James: Like when people trade in their car when their engine is about to fail.
Thomas: Yeah, exactly.
James: Do you have any statistics on how many businesses you sell, how they’re performing like a year or two after the sale? Is there any sort of metrics tracked in that regard?
Stats after the sale
Thomas: Yes. We do tend to follow up with people. What we find is that sometimes people buy business with the intention of doing a lot of work to it then don’t. The majority of businesses will remain I guess if you let, say, 80% of the business we sell, they’re going to be plus or minus 20% after a year. We deal with some that are significantly larger, so it’s not uncommon to see a business bought and actually followed through with a plan, especially when businesses are particularly solid when they are bought and the owner is selling it because they’ve been focusing elsewhere and someone buys and does focus.
We see businesses that maybe go 5 or 10 times bigger in a year. The occasional businesses that’s kind of struggling and drop a little bit, that’s usually if the owner’s not put in the work that they should. We tend to be quite a big issue in general whereas people take on businesses and they don’t spend enough time figuring out whether or not they’re actually better running the business, and then they just kind of neglect it and it kind of gradually declines because regardless of what someone tells you, every single basis is going to need at least some attention.
We did track metrics on outright scams, like how often we get offers that tend out to be a complete fraud. And I think I worked 350 deals, and then had one offer that’s not done as well as I should have done. So generally speaking, dealing with a decent broker, you’re not going to have any issues on that from, especially if you work for like a structured diligent process which we do now.
James: I think you dropped a good hint too about following the plan. I think when it comes to exit planning, I’m sure one of the things that you will need to do is outline what the next steps for the business might be to a potential buyer. Let’s talk about preparing the business for sale. We’ve really comprehensively covered why you might do it, we’ve had a look at what sort of success or failure rates are happening for people who’d take on the new business.
Now we’ve got to talk about what can we do with our business. By the way, I really liked the idea of planning from the beginning. I’ve created an entire course around a selling checklist that I’m working at the moment to publish at some point, and I think that that is because in a world where there’s a lot of people focusing on making themselves famous and personal brands, I think there’s probably a lot more merit in building something that’s salable and stepping away from that personal brand a little bit if you possibly can. So I liked the whole concept of it.
What sort of things are we going to have to consider from the beginning and right up to when we want to sell that are going to make this business salable. You already mentioned recurring income was one of them.
Preparing the business for sale
Thomas: Yeah. Recurring income definitely helps, as expected, the more recurring income there is, the more certainty there is, whereas if you’re relying on like one-time sales, theoretically or whatever, the source of sales you have could dry up and then that business is making zero. Whereas the recurring business, even if you sell nothing ever again, you’re still going to have some return.
James: A residual income.
Thomas: Yeah, exactly. So one of the things you mentioned as you were explaining was there was a lot of emphasis on like personal brand. People like building themselves up, so it’s pretty much the most important thing to consider is how replaceable are you in in the business. There’s nothing wrong with, I mean all entrepreneurs have to put in all the work at the start of the business or might even work full time in their business for quite a long time.
But when it comes to selling through a buyer’s perspective, they want to make sure that you’re replaceable. So the more replaceable you are in your business, the more likely someone is to a) want to buy it, and b) buy it for good terms. So again, it’s kind of why you’re working 40 hours a week, why you’re working 5 hours a week. And if you manage to get yourself to 5 hours a week, your business is going to be worth more.
James: Do you ever get people trying to sell a business where it’s built on their personal domain?
“Put time into the deal.”
Selling a business with a personal domain
Thomas: Uhm, I’m trying to think if we’ve ever done, I think we’ve done one, and in that case, it kind of had like a cartoon persona on the website. So we said to people, my number one advice is never build a website on a personal domain.
James: Yeah, I say that a lot. There’s quite a few people in my own community come through the blogging community and those guys are crazy about building on their own name. Maybe it’s an ego thing or it’s a quick win. It’s pretty easy to brand yourself because there’s no other version of you, but it’s not something that you’re going to be talking to a website sale broker about to sell for multiples at some point in the future, is it?
Thomas: Yeah. It’s not going to happen. I mean there’s nothing wrong with building a personal blog or a personal brand, but you should use that to leverage other standalone brands.
James: To power up your brand. Like Richard Branson does for Virgin, or Elon Musk does for Tesla.
Thomas: Yeah, exactly. There’s nothing wrong with having a personal brand but if you need to realize that to sell a business then separating it is important. It doesn’t mean you can’t put your face in the About Us page, but the business shouldn’t be about you. Ideally it shouldn’t have your name in it or anything like that, trying to avoid like your picture. And if you’re building a product or something like that and a niche that you’re not personally involved and then maybe come out with like using a picture because it’s not you, maybe you’re even using a cartoon picture, or somewhere along those lines.
So yeah, replaceability is very important from the buyer’s perspective. The user is for a business to appear more desirable, and that’s the number one thing you need to think about. You don’t necessarily need to think about it from day one, except when it comes to things like choosing your domain. But close to the sale, you need to stop being…
I was talking to a potential seller earlier on the phone and I was telling him that there’s kind of a difference between running your business for like as a hobby and saying you really enjoy it to being really quite ruthless with what’s 100% necessary to run the business. So he was spending 35 hours a week on a business, and when we actually went through what he was doing in those 35 hours, the vast majority of it is not actually relevant everything, like updating the…
James: I think you’ve described most of the workforce.
Thomas: Yeah. Exactly. So it’s fine if you have a job or when you’re just working and you’re not really planning on selling the business. But if you are planning on selling, it’s one of those things that’s really going to affect your valuation if you are really active in the business. So it’s definitely something to consider.
There’s like general best practices, making sure you’ve got very clean financials is important. I mean that’s almost going to be impossible to sell a business if you have no idea what you’re making, if it’s mixed up with other businesses you might have, if you can’t verify anything. So make sure you’re keeping track of invoices, payments you’ve made to people, income you’ve got coming in, use some sort of accounting software. There’s QuickBooks, Freshbooks, even an accountant or bookkeeper.
Thomas: Yeah, Xero. So anything like that. Ideally try and keep clean accounts. It’s going to be a lot easier for you to sell your business, for a broker to help you sell your business, or buyers, they go to the business if it’s very clear to them what you’re making and what you’re spending. So it sounds quite obvious but you’d be surprised how many people will come in the door and they let you have no idea what they’re making.
James: From a technical perspective, how do you do things like switch over billing for a recurring business when someone buys it? Do they have to buy the account that’s attached to it or can they re-subscribe people to new accounts?
Switching over billing
Thomas: Yeah, that’s a really good question I think. So generally speaking, with any sort of recurring income business, you would need to take over the account. So I would usually advise people not to have PayPal accounts so they can avoid it with recurring income. And if you do have a business account, which can usually be transferred, not necessarily cross-country; so if you’re in Australia and the buyer is in the U.S., it can be quite difficult, but it’s doable.
Things like Stripe is probably one of the better ones for transferring. It’s usually just a case of like going in there, changing your personal details. Networks like ClickBank are really good. Put out some ClickBank, you can actually go there and change names. So generally speaking, I’m not aware of many more ways that you can transfer subscriptions across. So you’ve always got to take over the account, and that’s a way of saying we’re quite up for people with recurring subscription businesses and it’s saying that you definitely need to consider because if it can’t be transferred, it’s not necessarily impossible to sell, but it certainly makes it more difficult when the kind of terms and post-sale obligations you might have be quite a lot different from the, switch out the accounts and you go sell the business.
James: It might be to remit the funds each month until they’ve migrated the billing, etc.
Thomas: Yeah, exactly.
James: So it’s doable but tricky. I imagine it’s way easier with things like email databases, you can export a CSV file, etc. So yeah. The payment is the one that came to mind. Well, are there any other major obstacles like that?
Thomas: Well, recurring payments are definitely a big one that comes up. I can’t even think of any other thing that come up too often beyond that, generally speaking, especially online, most things are quite transferrable. I mean one other thing is to make sure that if you’ve got other businesses, I mean lots of people have multiple websites, they might be able to have the same, I used to think, which is not necessarily a problem, but just make sure you can separate them out without any issues.
Let’s say you are self-employed and you’re taking payments through your website and then those are getting sent to your bank account, that’s fine. But be aware that when you’re dealing with a buyer, they’re going to want to look at your bank statements, which has got personal payments for you that you don’t want a buyer to see, then consider again, a separate bank account, so you keep it all separated out.
James: So in other words, the earlier you can, you partition your businesses out and make them completely separate modules if possible.
Thomas: Yeah, as soon as it’s practical. You don’t necessarily have to do absolutely everything. There’s nothing wrong with say having five sites on the same server, but just be aware when you do sell, the buyer is going to want to take it, take over. The more seamless is the buyer, the easier it’s going to be for you and the sale process, the more you’re going to get to the business and the better the terms are going to be because you don’t want to be the guy who’s remitting payments for the next two years because you can’t transfer your PayPal account or whatever.
James: Yeah. Now I mean I completely relate to it. I have a predominantly subscription business and one day I would like to sell it. So I’m sending it up on its own website and it’s going to get its own new billing system, and it’ll just be a gradual migration of moving people across to a new payment method, but once it’s done, then it’s able to be separated off from the main business, but it does take planning.
So what other things should we be taking into account? So far, we’ve covered that we’re going to have to have clean financials. That’s a really important one. We should consider all the different accounts, whether it’s payments, hosting, email systems, that they could be separated if possible.
Do we talk about a book of sale or anything like that? The selling documents? Or is that stuff you cover when you’re in the brokering section?
Thomas: Yes. So that thing we would cover. So we usually include a lot of detail on financials and then on questions, we usually ask, depending on the business. 80 to 120 questions, and we put through what we call a prospectus, some people might call it a memorandum. That’s usually 25 to 30 pages on the business.
James: And these ones, you’re just showing these to qualified buyers? Do you have a filtering process for who gets to see the prospectus?
Thomas: Yes. The way it works with us, if you want to request the information on the business we’re selling, you’ve got to sign a nondisclosure agreement, and also speak to one of our team, just so we can kind of qualify you. So if you say you’re interested in buying a business for $50,000 and you want an e-commerce business, and then you request information on a million dollar SaaS business, then we might ask you a little bit more about why you’re interested in that particular business. But yeah, you generally have to sign an NDA, and that’s without fail, and maybe some qualifying questions. And we keep quite a lot of data on buyers to make sure that you don’t have the same guy who issued questions in like 30 businesses but never actually made an offer or asked any further questions. So that’s like really important for us.
James: I imagine a big part of that is because in that prospectus will be some sensitive details about where the revenue is generated and where the opportunity is lying to grow the business even more. Are people buying based on what they see or is there some element of hope or potential improvement that people are valuing as well? Where do you sit with that one?
Why people buy
Thomas: Yeah. So it does really depend on the situation. You get some buyers who just want to buy as kind of an investment and they just want to keep the business where it is and they’re quite happy doing that. Some buyers buy because the seller or the broker is explaining the business in a particularly good way and there are some growth points that have been outlined by the seller or the broker that they could have followed and built up. Some will buy because they already have experience or contacts or business in that niche and they know that they could build up this business based on what they already have. There is real variety. I would say it’s 50-50, there are always buyers who are quite happy just keeping the business where it is. It might be their first purchase and really they just want like an income replacement or the just want to kind of prove out their old buying an online or running an online or running any business model, and then you get the buyers who are kind of looking into really expanding or growing their business.
Where to get funding
James: When it comes to funding, do you have situations where someone would like to buy a $100,000 business but they don’t have $100,000 available to them? Are there ways that people can get financed?
Thomas: Yeah. So with financing, generally speaking, below $100,000, it’s very rare to see any deals financed. The vast majority of deals are within a level of cash. It’s not necessarily that it’s impossible to get financing. It’s more of the fact that there is so many cash buyers that if you are not in a cash position, then you’re going to find that difficult to compete with those who are. As you get higher into the 6-figure range, it’s very common to see financing. Almost every deal in the 6-figure range will have some financing, usually the amount of cash down, you expect will depend on the business and I guess what other buyers are out there, but usually 60% to 80% cash down, and then the majority of those businesses that we deal with are seller financed. So you might buy a business for say $200,000 and you put $150,000 cash and then you agree to pay the next $50,000 over 12 months.