5 Steps to Prepare and Sell your Business for Maximum Value 1 Web Based Business Valuation Formula Trailing 12 Months Sellers Discretionary Earnings SDE Multiple List Price Plus the landed cost of ID: 801023
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Slide1
Great Business!Dumb Owners?
5 Steps to Prepare and Sell your Business for Maximum Value
1
Slide2Web Based Business Valuation Formula
Trailing 12 Months Seller’s Discretionary Earnings (SDE)
Multiple
List Price
+
Plus the landed cost of good, saleable inventory on hand at closing
$300,000 (SDE)
3 (Multiple)
$900,000
+
Plus the landed cost of good, saleableinventory on handat closing
2
EXAMPLE
Slide3How to Calculate Seller’s Discretionary Earnings (SDE)
3
SDE
Net Income
Add Backs
Slide4Value Ranges for a Physical Products Business
4
SDE Less
Than $700,000
1.5-3.5x +/-
SDE Greater
Than $700,000
3.5-5x +/-
Slide531,497
44,574
19,837
46,572
47,276
6,601
2,365
63,994
42,477
56,433
103,452
102,945
568,023
Trailing 12 Month P&L
5
Total Gross Profit
9,657
3,649
24,509
7,904
18,678
44,917
66,299
44,523
37,865
29,732
12,342
5,156
305,233
23%
8%
55%
15%
28%
87%
97%
41%
47%
35%
11%
5%
35%
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Total
Income
Costs of Goods Sold
Shopify sales
12,617
13,751
13,573
16,576
20,527
16,201
21,542
34,627
25,352
27,241
36,092
34,068
272,168
Amazon Sales
21,029
22,919
22,622
27,627
34,212
27,001
35,904
57,711
42,253
45,402
60,153
56,780
453,613
eBay Sales
5,257
5,730
5,655
6,907
8,553
6,750
8,976
14,428
10,563
11,351
15,038
14,195
113,403
Amazon Europe Sales
1,104
2,963
867
1,047
12
15
0
0
0
0
41
0
6,049
Wholesale Sales
1,147
2,859
1,629
2,320
2,650
1,550
2,243
1,752
2,174
2,171
4,469
3,059
28,023
Total Income
41,154
48,222
44,346
54,476
65,954
51,518
68,665
108,518
80,342
86,165
115,794
108,102
873,255
COGS – Contract Labor
2,530
2,888
1,276
1,414
2,541
1,660
8,121
618
3,369
3,876
4,510
3,589
36,392
COGS – Freight
524
155
619
971
265
1,377
1,030
287
1,288
437
1,319
1,121
9,394
COGS – Purchases
6,603
605
22,614
5,519
15,872
41,880
57,149
43,619
33,208
25,419
6,513
447
259,447
Total Cost of Goods Sold
COGS as % of Total Income
Expenses
AdWords
2,000
1,000
1,000
1,000
1,000
2,000
1,500
1,500
1,000
1,500
1,500
1,500
16,500
Bank Fees/Credit Card Fees
-50
0
0
150
0
96
0
5
0
0
0
0
200
Dues & Subscriptions
0
0
0
60
0
11
0
0
0
60
0
0
131
Interest Paid
0
0
0
0
0
0
620
572
320
120
66
10
1,707
Legal & Professional Fees
0
0
10,000
0
0
0
0
0
0
0
0
0
10,000
Meals & Entertainment
85
121
69
59
322
61
132
231
74
88
101
225
1,568
Merchant Fees & Commissions
148
136
183
190
102
196
104
138
175
144
105
108
1,730
Office Expenses
207
191
23
75
322
32
60
17
135
122
93
210
1,488
Owner Payroll
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
100,000
Subcontracted Labor
956
808
907
334
80
142
33
100
85
169
153
121
3,887
Vehicle Expenses
476
459
489
444
501
478
499
463
478
449
497
513
5,746
Total Expenses
12,156
11,048
21,004
10,645
10,660
11,348
11,281
11,359
10,600
10,986
10,848
11,021
142,957
Total Net Income
19,340
33,525
-
1,167
35,927
36,616
-4,748
-8,915
52,635
31,877
45,447
92,604
91,924
425,066
Slide619,340
33,525
-1,167
35,927
36,616
-4,748
-8,915
52,635
31,877
45,447
92,604
91,924
425,066
Trailing 12 Month P&L with Add Back Schedule and SDE
6
Total Gross Profit
9,657
3,649
24,509
7,904
18,678
44,917
66,299
44,523
37,865
29,732
12,342
5,156
305,233
23%
8%
55%
15%
28%
87%
97%
41%
47%
35%
11%
5%
35%
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Total
Income
Costs of Goods Sold
Shopify sales
12,617
13,751
13,573
16,576
20,527
16,201
21,542
34,627
25,352
27,241
36,092
34,068
272,168
Amazon Sales
21,029
22,919
22,622
27,627
34,212
27,001
35,904
57,711
42,253
45,402
60,153
56,780
453,613
eBay Sales
5,257
5,730
5,655
6,907
8,553
6,750
8,976
14,428
10,563
11,351
15,038
14,195
113,403
Amazon Europe Sales
1,104
2,963
867
1,047
12
15
0
0
0
0
41
0
6,049
Wholesale Sales
1,147
2,859
1,629
2,320
2,650
1,550
2,243
1,752
2,174
2,171
4,469
3,059
28,023
Total Income
41,154
48,222
44,346
54,476
65,954
51,518
68,665
108,518
80,342
86,165
115,794
108,102
873,255
COGS – Contract Labor
2,530
2,888
1,276
1,414
2,541
1,660
8,121
618
3,369
3,876
4,510
3,589
36,392
COGS – Freight
524
155
619
971
265
1,377
1,030
287
1,288
437
1,319
1,121
9,394
COGS – Purchases
6,603
605
22,614
5,519
15,872
41,880
57,149
43,619
33,208
25,419
6,513
447
259,447
Total Cost of Goods Sold
COGS as % of Total Income
Expenses
AdWords
2,000
1,000
1,000
1,000
1,000
2,000
1,500
1,500
1,000
1,500
1,500
1,500
16,500
Bank Fees/Credit Card Fees
-50
0
0
150
0
96
0
5
0
0
0
0
200
Dues & Subscriptions
0
0
0
60
0
11
0
0
0
60
0
0
131
Interest Paid
0
0
0
0
0
0
620
572
320
120
66
10
1,707
Legal & Professional Fees
0
0
1,0000
0
0
0
0
0
0
0
0
0
10,000
Meals & Entertainment
85
121
69
59
322
61
132
231
74
88
101
225
1,568
Merchant Fees & Commissions
148
136
183
190
102
196
104
138
175
144
105
108
1,730
Office Expenses
207
191
23
75
322
32
60
17
135
122
93
210
1,488
Owner Payroll
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
100,000
Subcontracted Labor
956
808
907
334
80
142
33
100
85
169
153
121
3,887
Vehicle Expenses
476
459
489
444
501
478
499
463
478
449
497
513
5,746
Total Expenses
12,156
11,048
21,004
10,645
10,660
11,348
11,281
11,359
10,600
10,986
10,848
11,021
142,957
Total Net Income
Add Back Schedule
Interest Paid
0
0
0
0
0
0
620
572
320
120
66
10
1,707
Legal & Professional Fees
0
0
10,000
0
0
0
0
0
0
0
0
0
10,000
Meals & Entertainment
85
121
69
59
322
61
132
231
74
88
101
255
1,568
Office Expenses
207
191
23
75
322
32
60
17
135
122
93
210
1,488
Owner Payroll
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
100,000
Vehicle Expenses
476
459
489
444
501
478
499
463
478
449
497
513
5,746
Total Add Backs
9,102
9,104
18,914
8,911
9,478
8,905
9,644
9,616
9,340
9,113
9,090
9,291
120,509
Total Seller’s Discretionary Earnings (SDE)
28,442
42,630
17,747
44,839
46,094
4,157
729
62,252
41,217
54,560
101,694
101,216
545,575
31,497
44,574
19,837
46,572
47,276
6,601
2,365
63,994
42,477
56,433
103,452
102,945
568,023
Slide7TTM SDE with COGS Flipped to Accrual
7
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Total
Income
Costs of Goods Sold
Shopify sales
12,617
13,751
13,573
16,576
20,527
16,201
21,542
34,627
25,352
27,241
36,092
34,068
272,168
Amazon Sales
21,029
22,919
22,622
27,627
34,212
27,001
35,904
57,711
42,253
45,402
60,153
56,780
453,613
eBay Sales
5,257
5,730
5,655
6,907
8,553
6,750
8,976
14,428
10,563
11,351
15,038
14,195
113,403
Amazon Europe Sales
1,104
2,963
867
1,047
12
15
0
0
0
0
41
0
6,049
Wholesale Sales
1,147
2,859
1,629
2,320
2,650
1,550
2,243
1,752
2,174
2,171
4,469
3,059
28,023
Total Income
41,154
48,222
44,346
54,476
65,954
51,518
68,665
108,518
80,342
86,165
115,794
108,102
873,255
COGS – Contract Labor
2,530
2,888
1,276
1,414
2,541
1,660
8,121
618
3,369
3,876
4,510
3,589
36,392
COGS – Freight
524
155
619
971
265
1,377
1,030
287
1,288
437
1,319
1,121
9,394
COGS – Purchases
6,603
605
22,614
5,519
15,872
41,880
57,149
43,619
33,208
25,419
6,513
447
259,447
Total Cost of Goods Sold
11,523
13,502
12,417
15,253
18,467
14,425
19,226
30,385
22,496
24,126
32,422
30,268
244,511
COGS as % of Total Income
28%
28%
28%
28%
28%
28%
28%
28%
28%
28%
28%
28%
28%
Total Gross Profit
29,631
34,720
31,929
39,223
47,487
37,093
49,439
78,133
57,846
62,039
83,372
77,833
628,744
Expenses
AdWords
2,000
1,000
1,000
1,000
1,000
2,000
1,500
1,500
1,000
1,500
1,500
1,500
16,500
Bank Fees/Credit Card Fees
-50
0
0
150
0
96
0
5
0
0
0
0
200
Dues & Subscriptions
0
0
0
60
0
11
0
0
0
60
0
0
131
Interest Paid
0
0
0
0
0
0
620
572
320
120
66
10
1,707
Legal & Professional Fees
0
0
1,0000
0
0
0
0
0
0
0
0
0
10,000
Meals & Entertainment
85
121
69
59
322
61
132
231
74
88
101
225
1,568
Merchant Fees & Commissions
148
136
183
190
102
196
104
138
175
144
105
108
1,730
Office Expenses
207
191
23
75
322
32
60
17
135
122
93
210
1,488
Owner Payroll
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
100,000
Subcontracted Labor
956
808
907
334
80
142
33
100
85
169
153
121
3,887
Vehicle Expenses
476
459
489
444
501
478
499
463
478
449
497
513
5,746
Total Expenses
12,156
11,048
21,004
10,645
10,660
11,348
11,281
11,359
10,600
10,986
10,848
11,021
142,957
Total Net Income
17,475
23,672
10,925
28,578
36,827
25,744
38,158
66,774
47,246
51,053
72,524
66,812
485,787
Add Back Schedule
Interest Paid
0
0
0
0
0
0
620
572
320
120
66
10
1,707
Legal & Professional Fees
0
0
10,000
0
0
0
0
0
0
0
0
0
10,000
Meals & Entertainment
85
121
69
59
322
61
132
231
74
88
101
255
1,568
Office Expenses
207
191
23
75
322
32
60
17
135
122
93
210
1,488
Owner Payroll
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
8,333
100,000
Vehicle Expenses
476
459
489
444
501
478
499
463
478
449
497
513
5,746
Total Add Backs
9,102
9,104
18,914
8,911
9,478
8,905
9,644
9,616
9,340
9,113
9,090
9,291
120,509
Total Seller’s Discretionary Earnings (SDE)
26,576
32,776
29,839
37,489
46,305
34,649
47,802
76,390
56,586
60,166
81,613
76,104
606,296
Cash P&L TTM SDE = 545,575
Increase in TTM SDE = 60,721
Slide8The Five Pillars of Maximum Value
8
The 5 Pillars
Risk
1
Growth
2
Transferability
3
Documentation
4
Planning
5
Slide91. Risk
9
AGE
Most buyers prefer a business that is at least 24 months old.
The older and more established the business is, the less risk there is. Less risk equals more value.
DEFENSIBILITY
Branded products are preferred and bring more value.
Trademarks, Copyrights, Patents, Amazon Enhanced Brand Content all mean greater defensibility.
DIVERSIFICATION
One revenue source, especially a 3rd party platform is perceived as riskier to buyers.
A 100% Amazon FBA business with a branded line of products is 15-20%
less valuable
than an equally sized and profitable business that sells through multiple channels where you own the customer.
Slide102. Growth
10
TIMING
The best time to sell a business is when it is still growing. Positive growth trends show built in value.
The worst time to sell your business is when the last 1-3 months are the worst in recent months. If the business is seasonal there is always a YOY comparison.
GROWTH OPPORTUNITIES
Most buyers want to grow the business and sell it in a few years for a much higher value.
The greater the growth opportunities (especially open ones), the more valuable a business is.
OPEN PATHS TO GROWTH
Untapped growth opportunities are only theories, and only bring value if a new owner implements them successfully.
The best growth opportunities that bring more value are those that are already open, proven and profitable...yet not fully tapped into.
Slide113. Transferability
11
VENDORS
Vendor relationships must transfer or the business is not sellable.
Special discounts must also transfer to a new owner.
There should be zero shortcuts taken with vendor relationships. Shortcuts equal risk and devalues a business.
PARTNERS
Partnership financials are usually the cleanest, but the workload is often high for a single owner operator.
Reduce combined workload to less than 40 hours per week.
If not, a negative add back will have to be done to replace one of you, and the value of your business will decrease.
STAFF & CONTRACTORS
Never hire someone you cannot fire.
Relatives working for a business owner often do so for the fun, security and flexibility. When the business sells relatives working for the business often become a financial liability.
Consider outsourcing “relative” work 3-6 months prior to listing the business for sale.
Slide124. Documentation
12
FINANCIALS
Learn to properly use QuickBooks or
Xero
, or hire (outsource) someone to handle the bookkeeping.
Using excel may work for you, but when a broker needs a clean P&L to determine the value range of your business, adjust COGS from cash to accrual, or a buyer or SBA lender asks for a balance sheet you’ll be out of luck, lose value and work 3x as hard scrambling to create one.
Clean financials instil confidence and bring more value.
METRICS
Metrics help buyers / investors understand what they can invest in growing the business and what their ROI will be.
Knowing your metrics shows how knowledgeable you are and how solid of a business you have likely built.
Average cost to acquire a customer, lifetime value, repeat order rate, recurring revenue percentage, revenue by SKU, B2B vs. B2C, and a host of other possible figures.
SOPs
When you create
SOPs
it helps the buyer understand that you have a
well documented
, transferable business model that will grow in the future with fewer headaches and less risk.
SOPs also reduce the workload of the owner. All buyers look closely at the workload of an online business. Many are buying lifestyle investments, not jobs.
Slide135. Planning: Plan to sell, don’t “decide” to sell.
13
Planning in advance of a sale will help you build a more valuable business. Here are a few things QLB Clients have done to increase the value of their businesses without producing more sales.
Review all SKUs for profitability. Renegotiate weak ones, discontinue unprofitable ones.
Optimize PPC and cull losing keywords.
Multiple manufacturers? Consolidate shipping from two manufacturers into one container.
Ship via freight/sea. Not via air & never run out of inventory. Ever.
Get relationships in writing. Formal contracts if possible, a written understanding at least.
Set up SOPs for daily tasks for yourself and contractors. This will instil confidence in buyers and make the transition easier.
Use QuickBooks or
Xero
for bookkeeping. Fire the in house bookkeeper & hire a remote one @ ½ the cost.
Flip cash accounting to accrual in your accounting software, or track beginning, ending and inventory purchases on a monthly basis in a separate excel file.
Fire relatives or inefficient staff and outsource remotely @ ⅓ the cost and replace lifestyle expenses with work. (i.e. You hired 6 customer service people because you don't want to do any…replace one and do some on your own).
Keep running the business as if you plan to keep it for the next five years (with a few minor tweaks).
Review QLB & Catching Clouds Closing Down Checklist
HERE
Every $100,000 saved through the ideas above could add $250,000-$350,000 to your final list price