How We Sold a Hybrid Business in Less Than Three Weeks for a 60x Sales Multiple
After over a decade in business, we’ve seen our fair share of businesses. We’ve helped sell display advertising sites, subscription-box businesses, SaaS companies—we’ve had a hand in vetting and selling nearly every type of online business model you can imagine.
The keyword here is online. Recently, we had a listing that provided us with one of the biggest challenges we’ve ever faced: a hybrid business model.
When the sellers originally came to us wanting to sell their business, we knew it was going to be a test of the collective strength of all of our departments. But we believed in our team and the solidity of our sales processes.
Let’s take a closer look at how we helped our sellers secure a life-changing exit with a hybrid business.
The Hybrid Business Model
If you regularly read our blog, you’re no doubt used to seeing the different monetization methods our sellers typically use.
When the sellers approached us, what we saw at first was a profitable Amazon FBM and eCommerce business. As our vetting team dug a little deeper into the business, we found out that not only did the sellers handle mail orders, too, but they also maintained their own printing facilities.
We were looking at the possibility of a hybrid listing: an online business with a physical location.
It was an exciting idea, but we had to make sure the business would appeal to our buyer pool. There are a lot of considerations when vetting and valuing a hybrid business.
Physical Location vs. Location Dependency
One of the primary concerns our vetting team had was portability. They sent the sellers a detailed list of questions covering every possible scenario for a potential buyer.
Foremost was whether the equipment could be moved and how it could be stored. Could a buyer set up shop in their own house or apartment? The sellers, who were leasing a 1,300 square foot shop, thought it would be straightforward to ship the equipment, but it might be a stretch to install it in a residence, as some of the equipment was five feet in length.
One possibility, then, was for future buyers to lease their own facility and arrange to have the equipment shipped to them. The additional expense and time to make it work didn’t make it the ideal solution for appealing to prospective buyers.
There was another option, though. The business had two additional employees who worked at the facility, operating the equipment and fulfilling orders. Was it possible for them to run the business without the physical presence of a buyer?
The sellers came back and said not only was it possible, but it had already been done. In fact, the employees had continued working at the facility autonomously when the sellers had been unable to leave home at the start of the pandemic.
This type of setup is much more attractive to potential buyers for a few reasons. It avoids the unnecessary expense of transporting equipment and the manufacturing and fulfillment delays that would come with setting up a new facility. It also allows buyers to view the business as a more passive stream of income.
Our vetting team was satisfied with the possible solutions. But that wasn’t the end of the hurdles we faced in listing our first hybrid business. The P&L sheet also posed a challenge.
Creating an Accurate P&L Sheet
When it comes to checking out the finances of an online business, our vetting team has standard procedures for any type of monetization method. But a business that has both online and offline dealings needs a more customized approach to compiling an accurate P&L statement.
Our sellers worked with a certified public accountant (CPA) who finalized their balance sheet once per year. That was fine for previous years, but buyers like to see recent numbers to assess current growth.
Our vetting team compiled the P&L statements for past years while waiting on the first quarter numbers from the sellers. While they were waiting, though, another hurdle came up: the sellers decided to hold off on listing.
Listing at the Right Time
There are any number of reasons a seller might want to hold off on listing. When we talk about planning an exit, this is one of the things we emphasize. It’s not about timing the market. It’s about creating a plan to sell your business at the optimal time for you.
In this case, the timing was off for the sellers by a few months. They were coming up on their busy season and knew that in a few months, they would be able to show even more steady, consistent growth.
It wasn’t a case of cold feet. It was the seller planning ahead to optimize their eventual exit.
When coming up on peak season, sellers have two options: try to sell just before or immediately after.
Selling before peak season can give sellers some leverage. The business might sell faster, because buyers know the busy season is coming, and they want to get their ROI back as soon as possible.
Selling after peak season is also an option, especially if seller’s have some indication that the current year will outperform the previous year by a significant amount. When the profit from the more successful season is factored in, their trailing twelve months (TTM) profit is higher, which would result in a higher multiple.
The sellers went with the second option. Once their fourth quarter numbers were handed over to their CPA, they came back to our vetting team, ready to proceed.
All the work that had been done a few months prior made the process go much faster. Within a few weeks, the sellers were ready to go live on our marketplace with a valuation of $1,487,191, or a 25x average monthly net profit sales multiple.
Within just a few weeks, 33 verified buyers had already unlocked the listing. Unlocking a listing provides buyers with verified funds more in-depth information about a business and allows them to schedule calls with a seller to find out more or negotiate an offer.
Several buyer-seller calls were lined up, but some potential buyers wanted more information before deciding whether to make an offer. The printing facility issue was a frequent concern from buyers, who had to consider the costs involved with either keeping the equipment where it was or setting up a new workspace elsewhere.
The physical location wasn’t the only thing on our buyers’ minds, though. They also wanted more information on the sellers’ marketing efforts both on and off Amazon.
This is the biggest reason we offer seller interviews for six-figure-and-up listings. We speak with these sellers a little more in-depth so they can talk about their professional backgrounds, marketing techniques, and potential growth strategies for the businesses they’re selling. It allows buyers to get a clearer picture of both the business and the seller, which could lead to firmer offers and faster sales.
An Offer Is Made
Our sales team helped our sellers navigate conversations with potential buyers until an offer was made by an investment company that had been looking for the ideal business for over a year: $1,784,630 in cash upfront, followed by a performance-based earnout.
There are several types of deal structures that can be negotiated when businesses are sold. In this case, with a performance-based structure, a baseline calculated from the TTM was identified in the offer. After the upfront cash amount, the seller would receive 33% of profits above the baseline until either an additional $1,784,630 had been paid or five years had passed.
The cash upfront already brought our seller to a sales multiple of 30 times the business’ monthly net profit. When combined with the earnout, the value of this sale increased to an impressive 60x sales multiple.
With the offer accepted, it was time to finalize the sale.
On our marketplace, we find that businesses listed under $750k are often purchased by high-net value individuals (HNVIs). Listings over $750k, like this one, often attract private equity investment firms looking for businesses to scale.
When investment firms purchase a business through us, it’s not uncommon for them to request 30 to 45 days to carry out due diligence. This due diligence period allows them to review all business records in full to make sure everything is as was stated during the negotiation process.
This is part of the reason why our vetting process is so rigorous. It helps reduce the risk of deals falling through because of inaccurate reporting, saving time for both the buyer and seller.
If everything checks out after due diligence, the assets can then be migrated to the new owner. Upfront payments can be made to the seller in full or in part any time after the due diligence period, depending on the exact agreement outlined in the offer.
Getting to a 60x Sales Multiple Exit
To understand how our sellers were able to walk away with a life-changing 60x sales multiple exit, we need to take a look at the industry trends occuring at the time.
The sellers first contacted our team in the months following the start of the pandemic, which was a highly transitional period in the world of online business. Disruptions to shipments of non-essential goods created logistical nightmares for many online sellers. The uncertainty in the early days of the pandemic also led to an increased amount of caution from investors.
In the months that followed, though, we saw a huge shift in online sales. As lockdowns happened in tandem around the world, people found it easier to order goods online. The increase in business and revenue drew the attention of investment firms and HNVIs who saw an ideal way to create potentially high-return passive income streams.
We saw firsthand the effect this had on our marketplace, as we’ve discussed in detail in our State of the Industry Report.
The result was a significant increase in verified funds on our marketplace from buyers who were hungry for businesses just like this one. At the end of 2020, our buyers had over $1.6 billion in verified funds, which we thought was pretty substantial. Not even halfway through 2021, that figure had risen to $3.3 billion. At the time of writing, our buyers have over $4.6 billion in verified funds waiting to be spent on the right businesses.
With so many buyers entering the picture, it’s no wonder we’re seeing businesses sell faster and for more money than in previous years.
In fact, when we look at the data, the average sales price for a business sold in 2020 was 73% higher than it was in 2019 and 131% higher than it was in 2018.
With competition for quality businesses at an all-time high, we truly are in the midst of the Season of the Seller.
That means it’s a great time to start thinking about planning your own exit. You can schedule a call with one of our business advisors to find out how much your business is worth, develop strategies for preparing your business for sale, and get guidance on negotiating with sellers.
If you’re not quite ready to start the process, you can get a general idea of the value of your business by using our free valuation tool, which is based on real sales data.