How to Buy and Sell a Business As Told By an Entrepreneur

You don ’ t have to start a clientele from scribble to be an entrepreneur. In fact, buying a business might be a better decision .
Creating, sell, and buy businesses are all contribution of the entrepreneur ’ randomness travel. After starting one business from cancel and selling it, I bought a business that already had gross, scaled it, and sold it .
then, I started Hubstaff in 2013. Our growth caught the attention of investors and we ’ ve talked to several VC ’ south, but we opted to bootstrap the company rather. We ’ ve wanted to grow by getting into associate markets, but we didn ’ t have the bandwidth to start an enterprise from scratch. Because of this restraint, we decided to make our first software skill .
What follows are the lessons I ’ ve learned from 12 years ( and counting ) of entrepreneurial feel from buying, sell, and creating businesses. I ’ ll explain how we applied that cognition to make our first skill and how you can besides grow your clientele through an learning.

My Career As An Entrepreneur

My career as an entrepreneur | The entrepreneur's guide to buying and selling a business
2003 – Started golf company from scratch

  • Owned 100% of the company
  • Reached $1.8 million annual revenue at its peak in 2007
  • Sold 50% in 2009 for $250,000
  • Later sold the rest of the company for $150,000

2009 – Purchased and operated SEO company

  • Bought the business for $900,000 with four other investors (three of them silent)
  • Owned 18% of the total stock, received 4% in vested stock, and purchased 14%
  • Reached $2.4 million annual revenue at its peak in 2011
  • Sold in 2014 for $250,000

2013 – Started Hubstaff on the slope out of my own personal pain
2014 – Went full-time on Hubstaff upon sale of SEO company

  • Started from scratch
  • 50% owner with co-founder
  • Currently at $1M annual revenue

2015 – Acquired project management software to grow Hubstaff

The Pros and Cons of Buying an Existing Business Vs Starting Your Own From Scratch

While, there are versatile benefits to both buy and build up a party, it all comes down to what you ’ rhenium willing to sacrifice in your entrepreneurial travel .
If you build a inauguration from scrape you get creative control and the experience of building something from nothing. The tradeoff is that it ’ s a slowly, painful, and expensive process. You have to iterate and learn as you go and learn is expensive. We ’ ve invested close to $ 600,000 in Hubstaff so far which doesn ’ t include founders ’ clock time. That ’ mho cash that could have gone into our pockets. It took three years for Hubstaff to get solid grip and each day is however a struggle. While creative control is capital, it comes with excess work and requires excess solitaire .
If you buy a company, you ’ ll sacrifice the original creative operate and the founder ’ sulfur know but you can get a tax income stream faster. You can literally become the owner of a million-dollar income pour nightlong if you can pay for it. Compared to construction, buying a caller is less bad because you ’ re the occupation has already been proven to generate paying customers .

Buying is also cheaper than building

One of the reasons for buying an existing clientele is because it ’ south cheaper. It sounds counter-intuitive because of the upfront monetary value, but if you buy the business at up to three times the net profit, you ’ re getting a great deal in both time and money. You ’ ra buy the e-mail list, the code, the brand, and so on which already make money. Imagine the investment it would take to build all of that from strike .
For model, with my golf business, we made over 25 DVDs and paid about $ 10,000 to produce each one. That ’ s over $ 250,000 spend and it took about $ 1 million to build the electronic mail number. But we didn ’ triiodothyronine sell the party for about that price because we had already depleted most of the value from those assets. We had already promoted to the e-mail list a long ton and launched all the products. The person who bought the commercial enterprise didn ’ deoxythymidine monophosphate have modern products to sell or new customers to sell to so the business was worth less .
A parole of caution when buying an existing commercial enterprise : people always sell a business for a reason and they might not be completely honest about it. If the business is sincerely carry through and bringing in money on automatic pilot, would they truly want to sell ?

How I Discovered the Key to Building to a Scalable Business

To understand how I built Hubstaff, it ’ randomness significant to know where I began. In 2004, I had a compensated job that paid me $ 50,000. That ’ mho when I started my beginning business selling instructional golf DVDs and books for $ 47 each .
I had to make $ 137 a day for my business to replace my wage. That equated to selling 2.93 units a day. If I wanted to grow the business to $ 1 million in annual gross, I had to sell :
$ 1,000,000 / $ 47 per unit = 21,276 units per year
21,276 units per year / 365 days in a class = 58 units per day
That ’ s closely 20 times the number of units it would take to replace my income .
There were two obvious ways I could ’ ve made it easier to build that business to $ 1 million in annual gross :

  1. Sell the products at a higher price point
  2. Have several products to upsell on

That ’ south when I realized recurring revenue is crucial to building a million-dollar business. It ’ s a cardinal factor in creating a business that scales .
If you sell units manually like I did, you have to fight for every one transaction every day to meet your day by day quota .
For a recurring gross exemplary, the subscription requital occurs automatically and gets you to the phone number of units sold per day on a repeat basis. At the time of writing this article, HubStaff has about 2,400 customers paying an median of $ 32 per month :
2,400 customers per month / 30 days a calendar month = 80 units sold per day
That repeatable transaction is what enables you to spend your meter growing the business rather of fighting for the next sale .
Recurring gross doesn ’ t alone apply to the software industry. It can be indemnity renewals, warehouse outer space rentals, information membership sites, and anything else you can bill on a monthly basis .
This realization about recurring tax income led me to another epiphany : recurring revenue businesses are worth more than pay-per-unit businesses .
When exiting any business, you sell the assets – the electronic mail list, domain, code, infrastructure, grace – but for a recur gross business, you ’ re besides selling the subscriptions .
If I were to go bet on and do my first business all over again, I would ’ ve found a manner to make it into a recurring tax income model. Hubstaff was my first recur gross business and I ’ ve never looked back .
While recurring gross is a big component that allows a company to scale, it doesn ’ triiodothyronine mean that the caller will become a unicorn .

I Don’t Care About Building a Unicorn and You Shouldn’t Either

The inaugural – and biggest – error an entrepreneur can make is aiming to become the adjacent billion-dollar unicorn. It ’ s entice, but looking at the data under, more than 70 % of businesses make less than $ 1 million annually. While the data is from 2004, it ’ s unlikely the numbers have shifted dramatically .
small_business_annual_revenue
There are presently 174 unicorn companies in the United States. In 2010, there were 27.9 million small businesses .
now, let ’ s say you end up creating a business that lasts more than five years. According to the numbers above, there’s a 0.00062% chance that you’d become a unicorn .
Whether I ’ m build or buying a company, I aim to do $ 1-10 million in annual tax income because it ’ second more realistic. I don ’ triiodothyronine want a trillion-dollar party. I don ’ metric ton want a occupation with 400 employees reporting to an office. I want to lead a life style business that provides me with enjoyment and exemption. I want a occupation working for me and a team that I like. Those things are more important to me than becoming a billion-dollar business .
To illustrate this indicate, I ’ ll use Buffer as an model. They ’ ve done an amazing job building an all-star team and a valuable company. They presently bring in $ 9.51 million in annual recurring tax income. They ’ rhenium not at $ 1 billion. They ’ rhenium not at $ 100 million. And they ’ rhenium fine with that. The founders, Joel and Leo, are happy doing what they do .
I try to replicate Buffer more than I would Uber, Airbnb, or Facebook. It ’ s more naturalistic and provides me with the life style I want .
An entrepreneur invests time and money and energy into their business and themselves. It ’ s significant to do something you understand that will provide measure to people rather of trying to become a unicorn .
This international relations and security network ’ metric ton to say it ’ second bad to have big goals and large ambitions. I support ambition – I wouldn ’ triiodothyronine be where I am without it. But preferably, it ’ s important to focus on the humble wins before trying to become the following big thing .
I like to think of entrepreneurship like baseball : Don’t try to hit a homerun if you haven’t hit a single yet. Focus on hitting the singles. That ’ s how you ’ re going to win .

4 Key Tips on Valuing and Selling a Business

1. Get Out While Your Business is Doing Well

A common misbelief entrepreneurs have is thinking the commercial enterprise they start will be around constantly. According to the U.S. Bureau of Labor Statistics, about 50 % of companies will survive ( natural datum ) more than five years .
The golf occupation I started in 2004 bring in $ 1 million in annual tax income for six years. After that, competitors came in, advertising rates increased by 300 %, conversion rates dropped, Google changed their advertise rules, and so on. We had built a database of over 500,000 golfers, but they stopped buying a much. The monetary value of buying dealings went up 20-fold which made it extremely unmanageable to acquire newfangled customers productively. The business model no long worked .
The SEO company I bought made over $ 1 million in annual gross for five years. We chiefly sold to SEO agencies and most of them went under after Google ’ s algorithm changes in 2011-2013. Their clients were scared and slashed their SEO budgets. About 60 % of our clients went out of business and the other businesses changed their strategies.

The market and environment change quickly; pay attention and prepare for it.
It ’ south significant to understand and accept that a business might merely have a few years of in truth adept gross. When you have those good years, know that you may need to bank some of it so you have the ability to move on. Otherwise, you might end up trying to make a fail business work .
For example, I banked some cash from those two companies which allowed me to go three years without an income to build Hubstaff. That ’ s because I didn ’ thymine continue trying to grow a clientele that no longer made sense. I accepted that things were changing and I prepared for it. I took the cash, put it in the bank, and lived on that while building my next thing .

2. How to Quickly Value a Business

I ’ ve mentioned it before, but selling two businesses and buying one teach me a boastful example : lose your ego .
many entrepreneurs believe their business is worth more than it actually is. I ’ ve met entrepreneurs who felt that their businesses were worth $ 20 million when they had $ 10,000 in monthly recurring tax income .
Unless you’re acquiring users or growing revenue at an accelerated rate, your business is probably worth about three times your cash flow.
Below is an example for evaluating an report software business from David Newell, a broker at FE International .
fe_international_b2b_saas_valuation
You can see that it ’ s a SaaS party in a stable industry with a net profit of $ 283,000 and the request price is $ 900,000 ( which will likely be negotiated down during the sell work ) .
When selling your business, keep in mind that buyers are more will to pay for profits – not assets. It doesn ’ t matter if you spend $ 500,000 or $ 20 million to build software. If you can’t get any paying users, your business isn’t worth anything.

3. What to Do About Seller Financing

Since we ’ ra talking about growing a occupation through acquisition, I ’ megabyte going to focus on the buyer ’ s point of view .
If you plan on buying a caller, try to get seller financing and negotiate to pay for only a fortune of the business up front. This lowers the amount of money you need to raise. then, you can use the recurring tax income from your new commercial enterprise to pay the rest of the debt over clock time .
You can increase the chances of a seller wanting to work with you if you demonstrate your experience and convince them that you have the skills to keep the business animated and grow it. This gives them confidence that they ’ ll be paid in full .
It ’ randomness clear that seller finance favors the buyer. In some cases, sellers provide finance to a buyer but preceptor ’ triiodothyronine receive all the payments because the buyer wasn ’ thymine able to keep the commercial enterprise alert. This is why it ’ south difficult to get seller finance. If you can negotiate for seller finance, be wholly honest about your ability to grow the business and pay off the seller .

4. Get Everything Lined Up

Selling a commercial enterprise international relations and security network ’ metric ton a simple as putting your party on the marketplace and getting a buyer. You have to get everything lined up. You ’ ve got to find the right buyer, sell them on the idea that they can grow the business, have all your documents in holy order, know your numbers inside out, and make certain your product is ready to be acquired. These things must all be given their due diligence and every detail must be thoroughly reviewed .
I had to drastically lower the price on the two businesses I sold just to close the distribute. Both businesses were on the market for over a class and we had to make massive employee cuts to keep the net income levels steady. In review, I waited besides long to sell the businesses. I should ’ ve started looking for a buyer when the business was placid growing. Again, sell while your business is growing, not at the chase end of its success .

Buying a Business in 9 Steps: The Ultimate Checklist

From my experiences, I ’ ve come up with what an ideal scenario would look like for me if I were looking to purchase another business. I hope this will give you an estimate of what you should consider before buying a business, what the buying march looks like and help you think through your buying decisiveness .

Step 1: Find parties that are interested in investing in you

These are probable the people closest to you who know your background and have and trust your ability to grow a company. They shouldn ’ triiodothyronine be concerned about what character of business you ’ re going to buy. They should be investing in you and know that whatever party you buy, you ’ ll be able to grow successfully .

Step 2: Find a business that is relatively undervalued in terms of cash flow

Remember, the value of a company is about three times its cash flow. Try to buy a business for less than that so you can pay off the finance quickly .
At the time of purchase, the SEO company I bought was doing $ 500,000 in annual profit and growing. It was valued at about $ 1.5 million but I bought it for $ 900,000. It was a capital softwood that allowed me to pay back investors and focus on profit much more promptly .

Step 3: Present the business to the interested parties and use their money to buy the business

When you have the buy discussion with the seller, negotiate for seller finance by leveraging your know. This will build trust then they believe that you ’ re able to grow the commercial enterprise and pay it off. You can even propose a higher price in exchange for seller financing and include a deduction for early payoff in the contract .

Step 4: Raise extra money to pay for the business

Justify extra fund-raise by creating a plan for how you ’ ll use the money to invest in the clientele and improve market and operations. You can besides use the money to pay the seller and get the early return rebate .

Step 5: Use the monthly cash flow to pay the monthly payments back to the seller

once you ’ ve bought the business, you ’ ll beginning making money from the beginning. Use that profit to make the monthly payments. As you continue to grow and improve the commercial enterprise, you ’ ll be able to make larger payments and get the early wages deduction .

Step 6: Take a salary for running the company

When you first take on a newly party, you may have savings from a previous subcontract or your former ship’s company thus you may not need to take a wage initially. In the begin, this is a good decision because you want to pay off your debt cursorily. however, your savings credibly won ’ t last constantly, and you should make certain to have some money in the bank in case anything undesirable were to happen to this new company. Take a wage so you can sustain your efforts in growing your newly company. I took a $ 120,000 wage when I was growing the SEO company .

Step 7: Apply specialized knowledge to grow the business

This will need to be planned out before you make the purchase. The business likely had something ill-timed with it – that ’ s probably why they sold it in the first gear place – it might be low conversion rates, a buggy product, expensive customer learning costs, and then on. Anything you can do to improve these shortcomings means more profit .

Step 8: Apply specialized knowledge to reduce expenses

The business may have been spending a long ton of money on a support team, developers, writers, and so on. Reduce overhead by using your own team or other resources you have. possibly the previous owner was spending money on unprofitable ads or spending $ 20,000 a calendar month on services that weren ’ metric ton showing a effective come back on investment .
I ’ ve made many of these reductions and increased monthly net income by thousands of dollars .

Step 9: Make your investors whole as soon as possible

It ’ sulfur fair and expected that it will take you a few years to pay your investors back. Lay out a plan for what the monthly payments to them will be and make it easy for them to understand .
If you plan to pay them off early, let them know that you plan on completing your payments early which means you would only pay a parcel of the sum matter to that would accrue if you were to pay according to the agenda. They might not expect this so it ’ mho significant to communicate your plans and make sure your investors are on the same foliate as you when it comes to money .
After all of the above, you will have bought a occupation, cut expenses, grew tax income, received a courteous wage, you would own at least 50 % of a good-sized clientele, and your investors would be happy .
That ’ sulfur my ideal scenario .

How We’ve Applied This to Hubstaff’s First Acquisition

Your business may get to the point when you ’ ve got the playbook figure out and you have the machine running and you ’ rhenium scale, and you want to add a fresh view to the business to grow it even further .
That ’ sulfur where we found ourselves, but we couldn ’ thyroxine allocate any resources to develop a new inaugural from boodle, so we decided that an acquisition would be our best count .
The types of businesses we considered acquiring were :

  • A blog. This could have been a new channel for traffic.
  • A freelance marketplace. We purchased a job board, Talentopoly, instead.
  • A SaaS application. The product would have to be somewhat related to Hubstaff and would directly add customers to our company

We had three criteria for making an skill :

  1. The decision would expand the revenue of the parent company.
  2. The plan could be executed using only our current marketing and development team.
  3. If software, the product would have to be built on Ruby on Rails.

We were open to doing anything within those constraints. For example, we could have acquired an accounting software business with alike customers to Hubstaff which would have given us ( 1 ) another product to drive gross and ( 2 ) a newfangled group of customers already paying for a intersection .
As destiny would have it, in September 2015, we interviewed a developer who mentioned he had created a visualize management suite, and he was going to shut it down to start a new visualize. It was a Kanban style suite that included time tracking. Hubstaff already uses Kanban for internal plan management .
It was distinctly a perfect match .
We asked if he would consider selling us the software since he was going to shut it down. We agreed on a consider to purchase the software and have him join our team to continue working on it until it was ready to be released. This was a win-win for both parties .

Your Turn

In our shell, an learning made sense with our limit resources and the action was extremely comfortable because we happened to interview person with software that fit absolutely with Hubstaff .
Most of the time, acquiring a company will take a set of time and money and, as mentioned in my ideal scenario, and there may be many stakeholders involved .
Whether you decide to build or buy a business, make it easy to scale by baking in a recur gross exemplar. alternatively of trying to build a unicorn, focus on hitting the singles and purpose for $ 1-10 million in tax income before swinging for a home run.

Keep those two things in take care and you ’ ll be well on your room to building a profitable business that provides value to people and allows you to live a life you want .
Have you bought or sold companies or think of doing either of those ? Share your thoughts, experiences, and questions in the comments below .

Resources

  • Join the Rhodium Weekend Facebook group to learn more about acquiring, scaling, and selling online businesses
  • Check out the Rhodium Weekend Conference to connect with like-minded entrepreneurs

If you ’ re concerned in acquiring a business, I ’ five hundred recommend three brokers :

  • David Newell from FE International
  • Eric Owens from App Business Brokers
  • Mark Daoust from Quiet Light Brokerage

source : https://www.peterswar.net
Category : Finance

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