are on the rise. Because of this, security and compliance will likely be top of mind for potential buyers. Knowing you are focused on security will leave potential buyers with one less thing to worry about. They will be interested to learn what steps you are taking to protect your customers’ information. In advance of going to market and receiving questions from potential investors, make sure you are encrypting data and that you are abiding by the Payment Card Industry (PCI) Data Security Standard. Not doing so could lead to complications during the due diligence process and could result in a deal falling through, which in this case, could have been easily avoided by putting security and compliance measures in place.
Specific Advice for SaaS Business Owners
Managing all of the metrics related to your SaaS business can seem like a daunting task. If you are considering divesting of your business, we recommend that you track your SaaS metrics in a user-friendly manner, as this will make your business more attractive to potential buyers. Software such as BareMetrics, ProfitWell and ChartMogul provide access to accurate real-time metrics, enabling you to make data-driven decisions more efficiently.
Along with the record-keeping best practices that all online business owners should follow, SaaS business owners will want to make sure that their codebase is well-documented. Doing so before speaking with potential buyers is recommended. You want the potential buyer to feel confident that they can take over and successfully run your SaaS business and having this clear documentation will likely alleviate any concerns they may have. We’ve found that SaaS business owners who have taken the time to document their code appropriately have shorter training periods and their deals close faster than those who do not take this advice. Keep in mind that you can also outsource this task to a developer if you do not have the time to document your codebase as you prepare for the sale.
In addition to making sure all is in order with your codebase, you will want to look into your intellectual property and make sure it is secure. Even if you have hired additional staff or contractors to assist with development, you want to make sure you own the intellectual property. For instance, if you have worked with contracting developers, make sure you have intellectual property assignments that note that you are the owner of the intellectual property. Additionally, make sure that staff contracts note that the intellectual property is yours. Speaking of staff, if you have employees willing to transfer and work for the new owner of your online business, this is a plus. Potential buyers will be pleased with this arrangement as it will help them and their staff get up to speed and reduces risk associated with the transfer process.
Specific Advice for E-commerce Business Owners
When preparing to sell an e-commerce business, there are several steps you can take to position your business for greater success. You will want to make sure you have contracts in place with suppliers outlining their commitment to supply specific products for a set period of time. Additionally, for goods that your company sells, make sure you protect the intellectual property by having trademarks and patents in place. Organize all related documentation as buyers will be interested in this information.
Buyers are looking to acquire a business not their next job. Because of this, the owner’s involvement in running the business should be limited. If you are currently more involved, we advise that you take steps to delegate mundane tasks to a team that is willing to transition with the business when it is acquired. This will make your business more attractive to potential buyers and will help streamline the transfer process. Furthermore, if you operate your own warehouse, we advise that you look into third-party logistics (3PL) since going this route makes scaling easier and these businesses are in higher demand for this reason.
When it comes to compliance, different regulations apply depending on the niche you operate in. Complying with these requirements is important. For example, if you sell a product will small pieces, you will want to check that these parts do not present a choking hazard. It is also wise to keep up with and align your product offerings with industry best practices. Potential buyers will be on the lookout for businesses following best practices and will be wary of businesses selling products that do not meet compliance requirements.
While preparing your e-commerce business for sale, you will want to resolve any open legal matters. Potential buyers will be more inclined to purchase a business without these types of issues. We recommend gathering all legal documents prior to the exit as not doing so could slow down the audit and listing processes.
We spoke about SOPs earlier but there are procedures specific to e-commerce businesses that you should document. These include processes related to inventory and packaging. Outlining these procedures for the new owner of your business will ease the transition process.
Lastly, while preparing to divest of your business, take stock of your inventory and your business’ plans and if possible, leave some powder in the keg (in the form of a new product, supplier, etc.) for the new owner. This will be appreciated by the buyer and will help facilitate a smooth transition period.
Specific Advice for Content/Affiliate Business Owners
As you prepare your content business for sale, we advise that you gather all relevant metrics and other important information. A key component of your business’ success relates to its website traffic so make sure you are tracking traffic. We recommend using Google Analytics since it is widely used and user-friendly. Also, confirm that all your content is unique and reads clearly. Utilizing someone else’s content (including images) without permission is not acceptable.
Be sure you are abiding by the Digital Millennium Copyright Act (DMCA) and following through on any takedown requests. Copyright infringement is a serious offense and potential buyers will not want to get involved with a business that does not take this seriously. Additionally, if your website features affiliate links, be sure to include an affiliate disclaimer on each page containing these links.
If you are looking to divest of your content business, it is best if your business’ branding does not revolve around you. We advise that you modify communications on all traffic platforms including on your website and on social media to drastically reduce mentions of you as the owner. This will help potential buyers see themselves as leading the business and will also help during the transition process.
There are some steps you can take to improve upon your business prior to divesting. You can work to grow your organic backlink profile by using HARO or PR publications. Additionally, if your business has been hit by a Google update, we recommend that you work on regaining traffic before exiting, as you will see a more positive outcome if you do so.
To help the new owner get up to speed on your business, we recommend that you create SOPs specific to your content business. What steps do you typically take to get a piece written, posted and promoted? If you are running an affiliate business, what processes with your affiliate partner(s) do you have in place? Outlining these will help the new owner get situated. Additionally, we advise that you develop a clear roadmap for the new owner. This would outline the business’ strategy and highlight opportunities for growth. Also, if you work with a freelance writer, we advise that you arrange for this individual to transition with the business. All of these efforts will be greatly appreciated by the new owner of your business.
Know Your Reason for Selling
One of the most important pieces of information for any transaction process is the seller’s reason for sale. Know your reason for selling – it is one of the first questions a buyer will ask, so you need to be able to articulate your motivation. Your answer needs to be honest and, ideally, shouldn’t express any urgency. Buyers expect to hear reasons such as selling to move into another niche, financing an offline endeavor or paying down debt etc. Red flags are raised if the sale rationale seems ambiguous, unsure or connected to the underlying performance of the online business.
The Value of Your Business
Earlier in this article, we touched on valuations briefly, however when preparing for a sale, it is important to understand of how your business’ valuation will be calculated. At FE International we value and advise on the sale of internet businesses with a wide range of monetization strategies (e.g. SaaS or AdSense) across almost every niche. Below we touch upon how we value SaaS, e-commerce and content businesses and offer suggestions for further reading.
Valuations of SaaS Businesses
When it comes to SaaS business valuations, most businesses valued under $5 million are valued using a multiple of seller discretionary earnings (SDE), also called seller discretionary cash flow. This is particularly the case if they are relatively slow-growing and do not have a management team in place.
SDE is the profit left to the business owner once all costs of goods sold and critical (i.e. non-discretionary) operating expenses have been deducted from the gross income. Crucially, any owner salary/dividends can be added back to the profit number, too.
For more information on SaaS valuations including a discussion on factors that influence what these types of businesses are worth, read our article “SaaS Valuations: How to Value a SaaS Business in 2021″.
Valuations of E-commerce Businesses
The first step in arriving at an accurate valuation of an e-commerce business is to determine earnings or “net revenue.” For companies with an estimated value of $10 million or less, the Seller’s Discretionary Earnings method is used almost exclusively. For businesses with an estimated value above $10 million, the Earnings Before Interest, Taxation, Depreciation, and Amortization formula is almost always used to calculate earnings.
For more information on e-commerce valuations and valuation drivers and advice to keep in mind when divesting of an e-commerce business, read our article “How to Value and Sell an E-Commerce Business“.
Valuations of Affiliate/Content Businesses
In order to arrive at an accurate valuation of an affiliate business, you need to look at the business’ financial picture, consider other attributes that contribute to its valuation and then determine the appropriate multiple. For most affiliate businesses, the Seller’s Discretionary Earnings (SDE) method is used to determine earnings or “net revenue.” In the internet business world, investors have increasingly gravitated towards the multiple-based methodology because of its simplicity and robustness in the face of scant financial or comparable data.
For more information on affiliate valuations, read our article “Affiliate Website Valuation: What’s Your Affiliate Site Worth?”.
Run the Business
Don’t forget to run the business – the sale process usually takes several weeks by which time you will likely have another reportable period of numbers. Time and again buyers ask for these during marketing or due diligence and it’s a far superior message to report stable or improved numbers than ones which have slumped from seller neglect. It’s an unfortunate fact that a good month of numbers won’t improve the sale price but a bad month will open the door for renegotiation.
Integrity is Important
The common thread running through all of these steps is credibility. If you want buyers to move forward, you must show respect by being open, honest and accurate about all things, both good and bad. This starts with the information that is shared to summarize your business, but is imperative with all documentation and dialogue exchanged and will be critical in due diligence through closing to ensure the transfer stays on track. Misrepresentations and conflicting statements will always be found out (we’ve never seen it otherwise) so it’s best to be completely open and honest from the outset.
If you want to know more about the sale process, please read our overview here or watch the video here. If you have further questions or would like to get in touch with an advisor, please email us at brokerage@feinternational.com.
