Have you ever wanted to know how to sell a business? What do entrepreneurs do when they want to get out and to retire or start something new? Businesses change owners a lot more than you may think, and if you own your own company or aspire to in the future, chances are at some point you will come to a point when you’re thinking about selling. I was surprised to find out that roughly 30% of business owners plan to sell their companies in the next three years.
Today Jim Wang who started Bargaineering, a popular personal finance blog, shares some of his expertise in helping entrepreneurs sell their businesses. Jim has a degree in computer science from Carnegie Mellon as well as an MBA from Jons Hopkins, and started his career like most of us working full time in corporate America.
Starting On An Untemplate Journey
But the mainstream corporate world where Jim wanted to stay long term. So he started on his untemplate journey creating his own business, working on it diligently in the evenings and on the weekends. His hard work working around the clock was well worth it though because his business took off. So much so that he was able to sell Bargaineering for roughly $5 million, and as you can imagine he learned an awful lot in the process.
Currently Jim is using his knowledge and experience to help business owners of all sizes Plan For The Sale. So what is Plan For The Sale you may ask? It’s an interactive course that has eleven main modules covering over 50 different topics relevant to selling a business. There are so many things to take into consideration when you’re selling a business, and the course covers them all. Now without further ado, here are some interview questions on how to sell a business that Jim has graciously answered for us.
Who do you think is the primary target business owner who would benefit from your product? Ex. minimum revenue, profitability figures, reach, etc.
Jim: The primary target business owner is someone who is looking to exit from a profitable business with revenues of at least six figures annually. They will get the most out of our program because that’s roughly the minimum size you need before you start working, in earnest, with lawyers, brokers, and other professionals.
That’s not to say it won’t be helpful for someone who has built up a fledgling side business and is looking for an exit. We find that those transactions are often simpler and don’t require as much outside assistance in the form of lawyers and brokers, so much of our material will go into too great detail on those subjects.
That said, we’ve talked to and worked with some smaller business with great success. In the end, I think it’s about education of the process and having more information is rarely a bad thing.
Does it matter whether your business is a S Corp, LLC, or Sole Proprietorship when selling your business?
Jim: If the business is incorporated, the structure is largely irrelevant. The big difference is between a sole proprietorship and a corporation because a sole proprietor cannot be separated from the business. The impact of this is that a sole proprietor cannot sell the business, he or she can only sell the assets of the business.
The tax ramifications of this difference can be significant. If you sell business assets held for under a year, they may be subject to short term capital gains. If, however, you sold a business you owned for more than a year, it won’t matter how long you owned anything because you’re selling ownership in a company.
This has some other implications as well. If you signed contracts, it may be difficult (or impossible) for you to get those contracts reassigned if you were to sell your business. For example, if you signed a lease agreement and you sell your business, your landlord may not let you assign the lease to the buyer under the same terms. This may have an impact on the deal.
If, however, your business were an LLC and the LLC signed the lease, selling the entire business would mean the lease would go to the buyer with all the other assets. To the landlord and the law, the LLC is still the renter even though it’s under new ownership.
Are most sales lump sum sales or is payment typically made over a course of time? The reason why I ask is because in the example I use for the article Quit Your Job And Die Alone, an entrepreneur sold her business for 1.1 million, yet she could not even buy a house for cash or qualify for a mortgage making me believe that she wasn’t paid the 1.1 mil up front.
Jim: We’ve interviewed Erica for our course and she had a very buyer friendly installment sale structure. Most deals are not as buyer friendly as hers but they typically are installment sales, where payment is made over a period of time.
Buyers are assuming quite a bit of risk when they buy a business, especially when it’s a privately owned business not subject to SEC filing requirements. As we saw with the Hewlett Packard acquisition of Autonomy, even government scrutiny can’t protect a buyer. The one thing they can do is spread out the payments so they have some protection in the event of something awful happening. They are still contractually obligated to make the payments but in the event of fraud, it’s easier to withhold payment than recover it.
Another reason has to do with cash flow – buyers are unable or unwilling to pay the entire purchase price at the close. Sellers can expedite the process by offering seller financing so the buyer doesn’t need to get a loan. With seller financing, the buyer might offer a higher price and cover future payments through business operations. These all play a role in the process.
For bloggers in particular, how important is the continued voice of the main blogger for potential buyers?
Jim: Buyers are like readers, they like continuity. A blog is a very personal medium and so buyers are fearful that readership will erode if the blogger leaves the site. It’s a very real concern so it’s something that a blogger needs to be cognizant of. As a blogger, you can assuage some of these fears by agreeing to remain on as a writer or consultant for a period of time. This gives you a comfortable transition period for someone else to take over.
For bloggers, how do buyers assign a value on traffic figures if the blog is not heavy on monetization? A great example is Get Rich Slowly who sold his site for millions of dollars however his content eschews the use of credit cards, mortgages, and any other sort of debt. Furthermore, there is very little topical advice on investing which seems to be a relatively lucrative business.
Jim: It all depends on the buyer and the metrics they care most about. I can tell you that Get Rich Slowly was a very well written and profitable blog that justified its purchase price. Quinstreet is a publicly traded company and so they have to answer to shareholders who don’t care how about readership and brand and all that qualitative stuff.
As for assigning a value on various metrics that aren’t immediately monetizable, such as RSS readers and Twitter followers, it’s best to come up with an estimate that you can reasonably defend. In the cases where you can run tests, try to test the value of those RSS readers. Run a promotion and see how many conversions you can get. Tweet out a link to your site and see how many visits you get and how much revenue that can generate. It’s not a perfect method but it’s the best available.
Absent actual sales data, put yourself in the shoes of a potential buyer. How would they take advantage of the traffic you have? Try to guess how they would value it based on the mechanisms they can put in place.
Lastly, it’s hard to sell a business that doesn’t make money. Despite what you read on the news about high flying VC backed startups with no revenues being sold for billions, most businesses with no revenue go out of business.
Do you think it is better to make your writing as dry as possible to reach as broad an audience as possible or do you think it’s better to inject your opinions and personality into your writing from a business standpoint?
Jim: It depends on the business but I find that most people like to connect with a writer, whether it’s a blogger or a newspaper reporter. I can get the news anywhere. The Associated Press can force feed me breaking news through a fire hose, Wikipedia can give me a history lesson devoid of emotion, but I go to a blog to connect to a writer and be entertained while I’m being educated. You don’t have to be the same as me in order to connect, you just have to be engaging.
What are your thoughts on the latest Google algorithmic changes? It seems a lot of small sites are really getting punished while brand name sites continue to get stronger. Any advice for those of us without multimillion dollar marketing budgets?
Jim: It doesn’t seem like it but it’s classic platform risk. Blogs, especially from a revenue generation perspective, live on search traffic and the revenue those visitors generate for a site. The best advice I can give is to find a way to convert as many of those visitors into loyal readers and try to grow that audience as best you can. You won’t be able to battle the big brands in search, so it’s best to connect with readers and expand a following that way.
Look at Zynga. Their problems are on display for the world to see because they’re a public company but they’re trying to reinvent themselves for a world after Facebook. That’s classic platform risk where their livelihood was dependent on Facebook. Blogs long enjoyed favorable status in Google and with brands taking over, blogs need to adapt and adjust in order to survive.
When do you think the optimum time is to sell a business, a blog, or otherwise?
Jim: The emotional side of me says that the best time is when you’re ready to move onto something else. The business side says that once you hit that inflection point, when you get hockey stick growth in revenues or traffic, that’s the optimal time to sell… but that’s also the most exciting time to run a business so why not see how high it can go?
Personally, I think that few people are ever lucky enough to reach a point where they can sell their business. If you reach that point and it’s a sum of money that can almost guarantee financial freedom for you and your family, it’s difficult to walk away. A wise man once told me that no one ever regrets a decision that secured their financial future. Maybe you could grow it and get more, but getting that first win gives you the ability to chase after other opportunities.
If you’re interested in learning more about how to sell a business, click here: Plan For The Sale.
If you enjoyed this article, check out Advice For Selling A Business: 5 Key Tips For A Successful Buyout
Untemplaters, have you or anyone you know sold a business before? What were the biggest challenges?
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