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WES S01E9: What’s My Online Business Worth?

Justin Cooke September 9, 2015

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Whether you’re looking to sell your online business in the next few months or just a curious entrepreneur, the “What’s my business worth” question is an important one.

We could have made this podcast pretty short – it’s only worth what a buyer’s willing to pay for it – but where’s the fun in that!

There’s quite a bit to think about regarding valuations and we wanted to dive into those issues in this podcast episode. We’ll look at some common misconceptions when it comes to business valuations, cover some valuable “rules of thumb”, and dig into our tips to getting the best multiples or valuation when it comes time to sell your business.

Are you enjoying the Web Equity Show? Please leave us a review on iTunes or you can leave us a message (button to the right) and we’ll play your question/comment on the show!

Listen To The Full Interview:

What You’ll Learn From This Episode:

  • Misconceptions regarding business valuations
  • Valuation rules of thumb
  • Getting top multiples when selling your business

 Featured On The Show:

 


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Justin Cooke:
You only get value out of something when you’re selling the actual value as opposed to potential value.

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 episode nine of the Web Equity Show, I’m your host Justin Cooke, and I’m here with my cohost, Ace Chapman, what’s going on brother?

Ace Chapman:
What is up sir? Another fun episode ahead.

Justin Cooke:
Yeah, man, we got a great episode lined up. We’re talking about what’s my online business worth? And this is an important question for any entrepreneurs, any online entrepreneurs. Everyone wants to know what their business is worth, right? I mean, whether you’re selling or not.

Ace Chapman:
Yeah, it’s one of those things that I think some people don’t pay as much attention to it as they should, and then other people absolutely obsess with it. So some people we may get them to start thinking about, hey, I’m building something that is a value and then there are other folks that are thinking about the Uber’s valuation and these other outrageous things and we can bring them back to reality.

Justin Cooke:
Yeah. I mean that’s one of the important things, right? Is that you get sellers that often are looking for valuations that are a little aggressive.

Ace Chapman:
Yeah. I’ll talk to sellers all the time, and I know you guys do, and they just don’t know. I don’t think that it’s something where they feel like, oh well my side is so much better than everything else in the market. I mean a lot of times they just, they’ve never done a deal before, they’ve never bought a internet business, or ever sold one. So they just have to be informed, and I found that showing them what’s going on in the market can bring them back to reality.

Justin Cooke:
Yeah. I can tell you though, it’s not just people are having done deals before man, it’s us too, I’ll be honesty with you here. So it’s easy for me to look at other businesses that we’re brokering and say, “Okay, here’s the valuation, here’s why, here’s the reasoning and …” It sucks to be the bearer of bad news, but it is what it is that’s our business, I get it. Where it becomes a little more difficult, is when we’re looking at our own businesses, right? So we’re like okay, here’s the objective reasoning for why your business is worth that much, but when it comes to my own businesses I’m like, “Ah, I think it’s worth a little bit more. I wanna get a little value or trying to sneak in some value on potential.” ‘Cause I see what it’s gonna be worth a year from now or two years from now, and I wanna get paid on that now. Unfortunately that’s just not the way the market works, right?

Ace Chapman:
Yeah. We’ve even done deals where the business in the past has been this huge business, and now it’s no longer there, and the person is like, but look what it’s done, it can do that again. So today what we’re gonna do is clear up some of these misconceptions about how you derive value, give you some rules of thumb that you can use to come up with a quick valuation, and share some tips on how to get the best value within reason, when you’re gonna sell your site.

Justin Cooke:
Yeah, I think that’s important, as we talk to potential sellers, first we beat them up a little bit and say, “Well, here’s the real valuation.” But I think for sellers listening to this, they’re gonna get some ideas on how to improve their valuation, especially if they’re looking at selling maybe six months, 12 months, 18 months in the future. There are things they can do today that’s gonna make their asset worth a lot more in the future.

All right man, before we get into that, let’s do some listener love, first up man, for anyone that’s listening to the show, that really digs it, that’s enjoying us putting on this podcast, we’d really appreciate if you head over to iTunes and leave us a review. We’ve got quite a few reviews from you guys already, so thank you so much for those, and if you’re digging the show, we appreciate if you left one as well.

Justin Cooke:
Second thing is, we’ve got a bunch of mentions on Twitter, people tweeting the show out and sharing it, I just wanted to give them shout for doing that and let them know we appreciate it. Got Michael Richard, given us a twit, Lynn Thompson, we’ve got Jeremy Vitale doing it, We got Andrew Youdarian, given us a shout about the show. Do you know Andrew, right?

Ace Chapman:
Yeah, yeah. I’m looking forward to meeting him when I’m overseas, but yeah, I’ve listened to his show for a while now.

Justin Cooke:
Yeah, man. I’m a big fan, he has, it’s a ecommercefuel.com, that guy is a boss. He’s got I think, the best eCommerce community out there, and it’s mostly experienced eCommerce site owners and they really open up and share information. So we’re a part of his community, I really dig it, I dig Andrew, he’s a really stand up guy. Do you remember, a while back, he did the public listing of his sale oversight?

Ace Chapman:
Yeah.

Justin Cooke:
Then he did the, was it the reverse Dutch? So he’s like raising the price, raising the price and then try to get it sold quickly, and he got really good valuation of it, was really interesting.

Ace Chapman:
Got a great valuation, also brought a ton of attention to this whole concept of buying existing sites and he’s somebody that’s done some deals. So he’s done some deals outside of that. So I love that he’s bringing attention to the fact that you don’t have to start from scratch, even the large majority of the folks in his community are going out and building deals and some of those are gonna come to the market. So, [crosstalk 00:05:09] what he’s up to.

Justin Cooke:
You know the guy that he has on the show, pretty often over there at eCommerceFuel on his podcast is Drew [inaudible 00:05:15], do you know that guy?

Ace Chapman:
Yeah. Yeah. Drew is another guy who is well versed when it comes to deal making.

Justin Cooke:
Yeah. He sold his eCommerce business I think for like low to mid seven figures, a couple of years ago and now he does some investing. I know that he’s got a group where they look for eCommerce businesses to purchase anywhere from like mid six to seven figures and he’s a super sharp dude man. I had him on the Empire Podcast, quite a while back when I was just … It was a pleasure talking to that guy, super sharp.

Ace Chapman:
Yeah. He’s somebody we should catch up with and see if he wants to come on the show.

Justin Cooke:
Definitely man. All right man, you ready to get into this episode?

Ace Chapman:
Let’s do it.

Justin Cooke:
All right, let’s do it buddy. So today we’re talking about what’s my online business worth? And after the question, can you sell my site? Is it even possible? This is definitely the most popular questions. Some just wanna know what their website’s worth, what their business is worth, and they wanna get an idea as to pricing. Ace, we could make this episode really short, right? We could just say, “Hey, it’s worth what a buyer is willing to pay,” and just end it right there, like we’re done with the show, it [inaudible 00:06:17] fantastic and move on. But I think there’s a lot more to it, and we’re gonna get into things like valuation, what gets you your multiple, we’re actually gonna talk about a lot of different misconceptions that are going on here too.

Ace Chapman:
Yeah, I think one of the things where it is really tough, is from the seller perspective, they’re only gonna be able to sell it for what a buyer is willing to pay. But from the buyer’s perspective, one of the tough things is, what is this thing really worth? I’m always working on the other side of the transaction, getting questions like, “Okay, is this worth what they’re asking? Should I just give them their asking price?” And we live in a world Justin, especially when it comes to buying things like houses and cars, where you just negotiate.

We don’t negotiate for a ton of things in America like groceries and all of that. But when it comes to those large purchases, we like to feel like, okay, I’m paying less than the asking price, and sometimes the asking price could be less than what the business is worth.

Justin Cooke:
Yeah, there’s some warm and fuzzies that come with the feeling that you’ve got a deal, right? So we’re gonna talk about that and talk about what an actual good deal is, versus what you might think a good deal is, I think that’s important. It is true too that a lot of times sellers want more for their business than it’s actually worth, we’re gonna talk a little bit about why that’s the case. I think clearing up some of the misconceptions is a priority because both sellers and buyers come to the table with some preconceived ideas that I think we can help.

So we’re gonna get into that, we’re gonna cover some rules of thumb and then we’re gonna share some tips for improving the value of the business that you’re looking to sell. So let’s start off with some misconceptions, buddy.

Ace Chapman:
Yeah, I’m excited to talk about some of these misconceptions, cause I can just send this to everybody that calls me, listen to this episode first before we talk, and that’ll save a lot of time. So one of the things is that valuations should be based on revenue and not profit. I get this all the time, but especially when we get leads from the hidden market that aren’t necessarily on the market, they haven’t already talked to a Broker.

A lot of times they’ve never bought a business, they’ve never sold a business, and they think, oh wow, literally was just having this conversation yesterday, with a company that was making the grossing $2 million a year, but the take home was only 200,000, they’re like, “Oh, we have this multimillion dollar business.” I’m excited to talk to them, and then I get on, I was like, “No, this isn’t a multimillion dollar business, your profit is 200,000.”

Justin Cooke:
Yeah, I’m not sure where this misconception came from that people think the valuation should be based on revenue. It’s particularly difficult with the low margin, like eCommerce type businesses, or just low margin businesses overall. Because they’re turning over so much revenue, they think they’re worth way more than they are, but at the end of the day someone looking to buy a business is looking at profit, you may be selling a ton of stuff, but that’s not really all that interesting to them.

Now I’d say this is definitely true for businesses under 5 million, when you’re at let’s say a $500 million level, and a major company is looking to acquire you, they may be less interested in profit and more interested in market share, but we’re not talking about that, we’re talking about the rest of us, those of us who are doing regular deals, they’re looking to buy all my businesses that aren’t $500 million. So for the rest of us we’re talking about businesses that are based on a multiple of profit and not revenue.

The second misconception is, and you hear this a lot online, is that websites are worth around 10 to 12 times their monthly net profit. I think I know where this one came from, so years ago when Flippa was starting out, there were websites that were being priced and sold at about 10 times monthly net profit, and so it’s one of those, I think persistent internet rumors, “Oh yeah, it’s about 10 times, maybe 12 times or something.” And it stuck even though that’s just not the case in today’s market.

Ace Chapman:
Yeah, I remember the days, and even before Flippa, I did my first Internet deal 16 years ago, it’s crazy to think about now, but back in the day, I mean it was even five, six monthly net profit and those days are just gone. I remember having conversations with people and it’s like, man, it just doesn’t make sense. You would have a eCommerce site that sells clothing, let’s say, no overhead, no lease, no employees, all that, and it would sell for six times earnings or 10 times monthly net earnings. Then you would have this offline business that had employees, and had to sign a lease, and all this inventory they held, and it would sell for two, three times annual net earnings.

That should have been a sign back then, that hey, there’s some room for growth and increase, and now we’re seeing that, we’re seeing that it has increased to around the same multiple that offline businesses get.

Justin Cooke:
I generally tell people, if you’re looking at less than 12 or definitely less than 10X on monthly net profit, and you think it’s a great deal, you’re probably looking at a unicorn, maybe the Unicorn [inaudible 00:11:22], or maybe there’s something that you’re missing in the deal. I mean it’s not reasonable that you’re gonna get one for less than 12X or actually less than 10X net profit today, it’s just not gonna happen. Yes, I know Ace, you probably done one, right? Maybe you’ve done one out there, but it’s pretty rare you’re gonna see [crosstalk 00:11:39], in much higher multiples and we’re gonna get into this a bit more and why that’s not such a bad deal.

Ace Chapman:
Yeah, I definitely agree. Sometimes I get, since we help people with due diligence and all that, we get these deals and it’s like we get the same ones over and over. It’s like, no, here’s the long list of issues and why this is selling at a 12 month times monthly net. The other thing that we get a lot of, is people call and saying, “Yeah, I wanna sell my site, it’s $100,000 business.” I’m like, “Okay, great, tell me about the business.” Then we get down to profits like, okay, how much is it making? It’s like, well, it’s not making anything right now. I’m like, “So where did your valuation come from?” It’s like, “Well, I spent $100,000 on it, developing, and design, and we have this amazing developer that put some time into it,” and all this stuff, and it’s like, that means absolutely nothing.

Justin Cooke:
God man, that’s a real like palm to head move right there, right? Like, yeah, you spend $100,000 but no one cares, a buyer doesn’t care how much money you spent on your design, on your development, and they go, “But I’ve got this awesome, amazing back in.” “Okay, well how much money you making? What were pre-revenue? That may work when you’re trying to raise money, but that’s not gonna work when you’re trying to sell to a portfolio investor, portfolio buyer, they just, that’s not interesting, 99.9% of the time. So yes, there’s probably someone out there, [inaudible 00:13:04], but not your average buyer for sure.

Justin Cooke:
All right, so let’s talk about the other misconception, and we see this a lot, where we have sellers that come to us and say, “Well, just a couple of tweaks, just a little tweak here and there, this business is gonna be amazingly profitable. We’re talking five times what it is today.” So let’s say the business is making $2,000 a month in profit, they say, “Oh, by the end of the year, this could easily be at 10,000 a month in profit.” That’s just not a selling point, right? For a couple of reasons, let’s just go with the fact that, that’s the case. Let’s just say that’s true, right? That it is true and someone will easily do that, that’s the buyers upside, right? So if those things can easily be tweaked, there’s no guarantee that’s gonna happen. So if they wanna try to make that happen, that’s the benefit they get in buying your business. You don’t get to use that to add to the sales price, right? They get the value after the fact.

Justin Cooke:
The second point is, if it is true, then you shouldn’t be selling right now, then you should get it five times what it’s worth, and talk to us in six months, nine months, 12 months, when that happens. Most often, I think it’s not nearly as easy as the seller would like to think that it is, and it’s just using that to try to hopefully bump up the sales price, which isn’t legitimate.

Ace Chapman:
Yeah. The example that I like to give is, you can’t take a pile of metal to a person and say, “Hey, this could be an amazing car, all you got to do is just read these instructions, put it together, and you’ll have this awesome car.” But I wanna sell it to you for the price of the actual car, even though you’ve got to be the one that goes and puts it all together, makes it work, and hope that it does end up working.” So at the end of the day, you only get value out of something when you’re selling the actual value, as opposed to potential value. That’s why in the world of venture capital, so many people don’t get funded, it’s rare that you find that single deal that is worth you going in and invest some money and taking that risk.

The other thing that we see a lot of people put value on, is the time that they put into the deal. I’ve been spending all these years planning the business and putting everything together, got the site build, I went out and I got all these partnerships, and all these things, I got the product, it’s ready to go, now I’m ready to sell it.

Justin Cooke:
They wanna get paid for their time, right? They say, “Look, I put two years of my life, my blood, sweat and tears into this, that’s gotta be worth something.” Well, not necessarily, it’s not necessarily worth anything, that’s the cold hard truth. I hate having that conversation and it’s hard for me to have that conversation without rolling my eyes, ’cause I’ve heard this one before, and it’s a tough conversation to have with seller. So, you kinda gotta do it, you gotta put the white gloves on and kind of pat their back a little bit, tell them, “Sorry. No, it’s just that doesn’t add to the valuation, the blood, and sweat, and tears you put into it doesn’t add to the valuation.”

Ace Chapman:
Absolutely. It’s tough, like you said, when you’re having those conversations, you could tell somebody that’s thinking, this is time away from my family, time away from what I wanted to do. I made the stock price and I’m not gonna get anything out of it.

Justin Cooke:
There’s a flip side to that too. Sometimes sellers think because they’re putting in a bunch of time, let’s say they’re putting in 15 hours, 20 hours a week into the business or something, they go, no one’s gonna wanna buy this, it’s like buying a job, no one’s gonna be interested in that. It makes $3,000 a month, but I’m putting in 15, 20 hours a week, that’s not gonna be valuable to anybody.

Justin Cooke:
That’s not necessarily true, there are the do it yourself David types, the people that like to get in there and get their hands dirty, want to do the work on the site. Or they’re the people that already have a team in place, they’ve got virtual assistants that can handle customer service, they’ve got processes for their other eCommerce businesses let’s say, and they can just take this site and plug it right in. So they don’t particularly care about the work that you’re doing, cause they’ve got a system to handle that.

Justin Cooke:
So I think that if you’re worried about selling your business, you’re thinking, oh I put time into this business. That’s not necessarily gonna keep someone from buying it, ‘Cause I do see that, like sellers were worried about selling their business, they didn’t think it was sellable, cause they’re putting time in, and we have to explain to them, “No, some buyers are fine with that, and some buyers actually look for sites like that.”

Ace Chapman:
Absolutely. If you’re a buyer, that can be a huge advantage to start to build your team so that when you come across those deals, of course those deals have fewer buyers than the ones that are very passive. But if you’re able to take on deals that do require a little bit of work and especially if you can outsource the work, that can be a huge advantage in being able to buy those businesses with a lot less competition.

Justin Cooke:
Absolutely. It’s like a barrier to entry for deal flow, and as a buyer you’re looking for those, right? Because it means you’ve got an advantage over other buyers, and either you’re gonna get the deal when they’re not, or maybe you can even get a discount on this business because other buyers are passing it over or just aren’t interested, because they don’t have what you have.

Justin Cooke:
All right, man. Last misconception we wanted to cover is the misconception that buying a business at a lower multiple is always the better deal, right? So if you’ve got two businesses and they look pretty similar and one’s at, let’s say 18X and the other one’s at 30X, the idea that the one at 18X is the better buy for you is not always the case. There’s a whole bunch of reasons for that, it may be that the other one isn’t diversified in terms of its traffic sources and maybe that’s too new.

It may be that it’s just not a very good fit for your personal skills, and the other one’s a better fit. So you don’t wanna take over a business that you’re gonna run into the ground. Whereas the one at 30X might be a longterm play for you, that works out really, really well. So I think that multiple is important from a buying perspective, but it’s not always an apples to apples comparison when you’re looking deal to deal to deal.

Ace Chapman:
Yeah, I am a much bigger fan of making sure, and I’m always reiterating this to my clients, the more important thing is just making sure that the business is real, making sure that you’ve done due diligence and that the business is gonna last, ’cause at the end of the day, I mean, whether it’s 24X or 30X, how many assets out there are gonna pay for themselves and literally less than three years, I mean you’re talking 30X, that’s less than three years, this thing is 100% payed for. So the real key is if you buy a 20X deal, that disappears after two months, that’s where things really suck. So if you could buy the 30X deal that really is gonna take 10 more months and it’s paid for itself, but it has a lot more longevity, that is the better deal than the more risky 20X deal.

Justin Cooke:
What do you think about this Ace? So I had this comment from a potential buyer, actually just someone in my audience and he was commenting on a blog post or something and they said, “Look, the deal is, if you’re buying a gas station, that just automatically has way more longevity than an online business about whatever kind of Amazon product that’s coming out. I think there’s some truth to that, like I think in general, if you take every for-profit website against every physical business, the physical business on average is probably more long lasting, but I don’t think that’s true if you find the right deals, right? Like you’re saying, if you buy a deal and it is fly by nights, it’s gonna be gone in six months, 12 months or something, that’s obviously problematic.

But I wouldn’t say that, that’s regularly the deal, I don’t think that, that’s often the deal, and I dunno, the offline businesses have their own unique challenges and issues. I’m not sure that it’s necessarily a win to look at offline businesses because they’re for sure gonna stand or stick longer. What do you think?

Ace Chapman:
Yeah, I think that at the end of the day they’re good and bad deals in everything. I mean there are definitely people who’ve bought gas stations and the deal goes sour and because of leverage and everything, I mean, it can go beyond just the money that they put up and losing that money. But I’ll also definitely, because we talked to a lot of people that do buy online deals without having a lot of expertise. For those people, it’s not so much that internet deals are risky, it’s that their lack of knowledge creates risk, because they’re going in there doing deals and yeah, I mean we’ve gotten calls, unfortunately from people who have lost their life savings on a internet deal, not because all internet deals are bad, but just because they had no idea what they were doing and they thought they did. It’s like, man, this was an obvious sign here and that was an obvious sign there, it was just a bad deal to begin with.

So I think that the person creates the risk, if you’ve got an expert, which I know a lot of them gas station owner, and they know what they’re doing for that person, the gas station is a lot better deal than anything that they can do online.

Justin Cooke:
Yeah, that totally makes sense on skill set. I think when you’re looking at online businesses too, this is not the first thing you look at, but it’s definitely something you consider, I think, which is niche, right? So something that’s in some kind of like trendy, here today, gone tomorrow, kind of weight loss space or Paleo or a crossfit, these types of things. I don’t think Paleo, crossfit are necessarily going away, but they’re more likely to go away than let’s say medical education niche, right?

So the crossfit right now is extremely popular, right? That may not be the case two years from now, I mean it’d be the case five years from now, whereas the people looking to get educated and get jobs and the medical space I think is much more likely to still be as popular or more. So I think having an understanding of which niches are a fly by night, which niches are I think popular right now, but may not be tomorrow, I think that’s important.

Ace Chapman:
Absolutely. Absolutely. So let’s get into some valuation rules of thumb. I mean, as people are looking through deals, they’re trying to figure out, okay, does this deal make sense? There are some general rules that make it somewhat easy to figure out, hey, is this a reasonable deal? So what I’m always trying to figure out before I even engage a seller is, is the seller reasonable? I don’t wanna waste time on something that’s unreasonable. Right now you see multiples in a range of 15 to 35X, and that’s net monthly profit.

Ace Chapman:
So you’ve got some variations and we’re gonna talk a little bit more about what makes something a 15X deal, versus what makes something a 35X deal. But that gives you that general rule of thumb to figure out, okay, is it worth even getting further into this? ‘Cause once you see the thing that is based off of gross revenue, and when you take it down a [inaudible 00:23:58], it’s fourth annual times net revenue and that kind of thing. It’s like all right, this probably isn’t something that it’s even worth digging into.

Justin Cooke:
Yeah, if you’re doing 10,000 a month net and they’re looking for $1 million [inaudible 00:24:11] business, we’re pretty far off the mark, right? Anything that you come in, you come in with let’s say 200, 250,000 even $300,000 offer, and they’re just gonna be offended. They take that very seriously at 25% of what they’re asking. So yeah, if they’re looking for something absolutely ridiculous, it’s probably not gonna work, because they’re being unrealistic in terms of their valuation. The other thing too is if they’re listing it at let’s say six times, right? Six times their net profit or whatever. I viewed that as a red flag Ace, I don’t know about you, but it’s like there’s something wrong with us. I’ll look into it, but there’s something wrong here that they’re listing it for so short, like why would a seller sell at six months net profit? It just doesn’t make any sense.

Ace Chapman:
Yup, Yup. Both sides should throw up a red flag, much lower than that, it’s kind of like, “Ah, I’m going in with eyes wide open and above that would be a red flag as well.”

Justin Cooke:
I think that’s an interesting point too, because new buyers, they’re like, “Ah, I think I found a deal, right?” They’re looking for that, they’re like, I really want a deal, if I can find a deal I’m gonna make out on this, and I think viewing that as a red flag, I think is pretty important, I think it’s valuable advice.

Justin Cooke:
All right, man, second Valuation rule of thumb, we’re talking inventory. So we’re talking eCommerce sites and really I think there are two trains of thought. So the first one is that all inventories included on top of the multiple at wholesale rates. So say for example, you have a business that’s doing 10,000 a month in profit, right? Maybe they’re doing 30,000 a month in sales, 10,000 a month in profit, let’s say that they’re getting a 25X valuation, that gives them $2,000 or 3,000, if they have inventory of $100,000 at a wholesale rate, then you would add that onto the price of sale. So it was 250,000 now we’re talking $350,000 to the business, so you can add it on at wholesale costs to the sales price.

Justin Cooke:
The second way to do it is to take inventory above or below normal levels. By normal levels you just look back over the last 12 months and see what their average inventory was per month. Then depending on where the inventory is at, at the time of sale, you either add to the sales price or subtract from the sales price, if they’re low on inventory. If they’re above their average level, then yes you buy that at a wholesale rate. If they’re below, and you’re gonna get discounted sale, ’cause you need it quickly at inventory. Between the two options, I think the second option is honestly more fair, I think it’s the more appropriate approach, because you’re buying the business on a multiple of net profit anyway.

How profitable would that business be if you had zero inventory? Like how well is that business running with absolutely no inventory? It doesn’t, right? You can’t totally completely separate it out. So some inventory has to come with that profitable business, and so having allowance for a particular amount of inventory that is at your average level I think is the better way to do it. That’s not how we generally do it at Empire Flippas, we’ll add on to the total amount to add the sales price, but I’m not sure that’s the best way to do it. So from a buying perspective, I wouldn’t wanna do it that way. So what are your thoughts buddy?

Ace Chapman:
Yeah, the normal levels thing is … So first of all, where we try to start is that this is a necessary part of the business for it to run. So from our perspective, whether you’re buying a SaaS business, or you’re buying a eCommerce business, you could consider that a SaaS business’s inventory was bought initially when they had to pay for all the development and everything of the software that you’re buying. So they can say, “Oh well I wanna add this on top, and that kind of thing, cause you’re getting this product.” But the truth is, that’s necessary for me to run this business.

So with inventory, even if it is a lower amount of inventory whatever, as long as they’re not doing some outrageous 50% off sale to get rid of a bunch of inventory. We really love just whatever the normal level is, we get the business, it includes the revenue at that normal level, and we basically just [inaudible 00:28:25] the business and that allows us, even if that multiple is higher, we’re comparing apples to apples, because at the end of the day, as a small business buyer and the average buyer, they may be looking at a SaaS business, content business and may even be looking at like an offline spa, and then they’re looking at this eCommerce business.

Ace Chapman:
For each one, you wanna be able to take the multiple and figure out, okay, what’s my ROI gonna be? I don’t really care about the value of the inventory, I wanna buy a business that’s a well oiled machine and that kind of thing. Then outside of that you start to get into some of these other negotiating points, but it’s fun to come up with different ways to handle the inventory.

The other thing is handling the expenses in the business, and I’m sure you get this a lot too, but you talk to sellers sometimes like, “Okay, so tell me about the expense.” It’s like, “We don’t have any.” Okay, like you do have something, there is some expense and that’s all [inaudible 00:29:23] there is a little bit of a red flag because they’re not realizing. It means they’re not keeping track, whether it was the developer when you first started or counting in your time or you’ve got some hosting costs, and maybe you’re using some software and literally walking through here are all the possibilities and then you start to get a real picture of, oh, so you do have expenses.

Justin Cooke:
Yeah, giving the seller the benefit of the doubt, I think sometimes they forget about expenses, like honestly you forget, right? So it’s like, oh well, I just pay for content. Okay, you’re just paying for content, what about the virtual assistant that you’re paying to put it up? What about the two customer service agents you have handling your Zendesk tickets? Oh yeah, oh yeah, those were expenses, yeah, yeah, yeah, we gotta include that.

Justin Cooke:
So I think sometimes they legitimately forget to add the expenses, ’cause they just don’t think about it. A lot of times when you’re buying these online businesses, you’re dealing with, it’s not like the Savvy, well oiled machine, right? It’s a guy who has got $6,000 a month, Lead Gen site or something. It’s not this crazy business with all these employees, no, they don’t have things that clean. I think yeah, this is a point of negotiation, only if it’s clearly laid out. So you mentioned it being a red flag if they don’t mention the expenses at all, that definitely can be a red flag. So when you do start digging into it, you may just dump the deal entirely, ’cause you’re like, “Look, I don’t want to do this for you, like I’m not gonna do the work for you. I’m gonna move onto the next deal where someone does have everything laid out, and we can discuss it.” Right?

Justin Cooke:
I mean if I come in, and you seem like you don’t know what you’re talking about, and you don’t have your expenses laid out, that I might just pass and move on to the next deal. So the guy who has everything laid out has everything, he has his ducks in a row, well now you can start to negotiate, okay, I think this expense, can you prove that to me? I think that you’re missing this expense, you need to add this in, or those types of things. Now it can become a negotiation point ’cause you’ve got something clear in front of you.

Ace Chapman:
Yeah, yeah, absolutely.

Justin Cooke:
The other thing I wanna mention in terms of rule of thumb is that a strategic buyer can look beyond a multiple, right? So they’re not looking at just, okay, I buy this business, I’m gonna buy it at 30X or something, because they may be able to add a ton of value to it, or it may add of ton of value to their already established business. So buying as a multiple of net monthly profit to a strategic buyer, that’s something they consider, but they may be willing to go way above what the standard 15X or 35X is. They may buy at 50 or 60X, if it’s the right pickup for them, if it helps them consolidate the market, if it gives them another brand that they gonna add their products to, it may be a hell of a lot more valuable to them than just the multiple of monthly profits.

Ace Chapman:
Yeah. That’s something that is so powerful. I think a lot of times people hear strategic buyer and they think it’s gotta be, “Oh, this got to be this huge corporation that really wants to come in and buy my business,” that kind of thing. At the end of the day, a lot of times it could be as simple as somebody who has a database that may be even the same size as yours, but that has a different group of customers that they can instantly go out and promote your product to. That gives them a lot more value than the person that’s just coming into the business new and doesn’t have any strategic type of benefit to buying your business.

Justin Cooke:
Yeah. Let’s say there was some, just as an example, right? There are some business out there that is selling some kind of ebook or info product or something to sellers on how to sell their 10,000 to a million dollar website or online business and they’re selling this, I don’t know, $50 product or whatever, and they’re making 1000 bucks a month, right? And they’re selling a bunch of those products, they’ve got a nice audience to them. A multiple of 20X, 25X that only puts them at 20,000, $25,000, but that’d be worth a hell of a lot more to us over at Empire Flippas, that’d be worth a hell of a lot of money, because we now have an opportunity to take our services and let them list and sell their websites on our platform, which ultimately is extremely valuable to us.

Justin Cooke:
So, yeah, from a strategic standpoint, as long as they’re getting people that are interested, they’ve got a nice audience there, yes, I’ll take on that additional cash flow, but I’m really interested in that customer base, that’s gonna be really valuable to me. So multiples, I’m not that [inaudible 00:33:40] 50,000, $60,000 sale price is totally realistic at that point.

Ace Chapman:
Yeah.

Justin Cooke:
All right man. So let’s talk some tips on getting top multiples. We’re gonna do a little rapid fire here, but keep in mind that we’re talking generally, so there are specific buyers may be looking for different things. This is just in general, if you want to kind of expand to that 35X multiple as a seller or you’re looking for deals that are probably worth that 35X multiple for a buyer’s perspective, these are the things you’re gonna wanna consider. First, you’re gonna look for sites where revenue and profit are increasing month over month, year over year. They’ve got a great trajectory, they have no signs of slowing down and they’ve been doing this for quite a while.

Ace Chapman:
Yup. The other thing that you want, you wanna try to get a business that has a proven track record. I just get nervous anytime I’m looking at a deal that’s six months old and when clients bring deals to me it’s like, “Oh, it’s worth, but it’s doing so great, it’s like yeah, it’s been doing great for six months.” So I like to get things that are at least a year old. Really I prefer two to three years is kind of that target market, but when you find that deal that may be over three years or even like five years old, which I mean it’s exciting now that we are seeing deals come to market that are eight nine 10 years old, but when you’ve got that kind of history behind a business, that gives you a lot of confidence that you’re in a deal that’s gonna be here for another five to 10 years.

Justin Cooke:
Yeah, I get a little freaked out with any business for sale that’s under a year old, and my reasoning for that is, I hate to say this, but like they could just be buying their own products, right? Their sister buying their products, they could have whatever and they could be flowing that money back into it and then sell it off to an unsuspecting buyer, and there are ways to check that in due diligence, but that’s one of my concerns for anything that’s under a year. Yeah, I’d say over years that’s really important, two to three years is good, three to five years is even better, five plus years is rare.

So we get this question a lot, well like how come there are fewer online businesses that are five plus years old or seven plus years old? I think there’s a couple of reasons for that. I mean they’re just more rare, you’re gonna have older deals in the offline space are similar. Now there are longer periods of time, but you don’t often see 20 plus year old offline deals come up for sale. You’re gonna see the younger businesses, so the younger they are, the more likely they are to switch hands.

It’s also because I think that we’re in the frontier here, right? This is the wild west, and so every year you have a ton more websites coming out. You have a lot of new online businesses started, so it’s gonna trend towards the younger businesses, they’re just more of them.

Ace Chapman:
Yeah, it is. I mean at the end of the day, the whole reason that we bought these businesses is the fact that, when you’re starting from scratch, a lot of businesses are gonna fail. So yeah, it’s gonna be one of those things where it’s rare for a business to even make it to five years.

Justin Cooke:
Third thing for getting a top multiple is when you have people or process in place to run the business without much owner involvement. So you’re not involved as heavily in the day to day, you’ve got people that can run it and you can back out, you can go on vacation for two weeks and your business continues to run. Those are businesses that in general, buyers are willing to pay a higher multiple for, and they’re more valuable to potential buyers. It’s not to say that there’s not people out there that will buy a business if you’re working in it, as I said before, but if you had to choose between the two, I would of course take the one with people and process in place, that requires less effort on my part.

Ace Chapman:
Yeah, I think some of it like you’re saying Justin, is just a preference thing, but a lot of times it just is a necessary thing for a lot of the buyers in the market that we’re in. So some of it is, hey, everybody wants to work less, but the other aspect is some people just don’t have a lot of time, or they’re not buying a business they’re gonna be in full time. They have a full time job, they’ve got a family, they’ve got other things that they need to get done, and so it just becomes a necessary thing.

Ace Chapman:
Point number four that I love when you can find these kinds of deals, but it’s businesses that you get into and you realize, man, this thing has a massive brand in this niche. I mean you start to poke around and people are talking about them and you know like they’ve really establish themselves in the market that they’re in, and they’re recognized that among the folks in that market that are searching for that product, when you can get those kinds of deals, and actually we did got a meeting right after this with the guy that runs a business that we own that is in the cosmetics arena, and in the little niche that they’re in, it’s been around for 10 years and it comes up in consumer reports and that kind of thing as one of the top five brands in that market, and that’s to me to be a part of for one, but it really ingrains your business in that space.

Justin Cooke:
Yeah. Buyers are paying a premium for established brands, so definitely if you’re known in your space and your niche, buyers are just, they know that they have to pay a premium for that. Now, I would say if it comes down to having, let’s say, an early brand, where you’re not terribly well known, but it’s like the beginnings of a brand, or just kind of more generic, less branded niche side or authority side or whatever. I still say the brand wins, because buyers are looking at this business and saying, okay, I can see myself with this brand, I can see my way forward with the brand, whereas an affiliate site that isn’t really branded doesn’t really have a brand, even the beginnings of a brand going, it just doesn’t have that appeal. The same traction with potential buyers that the brand sites do.

Justin Cooke:
All right man, sixth point for getting top multiples, you’re gonna wanna have crystal clear financials. Now, we’ve talked about this a little bit already, but as a seller, if you come in and you’ve got everything in a nice profit and loss, you’ve got [inaudible 00:39:37] for all of your expenses, and you’ve got everything broken down, you’re more likely to keep a potential buyer’s attention, right? They can go through it line by line and now they have negotiating points, everything’s clearly laid out for them. Whereas if you don’t have that, if you don’t have your financials in place, people are likely to pass you up and move on to the next deal.

Justin Cooke:
So you’re gonna wanna be in a position where you have the most potential buying audience possible, the best way to do that is have really clear financials and that has the potential to get you multiple offers and ultimately a higher price deal.

Ace Chapman:
Yeah, it makes such a huge difference. When we’re dealing with folks that contact us directly, a lot of times the financials are just a wreck. So you’re getting in, you have to go in like that detective and figure things out, and it just creates a sense of anxiety in the buyer’s got that, “Man, maybe I’m missing something, I don’t know what the picture is here.” And they’ve got to be the ones to come up and create that clarity.

Ace Chapman:
Whereas from a seller’s perspective, if you can just hand everything over, give them a clear picture of what’s going on in your business, obviously that’s gonna make your buyers happy, give you more potential buyers because they don’t, like I said, a lot of the buyers don’t have a lot of time to put into doing the work on these things. So it’s the seller’s job to make that as easy as possible for the buyer.

Justin Cooke:
Now, no deals are perfect, right? There’s no deal in the world that’s gonna have every single little thing working out great for them. But what are your first thoughts? As a buyer, have you come across an online business that has, number one, has revenue and profit increasing month over month, year over year. Let’s say it’s two and a half, three and a half years old, it’s got people and process ready to run it, it’s a real brand, it’s got a little bit of traction in its industry and they’ve got crystal clear financials. You’re gonna wanna snatch that up as quickly as humanly possible, right? Because you know what’s gonna happen, it’s like other people will come along and you’re gonna start bidding and trying to negotiate with the deal, they’re gonna want more, hell No, you’re right, you wanna get that as quickly as possible.

Ace Chapman:
Absolutely. It’s like, Oh man, I must be living right, somebody is shining it down on me.

Justin Cooke:
Yeah, it’s Unicorn territory. But yeah, I mean, you find that deal with all those in place, snatch it up. Yeah, it’s great. All right man, let’s do a quick wrap up. So, we talked a little bit about how valuations are based on let’s say 10X revenues, that’s just not the case anymore, valuations based on revenues at all, it’s just not the case anymore. Buyers just generally don’t really care how much you’ve spent, how much money you spent on trying to get everything up and running, they don’t care about the potential, they wanna know what’s it’s done, and what it’s done in profit and they’re gonna base it on a multiple of that. Generally that multiple is in the 15 to 35 net profit range today.

Justin Cooke:
One thing for strategic buyers to look beyond the multiple, it’s not always the best indicator of a good deal. You may have amazing deal for you at 30X, whereas this other one at 18 or 20X is really tempting, but the one with the higher multiple is your better option. If you really wanna sell at a top multiple from the sell side, you’re gonna wanna have an established growing site. It requires little of your time and has extremely clean financials. That is what’s gonna get you top dollar. What do you think Ace?

Ace Chapman:
Yes, I think we can get more people putting these kind of deals together, I think there’ll be a lot better deals out there. At the end of the day, I think it’s just you’re creating a win win. The better the seller builds a business that attracts more buyers, the buyer ends up getting the deal that they feel comfortable with. The seller ends up making more money off of selling their business, and it’s a win win, which is what this is all about.

Justin Cooke:
Yeah, man. Good for buyers, good for brokers and good for sellers for sure.

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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Discussion

  • Lewis says:

    Great episode guys! I was just discussing this exact thing (how an online business should be valued and what, exactly a buyer would look for) with my business partner the other day and your podcast flashed into my head. I look into the archives and POW – the perfect answer!

    Do you have any further information/episodes about inventory pricing? Specifically, and it might be an entirely separate category actually, I was wondering if there is any value that can be added to a buyer if a product is an industry with several low quality manufacturers and (through lots of pain and expense) the seller has uncovered 1 or 2 of the best manufacturers out there?

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