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gazette
Issue # 210 (03-17-2004)
Get Over it ? |
| In the Crosshairs |
|
So, you have decided to sell your business, now what?
Part 1 - Pricing
So, you have decided to sell your business, now what? Not only is that the title of this article series, but it is also the main question any business owner needs to answer if considering selling a business. Arriving at the decision to sell is difficult enough, (especially true if further complicated by ownership structures, family involvement and employees that may count on you), without adding questions about pricing, process, and of course, legalities. We will touch on these all a bit later and throughout the four parts of this article - first though, pricing!
OK, you have made the decision to sell your business and the first thing that needs to be established is the asking price. Much like selling a house, the asking price is the main sales and marketing arm of that "product" and can not be arbitrarily arrived at. If priced well below where it should be, two things will most likely happen: First, you will not sell the business for the profit you should and you and or your co-owners/shareholders have been poorly served. And second, you might find that you will have more trouble selling it than if priced appropriately higher (please note, this does not mean all prices should be raised - quite the opposite in most cases). Perhaps you are thinking I'm working on a bit too little sleep at the moment (and I am), but let me explain. If priced too low, it will appear to most buyers that the deal "must be too good to be true." And we all remember what we have been told about that. So seller beware, low pricing may actually scare away otherwise interested buyers. Of course, the opposite is also true and if priced too high - everyone will run for the hills. Why? Because the seller appears to be greedy, inflexible, or worse - crazy! Seriously though, an overpriced property is not going to help you achieve your goal of finding a buyer. I have had sellers arrive at extremely high prices and when I questioned them on their valuations the answers are usually something along the lines of, "I want to retire on that" or "Well Google is going to go public and raise the market" and so on. And while those might be true (except the Google comment unless of course you are Google) and you can price your sale however you want, that does not mean you should and it certainly does not mean you will find a buyer. Now that we have discussed the importance of pricing and what not to do, let me next say there is no exact science or formula for coming up with the right number. Are we having fun yet? Much like antiques, baseball cards and other collectibles, the sales price is ultimately an amount that a buyer is willing to pay and that a seller is willing to accept. Sounds simple enough right? The trick is putting the sale in an appropriate asking price range so that you will attract the correct potential buyers. And how do we do that? We use guidelines, experience and "rules of thumb." One of the most popular "rules of thumb" being used today is the Cash-flow or Revenue Multiple Method. Essentially you multiply your annual net earnings by some multiple of x and you have your price range. When profits are not usable (often true in high-tech companies per heavy startup and R&D costs), a similar method is applied using the gross revenue or gross profit numbers. Both buyers and sellers widely use this method because of the relative consistency and measurability (similar to P/E ratios for stock trading). Also for buyers, they can easily determine their ROI (return on investment) as the multiple can be viewed in terms of years. For instance, XYC.com has annual net profits of $500,000 and they will start with the range for a low-end of two times (or "2 X" as you will often hear) and an upper range of six times. This will give the business a wide, but an appropriate asking price of $1,000,000 to $6,000,000. Ultimately you will want to settle on something more specific but you are now in the ballpark. How do you choose your multiple? That requires a bit more thought, but again some basic guidelines that will help for selecting a multiple: 1x = electronic sales which have razor thin margins, little room for error no entry barriers or perhaps the business is very flat or even declining (or very poorly organized and difficult to prove financials). 2-4x = b2b and b2c ecommerce retail (higher multiples for proprietary or exclusive product lines and marketing channels). 4-6x = ISP (though traditionally these are reviewed at a multiple of revenue), web hosting and other businesses where there are residual revenues monthly or annually, established client base and or high barriers to entry. Can prices go below or above this guideline? Absolutely, and the reasons why vary greatly (from the assets included, to the condition of the business at the time of the sale and the terms of the sale, etc.). That being said, the vast majority of sales will occur at this price range and the average would be right in the middle. So start the sale of your business off right by putting the price in a solid asking range and then be prepared to discuss how you arrived at that number. From there, it's in the hands of the buyer and seller ultimately and what one is willing to pay and the other is willing to accept as before mentioned. Next up we'll discuss preparing the business for the sale. Good luck and stay tuned for the next addition. About the Author: Ross Whittaker is a Managing Partner at eBizBrokers, Inc., an e-business specialty brokerage firm located in Waltham, MA. For further inquiries or questions, please visit Ross in the "I Want To Sell My Website" forum: http://www.virtualpromote.com/apps/searchengine.forums/action::topiclist/forum::buy-my-website/ |
Read the In the Crosshairs section from the Last Issue or in the Following Issue
JimWorld Member comments and feedback ...
Posted On: 03/17/2004 06:09
Posted By: jcokos
Posted By: jcokos
As noted in last months gazette, this is the first in a 4 part series. Ross will be available here on the forums to answer any questions related to the above topic (pricing) in this thread. Please leave other "website selling" questions and issues in new threads. It's important to keep this one "on topic", as once we're all done hashing out ideas, questions and answers, I'd like to make this a "Sticky" topic in this forum for future reference.
Posted On: 03/17/2004 09:15
Posted By: mbttb
Posted By: mbttb
Hi Ross,
Thanks for your very informative article - I look forward to reading the future instalments.
Ross, could you please give your opinion regarding a suitable multiplier rate for sites that are content based, with minimal overheads, that derive revenue from advertising and from commissions gained on referrals that generate sales or leads for an external company i.e. traditional affiliate program type revenue.
I guess that's a "how long is a piece of string" type question i.e. factors such as proportion of revenue that is residual commissions (which usually aren't transferrable to a new owner anyway) in comparison to "one-time" payouts on sales, but I'm just wondering whether the multiplier would be, generally speaking - on the low end or high end of the scale?
Regards,
Michael
Thanks for your very informative article - I look forward to reading the future instalments.
Ross, could you please give your opinion regarding a suitable multiplier rate for sites that are content based, with minimal overheads, that derive revenue from advertising and from commissions gained on referrals that generate sales or leads for an external company i.e. traditional affiliate program type revenue.
I guess that's a "how long is a piece of string" type question i.e. factors such as proportion of revenue that is residual commissions (which usually aren't transferrable to a new owner anyway) in comparison to "one-time" payouts on sales, but I'm just wondering whether the multiplier would be, generally speaking - on the low end or high end of the scale?
Regards,
Michael
Posted On: 03/18/2004 09:58
Posted By: jdsalr
Posted By: jdsalr
hi Ross,
Can I use these articles on my site [url]http://www.workathomecommunity.com[/url] ? I feel they would add valuable content to my site. Thanks.
Can I use these articles on my site [url]http://www.workathomecommunity.com[/url] ? I feel they would add valuable content to my site. Thanks.
Posted On: 03/18/2004 10:02
Posted By: ebizbrokers
Posted By: ebizbrokers
Hi Michael,
Thank you for your posting - good question (and you partly answered it with regard to one-time payments v/s recurring, etc. etc.).
I would say straight affiliate sales would be on the lower end of the range (buyers will argue that you don't "own the customers" and that is the reason for a lesser valuation). However, content can be very very valuable - check out the recent purchase of military.com by Monster for $35M!
If you own the content, and can at least somewhat claim your customers (via signups, repeat visitors, etc.) then you valuation will certainly climb into the upper range. Just stay away from straight copy content and affiliate sales (have some of your own advertising sales where you own the client and you will instantly be worth a lot more).
Hope that helped and Best of luck!
Thank you for your posting - good question (and you partly answered it with regard to one-time payments v/s recurring, etc. etc.).
I would say straight affiliate sales would be on the lower end of the range (buyers will argue that you don't "own the customers" and that is the reason for a lesser valuation). However, content can be very very valuable - check out the recent purchase of military.com by Monster for $35M!
If you own the content, and can at least somewhat claim your customers (via signups, repeat visitors, etc.) then you valuation will certainly climb into the upper range. Just stay away from straight copy content and affiliate sales (have some of your own advertising sales where you own the client and you will instantly be worth a lot more).
Hope that helped and Best of luck!
Posted On: 03/18/2004 10:46
Posted By: ebizbrokers
Posted By: ebizbrokers
Hi jdsalr,
Absolutely! Looks like a nice fit (nice site too btw). Thank you for asking and for your interest.
Absolutely! Looks like a nice fit (nice site too btw). Thank you for asking and for your interest.
Posted On: 03/18/2004 11:25
Posted By: ttoker
Posted By: ttoker
Hey Ross,
Thanks for your valuable article.
I find it hard to believe that a business bringing 500g net profit is worth between 1-6 M. That is one hell of an investment where you'll make your money back in a couple of years and start making half a mil every year...There should be a lot of risk involved in that business or else my basic math says 500g net profit company is worth a lot more than 3-4 mil.
Another question, what is the best place to look for qualified buyers? Posting in forums with a message saying 'Business for sale - great deal' doesn't seem like a good idea to me.
Thanks for your valuable article.
I find it hard to believe that a business bringing 500g net profit is worth between 1-6 M. That is one hell of an investment where you'll make your money back in a couple of years and start making half a mil every year...There should be a lot of risk involved in that business or else my basic math says 500g net profit company is worth a lot more than 3-4 mil.
Another question, what is the best place to look for qualified buyers? Posting in forums with a message saying 'Business for sale - great deal' doesn't seem like a good idea to me.
Posted On: 03/18/2004 03:57
Posted By: ebizbrokers
Posted By: ebizbrokers
My pleasure ttoker,
Well, ultimately it's worth what you can get someone to pay for it (also depends if you want all cash or are willing to take financing, etc.). What is that 500g net was flat or sliding down? Or only recently proven to be at that level (i.e. is it a spike). What if there were NO barriers to entry? Would you pay a lot for a business you could start and be at that point in less than a year or two?
Conversely, $6M for a $500k site is far from a steal (and really depends on what is included). Per a recent Inc.com/Magazine article, the average multiple is 6.3 for Mid Market deals (less than $100M and more than ~$10M). Sure some are more...but some are obviously less - but that is the national average (and those are big solid companies obviously and they are only at that number - smaller less proven can't do better for the most part).
That's my 10 cents worth anyway ;-)
As for finding buyers - there is no one place or answer as they are potentially every where so we do a little of this and a little of that. A forum posting - you never know who you might meet!
Well, ultimately it's worth what you can get someone to pay for it (also depends if you want all cash or are willing to take financing, etc.). What is that 500g net was flat or sliding down? Or only recently proven to be at that level (i.e. is it a spike). What if there were NO barriers to entry? Would you pay a lot for a business you could start and be at that point in less than a year or two?
Conversely, $6M for a $500k site is far from a steal (and really depends on what is included). Per a recent Inc.com/Magazine article, the average multiple is 6.3 for Mid Market deals (less than $100M and more than ~$10M). Sure some are more...but some are obviously less - but that is the national average (and those are big solid companies obviously and they are only at that number - smaller less proven can't do better for the most part).
That's my 10 cents worth anyway ;-)
As for finding buyers - there is no one place or answer as they are potentially every where so we do a little of this and a little of that. A forum posting - you never know who you might meet!
Posted On: 03/18/2004 08:32
Posted By: jdsalr
Posted By: jdsalr
Thanks Ross. It will get good exposure, and should be very helpful. I look forward to the rest!
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