Chuck Mullins is a serial internet entrepreneur. It all began in 1996 when, at 18 years old, Chuck started his first internet business. Since then Chuck has built, bought and sold businesses ranging from a few hundred dollars to seven figures. Chuck spoke at The Exit about the 4 pillars of value and how to position your internet business for sale.
“Know what your metrics are. What is your customer lifetime value? What is your acquisition costs? This builds credibility and show’s that you know what you’re doing”
Takeaway #1 Seller Discretionary Earnings
Online businesses are priced by taking the seller discretionary earnings (SDE) for the trailing 12 months and applying a valuation multiple.
Seller discretionary earnings are the net earnings of the business plus “add-backs”. Add backs are often thought of as a subjective concept, but in reality, there are standardized principles applied across the brokerage community. Add backs are non carry forward expenses, one-off expenses, and nonoperating expenses.
Takeaway # 2 Valuation multiples
Valuation multiples are proportional to the size of the business. Or, as the business gets bigger, so does the multiple. This is due to the types of buyers present at different price levels. On the lower end of the spectrum, you have mostly “mum and dad” investors purchasing with cash. At the top end, you have institutional investors with deeper pockets.
Takeaway # 3 How to structure your profit and loss statement
It’s best to present your profit and loss statement as accrual, rather than cash. Accrual accounting recognizes all cost of sales at the time the product is sold, rather than when the money hits the bank account. The result is a smoother P&L and a higher SDE.
Takeaway # 4 Risk
Age is a major component of evaluating the risk in a business. If you have at least 24 months of sales data, buyers can see the year to year comparison of the business. This lets buyers view seasonality, growth trajectory and so on. So Chuck thinks it’s best to wait at least 24 months before selling the business. Defensibility is also a key factor in evaluating risk.
Takeaway #5 Growth
Buyers want to know about growth opportunities. So don’t fix all the issues with the business, or you’ll remove the upside for a new buyer. If you’re making any changes to the business before the sale, do these at least 6-12 months before selling to ensure you capture the uptick in revenue.
Takeaway #6 Transferability and Documentation
Before selling a business the transferability of the business needs to be considered. Vendor accounts, supplier relationships, even staff, and contractors all need to be considered. Professional and well document SOP will add value to the business.
Takeaway #7 Timing
Timing is key. Sell when the business when it is growing steadily, not during a high growth phase.
Takeaway #8 Clean data
It’s imperative to maintain clean financials and data to capture buyers’ attention and close off a deal. Know all the key metrics such as average order value, customer lifetime value, and a number of repeat purchases.