If you have a web design business, an SEO company or some other internet-based business and you’re looking to move into another direction, how can you work out what your business is worth? You may have worked for years building your company and when it’s time to move on, you want to make sure that you get a fair price for your business. You may have dabbled in web design only for a little while and just have a few clients, they are still worth something. Your web business does not even have to be profitable for it to have some value to a potential buyer. If they can integrate it into their existing systems, they may be able to find ways to make it work for them. Because we’re web designers, I’ll talk about valuing a web design agency but the same guidelines apply to selling any internet-based business.
Don’t let your business worth fade away
I’ve seen a number of businesses both established, long-term players and “hobby” web designers let their businesses fall in value to next to nothing because they have lost interest and let their client base gradually dwindle away to zero. Attrition in any client base is inevitable but if your clients can’t contact you or aren’t getting the service they are used to, that trickle will eventually turn into a flood. Before you know it, you’re left with a bunch of disgruntled clients and a bad reputation that could follow you into your next job or business.
I understand the difficulty in letting go of something that you have invested time and energy into. It is important to make sure that the people you’re selling your web agency to will look after your clients as well as you did. While you can’t control what they do with it after you sell your business, you can show them the value in what you have achieved by giving good, clear details on what you’ve done, why you’ve done it and what opportunities there are for them in the future.
What does your web business have to offer?
There are a number of things that a potential buyer will be interested in when considering the value of your business. How well you present this information will give them a good idea of how your clients see you and how you ran your company. We once looked at buying a web design business where the owner tried to convince us that it was worth over three times what he was asking for it. This was all based on projected earnings, his own valuation of his brand and a sprinkling of fairy dust! If he was exaggerating to us, was he doing the same thing to his clients? No one wants to inherit a nightmare. Keep it real and you’ll get the respect you deserve.
Who are your clients?
Depending on the type of business you have, you might not want to divulge too much information too early. The nature of selling a business is that the people most likely to be interested in buying it could be your closest competition. However, if you’ve advertised who your clients are on your website, being too cagey will stall any negotiations and lead to feelings of mis-trust. Often your potential buyer will already know who you deal with and are interested for that very reason. At some point in the negotiations, the buyer will want more details but early on, you could give more general information such as; “Large Manufacturing Company in Auckland” instead of “Joe Bloggs Ltd”.
How do you make your money?
Explaining where your income comes from will allow the buyer to do some calculations to come up with an offer for your business. For a web design business, they would want to know how much money comes in from the various services that you offer such as;
Keeping good records will show the potential buyer how your income stream has changed over past years. Buyers like to see an upward trend and professionally prepared accounts.
What opportunities are there for the buyer?
If you’ve been active in your business, you should have ongoing work in the pipeline. Detailing this for the buyer will make your web business much more attractive to them. There are significant costs involved in taking over another business both in purchase costs, time and training. Showing the buyer that this will be offset by ongoing income makes your business more attractive to them. No one likes to be left with an empty gas tank!
There could also be internal projects that you’ve been working on such as a new service or product that you were intending to offer your customers but hadn’t launched yet. It might be that you never offered them something that the buyer could. If you’ve only ever built websites but never offered email marketing, that could be an opportunity for them.
On the other hand, you might offer something that the buyer can’t, that would round out their business. A point of difference like this is very attractive to a potential buyer.
What else do you have to offer?
There are a number of other things that a buyer will be interested in, including;
- Your website analytics. Hopefully, you can prove that your web business has been doing well online.
- What plant and equipment are for sale (if any).
- How does your brand compare with your competitors.
- What sort of assistance can you offer with the transition?
- Are you willing to finance the purchase?
- What plans do your staff have?
- Do you have any business relationships that they may benefit from?
- What processes do you have that the buyer will benefit from?
4 Ways to value your web business
There are many ways of valuing a business. Here are four common methods of valuation. Some may be more relevant than others to your particular situation.
- As a Multiple of Revenue
This is a simple way to value a business but it does ignore much of the detail. All you do is set your business value as a multiple of the net profit (profit over the last 12 months after all expenses). Commonly, this is around 1x to 3x the net profit. This is far from accurate and may over-value or under-value your business. It ignores the cost of self-management and other factors important to arriving at a fair value.
- Similar Business Sales Comparisons
Potentially a good way to value a business but often, this information is either not available or too little is available to make an accurate comparison. If you are selling through a business broker, this sort of information may be more readily available but of course, there will be a commission to pay as well. Also, a direct comparison is problematic as businesses vary in the way they operate.
- Valuation based on Business Assets
Occasionally a business will not sell based upon its income stream but because of what assets it has. This might be a client base, mailing list or physical assets such as equipment, land or buildings. If a business has gone into liquidation, ceased operating or parts of it have become obsolete, this may be the only way to value it.
- Investment Model Valuation
Not everyone who buys a business will want to work in it. This model views the business as an investment and is a variation on the “Multiple of Revenue” model. It works better if selling a business where the owner was taking an income from the company profits. To arrive at a valuation, you take the net annual profit and deduct the salary of a staff member to manage the business. Then you multiple the remaining profit by 3x-4x.
What do other types of comparable businesses sell for?
Most web businesses have a certain amount of “passive” income. Passive is in quotes because I realise that it’s not that easy! For web design agencies, this is comparable with a book of insurance clients. The insurance agent will receive a “trail commission” based on the annual premiums of the insurance policies the clients are paying. This is very similar to a web agency that makes most of its money from website sales but creates a passive income from web hosting. The standard multiplier in the insurance industry is 2.5x the trail commission. An unserviced client base may sell for as little as 1x, whereas a very well-managed, large agency with clear plans for future sales can go for much more.
For web businesses that don’t have a passive income, valuations will vary a lot more. An accountancy practice is quite similar to a web design business, where everything that is earnt has to be physically worked for every year. In that industry, there is a standard of 1.0x gross turnover. This allows the buyer to improve profits by cutting costs. I believe the multiplier is low in this industry as clients tend to move from accountants much less often and there is also an annual income that should be much more reliable.
What could reduce your web business value?
The most common reason that a business will sell more cheaply is if the owner effectively wants to “abandon” it for a quick sale. This may be because of health problems, relationship issues, financial stress or business issues. In a situation like this, delaying a sale will only devalue the business more, so if you get a reasonable offer it’s probably best to take the money while it is still there.
There are some other factors that may adversely affect the valuation of your web business;
- A few large clients providing most of the income. If one left, would the buyer lose a large proportion of the income?
- Out-dated technology that may need to be replaced, incurring extra costs.
- If the owner is not willing to assist with a transition, the new buyer may be left holding a baby they don’t understand.
- Key staff who have skills that are not easy to replace might want to retire or leave to set up in competition.
- Reliance on providers that are not easy to replace.
- Changing customer trends. Perhaps your business is just obsolete?
- Your brand has been tarnished. If you’ve had some high-profile bad publicity, this will reduce what you can sell your web business for.
- Low quality clients. Do they pay on time? Are they growing?
- Lack of history. How long have they been clients? Are they loyal?
- Low quality services. If you haven’t been providing what your clients want, what sort of reception will a new owner get?
- The lifespan of your clients’. Is there any more to sell them?
- No contracts locking the clients in.
Are there any issues the buyer should be aware of?
We once looked at buying an SEO company in another city. It was relatively young and looked to have a good income stream. However, when we investigated further, we found that their own website did not rank anywhere on Google! They assured us that they were too busy ranking their customers higher to work on their own website. Looking more deeply into their processes, we discovered that they had been using some pretty unethical business practices on their clients websites. It was a time bomb waiting to go off. If we had bought the business, we’d have been dealing with nothing but client complaints. Furthermore, all their business had been sourced by online paid advertising – something we could do ourselves. In effect there was nothing worth buying.
If you attempt to sell your business in the knowledge that there are major issues you’re hiding from the buyer, you are misrepresenting your situation and opening yourself up to potential legal issues when they eventually discover them. In some cases, you could even be committing fraud. Every business has its problems and no one expects to buy a business without any bumps in the road, so be honest about your situation and you’ll be able to walk away with a clear conscience and clear yourself of any ongoing liabilities.
What is the best way to get paid for your web business?
It’s hard to let go of ongoing income you may have from web hosting, SEO or other internet-based services that you have built into a website package. However, there are ways of making this transition easier.
Lump Sum Payout
This sounds great but sometimes it’s not the best option. Getting finance to buy a business can be difficult, so it can rule out some buyers. Also, not everyone is comfortable taking a lump sum payment.
If the buyer is able to pay you out over a period of time (months or years), they may be willing to pay a little extra for that option. Also, this takes away the responsibility of managing a lump sum that will be burning a hole in your pocket!
If you are interested in staying on as a staff member, consultant or silent partner, the buyer might be willing to allow you to take shares in the company or give you a salary for an agreed period of time. This might give you the space you need to make decisions about your future.
Protecting your business during the sale process
Finally, getting legal advice is always a good idea. If this is unaffordable, you might be able to use a free legal service such as the Citizens’ Advice Bureau or even draft your own agreement with the potential buyer. Either way, consider asking potential buyers to sign an agreement that includes clauses covering non-disclosure and limitations on contacting clients. It will give you some protection if negotiations turn sour and signing will show you whether they are serious or not. The buyer will have their own concerns, such as potential competition from you if you set up your own business, so be prepared to sign a non-competition agreement for them.