How to sell a bussiness

Author

Aman Salarpuria
June 08, 2024

Selling Your Business: Numbers and Benchmarks by Revenue Stage

The previous newsletter provided a roadmap for selling your business at different revenue points. Now, let's delve deeper with specific numbers and industry benchmarks to illustrate the process:

Pre-Revenue:

  • Valuation: At this stage, valuation is primarily based on future potential. Investors might consider the size of the addressable market, the strength of your intellectual property, and the experience of your team. Seed funding rounds for promising startups typically value companies in the $1 million to $5 million range.

Early Revenue (Less than $1 million annual revenue):

  • Valuation: Here, valuation starts reflecting initial traction. A company with $500,000 in annual revenue, 50% year-over-year growth, and a low CAC to CLTV ratio might be valued at 3-5 times its annual revenue, translating to a range of $1.5 million to $2.5 million.

  • Selling Your Business: Attracting investors who believe in your future potential is key. Here's who you might encounter:

    • Individual Investors: These are individuals with funds to invest, often seeking high-growth opportunities. They might find your business through online platforms like https://flippa.com/ or https://empireflippers.com/. Listing fees typically range from $10-$49 depending on the platform and asset value, with success fees charged upon a sale (often around 10% for smaller businesses).

    • Angel Investors: Wealthy individuals who invest in early-stage ventures with high growth potential. You can find them through angel investor networks or pitch competitions.

Established Revenue ($1 million to $10 million annual revenue):

  • Valuation: Profitability becomes a key factor. A business with $5 million in annual revenue, 30% profit margin, and a diversified customer base could be valued at 5-7 times its EBITDA (earnings before interest, tax, depreciation, and amortization). Depending on the industry, this could translate to a valuation of $15 million to $35 million. (Industry Benchmarks: Technology companies often command higher EBITDA multiples, reaching 10 or above, while traditional brick-and-mortar businesses might fall in the 4-6 range.)

  • Selling Your Business: Reaching a wider pool of buyers is crucial. Here are some common exit strategies and the types of buyers you might encounter:

    • Business Broker Services: Experienced business brokers connect you with a variety of buyers, including:

      • Strategic Buyers: Existing companies in your industry seeking to expand their market share or acquire your specific technology or customer base.

      • Financial Buyers: Private equity firms or investment banks looking to invest in your business for a high return on investment (ROI). They typically focus on established businesses with a strong track record of profitability.

    • Merger and Acquisition (M&A) Firms: For larger companies, M&A firms specialize in connecting businesses with:

      • Strategic Acquirers: Similar to those targeted by business brokers, but typically larger and more established companies.

    • Investment Banks: For high-value acquisitions, investment banks can bring in:

      • Financial Buyers: These can be private equity firms, hedge funds, or even high-net-worth individuals seeking to acquire a well-performing business for a return on investment.

Remember: These are just a few examples, and the best buyers and exit strategies will depend on your specific business and industry.

Additional Tips:

  • Prepare a detailed offering memorandum. This document outlines your business's financials, growth potential, and competitive landscape to attract potential buyers.

  • Market your business proactively. Attend industry events, connect with potential buyers online, and leverage your network to generate interest in your company.

  • Be patient and persistent. Selling a business takes time and effort. Don't get discouraged if the process doesn't happen overnight.

By understanding the benchmarks, buyer types, and exit strategies for each revenue stage, you can approach the sale of your business with a well-informed strategy, maximizing your return and achieving a successful exit.