I met Jock Purtle at an affiliate party in the penthouse of Caesars Palace earlier this year (shout out to Charles Ngo!) and in between tasty bites of sushi and slow sips of whiskey, we got to talking shop.
Turns out Jock is a full-blown lifestyle entrepreneur, traveling the world and networking at conferences and parties with founders of start-ups and private equity managers alike. He helps CEOs structure their companies to be salable and pairs them with investors who want to buy a proven business and scale it up. He agreed to share how to structure your business so it’s “built to sell”
So with that, I’m turning over the typewriter to Jock Purtle, founder of Digital Exits
Your Company May Not Be Worth What You Think It Is
Let me tell you a story.
Joe ran a small advertising agency. The business was making $100,000 per year in net earnings on $600,000 in gross sales. The business had 5 staff and Joe was doing all the selling while his team was doing all the development and administration.
Excited by the prospect of selling Joe asked around at an industry trade show and found out that small agencies were selling for between 3-4 times earnings (EBIDTA – earnings before interest depreciation tax and amortization or commonly referred to as the profit from the last 12 months of trading)
In fact Joe started to believe that because he had such a good business that he should be valued at the upper range of the scale at 4X net and his business was worth $400,000.
Joe was so excited about this that he setup a meeting with the largest advertising agency in town that have over 80 staff and $10 million in sales. In the meeting Joe presented a great presentation on where the business was going, all it’s strengths and then finally on the last slide said “Gentlemen I am interested in selling my business for $400,000, would you like to buy it?”
One of the Partners interrupted kindly thanked Joe for his presentation, however interjected with “I wouldn’t buy any equity in your company, your business is worth nothing to us”
So what was the problem?
In short what Joe didn’t know is that buyers place a massive discount, even to nothing, on a business that is solely reliant on the owner keeping it up and running. Essentially what they are buying is a job, not an asset that is going to systematically continue to generate cash flows for the new acquirer.
What Buyers Look for When Acquiring a Business
- Profits – Buyers look at purchasing the profits of the business not the cash in the business. The perfect scenario would be growing profits. What a buyer is purchasing is future potential of the business and a way to make a return on their investment. They want to know that the business will be making more profit in the future.
- Client List – a business doesn’t make any money until it makes a sale and that sale is generated through a relationship with a customer. A buyer is also looking for repeat or recurring sales. The more times a customers buyers the more valuable your business is to a buyer.
- Systems and Process – a business is really a collection of systems and process that are combined to generate value for a customer and that value is sold for a price, which generates profit. It is the systems and processes that are valuable to an acquiring party.
How to Sell Your Business The Right Way
What can you do to improve the likelihood of selling a business?
There are a variety of things that you can do but I think to the two main ones are:
- Education – reading articles like this, books like built to sell, and talk to as many people as you can reach, especially people who have successfully sold their business, listen to podcasts like this and this and if you have the opportunity attend an exit strategy workshop.
- Extract the Owner – Buyers want to purchase an asset not a job. Make sure that you prep the business for sale and have staff and processes in place where the owner is not involved in the process. Have you tried the vacation test?
- Exit Strategy – I am a strong believer of developing an exit strategy. This in itself will radically improve the likelihood of a sale
Let me know if you’ve got any questions about structuring your business to sell and I’ll give you the down-low on the comment thread below!
About The Author
Jock Purtle is the owner of www.digitalexits.com. A Business brokerage focusing on selling online businesses.