When is the right time to sell? What are the pros and cons of selling a business?
Deciding whether or not to sell that company was an intense process and left me with several sleepless nights. This was a significant business that was by far my biggest revenue generator and income source. So it was no small decision.
Ultimately, I feel like I made the right decision to sell the company, and I'm glad I can still say that over a year and a half after the sale!
But now here I am again. I'm looking to sell another business. As you may have seen on some of my income reports, I've built up a great niche site + Amazon FBA business that has averaged $15k net per month over the past 12 months. This is my “Home Goods Brand.”
Even though I've been through the process before, I still find myself struggling with the decision. Is selling my business the right move?
UPDATE: Considering that I sold this Amazon FBA + niche site business for $425,000, I'm not too upset. I think it was a good choice.
So, today I'd like to walk through some of the pros and cons of selling a business. In the process, I'll share some of my thought process and hopefully help you think through your decision if you are considering selling a business as well.
When Should I Sell My Business?
This question is impossible for anyone to answer except for you. Selling your business can allow you to:
- Lock in your profits
- Cut your losses
- Free up your time
- Allow you to invest in other projects
- Get a lot of money in a short period of time
Keeping your business can allow you to:
- Continue with regular profit (or losses?)
- Force you to invest your time or manage your employees
- Run the risk of the industry changing while you aren't paying attention
- Lose income (and as a result, have a lower sale price)
This isn't to say that selling or staying is best for you. Your consideration will have to be unique to you and your desires.
Selling and staying each have their own benefits. But why would anyone sell a profitable business?
Why Would Anyone Sell a Profitable Business?
The business I am looking to sell in the very near future is quite profitable. As mentioned, it has netted me an average of $15,000 per month for the past 12 months. I started the business about 2 and a half years ago.
So, if I don't spend any time working in the business and it's profitable, why would I consider selling it?
The answer is risk.
While the business is going well now, I can't predict what the future will bring.
Since this is an Amazon FBA business, I don't know if Amazon will change something tomorrow that will drastically reduce the sales of my Amazon business.
This unpredictable risk is enough for me to consider selling. I've had a good run for 2.5 years. Is risking $450,000 (a very rough estimate of value) worth it?
For me, I am too afraid that a loss of momentum will catch up to me. The business is almost 100% passive for me: I spend less than an hour a week working on the business. I do have an employee that probably puts in 3 to 5 hours a week into the business.
Passive income sounds awesome, But it means that a competitor willing to put in more time and energy might be able to take my place. A smart entrepreneur could outrank my site, draw my traffic, and sap my sales on Amazon.
That business owner could then cut into my profits.
Just as bad is the possibility that there's a smart competitor for my niche site and for my Amazon listing. These don't even have to be the same people. My niche site could get attacked from one side and my Amazon listing from the other.
Similar businesses could pop up over night and start cutting into profits. That could lead to a lot more work to maintain a lower monthly profit.
But if I'm earning money, what does it matter? Why would anyone sell a profitable business?
I've been selling products on Amazon since 2014.
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So one way to look at is this:
- I can take the guaranteed $450,000 by selling to an investor now.
- Or I could keep rolling the dice that Amazon won't change anything and try to grow the business.
However, this is just one way to look at things. There are good reasons business sellers make that decision. There are also several reasons to keep and run a profitable business as well.
Reasons to NOT Sell Your Business
One reason to keep a business rather than selling is if you think you can grow it through your own efforts. You might be able to adjust pricing, explore additional sales and marketing channels, or perhaps bring in new products.
There are lots of levers you can pull to try and grow a business. Have you explored all of these options?
If not, perhaps you should focus on growth rather than selling your business.
In a nutshell, you have to consider whether or not you are leaving growth on the table and is the effort to achieve that growth within your skillset.
With my business, I potentially could do the following to grow the business:
- Increase my link building and SEO efforts to make more sales on my own platform ( outside of Amazon)
- Optimize listings and conversions better on Amazon
- Get my product into retail stores
- Increase paid traffic strategies
- Create new products
I have experience with SEO and creating new products, so these are both levels within my skillset that I could leverage. I have minimal experience running my own paid traffic campaigns, but I could always hire someone.
The same could also be said for retail.
Other Pros and Cons to Selling Your Business to Consider
When it comes down to it, there are TONS of factors for people to consider; and every business is unique and everyone's personal situation is unique.
I know this may be a little different, but I am going to make a Pros and Cons table and walk through my individual decision making process for whether or not I should sell my Home Goods Brand business.
|Pros to Selling||Cons to Selling|
|I could get paid up to $450,000||I don't really need the money (thanks to my previous exit).|
|That money could be used to invest in real estate or some other passive investment||$15,000 a month is a significant revenue stream to give up.|
|I could use the money to buy another business that I feel like I could grow more easily||There is TONS of growth potential|
|I wouldn't have to worry about Amazon||Will I have enough monthly revenue to cover my existing employees if I sell?|
|Free up mind power to focus on other existing business ventures||I'm leaving a lot of cash on the table if I can grow the business over the next year|
|Would free up a little bit of my time||The cash flow is enough to hire more employees that could work in the business to grow it or work outside the business to grow my other ventures|
|My skillset is better geared towards digital products vs. physical products||I could hire people with the right skillset to grow the business|
|I've become a bit bored with the business, other ventures are more exciting|
|Another owner could likely grow the business with a fresh set of strategies|
As you can see above, I've bolded the pros and cons that I'm placing the most emphasis on. These are the points that I'm thinking about most.
This can differ from one business owner to another. The advantages and disadvantages of selling a business will differ from one small business owner to another.
That is fine. It's to be expected, in fact.
For me, I think I'm ready to sell because Amazon is still a single point of failure. Yes, I generate perhaps 10% of my sales outside of Amazon, and I do refer significant traffic to Amazon with my own website.
However, I still know that if Amazon were to change something drastically tomorrow, my business could get cut in half. Or worse.
Others may not view the risk of being reliant on Amazon as that big a deal. I may be being overly cautious, because obviously Amazon is not going anywhere soon. Your exit strategy for any given business should always be based on your own risk appetite.
At the end of the day, that's why there would be lots of upside potential for a new owner as well.
What I Plan to Do With the Money
If I sell this business, I'll be left with a significant amount of capital to invest in other things. What should I invest in?
Right now, I'm looking to turn some of the capital I generate from my “active” businesses to more passive investments like real estate. At this point, I have not made any real estate investments. But I plan to.
And yes, I would use a property manager so that my investment is as hands-off as possible.
I've been consistently investing in the stock market and will continue to do that. However, I started investing in Bitcoin and Etherium a little while ago and will likely put some more money into these or other crypto-currencies.
I feel that as a sector, there will continue to be strong growth in this area for a number of years (but also highly volatile).
I also made my first loan on Prosper.com, and depending on how that goes may beef up some loans there.
Other than that, I'll keep a little bit of money in the account until I figure out what my next venture will be.
But then again, maybe I'm counting my chickens before they hatch and no deal will ever come to fruition!
How To Valuate A Company
One of the most important considerations you can make is thinking about what you can get for your business. This depends a ton on your industry.Here is a resource showing multiples for a lot of different industries.
My expertise is in web properties and most of those sell for 30x-40x your average monthly profit. In other words, we're looking at a 2.5x-3.5x yearly profit.
Your business will always have a range of multiples it can be sold for.
My employee Brady's dad has experience in franchises and he says that those go for 1x-2x their yearly profit. On the other hand, I ended up selling my Amazon FBA business I mentioned above for about a 2.5x annual profit.
Web properties have only become more valuable since I sold mine and I could have gotten a better deal if I'd have waited, but hindsight is 20-20.
So let's talk about how to get the maximum amount of value out of your business sale, no matter the industry.
How To Sell Your Company For More
Businesses in your niche sell at a range of multiples. Doing a few things right can get you at the higher end of that range.
If you want to sell your business for the maximum amount of dollars, try these tips:
Diversify Your Customer Acquisition
This is as important for web properties as it is for anyone. I've built a skill in learning to use long tail keywords to get free traffic from Google. This was the main source of traffic for my niche site associated with the FBA business.
But if you can diversify your streams of visitors, your business will sell for a higher multiple.
Diversified traffic to your business helps you grow your branding (more people know who you are) and protects you from risk.
I'm going to be doing fine if Google shuts me down on a site that gets traffic from Youtube, Facebook, Pinterest, email lists, podcast links, and links on other websites.
This protection against downside is very attractive to a potential buyer. And since all businesses have some sort of web presence today, it can help your future sale to diversify your traffic.
You could get involved on social media, start a podcast, rank for long tail keywords, or buy traffic through ads.
Even buying traffic, you could go through Facebook and Google to maximize diversification.
Diversify Your Income
This isn't always easy for some businesses, but it is often possible. If you own a concrete company, you could do commercial and residential concrete. You could work in multiple cities, counties, or states.
If you own a web property, this could be affiliate income, advertising income, selling your own courses, selling on FBA, publishing an ebook, adding repixel targeting, sending sponsored email blasts, or more.
This works similar to diverse customer acquisition. It puts your business in a much better spot if one source of income was to get destroyed. And income sources do get destroyed.
There are tons of horror stories of Amazon shutting down accounts and sites getting banned from Google Adsense.
I've gotten banned from Google Adsense myself.
And it's not just web properties that are affected; builders were bringing in the big dollars during the housing boom. But once the banks stopped giving out loans, builders were out of business.
They had no diversified income. Diversification is security.
One of the biggest impacts you can have on your business is to eliminate yourself. You know how many people want to buy a business where the owner is working 40-60 hour weeks?
That would be a big whopping 0. A donut.
No one wants to buy a full time job.
It might up your expenses a bit, but you'll need to learn how to eliminate yourself from the business if you want to sell. This will be more than worth it in the final negotiation since it can raise your valuation by a huge margin.
Not to mention that if you do this before you want to sell, you're giving yourself the opportunity to increase passivity. You can continue collecting checks while working less.
You might earn less total since you're outsourcing, but your dollars earned per hour worked will skyrocket.
Your valuation will be much higher on a passive business.
Sell At A High Point
If at all possible, it's best to sell your business when you're at a high point. Not only will this help your average monthly earnings, but it's nice for a prospective buyer to see.
Buying a business should be a rational decision, but people are emotional creatures.
We love to see growth trends. If you sell at a point when you've been having consistent wins, you might can squeeze a few extra dollars out of your sale.
Buyers like to see that your business has been trending up for a while since this indicates a little bit more security for the buyer.
You can get a higher multiple for your business if you plan ahead. The longer you plan ahead, the higher that multiple will be since you have longer to implement a lot of these tactics here.
Mind the Business Selling Details
Think about your ideal prospective strategic buyer. Think about what business broker you might use or if you would look at an online marketplace. Taking these factors into account will not only make your business sale go smoother, but probably make it more profitable, too.
If I were going to sell a business today, I would start by diversifying income and traffic. Even if the sale is a year down the road, it would be a good plan to start making sure that the buyer will be as safe as possible.
This security and lack of risk makes your business an attractive prospect. You can be one of the few who planned ahead and hit a very high multiple for your niche.
Advantages and Disadvantages of Selling a Business: Your Thoughts?
Overall, what are your thoughts about selling a business? When is the right time to sell and when is it not the right time?
I'm open to hearing your thoughts in the comment section below.