If there’s one thing I’ve learned from selling two online businesses, it’s this: Ignore the formulas and multiples the internet tells you to use to value your business.
Formulas feel good because they make it easy to settle on a number. Content companies, for example, are known to sell at 3-4x annual profit. Following this logic, if your company’s profit was $100,000/year, you might aim to sell that business for $400,000.
But if you use these formulas as a guide, you might literally sell yourself short. A multiple is one data point that can help inform your sale price. Yet it’s far from the full story.
In fact, when it comes down to it, only two numbers really matter when it comes to selling your business: what your business is worth to you and what it’s worth to the buyer.
Lots of metrics can be used to support a price: profit, revenue, number of customers, the size of your email list, how much search traffic you get each month, etc.
But in the end, that all goes out the window in favor of how much the business is worth to you and how much it’s worth to your buyer.
Think of selling your business like selling a house. Say you list your house for a certain price. You might base that expectation on sales of similar homes in your neighborhood or by multiplying your home’s size by the average cost per square foot in your area.
But those formulas and comparisons aren’t actually worth a dime. What determines the sale price is how much the buyer is willing to pay and whether that jives with what you’re willing to accept.
In the end, the house is worth whatever you get for it.
That’s why valuation formulas are more likely to tie you down than help you get the maximum price for your business. If you focus on an arbitrary multiple, you might overlook the true potential for your sale.
While you should ignore valuation formulas when it comes to thinking about how much to sell for, it’s worth watching them more generally for your industry. Tracking valuation formulas can help you spot trends, which might influence when you consider selling your company.
For example, online content businesses are hot right now. This makes sense: The pandemic prevented businesses from marketing in person, so many turned to online content as a way to stay in touch with their customers and continue to grow. The result is one of the best sellers’ markets in years for online businesses owners.
I’m hearing this anecdotally from friends who have sold recently. But even if you didn’t have that network, you might spot this trend by watching valuation formulas.
One place to watch is Empire Flippers, a brokerage firm that helps entrepreneurs buy and sell websites. The company reported that content websites they helped sell in February 2021 sold for an average of 30-33x monthly profit, up from 26-27x in February 2020. Empire Flippers’ Director of Marketing Greg Elfrink talked about this increase on a Hustle & Flowchart podcast in early 2021. I bet it’s even higher now.
(That company relies on multiples of monthly profit rather than annual profit; they say it’s more fitting for online businesses because profit can change drastically from month to month, especially for newer businesses.
If you do the math, you’ll notice the top of their range, 33x, is not quite 3x annual profit, which is lower than the 3-4x multiple I cited earlier in this piece. If I had to guess, I’d expect businesses that sell in the six- and seven-figure range through a broker to command a lower price than businesses that don’t, because business owners often turn to brokers when they don’t know how to sell their business. Businesses owners who have multiple unsolicited offers on the table might not need a broker’s help, especially if they’re strategic buyers. More on that below.)
If you’re a seller in this market, don’t aim for that average multiple from the brokerage firm. Aim higher.
One approach that can help you increase your sale price is selling to a strategic buyer.
A strategic buyer is a company in your space or adjacent to it who can combine what they’re doing with what your company offers to effectively increase the value of your business. In other words, your company will be worth more to them because they’ll use it for a slightly different purpose than you did.
Hubspot’s recent strategic acquisition of The Hustle is a good example. On its own, media and events company The Hustle brought in millions of dollars in revenue. Yet Hubspot’s acquisition means the company can also monetize The Hustle’s 1M+ subscribers by selling marketing software. This makes The Hustle worth far more than it would be on its own or to other potential buyers, and likely made it easier for the founder to negotiate a higher sale price.
If you want to learn more about this topic, John Warrillow’s The Art of Selling Your Business or his podcast is a good resource.
Of course, just because you believe your business is worth a certain amount, doesn’t make it so.
Some founders say they’ll only sell their business for a certain price because that’s how much they need to retire. But just because you want a particular sum doesn’t mean the business is worth that much, and it certainly doesn’t mean a buyer will pay that price.
Your target selling price is only viable if a buyer agrees to pay it.
Your work lies in finding ways to align the value of the business with your ideal sale price, such as increasing profit.
And then, just as importantly, you need to position the business effectively so a buyer is willing — and ideally, begging — to pay the price you have in mind. If you’ve built a valuable asset and positioned it well to the right buyer, you might be able to command a price that’s far higher than your industry’s standard multiple.