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WES S03E04: Preparing To Sell Your Online Business (Part 2)

Justin Cooke February 15, 2017

Subscribe to our VIP LISTIn last week’s Part 1 of this 2-part series, we looked at the preliminary steps you’d want to take if you plan to sell your business – from getting started all the way through 12 months out.

This week, we’ll cover the process from 9 months out all the way through the day you list your business for sale.

We’ll dig into growing your revenue, cutting expenses to maximize your earnings/margins, and putting teams and process in place to maximize the value of your business.

The goal with this 2-part episode is to give you a blueprint you can use to list (and ultimately sell) your business for the best price.

If you’re thinking about selling your business in the next 12 months, you’ll definitely want to give this one a listen. You’ll likely pick up a few tips you can use along the way.

 

 

Fan of the show? Please stop by iTunes and leave us a review! We’ll give you a shout on a future episode and would love the feedback!

Have a question? Feel free to use Speakpipe to record a question and we’ll do our best to answer it on an upcoming episode of the Web Equity Show.

Listen To The Full Interview:

What You’ll Learn From This Episode:

  • 9-6 Months Out From A Potential Sale
  • 6-3 Months Out From A Potential Sale
  • 3 Months Out From A Potential Sale To Listing

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Featured On The Show:

 

Justin Cooke:                     We can argue it for you as a broker, but sometimes buyers argue back and it becomes a negotiation point, which is not something you want.

Speaker 2:                           Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show where thousands of successful entrepreneurs go to learn about buying, growing and selling online businesses. Your hosts, Justin Cooke and Ace Chapman share their real life advice, examples and expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.

Justin Cooke:                     Welcome to the Web Equity Show. I’m your host, Justin Cooke, and this is season three episode four. We’re talking, Preparing to Sell your Online Business. I’m with my cohost, Ace Chapman. Ace, what’s going on buddy?

Ace Chapman:                   What is up man? We are today getting into part two of our episode on Preparing to Sell your Business. We’re going to go from where we ended last time at the 12-month point to nine months out, six months out, three months out. This is going to be a great episode.

Justin Cooke:                     Yeah, man. We’re going to walk through each individual, kind of, period and what you should be looking at as a seller, what you should be thinking about as a seller. I think it’s great. In our last episode we ended at the 12 months, but we’re going to get down to the nitty gritty, get you to actually listing your business.

Ace Chapman:                   Yeah. When you go from that last episode and you’re looking at 12 months, it’s … you’re doing a lot of the kind of things, working on the business to prepare it to sell. It’s interesting, and I love how it breaks down. Three months out when you kind of think you’re winding down, it’s actually a lot of work, as we just went through. What needs to be done three months out? It’s still a lot of work. Today we’re going to get into that. I think for folks that are getting ready to sell their business, it may be surprising, but it’s good to be prepared because I buy businesses from people all the time who don’t do this work, and we don’t give them as good a deal as we would if they did do this work.

Justin Cooke:                     Yeah, for sure man. When you say three months out, and the funny thing is you may actually be nine or more months out. We’ll get into why that is a little later in the show. Before we do that man, let’s do some listener love. We’ve got a five star iTunes review buddy from JWB Browns with awesome insider info. Ace, an insider buddy. How’s that feel?

Ace Chapman:                   It feels good.

Justin Cooke:                     “I have a set of very valuable information you can’t really find anywhere else. It’s just a huge asset for both buyers and sellers. Thanks Justin and Ace for putting this out there.” Well thank you man, appreciate the review. If you’re listening to this show and you appreciate it as well and you’re a buyer or a seller, or a potential buyer or seller, and you want to give us a shout, make sure to head over to iTunes, give us a view. We’d really appreciate it. We’d love to give you a shout on the show. Kind of nice Twitter mention from Mark. Had a quote from you, buddy. This is becoming a habit for our show. It’s always the Ace quotes. I don’t know what’s going on here, but you tend to rock it with podcasts interviews, and [inaudible 00:03:06] this is a podcast interview [inaudible 00:03:07]. Excellentstashexpected.com, episode 129, and the quote is, “Sometimes just being bold and asking for the outrageous can get it done.” Ace, I got quote envy.

Ace Chapman:                   This is something that surprises a lot of people. It can go both ways. It can get it done, but it can also get you cursed out. You got to be prepared for both.

Justin Cooke:                     Yeah. What do you mean by being outrageous? Being bold and asking for the outrageous, like a ridiculous deal? I mean, is this kind of like if you don’t ask for it, you won’t get it? That kind of thing?

Ace Chapman:                   Yeah, absolutely. If you don’t ask, you won’t get it. You don’t know what the person on the other end of the phone, or on the other side of the negotiation table really wants or really expects, and trying to guess probably isn’t smart because you just have no idea. A lot of people spend a ton of time trying to figure out, “What do they want? What do they want? What’s their bottom line? What are they going to take?” The best way to find out is just to throw out something, and if you’re going to throw out something, don’t start at your best offer for sure. It’s best to start out with something that may be just completely outrageous.

Justin Cooke:                     Yeah, it’s interesting. What do you think about the idea that from … Okay, the sellers sometimes they … [inaudible 00:04:29] hammering this quote home but, some of the sellers, it’s their baby, it’s whatever. If you come in with a low ball offer, they get offended to the point of potentially not doing business for you. Is that just like you try … Well, I mean, I know you, you’re a pro, so you’re going to say it in a nonthreatening way, you’re going to do it more matter of factly than a personal attack, which you should as a potential buyer making an offer, right?

Ace Chapman:                   Yeah.

Justin Cooke:                     Have you ever had a situation where they’re just like, “No, I won’t take that. In fact, we’re just not doing business at all. I won’t take that.”

Ace Chapman:                   Yeah. I have actually literally been completely cursed out and kicked out of the house and working with a potential seller. That’s happened, but I’ve also seen where that’s happened and then they come back and we still get a deal done. This is important for kind of the buyers listening in. When a seller does that, you do have to understand that their baby, and they may take it personally, but you want to stay professional, you want to still stay connected, you want to let them know, “Hey, I understand that you’re feeling that way,” and a lot of times you still get the deal done.

Justin Cooke:                     You’re such a vulture dude. You’re such a vulture. You remind me the, I don’t know, those guys that go for the foreclosure deals. I know you didn’t buy good businesses, but you know what I mean. Those guys that go on there like, “Look, you’re going to lose your home. You might as well sell it to me.”

Ace Chapman:                   Yeah, it’s very interesting. It’s a very delicate thing and yeah, that deal where I got kicked out of the house and cursed out. He invited me to his house to talk about it and it didn’t go well at first, but then we still got the deal done later and we were able to work it out.

Justin Cooke:                     I’d say, by the way, if they get … All right. The guy kicked you out of his house, cursed you out or whatever, well that, I mean, may just be a sign that you shouldn’t do business. [inaudible 00:06:13] came back to you later and like, “We’re still willing to negotiate,” and you were willing to work with him, that’s fine. That’s actually not such a bad thing either. They come back to you and they’re cursing you, they kick you out, and they’re like, “Don’t come back [inaudible 00:06:22] whatever.” It’s like, look, you were probably, because you’re buying a business, you’re going to be stuck working with them to some degree. There’s a turnover period, and if they’re going to treat you like that now maybe they’re not so great to work with and it’s good to know that right now before you go any further.

Ace Chapman:                   Yeah, and the last thing I’ll say on it is, it’s a win-win. If they don’t come back to you, then it’s like, “Great. I didn’t want to deal with that person.” If they do, even a higher level of respect because it takes a tremendous amount of humility to come back and say, “Hey, you know what? I apologize. Went too far. Let’s see if we can work this thing out.”

Justin Cooke:                     That’s cool man. Yeah, that makes sense. That’s some, what is it, John [Topher 00:07:05] kind of stuff right there.

Ace Chapman:                   Ninja.

Justin Cooke:                     Yeah, right. All right man. Let’s get into this episode. We’re talking season three episode four, Preparing to Sell your Online Business part two. Let’s just jump right into it, man. Nine months out from a potential sale. Let’s talk about some of the things you just look at, some of the questions a seller should potentially be asking themselves. Just a quick note here, you’re inside of the trailing 12 months of earnings, and what that means is when you’re going to sell your business, it should be based on previous earnings in general. You look at a trailing 12 months. You’re inside of that hot spot right now. Any of the changes you make or don’t make in this period, to your profit month over month, is going to affect the valuation. It could affect it heavily. Everything you do, keep that in mind because it is heavily going to impact your valuation.

                                                The first thing we should look at, which is just kind of obvious is, you should start to really maximize your earnings. Now you might ask me, “Well, who isn’t maximizing the earnings all the time?” Well, the people that are in the growth stage. If you are now inside that 12 months, definitely the nine month mark, you need to stop thinking about growth and focus on earnings, focus on maximizing your profit, so that means, if you’ve got some conversion optimization going on and a lot of split testing and you’ve got some loser iterations in there, you need to just start focusing heavier on the winners. If you’ve got ad spots out there that are doing well, double down on them. If they’re not doing well, cut them. If you have any traffic leaks on your site, [inaudible 00:08:38] you have a Amazon affiliate site, and you’re linking out to a bunch of other things, you may want to drop those links. You may want to add more links to additional products. You may want to add some ad spots. If you have using an AdSense monetization method. You may want to add up locks up to the maximum allowed or you may want to maximize your email list. If you have an email list, you may want to start reaching out to past customers or potential customers, and really pushing them to a sale.

Ace Chapman:                   Now this next one goes to that same point, which you want to maximize the bottom line in the business, but you also need to continue with the long term growth projects. You don’t want to cut out things that are kind of in the best interest of the business long term. Doing things like, “Oh, I’m going to sell all my inventory at the rock bottom price and do things that may increase the bottom line but hurt the business long term,” that’s not smart, for a couple of reasons. Number one, you want to sell an asset to somebody that does have as much longevity as possible and you want to make the case for that. It’s not just that you’re not going to pull those kinds of things and you don’t mention it to the buyer. You want to let them know, “Hey. Yeah, we could have done things like sell the inventory but want to hand over a business that’s going to be strong for you.” The second part of that is you don’t know when it’s going to sell. You pull some sneaky move that maximizes that bottom line and then six months later the business hasn’t sold and you’re stuck still having to go back and make that investment into the business anyways.

Justin Cooke:                     Yeah. I think a good example of this should be like an FBA business where they have kind of the product discovery team. Say they have one or two people that are constantly looking for and testing out new niches and products, and you’re like, “Oh, well I don’t need them anymore because I’m selling the business. Let me fire them, let me cut my costs down and improve my profit margin.” Well, that may temporarily boost profits but that’s not really in the interest of the business long term and, as you said, it may take three months, six months, even nine months, 12 months to sell your business. If you’re not doing product discovery during that period, and you start to decline again, that’s not a good position to be in.

                                                Third thing I want to mention here is, do not spend any money on exploratory marketing efforts. The thing is, if you’ve got paid ad words channel that’s working really, really well, making you a great return. I mean, you’ve got a paid Facebook strategy and you want to start testing out Instagram, you want to start testing LinkedIn or something like that, it’s not really a good time to do that. Now, as a seller’s broker, as someone who lists and sells businesses, we sometimes make the case, right? We make the case when we’re listing your business. We say, “Look, these expenses aren’t valid because we were testing new marketing strategies. We want to continue testing all the way through the sale. Take off this $3,000 a month in spend. We are putting on Instagram because we are just tossing it out.” But sometimes buyers come back and they go, “Well, you need to do that to continue with the business. I’m not discounting the business, that $3,000 a month in spend, I need to include it,” and so from their estimates, they give you a lower valuation.

                                                Even though we as brokers will sometimes say, “Look, it should be cut out. Buyers can use that as a point of leverage or negotiation point.” You don’t have to even be in that position by not having that spend, I think that’s a good move. Now, we can argue it for you as a broker, but sometimes buyers argue back and it becomes a negotiation point, which is not something you want.

Ace Chapman:                   There are some additional expenses, and this is the next point, that you can get rid of and that can help the bottom line. You have things that are personal, you have things that may not be necessary. You may even make donations out of a business. We’re doing a deal right now where it’s a part of their business model to send a donation as a part of each sale. In that case it’s a part of the business we felt like, and so we didn’t include that because they are using it in their marketing and that’s been a part of the business. But on the backend, if you’ve got a cause that you’re passionate about and you were making the donations, that’s now something that you don’t need to include or your trip to Tahiti that you took with your wife or your husband, that’s now something that will drop to the bottom line. Those are the things that you want to get rid of and then obviously don’t add additional expenses as you’re going through the process where now you have to explain like, “Oh well, this isn’t really including the business. Once you decide to sell, and you’re not [inaudible 00:13:23], you’re not [inaudible 00:13:24] away from it, you want to cut out all of those personal expenses.

Justin Cooke:                     Yeah, there are always those kind of questionable personal expenses that we can usually argue with a potential buyer and most savvy buyers get it. But again, you don’t want to give them a point of leverage. That trip to Tahiti where you discuss business on the plane, and then just relax the whole time, and try to call it a business expense. Well that may come back to bite you if you’re inside of your last 12 months. Just take it out of the business, pay it personally. A lot of people, and I guess the point is … We don’t do this with our business [inaudible 00:13:54] do. They use their business as kind of their personal cash machine. They have … the blend between personal and business is just, it’s all the same to them. When you’re coming inside the 12 months you want to break that out. Keep your personal expense personal.

                                                Another thing is if you have inventory, you’re going to want to keep up on the inventory that’s required for growth. If generally you have a thousand units of your main product x or whatever and you add an additional 10% units per month or whatever, just continue to do that. You buy 1,000 in month and buy 1100 the next month and so on and so forth. Continue to do that. If you buy more inventory and you think, “Look, I’m going to get huge value because I’m going to get …” you’ll be able to sell that inventory for profit or whatever. No, that doesn’t work. They’re going to be buying it at wholesale generally, so you’re not actually adding to the valuation of the business in any substantial way.

                                                Also, if you overbuy you’re not really … it’s not going to take away because the way we determine expenses generally is accrual based. If you bought a thousand … Say you had a real big buy, right? It was your big buy for the quarter or for that six month period. You’re not going to have a negative profit month in January, if you bought it all in January. [inaudible 00:15:18] we’re gonna look at the cost per item and then look at how many items you sold that month and use it that way for expenses. Now it’s cash based for your profit and loss. We’re going to do cash based for profit and loss. We are going to use accrual for expenses. It’s not going to help or hurt you either way. Just continue to maintain your inventory as you normally would, and when you’re transitioning to the buyer, when you’re actually going to sell the business, make sure that there’s enough for the buyer to take over, be comfortable and keep up on everything. Don’t have them run out of inventory.

Ace Chapman:                   Yeah, and the real key here is that you want to continue the business as it is. One note that I would say on the inventory is, if you can adjust it so that isn’t a huge purchase each year and there’s this huge thing just, because that can be overwhelming. I’ve seen it from the buyer’s standpoint where they’re like, “Oh my goodness, every September I’ve got to spend $70,000 to buy inventory,” and it’s just about the number even though, just like Justin explained on accrual basis, the business is still going to sell the same multiple and that kind of thing. That can just intimidate people-

Justin Cooke:                     Is it scary?

Ace Chapman:                   Yeah. Yeah. That’s something that for some reason, just, if you split out a couple of purchases, splitting that into 35 or splitting that in four ways that makes the … if it works for your business. That’s just something to think about where, it doesn’t affect the cash flow, but it can be a psychological impact for the buyer for them to just think, “Oh. I got to write the 70,000 cheque,” it’s like, “Yeah, it’s in the business,” but they’ve got to keep that in the back of their head.

                                                The other thing to continue is, you want to make sure that you’re doubling down on any positive ROI growth channels. If you do see, all right, now we’ve cut out the things we’ve tested that aren’t working, but here’s this other opportunity that maybe we could put some more money into and drop some more money to the bottom line. Then you want to do those things because with these businesses, unlike like a lot of offline deals, people are used to adjusting the sales price. Offline, if a business all of a sudden explodes in the middle of negotiation you’re going to get a lot of resistance trying to justify the increase. These days, with Internet businesses, people are used to those multiples, even on a monthly basis like, “Hey, we’re adjusting it up or down kind of based on the last three months average,” and that kind of thing. Continue to do things to grow the business.

Justin Cooke:                     I got a quick question for you on the first thing you mentioned. You said that a once a year kind of inventory purchase is a little more scary than a quarterly or a monthly purchase of goods or inventory. Let me ask you this. If on the profit and loss, if you’ve laid out, let’s just make the math easy and say that I did $120,000 purchase at the beginning of the year. It was like the inventory for the entire year, and the profit and loss, if I had it, just let’s say $10,000 a month, which would probably just make it cleaner and maybe more palatable for someone just looking into business initially, and then they were able to match it up with the books and bank statements showing the $120,000 spend in one month. Would that be acceptable or would that be freaky to a potential buyer you think?

Ace Chapman:                   Yeah, I think they’re going to … Obviously it depends on how savvy the buyer is. But what I’m going to want to know is, when is the purchase made? How much are the purchases? Really I’m going to look at the actual invoices for that manufacturer, and I want to see … that’s what’s going to tell me a couple things even further than just this, but taking this aspect is going to tell me what that bill was and when they’re paying it, when the order was, that kind of thing. I know in this business when we need to set back a certain amount of money and make sure that we got money for the inventory, because that’s the real thing. For the average person that is spending a ton of money on the business, they don’t have a lot of money that’s just sitting back to write another huge check. I’d hope people that get into a deal and they realize, “Oh, I’m at the cycle where I’m three months out from $100,000 purchase and I’ve made 30 from this business and now I’m trying to [inaudible 00:19:28] it out.”

Justin Cooke:                     Well what’s crazy to me? I mean, anyone who is able to so easily, kind of, estimate their inventory a year out, and buy all those products … What? That seems really strange anyway, and also scary from a seller’s perspective. How do you know you’re not buying dead inventory? Who knows that niche isn’t going to go away, or the interest in that product or whatever isn’t gonna change and they’re going to be buying other products. It’s a little scary to be doing that anyway. You might want to break it down a little more, unless you’re getting some super sweetheart deal by buying in bulk at a certain level. Even then it’s a little scary, but if you’re getting some super sweetheart deal, that could be the reason I guess, but yeah, that would be a little odd anyway.

                                                The next point man, continue to double down on any positive ROI grow channels, and we said this before, but by now you should have already cut out your exploratory marketing, not starting any new exploratory marketing. You should take in any other channels you were testing, and not really seeing an ROI yet. You should have thrown that money into the positive ROI channels. You should, if at all possible, if you’re putting in a dollar and spitting out three or four, you should really be maximizing that by adding to ad spend, maximize the ROI on that because it’s going to definitely affect your valuation.

                                                One other thing too is to watch, especially paid traffic channels, very closely. You want make sure that you don’t start losing money on those. Again, it’s really hard to argue, especially for ones that are delivering an ROI that, “Oh, we didn’t need to spend that much. We were just spending a little extra and now buyers generally don’t buy that.” You want to make sure that you’re profitable on all of your paid traffic channels.

Ace Chapman:                   Yes, this is the time to make sure you are profitable.

Justin Cooke:                     All right man. Let’s talk six months out from potential sale. Should have switched up a bit. Now we are not only inside of the trailing 12 months, we’re inside the six months. Sometimes 12 months aren’t used, trailing 12 months, sometimes it’s six months. Three months [inaudible 00:21:21] kind of a minimum, but six months is used pretty often if there is fast growth or we’re heavily declining. If it’s fast growth business we might just use six months, so you’re definitely inside of that now. Here are the things you want to do. First thing, continue the process of removing yourself from the day to day and this is important, especially if there are real technical requirements or there’s real specific information or knowledge required. Let’s say that it’s like very detailed medical information.

                                                There’s content marketing. You’re writing blog posts or you’re getting guest posts or whatever and it’s very detailed and specific medical information needed and you are a nurse or doctor or whatever. When you’re writing that content, that’s going to be challenging for a buyer because you’re probably not going to have a buyer that’s a nurse or a doctor. Replacing kind of your knowledge there and having someone else add that content would be helpful. If it requires a programmer and you’re doing some of the programming, you’re doing some of the technical work, hiring someone, making sure they’re ready to go and able to go with the sale, I think is really key.

Ace Chapman:                   Yes, that’s something that is very annoying is when you get into a deal then they’re like, “Oh yeah. We have this VA and there were doing this. We have this employee who’s doing this,” and then you’re like, “All right, great. Are they coming with the business?” It’s like, “No, they’re not. I want to take them with me because they’re kind of helping out on another project that I’ve started.” Part of it is, make sure that you’re hiring the outsourcer, but then make sure that you’re not using them in your next project or … They’re just people that whatever the case is, they’re going to want to work with that buyer.

Justin Cooke:                     We had a business, we sold just last quarter, that was, it was a few hundred thousand dollars and it took us a long time to sell. I forget exactly how long because more than six months, maybe nine months or so. The problem is that the seller was a tech guy and he was a programmer and didn’t have someone full time or really kind of in place. He was doing some of the work. He had one guy, but he was doing a lot of the work or directing a lot of the work. Finding a buyer that was just able to do that was challenging. We have a big audience and a lot of buyers, so we were able to kind of work through them, but I mean, first off they have to be a match for that. They have to be able and willing to do it. Then everything else has to fall in place too. There has to be the right business, has to be at the right price range, has to be a good fit otherwise. It’s much more challenging. Would’ve have been a much easier sale if he had someone kind of doing this work or kind of managing the process there.

Ace Chapman:                   You also hear, you want to start making sure that you’re structuring your SOPs. When I say structuring, we talked about in the last episode when it comes to SOPs, you can begin working on different process in the businesses, once you’ve got those figured out, and you’re putting them into the bigger document, that is your SOPs. Now it’s time to make sure that they’re easy for some stranger who knows nothing about your business, to come in and be able to use those SOPs to run the business. That means grouping them by department, grouping them by skillset, grouping them by different areas in the business. It’s one of those things that is some work, but when I say it will pay you back, whether it’s by the sale happening very quickly, by you getting a higher multiple or just finding a great buyer for your business, and probably all three. It’s worth the work.

Justin Cooke:                     Yeah, this is totally true. To be honest with you Ace, we’re kind of in a position where we haven’t done that for Empire Flippers. We use SweetProcess for SOPs. If you go inside SweetProcess right now, you’ll find it’s just kind of a jumbled mess, to be honest with you. There’s a ton of SOPs, they’re good and detailed and well written and our team uses them, but they’re not broken down by department, or the naming convention isn’t great, or they are not grouped great. We’re actually going through and doing that now. One of the reasons for that is we’re hiring customer service apprentices. We want to bring some people on that we need to train, and because we need to train them, we need those kind of organized because, just like a buyer, right? They’re going to need to be able to come in and … It needs to be legible for them to be well trained and to understand the importance and why the SOPs are there. We’re going to group them by, these are the vetting SOPs, these and the customer service SOPs, these are the sales SOPs, to really kind of tighten it up a bit, and name them better. That’s another problem we have. Yeah, we need to do a bit of that ourselves, well, we’re working on that right now.

                                                The third point when you’re six months out or less for a potential sale, is to reach out to your competitors. If you haven’t done this already, you haven’t connected with them. It’s the time to do that. You want to make some introductions. Maybe there’s a way for you to work together. Maybe you can add some revenue and ultimately profit or [inaudible 00:26:13] make your business more profitable by working with your competitors. But even if you’re not doing that, maybe you can open the door for a potential strategic buyer. Maybe they have the cash sitting around. Maybe it’s to their advantage to buy you, and maybe they’ll buy you at a higher multiple than a portfolio buyer would look to spend on your business. Now, not necessarily, there’s no guarantee of that, but it’s worth reaching out, at least asking the questions. Worst cases you end up with a good collaborative partner.

Ace Chapman:                   Yeah. One of the things that I think is a great intro, here, is reaching out with a little bit of flattery. Finding something in their business that you like or some about them or whatever. Because sometimes people are going to be a little apprehensive about a competitor reaching out to them. But, when you tell them there’s something that you respect or love about their business, a lot of times that goes away.

Justin Cooke:                     One of the last thing you want to do six months out is you’re going to want to look for any additional ways to cut expenses and or boost revenue. We keep hammering this home because it’s so important to the valuation ultimately for [inaudible 00:27:17] price. You want to head into the sale on an upswing, right? If you were not doing this, if there’s any kind of little expenses that are just kind of recurring and you just haven’t bothered to get rid of them, now’s a good time to start doing that. Again, even if your revenue is flat over the course of 12 months, but six months out you’re able to cut some expenses, you’re able to increase your profits and if I’m graphing that out, your profits grew six months after the business.

                                                It’s a great way, I think, to kind of finagle the chart’s a bit to make it look like there’s more profit over time, and it’s not untrue because it is. You actually cut those expenses. Even if revenue was flat lined, you can be improving the margins and ultimately that will help your valuation, give you a better multiple, and it’ll make it less likely that buyers are going to give you some low ball vulture offers like Ace, when he comes [inaudible 00:28:08] his vulture deals. No, but, you know what I mean? If you’ve got this business that has great trailing 12 months, they been growing revenue even slightly, but they’ve even improved their margins and it’s a super solid business. You’re like, “Oh God, we’re going to have to pay for it. It’s a good one. It’s a good business. I’m going to buy it. But, I’m going to pay a bit more for this one.”

Ace Chapman:                   Yeah, that’s exactly what we’re doing this episode, or this series is, telling people exactly what they need to do to make sure that I have no right to come in and [inaudible 00:28:39].

Justin Cooke:                     That’s exactly right. This is the, how do you defeat Ace series. Let’s talk three months out for a potential sale. One of the things you want to do three months out is to review your previous nine months profit and loss. Over the last nine months [inaudible 00:28:57] trailing 12 months. Were there any gaps or depths? Was there a down month in traffic? Was there a down month in revenue or profit? You want to make sure that you remember your reasoning there. What was the reason for that? Why did that happen? What’s the likelihood that it will happen again? I mean, just have an answer to that. It’s also a good chance for you to kind of get a grasp on what your trajectory is looking like. Make some adjustments if you need to, but just kind of review and also a way for you to make sure you have answers to any of the potential questions. You want to be aware of those so you’re able to answer them by potential buyers.

Ace Chapman:                   Yeah. Your preparation here, really with any issues, whether it’s the gaps in earning or it goes down, whatever, the more prepared you are at this point to answer all the questions about the business, the better. You also don’t want to stop running the site. You’ve got to continue doing the work, and this is even when you get it under contract, so, until the very end. It really continues even in the months after when you’re helping the buyer and training and all that, you still kind of want to treat it like your business. Don’t stop working. Don’t let sales decline, don’t abandon the business just because it’s under contract and really even just because it’s sold.

Justin Cooke:                     This is so frustrating, Ace. When we list a business and maybe they checked out. They sort of checked out two or three months before actually taking it to us and getting it listed, but there hasn’t really been a problem yet. Let’s say it takes a little longer to sell, we’re like a month or two months in or whatever, and it just start declining and it’s in this … because it’s based on stuff they didn’t do four or five months ago at that point. Now you’re going to get low ball offers. Now they’re going to be disappointed because it was listed for more. Now it’s … every month the price is going down. It’s less and less and it’s a really bad situation to be in. We hammer this home with our sellers, we remind them multiple times. We’ve mentioned it on the Empire Flippers podcast, we mentioned it on Web Equity Show, do not stop running your business. I think that’s one of the worst things you can do heading into a sale, is checking out. When we talked about when you should sell, make sure that you start preparing and get listed before you’ve checked out, because once that’s happened we’re going to be in a bad spot.

Ace Chapman:                   That’s what I tell [inaudible 00:31:30]. It is really crucial. When they ask me, “Oh shit, I’m thinking about selling.” Yes, you should get ready to start selling, because what a lot of people end up doing is they feel like it’s time to sell when they’ve checked out and that’s too [inaudible 00:31:46].

Justin Cooke:                     That’s right. Next point is to … It’s time to figure out which broker you want to use and to reach out for them for any last minute suggestions or thoughts. Again, brokers are happy to take your call if you’re planning on selling in three months. The reason is they want to build that relationship with you. They’d love to help guide you and also to make the business worth more so they can get a bigger cut when they help you sell it. It’s time to figure out which broker you want to go with and actually reach out to them, ask them some questions, and start getting prepared for the sale. A lot of times they’ll have, well, just one or two suggestions that might help you make a little bit more money or might cut some expenses that you hadn’t thought of or find ways to improve the valuation from there that will make it more valuable. They may tell you, “Look, you’re better off selling in probably six to nine months because of this, this and this,” and again, that’s good to know as well. It’s time to reach out to a broker.

                                                The next point is to continue cultivating relationships with competitors or potential strategic purchasers you might have. You’ve already kind of connected with them, reach out to them. Reach out again, there may be … Tell them kind of what you’re up to, where your business is at and start fishing around for a deal. I mean, you may find … Ace you’re a good example … there’s someone that’s open to buying them out, or you may find that your competitors are in a position for you to buy them out and you decided to, “Look, I’m not going to sell this business. I’m instead going to make an acquisition and buy out my competitor.” Or at least work together. There are a ton of reasons, I think, to potentially work with your competitors. Yes, you may be giving up some strategic advantage. You just don’t open your books to your competitor right off the bat, but I think it’s at least worth opening up that relationship.

                                                Also, when it comes time to actually opening up your books and working with your competitor, you may want to work with a broker, you may want to work with legal on that to make sure that you’re not releasing information that could be damaging and make sure they’re under contract, where it’s not going to cause you a problem. I’m not a big fan of contracts in general. I think I shoot for clarity over contracts, but when you’re dealing with competitors and very specific information about how your business is run, when they directly compete with you, I think it’s a good idea.

Ace Chapman:                   There’s so much that you’re able to share without getting into anything proprietary, especially online. I mean, they know who you are, they know what your brand is. They can go and do a ton of research about where your traffic is coming from, what your social media … I mean there’s just … A lot of it’s already out there so to get some general parameters about what they would consider selling for? About what you’re making? That’s where the conversation should start and then you’re exactly right. You want to get into the contracts and all that before you get into the nitty gritty.

                                                Another place to be careful is with your clients and customers, how you deal with them and how you kind of tell them that you’re selling. But it can be valuable to mention it to some of your high value clients, especially ones where … If it’s a B2B business that, say, it’s an integral part to their business. Sometimes you could try to keep it a secret from them and then at the end you realize, “Hey, we would have bought this, and we would have paid you more because we wanted this the whole time. We didn’t even know you wanted to sell.” You got to be careful there, but you don’t want to miss out on the opportunity to be able to sell to a client or customer that’s going to give you a higher multiple. I know you’ve dealt with this.

Justin Cooke:                     Yeah, I think … I don’t know if I mentioned on the podcast before or not, but yeah, there was someone that I was recurring business that they, it was like for managing your VAs, right? I think, managing their time and, we’d used it from when they were in Beta all the way through kind of their launch and through their growth and profitability and it was a developer created, it was a cool piece of software. We were customers, paying costumer, [inaudible 00:35:33] customers and Joe reached out to them for some support or something and he found out they sold, and he was like, “What? When did you sell? What’d you sell for? How much was it?” We’re like, “Oh my God, I can’t believe you sold for that much money that we would have bought you in a heartbeat.” I mean at least … We had been involved in their Beta, like even Joe had been giving the feedback and stuff.

                                                It’s like we were just like their average customer that randomly signed up. It would’ve been good to at least reach out to us as a potential strategic buyer, as customers, because we were obviously fans of the software. I mean, we had a big package with them and loved it so, at least talking to us about it I think would have been a smart move on their part because we would have paid them more for the business than they ended up selling it for so. I’m sure there are plenty of other people that have been in that same situation too, “What? You sold that? I would have bought that.”

                                                Another thing you want to do is, and this is kind of your last chance to do a run through on your training documents and SOPs, if you’re like many of us, you have SOPs, and they’re in place, but they can get out of date. The screenshots can be out of date, they may have added a step or two that haven’t been updated. If you’re inside of three months of selling, this is the time to make those updates and make those changes. You just want to clean them up and make sure they are good to go for your buyer.

Ace Chapman:                   A good thing to try there when you’re doing this is to take somebody, a friend, whoever, family, who knows nothing about your business and let them walk through because it’s really tough. A lot of times we just make assumptions as we’re walking through that, “Oh somebody is going to understand that.” But taking somebody completely unfamiliar with the business and walking them through the SOP is going to be valuable and what it’s going to do is save you a lot of time headache and just back and forth, when that buyer buys the business, having to do a ton of hands on training.

Justin Cooke:                     Yeah, outside eyes is helpful because you get so caught up in your business, you’re so used to it there you’re like, “Totally makes sense,” and then someone else is like, “What? I don’t even know what you’re talking about here.”

                                                Let’s mention kind of the last point here. You’re inside of three months, one of the things you’re going to need to do is you’re going to need to prepare your story and, it sounds odd, “Why do I need to tell a story. Look it’s numbers and accounting and I show my profits and there’s my valuation, and that’s it.” Well not really. I mean, selling your businesses is an emotional process and there’s some emotions going on the buyer side too. They want to hear your story. They want to know where you came from? Why you started the business in the first place? What was your passion for it? Or if not passion, why did you see upside in it? Where do you see the market going? What’s your kind of unique position? What’d you bring to the business? How do you differentiate yourself? They want to hear that.

                                                That’s one of the reasons that we do seller interviews. We actually do audio interviews with our sellers where we have them kind of step through their story and kind of draw it out of them. Some of them are a little reluctant to tell it, but we do our best to draw it out along with the kind of the numbers and the information. I think that’s really important. Buyers really appreciate the story because it’s an opportunity for them to hear from the seller directly, on why they got started. If you’re inside of three months, it’s good to kind of look back over your story, remember why you did what and kind of your emotional stage at each point so that you can retell that when you get in a buyer seller call, or you get the buyer and your broker on the phone and you’re going through it. The potential buyers are going to want to hear about that from you.

Ace Chapman:                   One of the things that’s funny here is, you get on the call sometimes and, obviously nerves can be high and it may be a stressful situation or whatever, but when you get on these calls, as fun as you can make the story about your business and interesting and pulling out your passion and telling stories and all of that. That’s going to draw the buyers in. The more that you try to be formal and, stick to the numbers and all these things, you’re just like all of the other businesses that they’re getting on calls with, and the average person [inaudible 00:39:30] talked  to several people.

Justin Cooke:                     Yup, and it’s a way for you to differentiate your listing from others, right? Because it’s really … Buyers are looking at a bunch of listings and if they connect with your story, it’s important. Now look, I don’t care what your story is. If your business is not interesting to me. For it’s not my price range or it’s not in a niche I’m interested in, or I just don’t like the business for whatever reason, I don’t give a shit about your story. But if it’s in the range and it’s kind of interesting, you’re going to really suck me in by giving me all the details and making me connect with you and kind of your reasons for building the business. It’s a little kind of touchy feely here, but telling your story is important.

                                                All right Ace. Let’s do a wrap up of this episode. Part two of our, Preparing to Sell your Online Business mini series. The first thing is that these last few months are on the clock, right? Earnings matter a ton, keep that in mind all the way from 12 months all the way through listing your business. It’s way better to see growth in your trailing 12 months rather than decline. If you’ve got revenue growth and profit growth month over month, maybe one or two down months and then pop right back up, that’s great. That looks fantastic from a buyer’s perspective. If it’s growing crazy, like 30% a month or something, it might not actually be a great time for you to sell. You may want to wait until it starts to level out a little bit more. But we’re talking like 5% month over month or, a 30 40% per year or something. That’s great and looks great for a buyer. If it doesn’t have that kind of revenue growth and you can’t show the profit, if you can cut expenses, work on the conversion rate optimization, if you can maximize your paid traffic channels to show profit improvements or margin improvements, work on a margin on your product for example, that’s fantastic too. It’s the next best thing.

                                                If you can’t show revenue and profit growth, at least show profit growth by boosting your margins, that’s great from a buyer’s perspective. Maximizing your earnings overall, cutting out your expenses, but keep in mind, don’t cut out any expenses that are critical to maintaining the business post sale. Don’t cut out key employees. Don’t cut out things that are going to level out or cause decrease in the business at the time of listing. That’s the worst position you could be in, so be very careful there.

                                                Keep your competitors, related companies, and customers or clients in mind as potential strategic buyers. You’ve been building relationships with competitors and with potential key customers or clients anyway, so opening the door to that I think is a really good idea. Ace, checking in with a broker three months out, seeing if they have any last minute advice and kind of preparing them, telling them, “Look, I’m looking to sell my business.” If they can give you one or two key insights that, get you 10%, 15% more for your business, depending on how much you’re selling for, that could be  significant.

Ace Chapman:                   Yeah, it is. All of these little tweaks, and this is the point that I kind of want to make in the wrap up. All of these little things, they may seem small as a single little thing, but when the SOP impacts your total sales price just a little bit and then talking to the broker, getting some advice impacts it just a little bit, and having your outsourcers ready to go impacts it … All these things add up to really big numbers. Keep this in mind as you’re going through this list and getting your business ready to sell.

Justin Cooke:                     Yeah man. Last thing, story. If your story [inaudible 00:42:49], buyers really like to hear that. Look, you’re not going to be able to sell your business to someone that’s not interested or not in the right price range, but if it’s in the range, if kind of like the other ducks line up, the story can be the thing that hooks them and gets them to buy your business instead of the other listings that are available. Buyers have options, so they are looking at other businesses. If your story is compelling, and it connects with them, they’re more likely to buy from you, and to buy from you at a higher price.

                                                All right Ace, in our next episode we’ll be looking at all the documentation and processes you should have in place to maximize the value of business. We mentioned when and what kind of documents you should prepare here, but we’re going to get into much more depth and be very specific in the next episode. We’ll try to keep it less boring, I know were talking spreadsheets and QuickBooks, but we’ll do our best to be clear and have a little bit of fun.

                                                If you dig this episode, if you dig this series or this podcast, make sure you head over to webequityshow.com and let us know in the comments, we’d love to hear from you. You can also drop us a review on iTunes, not only will we appreciate it, we’ll also give you a shout on the show. All right Ace, I think that’s a wrap, man. Be back next week?

Ace Chapman:                   Back next week. See you guys then.

Speaker 2:                           Thanks for listening to the Web Equity Show. Now is your chance to be a part of the action. Go to www.webequityshow.com/gift and send us your business acquisition or exit question and have it answered on the show.

 

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