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Don’t sell yourself short: How much is your company worth (Part 1)

Do you know how much your business is worth, when to sell, and how to prep your company to get top-dollar for it? We interview M&A advisors and business brokers to get you answers, learn about trends, and ward off any pitfalls.

Today, we’re interviewing Mark Daoust Founder of Quiet Light Brokerage

Quiet Light Brokerage is a team of serial entrepreneurs, who have personally started, bought, and sold online businesses. With 600+ online businesses sold, they can explain exactly what you should expect, help you prepare your business for sale, and steer you toward success.

NXT: Who do you normally work with?  

We work with Internet entrepreneurs and online businesses that are already established, at the six, seven, low-eight figure range. Boot strappers are typical clients of ours, and we mainly collaborate with CEOs and Founders.

NXT: Is there a different approach that you take when valuing a B2B vs B2C? Are the multiples different?  

Not really. It depends on a lot of other factors.

NXT: How do you find these clients?

Inbound marketing! Clients are the ones that approach us because this is a pretty small community and we have developed a reputation as trustworthy advisors.

That said, we only take on as clients fewer than 10% of the people that approach us. We often have to turn people away because they don’t have something that’s sellable yet.

It is common for us to give people a roadmap to help them get to a value that makes sense. We help identify opportunities to grow their business, or we tell them what their realistic options are.

NXT: How do you value an online company… what kind of components do you look at?

There’s a simple way to think about this: most businesses are valued on their annual earnings (over the past 12 months). Most businesses that we deal with will be valued at 2-4x earnings.

The more complex process is understanding where you fall in that range.

NXT: So what sort of companies are at the low end vs high end? 

It really comes down to four factors: how risky is the business, how much opportunity for new growth is there, how easily can the business transfer to a new owner, and how clear and verifiable is the documentation. A business that scores well in these four categories will be closer to the 4x range.

In terms of business types, SaaS businesses tend to get the highest valuations. Their model of recurring revenue, predictable cost of acquisition for new clients, and known customer lifetime value makes them appealing from both a risk and growth standpoint.

On the low end of the valuation range would be any business that has really low margins or extremely complex workloads. For example, an e-commerce business that requires an owner to fulfill all orders themselves would not get a very favorable valuation, especially if the gross profit margins are low.

NXT: You mentioned that you are able to identify opportunities for owners to either grow their business or tell them what their options are at that point in time. What are some examples?

I’ll give you two simple examples.

First, a lot of business owners get the timing wrong on selling their business. I know I did when I first tried to sell my first business. Fortunately, the person who helped me advised that I wait one year before selling. That advice helped me gain over 300% in value! If we see that a business’ trend is going in the right direction, we’ll often advise an owner to hang onto the business a bit longer to get a higher value.

A second example would be making a business more transferable. A lot of founders and bootstrappers do a lot of work themselves. This can make the business more difficult to transfer and hurt the value of the business. In these cases, we’ll advise a seller to outsource various parts of their day-to-day activities to show that the business can survive without them.

NXT: What’s a good time to think about selling your business?

The ideal time to sell is when you’re growing at a steady pace, say around 10-15% year-over-year. This is the sweet spot, because you’re still showing upside potential but it’s not ridiculously fast.

Instead, let’s say that you are growing A LOT, and in June 2017 you outperformed May 2016 by $100,000 in sales. If you have a valuation multiple on earnings of 3x, your value grew by $300,000.

While buyers will love this sort of growth, they won’t necessarily trust this as a ‘new normal’ for your revenues. As a result, you won’t get an offer that really compensates you for this growth. As the business owner, you might want to hold on until growth levels off a bit.

Of course, if your top line is declining, then it will be very difficult to find buyers and you may be 2-3 years away from a sale, where you have to focus on growth.  There are buyers of declining business too – maybe they can monetize them better – but you’d be at the bottom of the valuation range.

NXT: What can an owner do to have the most impact on his/her company’s valuation?

The most foolproof way to get top-dollar is also the most boring, and that’s by having clean documentation and financial records. This is the most controllable factor in making sure that your company is valuable. On the other hand, if you don’t have clean books, that could make your business UN-sellable.

NXT: What’s your biggest challenge in a deal?

The gap between seller and buyer expectations. We do a valuation call with the seller at the very beginning, and let them know where the market is going to be. If the seller’s valuation is $900,000 and our valuation is only $300,000 then there’s going to be a problem.

Our goal is to give a seller realistic expectations from Day 1 of what the market will give them for their business. For a lot of sellers, this will mean that it doesn’t make sense to sell, and that’s fine. I would rather a person hang onto their business until they are really ready to sell than sell their business for less than it is worth to them.

NXT: Do you have an example of a case study where the owner successfully grew their company’s value? 

For a good case study, take a look at this Forbes article featuring a client of ours.

NXT: What’s the typical deal fee?

For anything under one million, we charge a 10% commission that is completely conditional on the success of the acquisition. Anything that is over one million has a graduated scale that we talk about with the client over the phone.

NXT: How are you different than other business brokers… why should someone work with Quiet Light Brokerage?

Every broker involved with QLB (including myself) has bought or sold their own online business and knows the entire process inside-out. We are a small team with five brokers total, and all but one were previous clients of QLB. We have 40 years of combined experience and QLB has been up and running for ten years, so you get tons of experience in your corner.

When I started, there were not a lot of people doing this. I think the tipping point was the realization that a broker’s background – someone with real-world experience – was going to do a better job at selling businesses and helping owners out.

Big thanks to Mark Daoust at Quiet Light Brokerage for his advice and insights. He founded QLB after selling an online publication that boasted over 220,000 subscribers. He is a frequent speaker at conferences and a guest contributor to publications such as Entrepreneur, Forbes, Inc, etc. He takes pride in watching a buyer and seller work out a deal that truly leaves each other in a better position than when they started. For more information on Quiet Light Brokerage and their team of entrepreneurs, head over to their website at: https://www.quietlightbrokerage.com/

QuietLight Brokerage

Tessa BoardStudios.com

Tess is a Business Development Associate at Board Studios Inc, an animation production agency that helps B2B companies simplify and communicate more effectively. She's passionate about B2B business models & marketing, and spends a lot of time working on partnership development, content marketing, and scouring for the best business books for BookVideoClub.com. Her blood type is an authentic caffè macchiato.

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