Every business owner who comes to us ready to sell wants to know the same thing – how do I maximize the value of this business?
Whether you’re ready to sell an Amazon business in the near future, or won’t be ready to sell for many years, the answer is the same. The single most important thing you can do to maximize the value of your business now? Operate the business as if you’re planning to sell it.
In the heat of the everyday-business battles that we all deal with as entrepreneurs, of course, that’s easier said than done. To make it easier, the first step is to break down the formula that will one day be used to calculate the value of your business.
What Will Determine Your Business’s Value?
Your business’s anticipated value = Last 12 Months Discretionary Earnings x a Multiple.
In other words, your business’s valuation at the time of sale is based on these two factors:
- Earnings
- Multiple applied to those earnings
If you’re in the trenches, you’re already focused on earnings. Activities like optimizing your margins, lowering CPA, and increasing reviews have your attention daily. But focusing on that multiple now offers a great opportunity to create value for the future.
When you’re ready to sell an Amazon business, the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) will be calculated, and a multiple applied. The multiple will be determined by some things that you don’t control, like the state of the market and the overall economy at the time, and other things that you can control.
Four Factors that Will Maximize the Multiple
In terms of the factors you can control, I like to use the analogy of four pillars on which the value of your business is based and which help determine that multiple. The four pillars account for the general health of your business as well as its unique strengths and weaknesses.
Let’s look at each one more closely.
- Risk Exposure
Every buyer wants to protect their investment by minimizing risk. A business that’s highly vulnerable to competitors or relies too heavily on one vendor, for instance, puts an investor’s capital at risk. Buyers want to avoid a business that has all its eggs in one basket, so developing new product lines and building out new acquisition channels, like email, can significantly affect value in the future.
- Growth potential
Amazon’s numbers are impressive, to say the least. The explosive growth of users on the platform and the constantly upward-trending stats like revenues and sales volume all have the attention of buyers. When it comes to your individual Amazon business, buyers will want to see that it’s growing along with the platform at a healthy rate and also positioned to take advantage of new opportunities on the platform as they become available.
- Transferability
Every buyer will tell you that they begin mentally running a new business long before the deal goes through. A business that’s heavily dependent one person to run it, or won’t easily transfer from one team to another, spells trouble from an investment standpoint. A business with clear and straightforward operating procedures and streamlined processes, on the other hand, is a dream for buyers. Although it can seem daunting to take out time now to set up your business so that anyone can run it, those efforts ultimately pay off big when you’re ready to sell.
- Documentation
Even a business with relatively low risk will seem enormously risky to a buyer if you’re running it in your head. Organized and accessible documentation like clear and clean financial records make the world of difference for a buyer evaluating an investment. A buyer wants to be able to look back to the past in your business in order to envision and plan for the future. Separate accounting and independently verifiable financials will help them do that. Again in this case, any time and expense you go to now will only maximize your business’s value later.
In broad terms, those four pillars help determine the multiple used to calculate a business’s value. The more you work on each one of these areas now, the easier time you’ll have and the greater your payoff will be when the day comes that you’re ready to sell. Any time you take now to think like a buyer and investor, will make a huge difference.
What will an investor see when they look back to the past of your business and forward to the future? Will that picture be complete and will past events be easy to verify? What steps have you taken to minimize risk? How quickly and easily can another individual or team step in to take over operations?
Selling a valuable online business can be a life changing event for the person who built it, and the time to start planning for that event is now.
Recent Comments