It takes a lot of sweat equity to build up a successful business. At the end of the day, after all the hours, days, and weeks we pour into our businesses, we want to know there is a light at the end of the tunnel. For many, that will mean selling your business. As far off as that may seem, it’s crucial to prepare for a big exit, right from the start.
For many savvy entrepreneurs, selling your business for a windfall of cash is the goal right at the outset. But even if it’s not your dream, no entrepreneur should rule it out. Selling your business can give you a large lump sum of capital, which can then be used to either buy other assets you can then build up, or perhaps to expand another project.
There’s a chance you’re reading this thinking, “I’m still trying to earn my first dollar! This is the last thing on my mind, and I don’t even know if I would want to ever sell.”
But here’s the thing. Even if you build a business with zero intention of selling it for a big payday, and even if you never do actually sell, you should still build your business as if you are going to sell it someday. Building a business with this mindset will make the entire operation run more efficiently—you’ll be able to see how your business is trending overall, maintain a cleaner financial picture, and implement better standard operating procedures.
Building your business using the lens of how an outside investor would view it will do wonders for your company’s value and integrity, no matter what your end goal may be.
Whether you want to build out a business in a more efficient way, or you want to actually sell your asset with a big exit down the road, you have a lot of preparation to do. You will notice that preparation is key here. By having everything clearly spelled out and lined up from the start, you will be able to make better decisions—both in growing your business and in ultimately selling it.
Let’s dive into the core things you’ll need to prepare.
Built to Sell: Creating a Startup That Will Have Buyers Lining Up
Most of the steps in this article can be taken right from the moment you start your business. You can save yourself a lot of time and headaches by taking these steps one by one, starting now, instead of all at once when you decide to sell your business.
Google Analytics or Clicky: Get One Now!
Every business will benefit from using some form of analytics.
You absolutely need to have a way to track how many people are actually going to your website. If you’re a startup without a website, such as an Amazon FBA business where the majority of your traffic is going to a listing on Amazon.com versus a website, you’ll still need some other kind of analytics.
Since you can’t control what kind of analytics are used in the case of having products on Amazon, you can still use their back office they supply with a Seller Central Account. The account should show various statistics and reports you can use to see how many clicks you are getting.
While not ideal, it is still better than nothing.
From a selling perspective, analytics are critical to to convincing buyers to purchase your business. A savvy buyer will comb through your analytics and see trends, whether positive or negative, and be able to see the overall health of the website from a traffic perspective. It could inform the buyer of any kind of SEO penalties the site is under, or perhaps is at risk for, and it could also show some potential SEO gaps that could easily be filled such as having profitable keywords on page 2 of Google that just need a little bit more on-site SEO love to rank on page 1.
The analytic tools we most commonly see on our marketplace, and which, as a result, buyers are most comfortable with, are Google Analytics and Clicky. Google Analytics is definitely the standard choice and therefore the best option for most people, but if you are in the SEO game you might prefer Clicky to avoid allowing Google to access to the more intimate details of your website.
Create Standard Operating Procedures for … Everything
Standard operating procedures (SOPs) are really the bread and butter of making your business into a machine that can run without you being the bottleneck. The better your SOPs, the more you’ll be able to free up time to work ON your business instead of IN it.
Whether you’re looking to sell or not, having great SOPs can mean the difference between your business simply being an extension of you personally, and being a self-sustaining entity regardless of the presence of its founder. The latter’s value as a business far, far exceeds that of the former.
If possible, start off by doing every task you can yourself. Once you have done it a few times, consider using a tool like Camtasia to make small, easily consumable videos showing you doing the task. You should also write them down in some kind of document that accompanies the video.
SOPs are not only extremely useful for your team; they are also super-attractive to potential buyers down the road.
You can get fancy and house your SOPs in a Sweet Process account or you can use a simple Google Docs system to manage them all.
Here are a few common areas where you can use SOPs:
Product Selection
Product selection refers to how you choose and source the things you’re selling to your customers. Whether you’re an affiliate, a dropshipper, or you’re sourcing your own products for an ecommerce or Amazon FBA business, product selection is integral to your business making money.
For an affiliate website, it might be as simple as documenting how a virtual assistant (VA) would go about browsing various affiliate networks for new offers that would resonate with your website’s audience.
For a dropshipping business, it might be documenting an entire exhaustive research process that you have found works well for you and that you definitely want to record as a process.
Likewise with an Amazon FBA business; you might be using a product research tool like Jungle Scout and want to outline how you use it to successfully source new products.
Keyword Research
Getting the right keywords is of critical importance for any business looking to grow using organic search traffic. However, there are a thousand ways people do keyword research. Your methodology is likely to be unique enough to warrant you outlining the entire process via video or other documentation.
For big content sites, getting the right keywords is one of the most important things you will do, because many of the keywords you will target are the ones being entered into Google by people who are already wanting to buy what you have. It is some of the best traffic you can possibly get, so you want to make sure you’ve fully documented the process of how you get them to your site.
Advertising System
If you are using any kind of paid traffic (Facebook ads, Amazon PPC, Adwords, etc.), then you will definitely want to outline the methods you use on these different platforms.
Furthermore, you should include what to expect in brand new marketing campaigns. Often a paid ad campaign may initially fail, making zero money, only to be tweaked and tweaked again until it suddenly becomes a huge winner. Outlining your advertising process will help you communicate this process to someone else, whether you bring someone on internally, or outsource to a firm or freelancer.
There are other areas where SOPs can be helpful, too. Study your business and see where they could be of use. Do them correctly and you will thank yourself down the road, big time, as SOPs can save you significant amounts of time when growing and scaling your business. If you need more help on how to go about writing an SOP for your business, you can see our blog here on writing effective standard operating procedures.
Line Up Multiple Suppliers for Your Products
Another crucial step in the process of building your business for sale is to ensure that you have multiple suppliers for all of your products. Here are the reasons why:
Profit Margin Increase: We have had ecommerce sellers say flat out that they increased their profit margins by double percentage points simply by finding a different product supplier that gave them a much better deal.
Avoid Shutdowns: What happens if you only have one factory making your product and that factory suddenly goes out of business? You’re out of luck. You need backups for emergencies like this. Without a good supplier, you are effectively out of business.
Avoid Suppliers Getting Leverage on You: The supplier knows that without a product, you have nothing to sell, and they may try to increase their price over time, thinking that you will just accept the price hike. Having multiple suppliers will greatly increase your ability to negotiate for better terms.
When it comes to selling, if any of these weaknesses in your supply chain are evident, the value of your business goes down, and the risk involved in buying goes up. Selling aside, such issues make your business more vulnerable, putting everyone on board at risk.
Get Your Finances in Order
When all of your business expenses and earnings are going into your personal account, it can get a bit messy to see what is going on with the business. For clarity’s sake, and to save your own time when it comes to selling your business, you should have a separate account that handles all of your business transactions.
You can set these up pretty easily with your current bank; it is a seamless process and it will potentially save you a lot of time when you are ready to sell the business. Keeping clean financials is important, which is why having your own separate business bank account is a good starting point.
There are plenty of other ways to take care of your actual financial records that keep them neat and orderly. QuickBooks is perhaps one of the most robust solutions out there, and if you’re in a business where you have many different income streams then it is recommended you hire a bookkeeper to use this software for your business.
If you’d rather not go the route of Quickbooks and hiring a bookkeeper, you could use a bookkeeping service like Bean Ninjas. This company is great, because they are actually geared toward online businesses specifically, so they know the industry and the lingo you will be working with.
Knowing When it is the Right Time to Sell
Again, even if this seems far off, think about the timing right from the start. When will it make the most sense for you to sell your business?
There are all sorts of things that can come up during the running of a business that might change your initial answer: divorce, financial hardship, new projects you need capital for, purchasing real estate, etc.
However, it’s still a good idea to set some goals here.
Two of the biggest contributions to the actual value of your business are:
Length of time of profitability (the more months you can show a net profit, the more valuable the business is)
How much money the business is actually making and whether it is on an upward or a downward trend
Understand the Multiple: The Magic Number Behind Your Business’s Value
The “multiple” is the number your average monthly earnings are multiplied by to determine the overall value of your business. Multiples are determined by a bundle of factors, and for most businesses, range between 20 and 40 (although 40 is considered quite high). The multiple is set either by the broker you are using to sell the business or yourself if you are selling the business privately.
One key factor in determining your multiple is the period of time used to calculate your monthly average earnings. For example, a business that uses a 12-month net profit average could get a multiple of 30x, whereas a business using a three-month net profit average is going to be hard-pressed to get more than 25x.
Of course, what creates the higher and lower multiple is more complex than just length of time. That just happens to be one of the more important factors in what multiple you get during your valuation.
Some of the other factors taken into account are:
Net profits
Diversified traffic
Diversified monetization (e.g., an affiliate site might have several different affiliate networks, or even its own info product on top of the affiliate offerings)
Email list that is actually optimized and bringing in revenue for the business
Backlink profile if SEO is the main driver of traffic
While there are many more factors that go into figuring out the multiple you get, these are the primary ones to know about and focus on.
When you think about selling your business, ask how much you want to get out of it and do some simple math. What is your average net profit over the last 12 rolling months? Now, multiply that number by 20-40.
How do you feel about that number?
Your feelings should be an indicator of whether that is enough for you to walk away happily and have enough capital to invest into your next project, or whatever else it is you plan to do.
While there is a lot more to be done as you get closer to the actual sales date of your business, the fundamentals in this article will serve you well. And remember, even if you don’t plan on selling your business, these fundamentals will help you in running a far more effective and valuable business. Not to mention building your business in this way is also going to help you in seeing what kind of trends are happening within your business.
Of course, if you do decide to sell down the road, the majority of the hard work is out of the way!
There will be a part two for this article coming out shortly, but I will be here to answer any questions you have as well. Remember, to build your business as if you are going to sell is one of the number one ways to make your business more successful!
Did this article help you? Do you still have questions about being prepared for a big exit? Let me know in the comments!
The post Why and How You Should Build Your Business to Sell From Day One appeared first on Foundr.