In this episode:
02:44 – When is it time to sell?
03:44 – Just before selling…
04:59 – The steps to make the sale
10:16 – A sale book checklist
13:15 – Why are you selling?
14:36 – How much is your site worth?
17:11 – Some mistakes to avoid
19:31 – Protection after the sale
22:04 – Pre-qualifying buyers
23:04 – Would a broker help?
26:49 – Selling domains
29:58 – The reasons people buy
34:04 – Easy ways to find a buyer
35:00 – The key points summarized
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James: James Schramko here, welcome back to SuperFastBusiness.com, and my co-host for this series podcast, Matthew Paulson.
Matthew: Hey James. How are you?
James: I’m going well. Matthew Paulson from mattpaulson.com, with two T’s, so I believe. Now, it’s great to have you back for part 3. We’ve already covered a few episodes that have had some great reactions. In part 1 of this 6-part series, we talked about how to grow and monetize an email list of 250,000 emails. We got some nice comments about that. Part 2, we talked about side projects and why you probably shouldn’t do them. A nice case study there. We both had some great inputs for those episodes.
Now part 3 is going to be a little more about you Matt, because in this one, we’re talking about a $400,000 website sale case study. So why don’t you get us started with this one.
Matthew: Yeah. This kind of dovetails off of our last conversation. We discussed why side projects generally aren’t a good idea, and it’s mostly because they’re a distraction from kind of your main thing. So about a year ago now, I had two big businesses. One of them made more than a million dollars a year and the other made $200,000 a year, but they both took about the same amount of time. So I decided it was time to find a new home for the smaller business and just try to find a way to sell that and get rid of it and hand it off to somebody who wants to put the time and to grow it.
I wasn’t neglecting it but I didn’t have the time to grow it because I was too focused on the bigger thing. The smaller business that I sold was just becoming a little bit of a distraction so I decided to sell it and cash out at that point.
James: So it will be interesting to find out what the steps are. We understand why you wanted to sell it because you realized that it wasn’t giving you the same bang for buck as your primary business, and you wanted to stick to your core business and offload this one. So the motivation is there. Just on that topic, what sort of things do you think a business owner might think about when they’re deciding if they should sell or not?
Things to consider before selling
Matthew: I think if you’re thinking about selling your website, and you’re having those feelings that it’s maybe time to get rid of it, it’s probably time to get rid of it. It’s really kind of a “trust your gut” thing, but if you’re kind of sick of working out, you’re not giving a website the time and attention it deserves, you’re focused on something else, it’s probably a good time to cash out, because if you have a website and you’re not working on it, you’re not keeping it up-to-date, that kind of an asset tends to decline in value overtime and fade into the history of the Internet.
James: So basically, you’ve got to have a bit of a passion for the business. Even if you’re not passionate about the market, people confuse that one sometimes, but you’ve got to be passionate about getting out of bed and thinking about this business and putting more energy into it.
Matthew: Yeah. If you lose that passion, it’s probably time to give it to somebody who has that passion and you’ll get a chunk of change and then you can focus on something that you’re more passionate about.
James: Are there any tips that should be kept in mind just prior to putting your business up for sale? I’ve heard some varying viewpoints on this. Some people say you should make it more cashflow-friendly, make it work less without you. Other ones say, “Hey, don’t change it too much because savvy buyers are going to detect recent changes just prior to sale to stagger sale price.”
Matthew: Yeah. I think if you are going to make changes like that, you should do it probably 6 months before you want to sell it. That way, all the changes that you make have time to bake in and that way, the buyer is going to know what they’re getting. So if you want to try to improve the monetization, if you cut back on expenses, if you’re doing any kind of exploratory marketing that you’re not sure if it works or not, you should probably cut that out.
So it’s really just a matter of cutting the fat and letting it run for 6 months so you can prove you know what the numbers actually are after you’ve made those changes, cut expenses, tried to generate additional revenue, and try to get yourself out of the business. Once you have that lots of time passed, then you can get away with those kinds of things a little bit easier.
James: Right. So it’s important to have a consistent set of numbers that lead up to the sale point that someone who’s looking a the business could look at and say, “Hey. I see what I’m getting into here.” Let’s talk about what’s involved with the sale itself. Tell us about the steps you went through.
Matthew: Sure. Actually, there are two different ways to sell your website. You can do it through one, a broker. So there are companies that will broker your business for you or your website. They will find a buyer for you, they’ll set up the deal, they’ll handle everything. Some of the big ones are FE International, so that’s feinternational.com, there’s Justin and Jill from the Empire Flippers, they deal with smaller websites. There’s a company called Quiet Light that deals with larger websites. There’s a few different ones and some are better than others. Let them just handle that for you and they’ll scrape up a buyer if you don’t know how to go find one yourself.
I actually didn’t go through a broker. I thought, you know, if I’m going to hire a broker, this is going to cost me 10% of the business just to sell it, so that would be $40,000 that I’d have to pay a broker to sell it. So I thought you know, maybe there’s a way I can do this without having a broker and save that fee. I’m not against using a broker but in my case, it worked out to not do that. I tried to sell it myself prior to calling the broker and it just happened that some buyer showed up about a week before I was going to give a broker a call. So the way that I found those buyers was there’s a conference in October every year in Las Vegas called Rhodium Weekend.
James: What’s that all about?
Matthew: Yup. So that is a conference for website buyers and sellers, and there tends to be a lot more website buyers there than there are sellers. So I hit every up at that conference and just kind of said, “Hey, I’m thinking about selling this,” and a couple of guys, the names are Andrew Pincock and Dave Parkinson, they’re a couple of guys that do lead gen in Utah. They hit me up and said, “Hey Matt, we’re interested in your business.” So I sent them over the numbers and then we negotiated from there.
James: Right. So what you’re saying is you might save a brokerage fee and reinvest it into a weekend in Las Vegas.
Matthew: Yeah. I mean that trip cost $2,000 to get the plane tickets, get the hotel, lose some money gambling, hang out with people, get some drinks.
James: So it comes down to if you enjoy selling things, and if you are good at it, but I imagine one of the big benefits of a broker might be distribution. They may have the customer that you’re looking for that you can’t find yourself, but you’ve just solved that by going to a buying and selling convention, which is pretty clever.
Matthew: Yeah. I mean, I recommend a broker in most cases. I just happen to get lucky by finding a buyer before I gave a broker a call.
James: There’s another broker too, Jack at Digital Exits.
Matthew: Yeah. Jack’s a good guy.
James: He’s a great guy. He came to one of my first workshops, I think my fourth workshop actually, he came to, and sat in that workshop and just switched on to the whole online marketing and just went on an explosive growth rampage. The guys at Empire Flippers, are fantastic as well. There are other marketplaces as well, like I think Flippa, is a marketplace.
Matthew: Yup, there’s Flippa and a couple of other companies getting to that market, too.
James: But like any marketplace, you really have to do your due diligence and sort through the good deals from the bad ones. At least one tip there might be to look at what actually sold in the past year so that you can get a feel for where the market actually is versus what people are asking for, which is often very optimistic.
Matthew: Yeah. And if you’re going to sell a website in Flippa, you’ll find that there are a lot of non-serious buyers. There’s guys from, I hate to say it, but India, Pakistan, who will want to give you a lowball offer and just try to waste your time. So you just have to be careful for time wasters on Flippa. If you’re going to list your website there, any website that’s worth maybe more than $50,000, I don’t know if I’d list it on Flippa. I’d probably give it to a broker. But first of all, the website Flippa can be a nice place to go.
James: OK. So we’ve given some ideas about where you might sell, where you might find customers. Let’s talk about how you do this. How did you determine valuation and also, did you put together a sale book? That’s the proof document that most people put together when they want to sell a business. I can talk about what would be included in that. Just wondering what process you went through for your $400,000 sale.
Matthew: OK. So what I did was I came up with a document that outlined the business, how it works, what the growth opportunities were, what the risks were, revenue history, all that stuff.
James: That, my friend, is the book. That’s the sale book.
Matthew: Yeah. So I put that up together. It was probably just 5 to 10 pages in length. I sent that over, got an NDA in place.
James: So let’s just slow that down a bit here because we’re into the meaty stuff. NDA stands for?
Matthew: Non-disclosure agreement.
James: Right. And the reason you have it is?
Matthew: You know, if you give them all the details about your business, it makes it pretty easy for them to copy.
Matthew: So you don’t want them to copy your business if they’re not going to do the deal.
James: So some of the good brokers will only reveal the book after they qualify a buyer. In some cases, the buyer may even have to pay a deposit to get a look at the book. So I’ve got a list of things here that might go into a sale book. Shall we just go through that and see if you had these or not?
James: So the money part, you’re going to have things like tax returns, bank statements, financial proof of what was actually going through the business.
Matthew: Yeah. You just want to be able to show, this is what the business actually made over the last 12 to 24 months, and then just have documentation to back that up.
James: Right. So P&L, profit and loss charts. Then you’re going to want to have things like analytics to show what’s happening on the website and opt-ins and all of those things.
James: Then you want to have a look at the business plan. Where does this business operate? Who are their customers? What things are happening in the future for the business? What’s likely to happen, like projections including assumptions and those sort of operational things.
Then you have anything like official documents. You may need to have trust deeds or trademarks go along with the business sale. A lot of people don’t look at this one, but the domain name obviously for an online business is kind of important. So did you include those sort of things?
Matthew: Yup. There was a trademark for the business that was included. There is a form you fill out in the website and the U.S. Patent Trademark office website, they do a transfer. That’s actually pretty straightforward. There are several domain names involved that got transferred is part of the deal.
So the document just listed all the assets that were included so there wouldn’t be any confusion about that. That made it clearer, prevented issues from somebody thinking this was included, you said this was included but it’s not. So that way, they know exactly what they’re going to get in the sale.
James: Exactly. Then you might put things like job descriptions for people who work in the business if you have anyone or yourself if you operate it, any supplier agreements, description of your customers, marketing plan, traffic sources, major competitors and any barriers to entry to the market because they can widely impact the valuation of the business.
Matthew: I think a good thing to put in there is what are the risks involved with the business. In every business, there’s something that can torpedo you, so it’s good to list out what those things are ahead of time, so that way, if something goes horribly wrong, you can say, “Hey. It was in the sale document that said that could happen.” It was a risk of the business that hasn’t happened in my case but it’s good to put that in there just in case.
James: Exactly. You can also list your unique, competitive advantages and of course, things like debts or any sort of loans. I was offered half a business twice actually, or even three times. Each time, I did my due diligence and found out they had cross collateralized loans and those are risks that if a different business went under it would pull back under the business that I was offered. So watch out for those ones.
Then there’s things like your refund rate, your lease size, what sort of support requirement is there, what sort of training you’ve done, if there’s standard operating procedures. List out all your products and offerings, and of course, they’re wanting to know why you’re selling the business in the first place. A good reason why might help. How did you explain that one to your seller?
Explain why you’re selling
Matthew: I showed them what the numbers were from my other business and said, “Hey, this other business is a much bigger opportunity for me. I just need to focus on that. This is no longer an area focus for me and that’s why I want to sell it.” That was a good enough of an answer for them.
James: Nice. So let’s talk about how you arrived at the valuation because there’s a few things that can help you get there. Risk, you mentioned already, like whether it’s a high risk or low risk might impact the multiples of profit method, if that’s the way you want to sell it. You might be selling it based on traffic or the market position, what sort of growth potential or easy wins are there, or whether it’s maxed out. You might be selling it based on not having to be involved in it, so it’s really a good investment style thing, but it could also be more like a job if you’re heavily involved in it.