We all work hard building our businesses.
We put in the sweat equity and all the tears that can come with it to build something truly great. After another day hustling at the office or typing furiously on your keyboard, you might be wondering… what is the end game here?
What are you really going for? Is there a glowing neon sign with the word “Exit” marking the path to your ultimate goal?
For the majority of businesses, the end goal is to eventually sell that business to another entrepreneur who wants to take the reins and simply enjoy the profits from the sale. Alas, most of us don’t even know what our business is worth, much less how to go about selling it — or if it's even sellable to begin with.
That's where Empire Flippers comes in. We've been brokering deals for years in the online business space, serving a quiet but hungry group of investors who are looking to acquire digital assets. The demand for profitable digital assets has been growing so much that our brokerage was able to get on the Inc. 5000 list two years in a row, both times under the 500 mark.
We can say with confidence that, yes, there is indeed an exit for your business.
By the end of this article you're going to know more about how online businesses are valued, what buyers are looking for, and how you can get the absolute top dollar for your content website, software as a service (SaaS), or e-commerce store.
(You might have noticed I didn’t include the word “agency” in the last paragraph. Digital agencies are incredibly hard to sell; to do so, you need to have streamlined your process as much as possible. Even though having clients is great, other digital assets are far easier to sell.)
If you’ve built a digital asset you’re looking to exit from, the first question you likely have is, “This sounds fantastic, but how do I go about putting an actual price tag on what I’ve created?”
We’ll dive into those answers below, but first let’s talk about why you're already in a great position just by being a reader of the Moz Blog.
Why is SEO the most valuable traffic for a digital asset?
SEO is by far the most attractive traffic source for people looking at purchasing online businesses.
The beauty of SEO is that once you’ve put in the work to achieve the rankings, they can maintain and bring in traffic for sometimes months without significant upkeep. That's in stark contrast with pay-per-click (PPC) campaigns, such as Facebook ads, which require daily monitoring to make sure nothing strange is happening with your conversions or that you’re not overspending.
For someone who has no experience with traffic generation but wants to purchase a profitable online business, an SEO-fueled website just makes sense. They can earn while they learn. When they purchase the asset (typically a content website for people just starting out), they can play around with adding new high-quality pieces of content and learn about more complicated SEO techniques down the road.
Even someone who is a master at paid traffic loves SEO. They might buy an e-commerce store that has some real potential with Facebook ads that's currently driving the majority of its traffic through SEO, and treat the SEO as gravy on top of the paid traffic they plan to drive toward that e-commerce store.
Whether the buyer is a newbie or a veteran, SEO as a traffic method has one of the widest appeals of any other traffic strategy. While SEO itself does not increase the value of the business in most cases, it does attract more buyers than other forms of traffic.
Now, let’s get down to what your business is worth.
How are online businesses actually valued?
How businesses are valued is such a common question we get at our brokerage that we created an automated valuation tool that gives a free estimate of your business’s value, which our audience uses with all of their different projects.
At the heart of any valuation is a fairly basic formula:
You look at your rolling 12-month net profit average and then times that by a multiple. Typically, a multiple will range between 20–50x of the 12-month average net profit for healthy, profitable online businesses. As you get closer to 50x you have to be able to show your business is growing in a BIG way month over month and that your business is truly defensible (something we’ll talk about later in this article).
You might see some brokers using a 2x or 3x EBITDA, which stands for earnings before interest, tax, depreciation, and amortization.
When you see this formula, they’re using an annual multiple, whereas at Empire Flippers we use a monthly multiple. There's really not much of a difference between the two formulas; it mainly depends on your preference, but if you’re brand new to buying and selling online businesses, then it's helpful to know how different brokers price businesses.
We prefer the monthly multiple since it shows a more granular picture of the business and where it's trending.
Just like you can influence Google SERPs with SEO knowledge, so can you manipulate this formula to give you a better valuation as long as you know what you’re looking at.
How to move the multiple needle in your favor
There are various things you can do to get a higher multiple. A lot of it comes down to just common sense and really putting yourself in the buyer’s shoes.
A useful thing to ask: “Would I ever buy my business? Why? Why not?”
This exercise can lead you to change a lot of things about your business for the better.
The two areas that most affect the multiple come down to your actual average net profit and how long the business has been around making money.
Average net profit
The higher your average net profit, the higher your multiple will tend to be because it's a bigger cash-flowing asset. It makes sense then to look at various ways you can increase that net profit and decrease your total amount of expenses.
Every digital asset is a little different in where their expenses are coming from. For content sites, content creation costs are typically the lion’s share of expenses. As you approach the time of sale, you might want to scale back your content. In other cases, you may want to move to an agency solution where you can scale or minimize your content expenses at will rather than having in-house writers on the payroll.
There are also expenses that you might be applying to the business but aren’t really “needed” in operating the business, known as add-backs.