In the interview:
01:25 – Sell it yourself, or get a broker?
06:10 – The downside of using a broker
07:40 – Broker payment set-up
09:10 – Seller fees to expect
10:44 – Valuating the sale
13:12 – Why sell your business?
15:49 – Some post-sale stats
17:53 – Prepping to sell
20:01 – When it’s on your personal domain
23:33 – The matter of transferring billing
25:19 – Other obstacles to selling
27:27 – The documents involved
29:00 – The reasons people buy
30:09 – Where the funding comes from
33:43 – Other things you want to think about
37:04 – Wrapping things up
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James Schramko here. Welcome to SuperFastBusiness.com. Today’s topic is exit planning. Building your business the right way to sell it. I’ve brought on a special guest, Thomas Smale from feinternational.com. Welcome.
Thomas: Hey James. Thanks so much for having me on.
James: So we should just be clear. There’s a couple of points, there’s two phases, so to speak. One is when you’ve got your business, you want to start thinking about your exit planning. That’s the first phase and then the second phase will be the sale of the business itself. Your company actually focuses on the selling part if someone doesn’t want to do it themselves. Why don’t we first talk about what are the differences between selling a business yourself versus using a company to sell it? And then I think we’ll spend most of our time on the exit planning phase because that’s something we’re going to do regardless of who sells the business.
Selling a business: DIY or via a broker?
Thomas: Yeah OK. So the way it works with a broker… So whether it’s us or whoever it’s going to be, it’s reasonably similar in their approach versus selling for yourself. I mean one of the main reasons you use a broker is they’ve got experience throughout the selling process, preparing your business to sell, presenting it to buyers, dealing with buyers. So you might have asked us to spend some time with you upfront, going over your financials, asking a bunch of questions about the business, preparing sales materials. So that’s not necessarily saying you can’t do it yourself, but we’ve got a structure doing it and it’s really based on feedback from literally thousands of buyers over the years as to what they want to see.
So while this is standardized internally, it’s built around a logic on what buyers have asked for. Whereas if you’re doing it yourself, you don’t necessarily know what buyers want to see. You might think you know but in reality, what buyers want and what you think might be quite different. From there, if you work with a broker, you’ve got existing buyer contacts, but if you’re dealing yourself, you might have a few friends or peers who might be interested in the business, but chances are you don’t know literally thousands of buyers actively interested in buying a business. So the initial reach you’re going to get is going to get lower.
We find that the majority of buyers we deal with take maybe a year or 2 years to make a decision on the business they want to buy. So if you’re just selling one business, the odds of that particular buyer buying your business is quite slim, whereas if you’re dealing with a broker, you might have dealt with someone who has already listed up five businesses before and said no. And then when your business gets listed, it’s the one they want to buy. So that’s another advantage.
James: OK. Just a quick recap there. You’re dealing with someone with lots of experience and lots of data points really and a database of buyers and you know what the buyers are looking for and wherever they’re at in the cycle, you always got a pool of buyers. So they’re all positives. You’ve got a couple of more there?
Thomas: Yes. Once you’ve got through that stage then that should start the negotiation stage which I mean most business owners are probably capable of negotiating, but one of the things you should do is a broker or any third party that removes a lot of the emotion from the process. So I’ve seen entrepreneurs who are passionate about the business, they like their business, so when they come to selling, you can be quite emotional and kind of almost irrational in the process.
Whereas the job of a broker, while they want to sell the business for you, they’ve got to be objective and help you make rational decisions so you don’t want to take a real bad offer just because you kind of get fed up with the length of the process or you don’t like a particular person. So you don’t want to deal with them at all. So that third party objectivity is important. It’s all necessary, a broker, you could do with a friend or whoever, just as long as you’re not the person, the business owner is the one negotiating.
And then from there, like getting an offer on a business, a lot of people gets to the stage where independently, they can get a lot of interest or get an offer, but there’s a big difference between getting an offer on a business and actually getting the cash in the bank and getting it closed. So an experienced broker you get will be working for your offer process, making sure that the terms you accept are good and you haven’t missed any kind of traps in an offer that often quite experienced buyers try to put in, walk you through the decisions process and make sure that what the buyer is asking for you is reasonable. And then they’ll like treat a contract negotiation so we’re pretty heavily involved all way through like drafting, making sure the agreement is fair for both parties, usually saving parties, especially the seller, a lot of cash on legal fees, accounting fees, throughout the broker, you shouldn’t really need an accountant or a lawyer, except just for like reviewing contracts.
And then all the way through the closing, so making sure that the transaction is safe, so once you’re on a contract using an escrow service, transfer in the business properly, making sure that you’re protected on that front. So a lot of it is experience, a lot of it is, I guess, objectivity throughout the process, and they’ll see the plus side of having suddenly already got you thousands of buyer contacts versus the probably tens of contacts you might have yourself. So that’s like a reasonable summary of why people might use a broker versus trying to sell themselves.
James: OK. Now I imagine there’s plenty of different brokers out there, what are some of the things that you see other brokers are doing that might make it not ideal to sell through a broker?
Why it’s not ideal to sell through a broker
Thomas: The broker industry, like many in the industry is extremely competitive, so you get a lot of brokers out there especially those who are trying to get businesses in, who upfront might set very unrealistic expectations with a seller, so they might attract you with really high evaluation, really low fees, or like really short expectation period to actually sell the business. So a business that’s worth half a million dollars, they might value a million dollars known if you go speak to another broker, he values at half a million, you’re quite likely to get with them.
James: So it’s like the old real estate listing trick.
Thomas: Yeah exactly. It’s not unique to brokerage, but it is saying that we see it quite often. The other one is like timing. So quite often, selling a good business, while there’s lots of buyers out there who are interested and don’t sell overnight nor shouldn’t sell overnight, if your business is selling like one day, like little preparation then there’s probably something wrong with the process and you want to make sure that you’re getting the best possible deal. So sometimes brokers will attract you to them and that could really short time frame, like, sell the business in two days, but in reality, that will get you to a situation where you accept a bad offer or you accept an offer that’s not really structured in a particularly good way.
James: Does the broker only get paid if the website is sold or the business is sold?
When to pay the broker
James: So they’re very keen to sell the seller on selling.
Thomas: Yeah. I mean I guess there are two broker models. I mean part of the reason I had ventured in the industry in the first place like 5 years ago, was that the traditional business broker model is: attract a lot of sellers and then over the course of a year, you might sell 10% to 20% of the business on your list because that approach is you’re kind of left alone and occasionally deal with business to sell regardless of like your advice or expectations, and they don’t really mind because they’re still getting paid on those couple. They’re not getting paid on the rest but that’s just I guess cost of doing business with them.
Whereas our approach has always been if we take it all, put like maximum focus, give the right advice upfront. So it might mean we lose in business while the brokers, just by being honest and upfront, our success rate for a seller is 93% versus the 10% or 20% you might get more traditionally. Like you said obviously, the broker is incentivised to get the sale done, but some will kind of put a lot less work and do a lot of deals at one, whereas our approach is more put a lot of time into a deal and sell almost everything.
James: And what sort of fee structure is someone going to be looking for when they sell their business, and a side question to that is what is the typical sort of business that is like a sweet spot for you?
What structure to look for
Thomas: For you it will depend, but the main majority brokers, if you’ve got a small business, say $50,000, you’d expect to pay 15%, if you have a bigger business, say $500,000, then it will expect to pay 10%, and anywhere in between 10% and 15%, depending on the size of the business.
If it’s much larger like in the multi-million dollar range, and that for you might come down to 9%, 8%, 7%, 6% as it goes up. In terms of for us, for our sweet spot, I mean we’re quite versatile and the range that we deal with, we sell sites in about $20,000 to $30,000 up to $2 million or $3 million. The majority of our deals are in the $50,000 to $500,000 range. We do a lot of volume at that level. When we say we deal with online businesses, we sell online based, chances are we sold things similar before, but we do a lot of e-commerce businesses, we do a lot of AdSense, Amazon, affiliate-type content sites. We do a lot of SaaS businesses. We really do a real range. But I mean the sweet spot for us is more on size rather than business model.
We’ve got so many buyers, so that’s like time and resource, investing and finding buyers, as long as it’s online based, chances are we’ve got a buyer in our list making sure it’s at the right size.
James: And for the different categories of sites you’ve mentioned, whether it’s e-commerce or affiliate AdSense sites or SaaS, I imagine you also do services from time to time, are there very different sale valuation methods? Is it usually some kind of a multiple of profit?
Sale valuation methods
Thomas: Yes. We use what we call SDE, which is seller discretionary earnings, which is very similar to net profit, except we do what we call is adding back at a discretionary cost. So for example, owner salary, anything that the owner’s taken out of the business that’s not relevant to running the business gets added back. So it’s factoring the net profit and then you take out any cost that the earners include to richen, really, themselves, because from the cash perspective most business is like through on as close to zero as possible, whereas when you’re selling your business, you want to make that net number as high as possible.
James: If you had to replace the owner though, you’d guess you’d have to allow commercial salary for that role.
Thomas: Yes. You take it into account. But we don’t generally take it into account as a cost in the P&L but we take it into account with a slightly low evaluation. So multiple ways. Let’s say you’ve got a business that nets $100,000 and you’ve got an owner who works 40 hours a week, and then you’ve got the same business making $100,000 but he only works 5 hours a week, then we wouldn’t necessarily adjust that number, but we will adjust the multiple of the business’s worth. So the business with 5 hours a week is going to be worth more than 40 hours a week.
James: How much would both of those businesses be worth roughly?
Thomas: I mean it varies. Like you mentioned, all the different types of businesses, they’re going to attract slightly different multiples. Generally speaking, the lower end of the threshold is like one-time service businesses, especially if they’re quite on the line, so you can see them going anywhere for 1 to 2 ½ times annual net, multiples of one, it’s like a full time job and it’s quite specialized. Whereas if got like completely outsourced, you’ve got like recurring client, then you might expect more, like 2 ½.
SaaS businesses… anything recurring, we can go anywhere and up to 4 to 5 times the annual net for small businesses that level, especially if it’s growing, and you’re just looking at the last 12 months. But I mean in general, I think the average multiple in the last 12 months is about 2.7 times. So a fair estimate, if you don’t know your definite, variable-wise would be 2 to 3 times the majority of business, which will show somewhere in that rank.
James: Excellent. That’s very comprehensive especially on the selling part Thomas. Now, we’re just going to switch into the exit planning phase. I think that’s something that would be really interesting for someone thinking about selling their business because it would prepare them well to lead up to dealing with a broker. Let’s start first with why would we even want to sell our business? What are some of the main reasons that you see people want to sell, and is it important to frame this with the buyer?
“Plan your exit.”
Reasons for selling a business
Thomas: Yes. I think firstly with exit planning, a lot of people think they should only be exit planning if they’re actually planning on selling their business, but I think it’s important regardless of whether you’re not thinking about doing it to doing it anyway and be saying it at the back of your mind.
In terms of reasons people sell, it’s definitely saying that, “Buyers, look out,” because from a buyer’s perspective, quite from people who sell businesses, when they’re kind of been like semi-abandoned, the owner might have moved on to new things, they want a safe out. If they’ve moved on to new things because that business is dying or if they need to look at some of the other things going on. So that’s probably the number one reason we get is usually entrepreneurs or serial entrepreneurs, you have multiple ventures and they just want to focus their time, energy and cash on one business, and the business they’re selling might no longer be core for whatever reason.
Sometimes, especially on the low end markets, sometimes we’re dealing with sellers who might just got off the new job or they’ve just relocated, they’ve spin off with a partnership and a business, their business just got funding, so they want to move on to new things, for whatever reason they just no longer have time to run the business. I guess less common for us but really more traditional with business brokers is retirement. You don’t find though that many online business owners who are nearing retirement. But I mean they also come up. Sometimes people just want to free up some space.
We deal with a few people who I guess buy and sell businesses quite regularly and that is their business. So whether you want to call it business flipping, website flipping. So we do deal with some people who build businesses out of purely intention of selling them after, say 1 or 2 years, or they might have brought them from scratch and then they let to sell it. So that would pretty be the main reason that people sell. And it’s definitely saying, “Buyers, look out,” because they want to make sure that the seller is leaving the business for the right reasons rather than the business falling apart, which is another reason that people sell. The business is on a decline, they don’t know how to fix it.