Industry Insights

2 Ways to Value a Business

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We continue to post chapters from our upcoming ebook guide, How to Sell an Online Business, to help business owners prepare for a sale. In this second chapter, we look at different approaches to value a business and which one is right for your online business in approximating its worth.

business valuation

2. Valuation & Financials

The first step for many digital business sellers is to understand the value of their business. There are many different ways to value a business, from asset-based and market-based approaches, to an assessment of historic and future earnings. Different approaches are favored based on the size of the business, its growth trajectory, the profile of the buyer, and the state of the business. For buyers of smaller, closely-held companies, a few useful methods are: (1) the multiple of earnings method, and (2) the market value method.

Multiple of Earnings Method

For an owner-operated, digital business, the metric often used as the number being multiplied is “Seller’s Discretionary Earnings” (SDE). SDE is typically calculated by subtracting the cost of goods sold and operating expenses from annual gross income, and adding back non-recurring, non-cash and discretionary expenses. Operating expenses are the necessary costs to running the business and are non-discretionary.

Examples of expenses that are often added back to the businesses’ earnings include owner’s compensation, depreciation, charitable contributions and personal vehicle expenses. For larger businesses where the value is less tied to owner benefits, the metric often used as the number being multiplied is “Earnings Before Interest, Taxes, Depreciation, and Amortization” (EBITDA).

ebitaFor businesses that are rapidly growing, have recurring revenue models or have high value to the buyer, “Revenue” is often used as the number multiplied. Since our industry focus is owner-operated, digital businesses, we will use SDE as our example metric, however many of the same principles apply for other metrics. Multiples for smaller website, and similar businesses usually range from 1.5x to 4.5x SDE.

Determining where a business falls within the range is tied to the predictability of future earnings and the effort required to maintain and increase them. Businesses that require more advertising to gain traffic or have a less reliable customer base will typically have a lower multiple. More predictable revenue businesses will command a higher multiple. Some thoughts for further consideration:

  • What is the digital business category (e.g. lead generation, content, membership/subscription, e-commerce, or software/SaaS)?
  • Where does the business’ traffic come from? Organic vs. Paid?
  • What is the customer retention rate?
  • How stable are the earnings?
  • How vulnerable is the company to new entrants in the field? Is the business easy to replicate?
  • How quickly is the business growing?
  • How easily can the assets be transferred to a new owner?

Market Value Method

Reviewing “comps’’ can be a great way to check whether your valuation assessment is on target. Comps can be obtained through brokerages and marketplaces online. The Hatchit Marketplace is a good place to start. As a first step, conduct a thorough search for business listings similar to that which you’re assessing. Next, narrow down the group, identifying the 5-10 digital businesses closest in type and size to yours.

Add these businesses to a spreadsheet, calculating a multiple of SDE or Net Profit for each (be careful to ensure that the figures being multiplied are “apples to apples”). You may want to include notes for each on your spreadsheet, as their unique attributes may help to further refine your range (e.g. “does not include inventory valued at $10k”, or “includes 5 patents”). Lastly, remember, the purchase prices you source online are “asking” vs. “selling” prices – you may need to take this into account when negotiating with a seller.

business comp table

Choose Someone to Value the Business

To further support your offer, you might consider engaging a professional for a third-party opinion on the value of the business. CPAs, appraisers, and business brokers are all good candidates to help with a valuation.

In addition to the Multiple of Earnings and Market Value method, a business valuation might employ other approaches including discounted cash flow, asset based, or capitalization in earnings. Make sure you understand the assumptions behind each approach before presenting the result to the seller.

Once the valuation is complete and you have decided to move forward with a sale, the next step is to organize your financials. Most buyer’s will want to see 2-5 years of financial statements that document your cash flow, balance sheet and profit and loss statements. In addition, buyers will want to understand the detail around any adjustments you have made to your financials when calculating the business’ SDE or adjusted EBITDA, since these inform the valuation and provide information about the cash available post-transaction.

financials

Take the time to develop a spreadsheet that lays out your financials so that they can be easily compared across the years provided, and clearly spell out any adjustments. Make sure you understand any inconsistencies or noteworthy occurrences in the figures, so you can explain them adequately. Be prepared, also, to show how your reported figures tie to your tax returns. Numbers tell a story and you want to control that narrative as much as possible. If you are selling for-sale-by-owner, it is advisable to engage a professional to help.

Additionally, it is advisable to speak with your CPA or financial advisor to understand what terms are acceptable for your personal and financial situation. Deal structures can vary widely, with implications on your income post-transaction. Also, selling your online business can result in a substantial tax liability:

  • Do you require all cash or are you open to the buyer financing part of the purchase?
  • What is the minimum amount of cash that you require a buyer to put down?
  • Are you open to seller financing if the buyer can’t secure a third-party loan?
  • Is your business set up as an LLC, S-Corp, or C-Corp, and what are the tax implications of selling the business’ stock vs. its assets?
  • Are you open to staying on during a transition period?

It's best to get these questions answered as early as possible so you don't waste time with an unqualified buyer. 

Regardless of whether you decide to sell through a broker or on your own, the process remains essentially the same.  We hope you took away a few insights that will help you value a business and yield the most money for it. Email us with any comments, suggestions, or insights of your own.

Quick Answer takeaways: 

  • Most web-based businesses use SDE for calculating a valuation.
  • Comps are a useful way to reality check your number.
  • Fast growing SaaS companies often use a multiple of revenue.
  • Predictability of future earnings can increase your valuation multiple.
  • Prepare 2-5 years of financials that include a balance sheet, cash flow and profit and loss statements.
  • Be prepared to tell the story behind your numbers.

Read the next chapter in the Seller's Guide on Marketing Materials.   

Images from Pixabay

Where to Sell an Online Business

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In our comprehensive seller's guide, How to Sell an Online Business, we help business owners prepare for an exit. Selling online businesses requires the right platform and assistance. In this first chapter, we look at the differences between selling for-sale-by-owner and going through a business broker. If you want a more professional looking and complete e-book with images and graphs, you can download the PDF. 

Where to sell a digital business1. Where to Sell an Online Business?

How you engage with buyers will be an important determinant of your selling experience. If you elect to work with a broker, you will want to clearly understand your respective roles. If you elect to sell your online business on your own, you will need to wear many hats and be well versed in the process. You may also want to lean on other professionals to help with elements of the transaction.

Working with a Business Broker

Engaging a business broker can be a great first step when considering a sale. Many business brokers will offer a complimentary valuation, even before you decide to hire them. This often includes taking steps to normalize your company’s income statement, then applying an appropriate multiple to the adjusted earnings – a process described below that requires some experience. Equally important, a website broker will know whether your Internet business is a candidate for a strategic acquisition, and how to price it accordingly. A broker can also help you assess what you can expect to net from a sale after all fees and expenses, which can be helpful when making the decision of whether or not to sell.

working with a business broker

Once engaged, a broker can help develop compelling marketing materials, leverage the firm’s resources and network to attract the right buyers, manage information exchange and negotiation, and work with you and your team to close the transaction and transition the business. Top brokers who specialize in digital businesses maintain websites with powerful domain authority and large networks of tech buyers – valuable assets to prospective sellers.

The cost of hiring a brokerage firm can vary with the specifics of the assignment, size of the company, and other factors. However, most brokers are primarily commission-based with back-end fees that can range from a few percentage points, to upwards of 15% of the transaction value. Some brokers also charge upfront for the valuation and development of marketing materials. There are a number of business brokers that focus mainly on digital businesses, including:

Some questions to ask a broker before engaging their services include:

  • Who will manage my listing?
  • Do they have experience in my niche?
  • Have they sold businesses similar to mine?
  • Where will my listing be marketed?
  • What will they need from me?
  • What is their fee?
  • What timeline do they anticipate?

Keep in mind that brokers have their own vetting process. If a broker won’t take on your web-based business, find out why so that you can address the issue and be a better candidate in the future. Broker feedback may be an important litmus test for the salability of your business.

Selling For-Sale-By-Owner

If you have experience with business transactions, or can lean on other professionals such as your CPA, attorney, or financial advisor, you might choose to sell for-sale-by-owner (FSBO). In addition to saving the brokerage fee, taking this route puts you in control of the process and perhaps enables you to more easily build rapport with prospective buyers.

selling fsbo

That said, if you sell an online business on your own, it can be a time-consuming and challenging task, particularly if you are simultaneously running the business. Be sure you have the skill set and bandwidth available to ensure a beneficial outcome. Additionally, without the benefit of a buyer network, you will likely need to invest in marketing your opportunity. There are a number of online marketplaces and platforms that can help market your listing:

  • Hatchit.us
    • Focus (>80% of listings): profitable website businesses <$2 mil in annual revenue (AR)
    • $0 listing fee
    • 0% success fee
  • Acquire.com
    • Focus (>80%): SaaS startups <$500k in AR
    • $0 listing fee
    • 0% success fee
  • Flippa.com
    • Focus (>80%): auctions and fixed price sites & digital assets <$200k in AR
    • $49 listing fee for online businesses
    • 5%-15% success fee
  • MotionInvest.com
    • Focus (>80%): micro sites <$50k in AR
    • $0 listing fee
    • 15%-20% success fee in marketplace

Regardless of whether you decide to sell an online business through a broker or on your own, the process remains essentially the same.  If you are still a few years out from selling, we suggest reading our article on preparing your business for a sale. We hope you took away a few insights that will help you decide how to sell your web-based business. Email us with any comments, suggestions, or insights of your own.

Quick Answer takeaways:

  • A valuation is another important data point in deciding whether to sell your business.
  • A broker can help prepare your business for sale.
  • A broker can help market and sell your virtual business.
  • Investigate business-for-sale marketplaces before listing your business.
  • Make sure you have the time and professional experts on hand to help sell your business on your own.

Read the next chapter, 2 Ways to Value a Business, in the upcoming Seller's Guide.

Disclaimer: This page contains affiliate links to Hatchit’s broker-partner sites. If you choose to buy or sell a business through a brokerage site we link you to, Hatchit may receive a referral fee at no additional cost to you. Thank you.

Ecommerce Sales for Fourth Quarter 2021

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Summary: Despite some fluctuations through out the year, total ecommerce sales for 2021 were up significantly over 2020, according to the latest statistics from the U.S. Department of Commerce.

Fourth Quarter 2021

  • The estimate for U.S. retail ecommerce sales for the fourth quarter of 2021, adjusted for seasonal variation, but not for price changes, was $218.5 billion, an increase of 1.7 percent (±0.7%) from the third quarter of 2021.
  • The fourth quarter 2021 ecommerce estimate increased 9.4 percent (±0.9%) from the fourth quarter of 2020 while total retail sales increased 15.2 percent (±0.5%) in the same period.
  • Ecommerce sales in the fourth quarter of 2021 accounted for 12.9 percent of total retail sales.
  • Total e-commerce sales for 2021 were estimated at $870.8 billion, an increase of 14.2% (±0.9%) over 2020. Ecommerce sales in 2021 accounted for 13.6% of total sales.

ecommerce sales fourth quarter 2021

As you can see from this graph, the percent of ecommerce sales vs. total retail sales has re-accelerated in the latest quarter after dipping a bit in 2021. 

Take a look at second quarter and third quarter 2021 numbers for comparison.

For more articles about ecommerce stats, see our Data Shot series.

Source: U.S. Census Bureau News, Press Release, Feb 18 2022

7 Reasons to Hire a Business Broker

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As a business owner and entrepreneur, you’ve likely poured your heart and soul into your company. So, when it comes time to sell, how can you ensure the best possible outcome? Hiring an experienced business broker is a great place to start. Here are 7 reasons why you should consider hiring a business broker to help sell your company:

hiring a business broker

1. Accurate business valuation and financials

Determining the value of your business requires both knowledge of valuation methodologies and an understanding of the landscape of buyers. A good broker will know how to properly normalize your income statement and how to apply a multiple-of-earnings assessment or alternative valuation methodology. Equally important, a broker will know whether your business is a candidate for a strategic acquisition, and how to price it accordingly. Finally, buyers prefer to purchase businesses represented by a professional because the financial information has been vetted by a third party.

2. Effective marketing

An experienced business brokerage will know how best to position your business to attract qualified buyers. Quality marketing materials, including a “teaser” summary and comprehensive overview of the business, will help attract the best buyer candidates and weed out unsuitable buyers. Brokers may also list your business for sale on their website as well as marketplace websites to target acquirers of companies that fit your size and profile.

3. The right buyers at the table

The universe of potential buyers for your business may be wide and diverse – from individual entrepreneurs, search funds, and fundless sponsors to strategic acquirers, private equity firms, and aggregators. There are pros and cons to each. A good broker will have in place a robust buyer network, as well as resources to reach additional candidates, so the right parties are at the table. Additionally, a broker can help screen buyers to ensure they have the financial wherewithal to acquire your business, and the right skills to operate it.

effective negotiation

4. Effective Negotiation

Purchase price is just one component of an offer. Deal terms, too, significantly impact the attractiveness of a proposal. Is the buyer seeking seller financing or performance-based compensation? Are you required to stay on for a lengthy transition? A broker can help you navigate terms, make informed decisions, and communicate effectively with the parties involved. Additionally, business acquisition negotiations can be emotionally charged. An experienced broker will help the parties keep emotions to a minimum and stay focused on a mutually beneficial outcome.

5. An Outsourced, Efficient Process

Running a sales process can be time-consuming and exhausting. In addition to preparation, the seller will need to manage multiple negotiations and respond to ongoing requests for information. Most business owners have their hands full just running their business. So, it makes sense to outsource much of the effort to a professional. A broker will help you avoid any business performance issues that might emerge if you are pulled in too many directions during the process.

6. Confidential Dialog

A sales process requires disclosure of confidential information to multiple parties. Without the assistance of a business broker, it can be difficult to confidentially engage with potential buyers. A broker can approach buyers, even competitors, with a “blind teaser,” followed by a non-disclosure agreement (NDA) before any information is exchanged. Likewise, a broker is less likely than a business owner to inadvertently alert employees or other stakeholders of the sale.

7. Documentation

There are a number of legal documents involved in a business sale transaction, including an NDA, Letter of Intent (LOI), and Asset or Stock Purchase Agreement (APA or SPA). While it certainly makes sense to engage an attorney when developing documents, a broker can help defray legal costs with access to boilerplate templates, past agreements, and a working knowledge of the key terms and opportunities for negotiation. Leveraging the knowledge of a broker to help with these agreements, while engaging your attorney for document review and counsel on key deal points, can be an effective division of labor. Finally, a business broker can assist in the transfer of assets at the conclusion of a successful sale.

Sell side brokers to consider include Empire Flippers, Flippa, Foundy (UK), Website Properties, Investors Club, ECom Brokers (UK), and many more

You may also be interested in reading about individual business brokers in more depth.

Disclaimer: This page contains affiliate links to Hatchit’s broker-partner sites. If you choose to buy or sell a business through a brokerage site we link you to, Hatchit may receive a referral fee at no additional cost to you. Thank you.

7 Digital Business Trends for 2022

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With the new year upon us, it's a good time to look at new business trends and which business ideas are attracting the most interest from business buyers. We reviewed a snapshot of website data from 13,000 page views into the first week of January to spot digital transformation trends. What we found is that there have been some significant shifts in the digital economy from last year’s report.

top 7 digital businesses for 2022

Some key findings before we count down to number one:

  • B2B solutions continue to dominate the list.
  • COVID impact: "interactive video" landed high on our rankings last year, but fell off the list this year as people may be anticipating the end of COVID.
  • Recurring revenue (vs. transactional): buyers are seeking a model that continues to deliver dollars, versus one that is focused on individual sales.
  • Lead generation debuts on our list as business owners look for more ways to drive targeted traffic to their sites.
  • Niche e-commerce and cloud service providers dominate the list at #1 and #2 respectively versus enterprise software and interactive video last year.

Read on from #7 to #1 for insights into what business buyers are seeking now.

#7 Lead Generation Platforms

These are sites that offer incentives, aggregation, or expertise to help buyers find what they are seeking. Typically, they are in the form of directories, coupons, resume templates, etc., that offer convenience and information to the user leading to revenue when the user makes use of a service or product.  

#6 Email Services

Email marketing services for businesses consist of ways to make outreach campaigns easier and more effective. They typically have a CRM and/or AI integration and consist of apps, plug-ins, and platform solutions that often employ a SaaS model. Email outreach is popular with businesses because it often has a higher ROI than other marketing channels.

seo tools

#5 SEO Tools

Optimizing not just traffic, but relevant traffic to your website is the heart of SEO. A good Google or Bing ranking can drive organic traffic to a website. But the pieces that make up a good ranking rely on data analysis and an understanding of competitors. Software solutions for SEO are frequently SaaS models. Some of the big names are Ahrefs, Semrush and Ubersuggest.

#4 Content Platforms

These are content-based sites that could be blogs, product reviews, or articles. They usually focus on a particular interest or hobby and make money through the posting of display ads to customers, affiliate marketing, paid subscriptions, or events. Content can vary from general consumer to technical professional.

#3 Enterprise Software

This is software geared to helping businesses manage their day-to-day company activities such as procurement, accounting, project management, supply chain, risk management, and compliance. Many of these companies follow recurring revenue models and service SMB to large business organizations.

#2 Cloud Service Providers

These are network services provided to organizations, which can be application or data based. Essentially, these third parties are providing an infrastructure solution through their remote servers. Typically, companies pay for the data they use but applications are likely to involve a more set recurring charge.

niche ecommerce

#1 Niche Ecommerce

This includes Shopify retail sites and other e-commerce. These retailers either fulfill goods themselves or through a third party such as Amazon FBA or dropship warehouses. Offerings are often within tightly-focused niches, e.g. personal gear, pantyhose, or women's tunics. The majority of these websites are B2C, though there are many B2B niche e-commerce sites as well.

We hope you found the findings of our digital business trends for 2022 to be revealing. For bigger tech acquisition trends in 2022, check out Storybee's up-to-date list.  If the acquisition route intrigues you, search our latest Internet businesses for sale. 

How to Close on a Business Purchase

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In the sixth and final chapter of How to Buy a Digital Business, we look at the much-anticipated purchase agreement and business sale closing. You'll gain an understanding of what to expect in the final step of the business purchase process as well as the seller's obligations. If you want a more professional looking and complete e-book, you can download the PDF.

Shake my hand6. Business Purchase Agreement & Closing

Depending on the complexity and size of the transaction, a purchase agreement template can be very simple or very complex. While a simple transfer of a digital asset may only require a bill of sale, the acquisition of an income-producing business is typically accompanied by an Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA).

Most acquisitions are asset purchases, meaning that the buyer transfers the tangible and intangible items owned by the company from the seller’s corporate entity into a different corporate entity owned by the buyer. These items generally include everything from the website, customers, and inventory to trademarks, patents, and goodwill.

By contrast, in a stock purchase, the buyer acquires the seller’s business entity itself, which includes all of the assets and liabilities contained within. In either case, you will want to work with an M&A attorney and CPA to help you decide which route is best for your situation based on the legal, financial, and tax implications of your purchase. Since most owner-operated web-based business transactions are asset purchases, we will focus on things to consider when drafting your APA. 

asset purchase agreement

Image from Pixabay

Asset Purchase Agreement (APA)

The APA is generally a far more robust document than a Letter of Intent, often 20-40 pages, addressing many of the same items as the LOI but in greater detail. The key elements of an APA include a complete list of the assets being purchased (and not being purchased), liabilities assumed, the purchase price and how it will be paid and allocated for tax purposes, details on the closing and post-closing adjustments, seller and buyer representations and warranties, and the handling of disagreements post-transaction.

There are typically schedules attached to the APA, including financials, organizational documents, contracts, permits and other key items upon which the purchase decision was based. Lastly, there are often separate agreements simultaneously signed at closing that handle elements of the transaction that fall outside of the APA, such as non-compete or consulting agreements. A few things to consider when working with your attorney to draft an APA:

  • Be specific when identifying included assets – detail domains, content, subscriptions, plugins, contracts, inventory and all other components of the business
  • Confirm that the seller owns the assets you are buying and that they are transferable to the new corporate entity.
  • Think through how you can retain some leverage with the seller post-transaction. A seller note or escrowed funds will leave you in a stronger position if, for example, the seller does not deliver on training or other promises.
  • Consider language where you have recourse if the seller does not deliver on promises (e.g. the seller note is reduced accordingly).
  • Optimize the asset allocation and explore creative ways to minimize taxes on the deal – with different depreciation schedules, some asset categories are more tax friendly for the buyer than others (e.g. “Personal Goodwill”)
  • Small deals do not need big contracts – speak up if you feel the template your attorney is working from is overkill.

Takeaways: How to Close on a Business Purchase

  • Have I carefully read the Asset Purchase Agreement draft?
  • Have I confirmed asset ownership by the seller?
  • What am I asking of the seller post-transaction?
  • Does the agreement fit the deal being signed or do I want something simpler or more complex? 

For a secure closing and asset verified transaction, visit our affiliate escrow agent Escrow.com. 

We hope you took away a few insights that will help you successfully complete a business purchase transaction. Email us with any comments, suggestions, or insights of your own.  

Download the complete buyer's e-book or start reading from the beginning.