As markets reel and continued inflationary pressure adds to economic uncertainty, you may feel like you have nowhere to turn. Despite the chaos, an underappreciated asset class is thriving: digital assets.
Online businesses, also known as online business M&A, consist of online assets like blogs, SaaS (software as a service), apps, and e-commerce stores. Investing in online businesses is analogous to investing in real-world ones; there’s a massive market of savvy buyers and investors buying up small online businesses and the industry is thriving.
This market isn’t going anywhere. Even better, unlike other asset classes, this is not a speculative space. These are cash flow-generating and profitable businesses operating in growing categories. The appeal for both institutional buyers and acquisition entrepreneurs alike is clear: The returns are real. Growth through acquisition, at these multiples, makes a lot of strategic sense, and we’re seeing enormous demand globally.
Many investors are amassing new funds or diverting investment interest toward these smaller assets. And similarly, savvy individuals are recognising the efficiency in acquiring something with a stable history of performance.
Want to get involved? Here are a few insights.
What Are Online Businesses?
Is My Business Ripe for Selling?
Only 18 percent of small business owners hold a masters degree, while almost a third of small business owners don’t get further than a highschool education. They hustle, they experiment, and they do whatever they have to for success. Perhaps that’s you. So, should you consider selling? There’s likely a buyer for your business.
The challenge, however, is that a simple, transparent and efficient process for online business owners to sell their businesses hasn’t existed until recently. These entrepreneurs might not know how to value their business, how to reach qualified buyers, or how to maximize their exit value after years of hard work.
If you’re looking to sell, keep a few things in mind when you’re ready to exit your business:
1. Determine the selling price for your business.
Review other online businesses for sale and research how they position themselves. You should typically calculate selling price on a multiple of profit for bigger businesses (>2 million turnover) or a multiple of SDE (Seller’s Discretionary Earnings) (adjusted for owner costs) on smaller businesses.
2. Buyers want future potential.
Buyers will pay for performance, but they’re also looking for opportunity. Don’t worry if your business faces some challenges or has a few weaknesses. This very thing is what buyers want to know about. Savvy ones see problems as an opportunity. Be prepared to share a warts-and-all account of your business’s financial and operational performance. Provide behind-the-scenes access to how everything works. Of course, prospective buyers want to know that your business is thriving, but they’ll also want to see opportunities where they can improve and drive even more revenue in the future.
3. Keep emotion out of it.
No matter how proud you are of your business and how sentimental you might feel about selling, keep in mind that buyers see this as a numbers-oriented business transaction. Don’t take it personally if there’s some critical analysis of your business. And don’t get frustrated if finding the right buyer takes time. Getting the right fit matters, and ultimately, your business is worth what a buyer is willing to pay for it.
What Will My Business Sell For?
As I mentioned above, the biggest area of confusion comes up when online business owners are getting ready to sell and they want to know how much the business is worth.
Here are some examples of what I’ve seen recently to give you some sense of comparison:
- A small business utility app sold for 5.45 times the annual net profit. Notably, this was also more than three times annual revenue as valuations at this level are almost always valued by net profit, not revenue. This was approximately a $30 million sale.
- An education SaaS business sold for 5.81 times annual revenue. This was about an $8.5 million sale.
- A personalized jewelry e-commerce business sold for 4.62 times annual net profit. This was approximately a $2.5 million sale.
- A content site about privacy and compliance sold for 7.63 times Annual Net Profit. Notably this incredibly high margin passive site, sold for seven times annual revenue. This was about a $5 million sale.
Financial performance is the best measure, but what else determines the valuation multiplier? There are several factors, including:
What Determines My Business’s Valuation?
- Your business performance: This is indicated by metrics like website traffic, number and engagement of social media followers, number of email newsletter subscribers.
- Recent growth: If your business has recently seen an uptick in sales, this can drive a higher valuation than if your business is struggling.
- Business processes: Is your business well-organized, with well-documented standard operating procedures (SOPs)? Will it be easy for a new buyer to hit the ground running? If so, this can be a selling point that drives a higher valuation.
How Do I Take Advantage of the Digital Asset Market?
Online businesses are now a critical and viable part of the small business economy and buyer demand, both individual and institutional, is thriving. This is a category of alternative asset investment that is now paying handsome returns for great online business owners.