Did you know that for most entrepreneurs, the day they sell their firm brings in more than half of all the money they will make? It's fantastic to be your boss, but there will come a time when you want to move on to your next adventure.
Billion-dollar software companies aren't the only businesses being bought these days. Investors are salivating at the prospect of purchasing a company like yours. Thrasio, an Amazon company acquirer, just set a new record for the quickest unicorn, and other acquisition businesses like Boosted and Perch are snatching up well-oiled enterprises left and right. If your numbers are correct and tight, you might be on your way to a big payout.
Last year, a record amount of trademark applications were filed, indicating that more individuals are starting businesses and brands than ever before. While some of these businesses will go on to become unicorns, the majority will fail. But what about the ones in the middle who establish a great firm and then get bought out? And what do you need for your company to be appealing to investors and receive a decent offer?
EXITpreneurs are business owners who are ready to go to any length to position their company for acquisition, and they are generally energised by the bootstrap-grow-sell-repeat cycle. If you're in this situation, you must understand how business valuations operate.
Business valuation: know how it's done
“Revenue is vanity, profit is sanity,” as Dave Bryant of EcomCrew puts it. In business, it's simple to calculate top-line revenue, and these figures are frequently quoted in case studies and other fancy marketing materials.
Buyers, on the other hand, are less interested in revenue. Profit is far more important to them. Profit, on the other hand, needs a lot more effort to calculate properly. Cash flow and the seller's discretionary profits will also be scrutinised by buyers. If you plan to sell your firm in the future, a good bookkeeper is a must-have piece of the jigsaw. When it comes to buying a firm, buyers seek four things, whether they realise it or not. These four things, which we refer to as the four pillars, are:
A firm that is less than three to five years old or operates in a quickly changing market is more vulnerable. This is to be expected, as investors anticipate a younger company to be more volatile. If you own a small business and want to sell it, make sure you have all of the other pillars in place so you can make a compelling argument. Risk considerations include a company's size, age, competitiveness, and defensibility, which refers to how high a competitor's barrier to entry is in your market.
Why should anyone give you their hard-earned money in return for this business? Consider your value proposition carefully at this point. Consider how you can make your buyer's life simpler after they take over the steering wheel. Although obvious measures like top-line revenue and profit margin are essential, other aspects such as transition ease are given more weight than you might expect. If you've identified new product SKUs that will create significant income in the future, that positioning is appealing to someone looking for a strong return on investment.
A transfer of goods is referred to as a sale. Is it possible for the buyer to manage the firm in the same way that you have? The apparent problem here is firms based on a personal brand - no one else can be you, so if you're the business, anticipate a more difficult exit and remain the name and face of the company long after it's no longer yours.
Other aspects of transferability to consider are workforce, supply chain, and workload. If you work 80 hours a week to operate your firm, a buyer is unlikely to be interested, which means they'll have to outsource more work, increasing expense and risk. If you ever want to sell your firm, make your position as transferrable as feasible.
Every entrepreneur who desires to be an EXITpreneur may get started right now. A buyer will not consider a company unless it has detailed documentation and reporting. The most crucial thing to put in place is financial paperwork, although established standard operating procedures (SOPs) and contracts are also essential.
Another reason you'll need a decent bookkeeper is that most e-commerce companies that are bought out utilise accrual accounting rather than cash accounting. Accrual accounting provides a more realistic image of actual business earnings, which is what investors will look for when deciding whether or not to purchase your company.
It may be frightening to sell a business, and many entrepreneurs miss out on one of their greatest paydays because they never execute on their exit strategy. Put these four foundations into action right now, and you'll be on your way to a spectacular sale.