Selling An Internet Based Business

[CallumW]

HI folks.

One of the businesses I own is entirely web based.

No it is not a website selling dodgy ebooks or get rich quick schemes.

When I say web based I mean that all of the employees work remotely, all clients are procured on-line and the business can be run from anywhere as long as you have a laptop. I have not had to make a business call for three years, everything is done with email or occasionally some form of instant messenger.

Staffing levels are fluid based upon workload, typically 4-12 part-time employees at any one time.

Now I can't work out how I would go about selling this business, I am even having problems with the valuation of the business.

Let me give a quick financial run down:

Last 6 months revenue = $100,000 at a 40% GP.

Next 6 month forecast = $120,000 at 40% GP.

The business has a track record going back 5 years and has a reputation which positions it amongst the top businesses selling this service in the world.

When everything is running smoothly it takes around 2 hours a day to administer and requires nothing more than the ability to use a PC and a little marketing savvy.

Somebody willing to put in a few more hours a day and implement some plans I have for diversification could possibly treble the revenue within 6 months.

Anyone have any ideas on how to work out a rough valuation of this business?

Thanks in advance.

Edited February 9, 2011 by CallumW

[steelepulse]

It depends how long the biz has been around and what the revenue stream is, as well as where all of your traffic comes from. As a general guide, it is anywhere between 6 months to 2 years of income (not revenue) for a regular site, while a well known mainstream site makes much more than that ( just look at the Huffingtonpost sale). Without knowing the details of your site except it being 5 years old, it would be between 1-2 years of income.

Depending on where your traffic is coming from and your income stream. Are you selling a tangible item, or information, or is your income from adsense and selling links? Is the traffic from Search Engines mainly, or paid ads and paid links?

Edited February 9, 2011 by steelepulse

[CallumW]

It depends how long the biz has been around and what the revenue stream is, as well as where all of your traffic comes from. As a general guide, it is anywhere between 6 months to 2 years of income (not revenue) for a regular site, while a well known mainstream site makes much more than that ( just look at the Huffingtonpost sale).

Depending on where your traffic is coming from and your income stream? Are you selling a tangible item, or information, or is your income from adsense and selling links? Is the traffic from Search Engines mainly, or paid ads and paid links?

Hi there, thanks for the reply.

Probably I did not make things clear enough in my original post. This is not a business based around a website, there is a website as part of the business but traffic to this site does not produce revenue, it is simply a store front (but could be exploited more). Revenue does not come from any form of advertising, we produce a tangible product which sits within the B2B marketplace. So basing this valuation on the math used to value a website is not right, web base sales (direct through our website) make up less than 1% of the revenue, although it could be a lot more if it were exploited.

The business has been around 5 years, with the last two years seeing some expansion, in truth there is room to expand a lot more, I have spreadsheets that I have created to show me income levels at various stages of expansion and at the current rate we could be hitting $1,000,000 turnover a year at 40% GP within 18 months. Most people would think me foolish for considering selling this business but it is time to retire for me and I want to clear the decks.

This is basically a bricks and mortar business without any bricks or mortar, kind of weird to evaluate as I am sure you understand.

[bifftastic]

Why do you even want to sell it if it's making good money?

If you have other things you'd rather be doing why not get someone to run it for you on a percentage, that way you can still have some input, the person you get in to run it can get a feel for it and at a later date you can work out a price together, assuming, of course, it's still running smoothly.

Businesses are normally registered and have assets that can be bought and sold, if yours only has customers and income potential that may be why you're having a hard time putting a value on it?

How do you see a potential sale of this business actually happening? Is it a limited company (or whatever version of that status businesses have wherever it's registered)

Is it even a 'real' business or is it more like an 'activity'?

What I mean is, if it's just some economic activity you've been doing, which makes money, that would make it difficult to define as an entity which could then be sold.

Do you have contracts with suppliers/customers/employees, or is it all fairly 'unofficial'

If someone was to consider giving you cash in order to take over what you're doing they'd want some kind of assurances. Otherwise there'd be nothing to stop you selling this business and then carrying on doing it yourself with all your current contacts, customers and suppliers.

All these things would help to define the value.

If someone were to consider buying a business, especially one that isn't in 'bricks and mortar' as it were, there'd need to be lawyers involved, due diligence carried out etc.

All gets kinda complicated. If you just want someone else to do the work and you get some money, you might be better off looking for a partner.

By the way, how many hours a day does it take when it isn't running smoothly?

Edit, didn't see the 2nd post or your reply whilst typing mine

Edited February 9, 2011 by bifftastic

[sfokevin]

You could save us a lot of time by posting a link to you site

[CallumW]

Thanks for the reply, probably easiest if I answer your questions in-line so I'll put them in red below.

Why do you even want to sell it if it's making good money?

If you have other things you'd rather be doing why not get someone to run it for you on a percentage, that way you can still have some input, the person you get in to run it can get a feel for it and at a later date you can work out a price together, assuming, of course, it's still running smoothly.

I considered this, but I am one of those people who can't leave well enough alone, I would end up still wanting to run things day to day.

Businesses are normally registered and have assets that can be bought and sold, if yours only has customers and income potential that may be why you're having a hard time putting a value on it?

I operate as a sole proprietor but have been considering registering a company in Hong Kong in recent months. The assets of the business could be seen as its excellent reputation, customer base and proven past income.

How do you see a potential sale of this business actually happening? Is it a limited company (or whatever version of that status businesses have wherever it's registered)

Is it even a 'real' business or is it more like an 'activity'?

It is a real business although not incorporated (see above).

What I mean is, if it's just some economic activity you've been doing, which makes money, that would make it difficult to define as an entity which could then be sold.

No it's not simply an economic activity, we operate as any business does, find customers, produce the product, get paid.

Do you have contracts with suppliers/customers/employees, or is it all fairly 'unofficial'

Yes to varying degrees depending on the size of the client. Employees are bound by an NDA although we all know how useless those can be.

If someone was to consider giving you cash in order to take over what you're doing they'd want some kind of assurances. Otherwise there'd be nothing to stop you selling this business and then carrying on doing it yourself with all your current contacts, customers and suppliers.

If you could see how we operate, then you would understand that once I were to hand over the keys so to speak, I would not be able to exploit past clients and relationships. I would effectively be locked out.

All these things would help to define the value.

If someone were to consider buying a business, especially one that isn't in 'bricks and mortar' as it were, there'd need to be lawyers involved, due diligence carried out etc.

All gets kinda complicated. If you just want someone else to do the work and you get some money, you might be better off looking for a partner.

I've tried the partner route in the past, never been comfortable with it, call me a control freak

By the way, how many hours a day does it take when it isn't running smoothly?

Good question, never more than about 3! Although one of my character faults is my inability to delegate effectively so sometimes I get involved where I shouldn't!

[bifftastic]

Thanks for your answers

Well, I guess it comes down to how much you want for it? How much of a hole will not having it make in your pocket? Add the legal fees and the price of whatever you can do in 2 or 3 hours a day that will stop you missing it (ok the last one could be very expensive! )

We're not helping much, are we?

[steelepulse]

So you're outsourcing the work then having a dropshipper ship? Everything seems so vague it's hard to get an idea of your actual biz model.

[CallumW]

So you're outsourcing the work then having a dropshipper ship? Everything seems so vague it's hard to get an idea of your actual biz model.

You seem to be fixed on the concept that we sell products like a retailer, we do not, we are in the B2B arena. We provide a professional product/service to other businesses.

[CallumW]

Thanks for your answers

Well, I guess it comes down to how much you want for it? How much of a hole will not having it make in your pocket? Add the legal fees and the price of whatever you can do in 2 or 3 hours a day that will stop you missing it (ok the last one could be very expensive! )

We're not helping much, are we?

Thanks for trying to help though, I think you can see how difficult it is to put a price on this. As for the hole in my pocket, it won't effect me that much, I have other business ventures that look after themselves, this one just kind of grew out of nowhere and I ended up in the hot seat. If I wasn't thinking of retiring very soon I would probably keep it on but I set myself a goal of stopping all business and work related activities at the age of 45, so now its time to start cashing in and think about taking up golf again

I think my best route might be to incorporate off-shore, then produce proper account for the next 12-18 months that can then be used to prove the business as you would any other bricks and mortar setup.

Complicated! Oh well, thanks for the input anyway, you did give me a few ideas.

[jayinoz]

I gather this is like an advert for the business to gauge the level of interest.

>>Last 6 months revenue = $100,000 at a 40% GP<< If paying tax this leaves approx 30K every 6 months I would suggest. An income for 1 person IME. As I gather you were not taking a wage as a manager of the site. Therefore your profit becomes your income and in most places tax is payable. yet you should be able to write off many expenses against this low level of income to pay very little.

All depends on how passive this income is....would be worth near nothing if it is totally from your own 60 hours work each week IMO on this sort of profit. Owners have a great tendancy to exaggerate profits and renvenue, so solid proof of earnings is essential, not debt owed but real profit payable regularly to the owner of the site. Yet each valuation is all subjective, you will probably have a huge variation. Yet when it comes to offer it all depends on your business system, proof of profits, growth potential, etc. In general if internet businesses are not being approached to buy them out then I would advise you stick with the cashflow and try make the income more passive by employing the right people. Otherwise target competitors to buy you out and let them make you an offer as they know you client base and marketing strategy better than a Lay person I would suggest.

If you expect to get more than a couple of years 'proveable' real profit from your business and it is not very passive income then I suggest you will be very disappointed. In general most would not offload a high growth income producing website unless the funds are desperately needed. Good Luck.

Cheers Jay

[CallumW]

If you expect to get more than a couple of years 'proveable' real profit from your business and it is not very passive income then I suggest you will be very disappointed. In general most would not offload a high growth income producing website unless the funds are desperately needed. Good Luck.

Cheers Jay

HI Jay and thanks for your comments.

Once again, I would like to stress that this business does not revolve around a website, we do not actively promote our website in any way, it's simple a shop window so that if clients decide to look for us on the web they see we have a site, nothing more.

I started this post to get some helpful advice on how to work out a valuation, not to engage potential buyers.

[steelepulse]

So you're outsourcing the work then having a dropshipper ship? Everything seems so vague it's hard to get an idea of your actual biz model.

You seem to be fixed on the concept that we sell products like a retailer, we do not, we are in the B2B arena. We provide a professional product/service to other businesses.

I thought you sold a tangible product based on what you said above and this is why I thought you outsourced the work seeing as you said you were brick and mortar, without the bricks and mortar . Is a service a tangible product?

"we produce a tangible product which sits within the B2B marketplace."

Edited February 9, 2011 by steelepulse

[bifftastic]

Thanks for your answers

Well, I guess it comes down to how much you want for it? How much of a hole will not having it make in your pocket? Add the legal fees and the price of whatever you can do in 2 or 3 hours a day that will stop you missing it (ok the last one could be very expensive! )

We're not helping much, are we?

I think my best route might be to incorporate off-shore, then produce proper account for the next 12-18 months that can then be used to prove the business as you would any other bricks and mortar setup.

Complicated! Oh well, thanks for the input anyway, you did give me a few ideas.

Sounds like a plan, then the value will be self-evident.

Good luck with it all

[CallumW]

I thought you sold a tangible product based on what you said above and this is why I thought you outsourced the work seeing as you said you were brick and mortar, without the bricks and mortar . Is a service a tangible product?

"we produce a tangible product which sits within the B2B marketplace."

Yeah it gets a bit confusing. Probably the easiest way to describe it is that our clients employ us to perform a service for them, the result of this service is the delivery of a tangible product. A good analogy would be something like web design, is web design a service or a product based model? It's a bit of both really, as the end result of the service is delivery of the product.

You can probably see why I am having a tough time working this out, it's not exactly a traditional business model!

[steelepulse]

If you want to see what it's worth, put it out there at a price point and see what kind of bites you get.

[CallumW]

If you want to see what it's worth, put it out there at a price point and see what kind of bites you get.

Actually you really helped me here, you gave me an idea of how to find a decent way to value the business.

If we take my web design analogy further, then the situation is almost identical.

Let's say a group of web designers work for a business which has no physical office, they all work from home, the business has an excellent reputation, proven revenue and bookings into the future. How would the owner work out a valuation? This fits my situation entirely except we are nit in web design!

[bifftastic]

Well, it seems you're getting nearer an answer, maybe this 'brainstorming' session will help you think it all out.

It would appear that it could be valued much the same way as any other business, just without all the fixed costs like buildings, permanent staff, utilities etc.

[steelepulse]

Another thought is your revenue stream. Are the current customers on recurring billing for said service, or do you constantly have to go and get more customers. Everyone loves recurring billing customers.

[CallumW]

Well, it seems you're getting nearer an answer, maybe this 'brainstorming' session will help you think it all out.

It would appear that it could be valued much the same way as any other business, just without all the fixed costs like buildings, permanent staff, utilities etc.

Yes thanks to all of you who have replied to this post, I've now been able to find several examples of valuations for similar businesses by applying the web design analogy.

You are correct bifftastic, pretty simple really, rule of thumb figure seems to be around $250,000 which is about what I expected in the back of my head.

Thanks very much folks you have all been a great help.

Edited February 9, 2011 by CallumW

[CallumW]

Another thought is your revenue stream. Are the current customers on recurring billing for said service, or do you constantly have to go and get more customers. Everyone loves recurring billing customers.

A bit of both really, some clients will order $10,000 worth a month for a couple of months, disappear and then come back a few months later for some more. Overall repeat clients make up around 70% of revenue, in fact we have not had capacity to take on any new clients for a couple of months now, which means I really need to expand but don't want to as I would rather just get rid of the whole thing, I came to Thailand to retire not ending up working harder than I did in the UK! Ha!

[GingerLing]

Another thought is your revenue stream. Are the current customers on recurring billing for said service, or do you constantly have to go and get more customers. Everyone loves recurring billing customers.

A bit of both really, some clients will order $10,000 worth a month for a couple of months, disappear and then come back a few months later for some more. Overall repeat clients make up around 70% of revenue, in fact we have not had capacity to take on any new clients for a couple of months now, which means I really need to expand but don't want to as I would rather just get rid of the whole thing, I came to Thailand to retire not ending up working harder than I did in the UK! Ha!

Callum, if you were selling in the UK a good starting point would be to factor the net profit by 2-5 times depending on the goodwill in your contracts. If there is a track record of repeat business over 3 years than factor for 3. You mentioned gross profit rather than net, so assumming a net of $40k per annum and assuming the last 3 years were the same, you would value at $120k+. Add to that the value of any IP on the product you produce and assets you want to appropriate to the business.

Sounds like you are the key to this business, anyone buying the business would be aware that and that the staff used to deliver the service / product are not tied to the business. These are two factors that addresses would increase a sale value otherwise they are unknowns which introduces risk and reduces the potential value. If you haven't already, get the freelancers tied into some contractual retainer. For yourself you need to demonstrate you can extracate yourself from daily operations and your function within the business can be undertaken by another person. Simply put, be clear about what you do.

Sounds like it would be a better idea to work you arse off for 18 months though and exploit the potential yourself, as you are probably best placed to exploit this potential, and then sell. Do this expansion using a company in HK or Singapore and benefit from the lower TAX liabilities than you would otherwise experience under UK duristiction. The extra money would pay for a European Tour professional golf coach and you could make up lost time on your game as a result

[Tatsujin]

You mentioned (I think) that 70% of the income is derived from existing clients, but how do you get new clients and how did you get the existing ones in the first place?

Also, with a business such as this (as you compared it to web design) I would think that a large proportion of your clients are kept and maintained because of you personally, rather than your staff. If you are out of the equation, how would this impact on existing clients?

[CallumW]

Another thought is your revenue stream. Are the current customers on recurring billing for said service, or do you constantly have to go and get more customers. Everyone loves recurring billing customers.

A bit of both really, some clients will order $10,000 worth a month for a couple of months, disappear and then come back a few months later for some more. Overall repeat clients make up around 70% of revenue, in fact we have not had capacity to take on any new clients for a couple of months now, which means I really need to expand but don't want to as I would rather just get rid of the whole thing, I came to Thailand to retire not ending up working harder than I did in the UK! Ha!

Callum, if you were selling in the UK a good starting point would be to factor the net profit by 2-5 times depending on the goodwill in your contracts. If there is a track record of repeat business over 3 years than factor for 3. You mentioned gross profit rather than net, so assumming a net of $40k per annum and assuming the last 3 years were the same, you would value at $120k+. Add to that the value of any IP on the product you produce and assets you want to appropriate to the business.

Sounds like you are the key to this business, anyone buying the business would be aware that and that the staff used to deliver the service / product are not tied to the business. These are two factors that addresses would increase a sale value otherwise they are unknowns which introduces risk and reduces the potential value. If you haven't already, get the freelancers tied into some contractual retainer. For yourself you need to demonstrate you can extracate yourself from daily operations and your function within the business can be undertaken by another person. Simply put, be clear about what you do.

Sounds like it would be a better idea to work you arse off for 18 months though and exploit the potential yourself, as you are probably best placed to exploit this potential, and then sell. Do this expansion using a company in HK or Singapore and benefit from the lower TAX liabilities than you would otherwise experience under UK duristiction. The extra money would pay for a European Tour professional golf coach and you could make up lost time on your game as a result

I think we are singing from the same page GingerLing, this is now my plan and it still puts me where I want to be in 18 months so I can live with that!

[CallumW]

You mentioned (I think) that 70% of the income is derived from existing clients, but how do you get new clients and how did you get the existing ones in the first place?

Also, with a business such as this (as you compared it to web design) I would think that a large proportion of your clients are kept and maintained because of you personally, rather than your staff. If you are out of the equation, how would this impact on existing clients?

We are fed around 300 leads a day from various sources, out of these I pick the most promising looking ones and then put a proposal forward.

If I was into keeping this business I would exploit direct sales more and also put out a lot more proposals. Of the 300 odd leads I get sent each day, I only contact around 5 prospective clients, as we just cant deal with too many right now we are full up for months ahead with just the odd space in our schedule here and there. Staffing isn't a problem, I recently advertised for a couple more part-time people in the UK and had over 200 applications! So it would be very easy to expand but a heck of a lot more work for me. Well in truth when I say a heck of a lot more it would probably take me 4 hours a day instead of 2 but when you don't want to be working at all an extra 2 hours a day is worse than prison!

[Tatsujin]

We are fed around 300 leads a day from various sources, out of these I pick the most promising looking ones and then put a proposal forward.

If I was into keeping this business I would exploit direct sales more and also put out a lot more proposals. Of the 300 odd leads I get sent each day, I only contact around 5 prospective clients, as we just cant deal with too many right now we are full up for months ahead with just the odd space in our schedule here and there. Staffing isn't a problem, I recently advertised for a couple more part-time people in the UK and had over 200 applications! So it would be very easy to expand but a heck of a lot more work for me. Well in truth when I say a heck of a lot more it would probably take me 4 hours a day instead of 2 but when you don't want to be working at all an extra 2 hours a day is worse than prison!

I think for me to be able to put a price on something like this I'd need to know far more about where and how these leads are coming in to you and the quality of same as this seems to be the core aspect of the business.