Recently, Thomas Smale, FE International CEO, was on Blair’s Elevating Business Podcast and he and Blair discussed how to prepare a business for sale. We invited Blair onto the FE International Blog to talk about some of the things that they spoke about and highlight what he learned from their conversation.
Starting an online business is a great way to make money, be your own boss, and have the freedom to work anywhere in the world. But selling your online business can be a great way to turn your hard work into profit and enjoy the benefits of all your effort.
Unfortunately, selling an online business can be a complex, time-consuming process, and many founders are unprepared for the level of detail involved. The best way to get the most value from your online business is to plan to sell it from the beginning, and here’s how.
The Importance of Due Diligence
Put simply, due diligence is the process a potential buyer will use to make sure that your online business is a good investment for them. Every purchase decision requires a lot of facts and information, so the buyer can decide how much risk your business poses, how much profit it is worth and what level of risk they are comfortable with. Among other things, potential buyers will scrutinize:
- The site traffic
- The financial records
- The owner
- Business operations
- Technical information
- Legal and financial liabilities
Understanding that these factors will eventually be audited by potential buyers, and looking at your business from the buyer’s perspective, will help you set up your business to appeal to buyers from day one.
It is also important to remember that potential buyers will be evaluating you personally as an owner and founder.
Part of researching your identity is simply to avoid scams and bad deals, but potential clients will also want to know who they are doing business with. Therefore, keep your social media profiles current and professional, maintain a good reputation and do business with quality and integrity.
Working with integrity helps you build a great business from the outset and also helps buyers trust that you are someone they want to do business with.
What to Do From Day One
When founding an online business to eventually sell it, here are the factors in planning from the beginning and starting your business on the right foot.
Register Your Business
Choosing which type of legal entity is right for your business can be a bit of a challenge but do your research, choose your entity type and register your business with your local authorities. Then, if you have partners, create a formal partnership agreement.
Register Your Trademark(s)
Trademark research is often a part of registering a business to make sure that you can do business under that name. Ensure that as you register your business and/or your domain name, you research and register your trademarks and own all your intellectual property.
License All Images and Media
Image licensing can be contentious and is a potential source of liability for your online business. Set up a process where you document the license of all images and media you use on your site to avoid problems down the road.
Organize Your Supplier Contracts
Maintain current and accurate records of all vendor and supplier contracts.
Maintain Good Financial Records
Potential buyers will expect accurate and detailed financial records dating back to the inception of the business. Keep track of your income, assets and liabilities, and regularly reconcile your records with your bank accounts. Setting up a clear, detailed financial system is one of the best ways to make your business sale-ready from the very beginning. There are many online accounting software providers these days and this is one of the best ways to record all of your financial transactions in one handy place. These platforms can easily produce the financial reports required in selling your business with just a few clicks.
Document Your Standard Operating Procedures
In some cases, defining your SOPs is part of creating and registering the business. If it isn’t, create them yourself. But first, write down all the procedures involved in managing your business, including technical processes, marketing, advertising, order fulfillment, record keeping, etc.
Building good tracking and reporting systems, keeping your files and documents organized and starting your online business with good processes and good habits will save you time and make your business more profitable in the long run.
What to Do 12 Months Before Selling
Most online businesses need at least a 12-month track record for accurate valuation, so it is essential to start preparing your business for sale and planning your exit strategy about a year in advance.
In addition, while most online businesses are driven by the passion and commitment of their owner/founder, you now need to establish a business that can operate without your direct involvement. Here are some of the factors to consider:
Record Your Traffic and Metrics
Traffic is critical to determine the value of your business. If you aren’t already, begin monitoring and documenting your key traffic and metrics. Specifically:
- Install Google Analytics and ensure it is working correctly, tracking conversions across the site and creating meaningful reporting data
- Install Google Search Console and address any potential issues with your site
- Monitor inbound links
- Track your keyword rankings against competitors
Maintain Your Financial Data
Naturally, you are already keeping your bank account statements and earnings reports organized into a useful system. Don’t forget to document any pre-paid accounts with vendors or agencies or pre-paid revenue from customer plans or subscriptions. Detail your accounts receivable and track all your expenses. If you have co-mingled business assets or accounts, separate them or ensure that you can separate them when necessary.
Reduce Founder Reliance
Most owners/founders play a critical role in the daily operation of the business, but it’s time to move away from that. Instead, hire staff or outsource daily operational tasks to freelancers. If you have contracts or agreements that reference you personally, transfer them to the business. If necessary, update your SOPs to reflect these new roles and procedures.
Consider the Tax Implications
Selling your online business may have significant tax implications that can be affected by the business or asset type. Therefore, it’s a good idea to consult with a tax adviser, who may have advice and guidance about planning for your tax liability, when might be a good time to sell and other tax compliance considerations.
It’s not a bad idea to discuss selling your online business with an M&A advisor, an accountant and/or an attorney a year in advance. That way you can make a plan for selling your business that ensures the process goes smoothly and you can make the most profit from the sale.
Questions to Consider
About a year before you sell, as you are planning on how to make your business transferable to a new owner, here are a few other questions to consider:
Is Your Business Location Dependent?
Most online businesses are not dependent on a storefront or a physical location, but not all of them. If your business is location-dependent, it may reduce how attractive it is to potential buyers. If possible, consider reducing location dependence by:
- Hiring remote or outsourced employees
- Developing robust online communication channels between team members
- Automating tasks
Do You Have Special or Unique Skills?
Is your business reliant on your or a team member’s particular expertise or unique skills that a potential buyer may not have? If a future owner needs to have specific skills, it may limit your potential buyers. Consider whether a future owner may be able to outsource those skills or replace that expertise in the business.
Why are You Selling?
A potential buyer will almost invariably ask why you are selling your online business. Of course, there is no right or wrong answer, but it’s a good idea to be prepared to answer the question. Give it serious thought, and make sure that you are committed to selling.
What to Do 1 Month Before Selling
As your selling date draws nearer, it’s time to take your final steps to prepare your business for due diligence. Here are the details to gather so they are readily available.
Review Your Financial Records
You will need to compile a profit and loss statement for your business and have all documents and records available for a prospective buyer. Some of the factors to include are:
- Sources of revenue: Sales, affiliate programs, AdSense, etc.
- Cost of sales: Cost of marketing and advertising, credit card processing fees, shipping, delivery, etc.
- Operating expenses: Refunds and chargebacks, site hosting and web services, employees and labor costs, etc.
Complete an Operational Verification
Document all the daily and weekly tasks of running the business, including the amount of time and expertise required to perform the functions and who performs them. This information helps a buyer determine how much work is needed to operate your business.
Provide Current Technical Information
Document all your platforms, plugins and software. Ensure that all the technology your business uses is up-to-date and properly licensed. If your online business creates software or SaaS, a prospective buyer may want to audit a sample of your source code.
Audit Your Accounts
Create a list of all the accounts your online business uses and make sure they are properly registered so the new owner can take ownership of them. Some of the accounts to consider are:
- Domain and hosting
- Email and contact list tools
- Affiliate accounts
- Lead generation tools
- Merchant and payment processing accounts
- Advertising services
- Social media accounts
Gather and Update Records
Ensure that all your financial records, traffic and metrics, contracts and agreements and other documents are organized and accessible. Also, make sure the information is current and accurate.
Contact an M&A Advisor
Even if you already have a buyer in mind for your online business, using a reputable M&A advisor is an excellent idea. With industry-leading expertise in business acquisitions, an M&A advisory firm like FE International can expose your business to a wider range of buyers and help you make and close the best deal for you and the buyer.
Continue Operating Your Business
Because selling your online business can take time, a few weeks or months may go by while prospective buyers conduct their due diligence. It is not unusual for potential buyers to request newer and updated traffic reports. Some owners stop investing in their online business once they have placed it up for sale. Still, you want potential buyers to see current traffic and financial reports that continue to show the business is performing well. Keep working on your business right up until you sell it.
As you can see, if you have been maintaining good organization of your documents and an excellent financial system throughout the life of your business, these final details will be relatively fast and simple to compile, check and turn over.
However, as you can also imagine, if you haven’t maintained good systems, gathering and providing all this data (and more: prospective buyers can request a massive range of documents) can be incredibly challenging. That’s why planning ahead to sell your online business from day one is the best way to make a great deal when the time comes.
Conclusion
Starting, building and then selling an online business can be an incredible way to make a profit while pursuing your passion. Working with an experienced M&A advisor is a great way to expose your business to the right buyers, make the best deal and ensure that the transaction goes smoothly, and everyone is happy with the outcome.
Planning for a successful sale from the beginning helps you save time and money and make the best deal you can with all the work and effort you put into your online business. Following these steps from the beginning will help you sell your online business for the right price, at the right time, with the least work.