Website Closers has never been busier. The drive, demand and motivation for the eCommerce, Amazon, Technology and Internet Companies at the focus of our sector continues to increase at unprecedented levels. And right along with that excitement comes increasing valuations and deal multiples. Our firm focuses on selling digital companies at the highest valuations possible, and in order to get there, our clients first need to prepare themselves and their companies for the most exhilarating day of their lives – the day they close their business.
The pandemic has not only solidified, but justified, the change our world is undergoing as more and more consumers shop online and expect more to be handled at or near their home. Whether its eLearning, eCommerce or any of the service companies that support these ever-growing niches, valuations are on the high and it is important for the owners of these companies to be well prepared for an eventual exit from their business.
But before going into how to prepare for an exit, one must first understand and eventually agree to what that exit might look like from a structure standpoint. Exit options for a high growth tech company vary wildly depending on deal value, sector and demand. However, at a high level, all exits in the SMB and Lower Middle Market are usually one of three types: Minority Sale, Majority Sale or a Complete Acquisition. Minority sales usually do not occur until there is at least $5 Million of EBITDA. A majority sale is common if a company has over $2 Million of EBITDA. And a complete 100% buyout of a tech or internet company can happen at any level, but tends to be uncommon for companies with over $2 Million of EBITDA.
And structure isn’t the only thing to think about. Timing is important as well. In Mergers & Acquisitions, timing is everything – you always want to go to market when the company is on a growth trend. Showing 1-2 years of consistent high growth will not only increase the company’s Enterprise Value, but it gives ownership options, because when you sell on the way up, you want to get the benefit of not only historical sales, but also future sales … since it’s YOUR blood, sweat and tears that caused this company to be what it is today. Let’s take an example of a recent Amazon FBA Business that came to us to sell:
When the client came to us, she had roughly $250,000 in monthly sales, or $3M in sales over the last twelve months (LTM), with a year over year growth rate of 100% (so the previous period saw sales at roughly $1.5M). Net Margins for most Amazon FBA companies are between 20-30%, and this client had 25% net margins. At $3M in sales, the company had $750,000 in profit. Clearly the company is booming, and clearly the owner knows how to run this company – so she is important to the future of this company. But this wasn’t the whole story – in addition to the company’s excellent growth rate to date with $750,000 in the trailing twelve months earnings, but in the last 3 months of the LTM, year over year sales have tripled for the same months in the prior year. And this puts the company on a trajectory of ending the current year at $6 Million in sales and $1.5M in profit.
The above example is something we see day in and day out at WebsiteClosers.com. And since we’ve represented over 3,000 clients over the years, we know exactly what options this client has before her. A company like this has the option of selling based on the LTM of $750,000 or the full year plan of $1,500,000 due to its growth rate. Selling on an LTM basis allows them to achieve the benefit of bringing in buyers that will utilize the Small Business Administration (SBA) to acquire the business. For these deals, buyers tend to be pretty aggressive because they only have to come up with 10-15% of the transaction funds for a down payment, and sellers tend to receive 85-90% of the entire deal in cash at closing – with the balance funded by a 7(a) SBA loan that is backed by the US Government.
For us, these transactions are very easy, and if the tax returns are clean and the timing is right, this option would be available for a client. However, since our goal is always to maximize deal values and to never go the “easy route”, we’re going to go with what’s behind Door #2 – which is much more exciting and involves selling the company based on forward looking financials. Whereas the company would likely trade around $3.5M if going the “SBA Route”, if we based the valuation on forward looking earnings, we would go to market closer to $6.5M. A difference of $3M in deal value!
One might ask – why would you ever go the SBA route if you’re going to leave $3M in deal value at the closing table. That decision is ultimately up to our client and is personal in nature, but one very big reason is that some sellers do not want to continue to be involved with their company after closing. Since this is a highly technical operation (yes – selling on Amazon is a skill very few know), that leaves private equity and other buyers out of the buyer pool because they will need seller involvement. But for those sellers that are willing to stay involved, your upside potential isn’t just the $3M mentioned above. Actually, it can be far higher.
Let’s continue to use the above example, and let’s say the company is sold for $6.5M in a Majority Sale, where 70% of the deal is cash at closing and 30% is retained equity (or rolled equity). That 30% is worth roughly $2M at the time of closing; however, if the seller and the new owner are able to grow the company over the next several years to an EBITDA of, say, $7 Million, and the company exits a second time at an 8X LTM multiple, then this transaction value is $56 Million and the 30% equity that was rolled in the first transaction went from $2M in value to $17M in value. So, this company that had $750,000 in LTM earnings sold for $6.5M (an 8.6X LTM multiple) on the first deal and $56M on the second deal, providing ownership with a total value of $21.5 Million between the two transactions.
This second bite of the apple is an amazing opportunity for business owners that are considering selling and want to realize the full potential of the deal. Earning a total of $21.5M on a deal that had roughly $750,000 in earnings when sold is a tremendous deal – nobody will argue that. These are the kinds of deals that we do every day at our firm and we can help you achieve these results by doing a few things up front in preparation for the sale of your business. Here are the things we recommend that you do in preparation for what will likely be one of the most exciting days of your life – the sale of a business you started from scratch:
- Prepare Early.
- Define Exit Goals.
- Get Financials in Order.
- Create a “data room” of information on your business so that it is readily available
- Create Operational Efficiencies & Promote Redundancy
- Reduce Concentration Issues
- Create a 1 and 2 year plan
- Prepare for the Handover
- Peg a date for going to market
- Go to Market when the time is right
It is never too early to prepare for the sale of a business. In fact, we have many clients that come to us before they ever launch their first product to get a feel for what kinds of companies tend to do the best on the market. They then stay in close contact with us through the years as they grow their brand. We recommend that you begin speaking to a professional business broker that has specific experience in your sector no later than 6 months before the date you would like to go to market. And importantly, the deal broker can help you identify the best time to go to market, and what the Enterprise Value range of your business will be, based on the timing of your sale.
Define Exit Goals
Work with a business broker that focuses on your sector so that you can get a good feel, up front, of what various buyers will be looking for when your business goes on the market. These goals should include your involvement after close, what you would like to see in the form of cash, equity and other consideration in a deal, and who you would like your ultimate buyer to be. Again, these exit goals should be discussed with a broker that works in your field so that you can prepare yourself for an exit, especially if your goals do not match those of the marketplace. One of the hardest things to do in M&A is to sell a business where the goals of the seller are far outside the reality of what the market is willing to bear. By defining those exit goals early with a professional that has been involved in the sale of hundreds of other companies just like yours, you’re helping yourself prepare and define those exit goals as your reach the ultimate date of listing the business for sale.
Get Financials in Order
It is important that business owners understand that the financial analysis of a company always comes first. While buyers might be intrigued by the category, service or good served by the company, it all starts with the numbers. An eCommerce company, for example, will want to ensure that it is preparing financials on a monthly basis and properly managing inventory on its balance sheet. Growing companies should always have their books prepared on an accrual basis, because a cash-based model will surely leave value on the table when selling. And since a company’s earnings are primarily what are used to multiply off of when valuing a company, we want those earnings to be as high as possible when exiting. You should work with a professional, expert business broker to ensure that these books are in line with what the marketplace expects to see, and what lenders, buyers and investors need in order to properly diligence the company. Additionally, tax returns should properly reflect the company’s income statement and balance sheet. While add-backs are certainly normal in a company, our advice is to limit to the extent possible the number of personal expenses on an Income Statement in the year before a sale.
Prepare a Data Room
If you are preparing to exit in the next year, we recommend that you set up a cloud file of information on your business. Important documents to have in your data room include the following:
- Corporate Structure, Organization & Incorporation Documents
- Ownership & Company Control
- Assets & Operations
- Studies, Reports and Marketing Collateral
- Tax Returns, Filings and Notifications
- Intellectual Property records
- Significant Contracts and Commitments
- Litigation & Environmental Matters
- Employees and Management Documents
- Compliance with Laws and Regulations
In addition to preparing all of the above in your data room, we recommend that you create a series of videos on how you operate your business and how you interact with various CRM, CMS and other online tools you utilize to run your business. Recording calls with customers, clients and others can also be a useful training tool.
The purpose of all this preparation is to make life easier for both buyer and seller during due diligence as well as during the transition of the business.
Create Operational Efficiencies & Promote Redundancy
The most valuable and easy-to-sell companies we represent are those that operate smoothly and efficiently, thus giving buyers a level of comfort that the company will not have any disruptions post-closing. We recommend that business owners “get their house in order” so that they are putting a buyer in a position to be successful on the first day they own the business. This is important because as buyers think about which company they will invest in, they all want to ensure that transition is smooth at closing and will lean towards those companies that offer them this level of comfort.
Redundancy is also important – we refer to a Perfectly Redundant Company as one where all of the employees are cross trained and can perform any function necessary to the day to day operation of the business. In other words, if any one person working for the company, including ownership, were to get hit by a bus, could the business continue to operate normally as he/she is scraped off the pavement. If so, then that business will be more exciting to buyers.
Both operational efficiency and redundancy require that a company prepare early. A business broker can be both coach and intermediary to help with this, and since brokers at Website Closers are 100% success based, a highly valuable service is provided at no cost to business owners until the fruit of all of this work is realized, through the sale of the business.
Reduce Concentration issues
Concentration is a known Risk Factor in Mergers & Acquisitions. And while there are a lot of risk factors, this one in particular ranks high for Technology & Internet Companies. Examples of concentration issues include: eCommerce companies that have 20 SKUs, yet 1 SKU represents 50% of sales; SaaS companies that have 4,000 users on its platform, but through just 3 master contracts; and, Digital Marketing firms that do more than 30% of their revenue through one customer. The reason these examples are considered “risky” is because if something were to go wrong with a hero SKU, or a SaaS contract ends out of term, or maybe a bankruptcy of a customer that represents a large amount of revenue … each of those things represent a massive drop in the value of a company if they were to occur. Thus, to the extent you can reduce concentration at all levels, you are making your company stand out from the crowd and increasing its value.
Create a 1 and 2 Year Plan
Knowing where you’ve been and how you got there is important. But even more important is planning for your future. Companies that want a big valuation for their firm need to have a path to growth and we recommend having a 1 and 2 year plan always available. And if you’re a high growth company, we might be using this plan to help value the company at market. But even more vital to the M&A process is putting a plan like this in front of a buyer during the sales process so that they can see your vision for how this company will grow. Also essential is that a business owner not make an assumption that a deal will close; a business should continue to be operated with the understanding that the company might not close during the initial process. The last thing you want to do is go through the sales process with a buyer only for the deal to break … and you’ve stopped growing as a company. We recommend that a seller have a plan instituted as early on as possible so that they can show how they are performing against that plan, month after month. If a plan is conservative and continues to be achieved or exceeded each month, then buyers will have more confidence that the plan after close is achievable as well. Growth is a critical component of the valuation process, so it is important that you use quantitative analysis to create a plan that can be achieved … and then of course … to go out and execute because the M&A process can take several months. A buyer will want to see that plan achieved or exceeded every month during that M&A process.
Prepare for the Handover
Tech and Internet companies tend to have a lot of passwords and files – get all of them into a secured location and ready for the day of closing. This will make your life a lot easier. Also – put a written plan in place for transition that you can present to a buyer once diligence is complete. This plan can be updated as necessary on both buyer and seller side, but put the parties into a position of strength since most of the legwork will be done. You do not want to procrastinate the preparation of the transition process because the days after closing should be focused on operational handover, not learning how to log into a website.
Peg a Date for Going to Market
This is an important preparatory process as well because you want to get your timing right. While there’s never a perfect time, and you don’t have a crystal ball to see what will happen to your company in the future, it is important that as you begin to plan for your exit, that you identify some benchmarks you would like to see achieved before the exit is put into place. In coordination with the 1 and 2 year plans discussed above, you can peg a date and back plan accordingly. Just like any other mission, in order to be successful, you want to ensure that you’ve planned for all contingencies, gotten the timing right, and put all of your soldiers in place so that when the day for war comes, you are standing tall ready to fight. And make no mistake about it, when you sell your company, it is difficult, emotional and feels very much like a fight … but a lot of this can be alleviated with proper planning with a professional business broker that knows your space well.
Go to Market
You have prepared yourself, your company and your people (although your people probably don’t know you are selling), you’ve prepared your financials and you’ve exceeded all of your sales goals – and you’ve done everything you can to get as much work completed up front … now it’s time to go to market. How you go to market, and with whom you go are critical factors to not just your success, but also to the kinds of deals (and deal structures) you will be seeing when you’re at market. This is where the broker you choose is critical.
Most brokerage houses want to turn and burn deals – flip them in and flip them out as fast as they can. We don’t see it that way. We are serial entrepreneurs ourselves – we have built and sold a number of tech companies through the years and we get why it is important to never leave crumbs on the table. If you use a broker that isn’t aligned with you to achieve the very highest multiple possible, then you are costing yourself time and money. We have heard stories of business owners selling their companies for sometimes 4 times less with these brokers that essentially flip companies, and it blows our mind that they chose that broker for the most important sale of their life. Take your time with the process of choosing a broker – you should be listening to what they have to say and questioning everything. And in the end, you should choose a broker that understands your desires in a closing, that understands the inner workings of your operation, and that will fight tooth and nail for the highest possible number for you. Our brand is based on a fighter at war, and we believe whole heartedly that we are the very strongest, most strategically aligned brokerage, worldwide, to help any tech, ecommerce, amazon or digital firm in the sale of their business.
Want to speak with a broker? Just email us at [email protected], or call us at (800) 251-1559. We will be happy to connect you with a broker that specializes in your particular kind of business, and deal size. We look forward to hearing from you.