How to Sell a Location Independent Business
Is it time to cash in on your location independent lifestyle?
Maybe you created and launched a business so you could travel the world as a global nomad, but now you’re ready to settle down and give your oldest child a chance to stay in the same school for a while. Or maybe Tim Ferriss inspired you to make the 4-hour work week your own, so you built an online publishing company, a digital marketing agency, or an investment agency, and now you’re ready to move to something brick-and-mortar. Maybe you just grew your enterprise so fast that you need someone else to take it on so that you can reignite your original dream of traveling the world.
Whatever the reason, selling a location independent business isn’t like putting your house on the market or sticking a For Sale sign in the window of your artisanal bakery in your hometown. Your legal concerns will be different, your buyers could live anywhere in the world, and your most effective advertising channels might not be obvious. When selling a location independent business, it’s important to find the right buyer amid the hordes of people who want to work from a laptop, as well as to sell your company for the right price.
Here’s how to sell a location independent business:
How to Value Your Business
Valuing a business means determining its value in cash. Writing in Entrepreneur, productivity expert and serial entrepreneur Stever Robbins says, “There’s no ‘right’ way (to value a business), though you could probably come up with several wrong ones. Ultimately, the business is worth whatever you think it’s worth, based on the criteria you set forth.”
Some buyers and sellers value a business according to its assets, which are the physical objects belonging to the company such as equipment, kitchen supplies, or leftover products. For most location independent businesses, however, this approach will not work since they rarely hold significant numbers of assets. Their very nature is to be sleek, nimble, and lightweight.
Revenue is the easiest criterion to use to determine a business’s value, though probably also the most hamfisted one. In strict terms, revenue refers to the income your business generates through its normal activities. Most of the time, those activities will consist of selling a product or service. In some cases, revenue may also include rental income, royalties, or interest.
Revenue is not income.
Revenue measures an organization’s effectiveness at generating sales and creating streams of money that flow into the business’ coffers. It does not, therefore, take into account operational efficiency. Income, on the other hand, is a measure of profit. It’s the total amount of earnings after expenses. Sometimes, income gets called net income or bottom line because it appears at the bottom of the financial statement. They are two different numbers, measuring two different factors, and neither by itself gives a full picture of an organization’s value or health. To determine the difference between income and revenue, ask yourself if expenses have been subtracted from the number. If they have, it’s income. If they haven’t, it’s revenue.
Sometimes, income gets presented as a percentage of revenue. For example, if a company’s revenue is $1,000,000 and its income is $600,000, then income as a percentage of revenue would be 60% (600,000 / 1,000,000). In this case, the 60% would be called a profit margin.
Profit margin can be a great tool to use as you value your business. It blends revenue with income into a single, easy-to-understand number that a buyer can make sense of.
Earnings are also a critical factor in business values. By showing a potential buyer how much revenue your company has brought in each year for the last 3-5 years, you and the buyer can see the historical value of the company’s earnings. If you project those earnings into the future, you can walk a buyer through several scenarios so they see how much they could earn by purchasing your company. Remember, though, that earnings are rarely stable. Factors like competition, technological upheaval, changing consumer tastes, and supplier prices can affect future earnings. That’s why having a professional financial official walk you through the process can be a smart move.
A more complicated approach that may work for larger enterprises is called discounted cash-flow analysis. It involves a complicated formula that divides projected future earnings by the long-term Treasury bill rate. Once you learn to use this analytic, you can do the process in Excel.
Pricing Your Business
Now that you know how much your business is worth, how do you price it for a fast-but-fair sale? This step just might be the scariest one in the whole process. If you overprice your company, no one will buy it, and it will atrophy while sitting on the market for months. On the other hand, if you under-price your business, you might lose good buyers who think your enterprise isn’t worth their time. Of course, you’ll lose money either way.
Pricing your business is about making sound choices based on data and financial facts, not on emotions. No matter how tempted you are to overvalue your business because it’s your baby, don’t do it. Conversely, forget the false humility that urges you downplay your accomplishments. You have a valuable product. Let’s figure out what someone else will pay you for it.
In an article entitled How to Calculate the Selling Price for a Business, Dr. Patrick Gleeson writes, “There are all kinds of bad ways to price your business, most of them having to do with your emotions and how you feel about the business. There are also four commonly accepted ways that will help you determine the right price.”
- Return on Investment (ROI) Method – This method prices a business according to how much net income it produces. A buyer wants to know how much money they’re going to earn off their investment in purchasing your business especially if they have to pay employees or even hire a replacement for you. A buyer may jump on this method, but you probably should not. There is no way to know that someone else is going to get the same ROI in the future that you have gotten in the past. Unless you plan to stay on and help run the enterprise for a while, ROI isn’t the best determiner of price.
- Sales of Comparable Businesses Method – This approach looks at the value of similar location independent businesses that sold recently and bases your price on theirs. It’s similar to determining a home’s price by the sale of other houses in the same area. It’s a good method if you are absolutely certain you compared apples to apples when you ran the numbers. A brick-and-mortar business is going to hold a different value than one that’s essentially packed into a laptop or mobile device. A business that sold five years ago won’t have the same value yours does today.
- The Industry Formula Approach – Each industry has a rule of thumb that states how much a business is worth. This approach rarely has merit since individual companies vary dramatically in income, costs, assets, and more. Like any quick fix solution, this one is best skipped.
- Asset Value Approach – This approach works by totaling up the value of all the good a business owns, including electronics, products, and any other physical assets. Even for a fixed-location property, this approach fails to consider many of the aspects of value a business generates. For a nomadic business, this approach almost certainly would not work.
In general, when pricing your business, you need to know your net profit (revenue – expenses + owner’s wages and benefits) and industry trends that will likely affect net profit over the next five years. From there, you can multiply net profit by about 2.45, adjust according to trends, and have a good ballpark figure for your sale price.
Where to Advertise
Since you don’t have real estate to put a sign on, and your potential buyers may live all across the globe, how can you advertise the sale of your independent location business?
It’s not as simple as it seems. Of course, you can use social media to your advantage. Tell your friends your business is for sale on Facebook, put the notice up on Twitter, mention it on LinkedIn, and snap pictures for Instagram. These can be good strategies to let your friends know you are putting your business on the market. But they rarely work.
A golden of rule of advertising says, Focus on your potential buyers. Or as the experts at Ampush say, “Don’t be afraid of small audiences. A highly targeted audience produces higher CTRs and CRs, due to greater relevancy. It’s all about identifying your niche, because niche audiences, while tiny in comparison to broad campaigns have built-in purchasing intent.”
Still, advertising too broadly remains a problem for many businesses—and sellers. Plus, while it’s good to share your news with friends, very few of them are likely in the market to purchase something like your business. People who want to live the digital nomad’s lifestyle flock to very specific sites online seeking the business that can make their dream lifestyle come true. They aren’t trolling thier friends’ friends’ Facebook accounts for a lead on that.
That’s why we created Dynamite Businesses. Our website is designed to be a marketplace for buyers and sellers of location independent businesses, so we weed out people who are not interested in our lifestyle, focusing only on the most likely buyers who are looking for a business like yours. We know how to create digital marketing strategies and campaigns that draw the right niche buyers to our site where they can see our listings.
How to Negotiate
Selling anything of size means employing top negotiation skills. If you sold your house when you started your journey toward location independence, you know how important negotiation can be for securing the best price and keeping all parties engaged, motivated, and happy. Selling your business might be fraught with more emotion even than selling your home. After all, this enterprise is one you constructed from the ground up with creativity and hard work. Unfortunately, that close emotional connection to an entrepreneurial enterprise can make negotiation even more complex than normal.
Peter Lehrman, CEO and co-founder of Axil, wrote in Entrepreneur, “While purchasers seek to acquire companies at the lowest possible price and most favorable buyer terms, business owners aim to realize the fruits of their labor by maximizing the price and arranging for optimal seller terms.”
One key to successful negotiation lies in mutual respect between the buyer and the seller.
Keep in mind that a prospective buyer is not a shark out to snap up your business for as little as possible. This person is also likely trying to make the right decision for their unique situation. Even if matters get tense or thorny questions come up during the negotiations, focus on your common humanity, and you’ll enjoy a much more relaxed and profitable experience.
Negotiating the sale of a location independent business involves several factors:
- Price – You want to get the most money you can for your business, of course, but there is more to a pricing strategy than a single number. Will you include any assets in the sale? If so, how will you determine the value of those? Are there royalties or use fees that need to be negotiated? Is there a non-compete agreement in place? Take into account everything you are giving up in the sale before you name a final figure.
- Payout – Will you only accept a single payout or are you willing to work out a payment schedule with the buyer? Is there an earn-out option where you receive a certain percentage of the sale up front and the rest only if your business meets its target goals?
- Contingencies – Is the sale contingent upon some factor such as a loan getting approved, a deposit received by a certain date, or a favorable review of the company’s financial records?
- Warranties – If your location independent business sells a product through an e-commerce platform, will your successor assume any warranties or guarantees you have offered your buyers? Are all your records, inventory, and legal documents correct and up to date?
- Transitions – Does the buyer expect you to spend a few weeks or months after the sale getting them up to speed on the business? How will relationships with vendors, clients, and creditors get transitioned from seller to buyer?
- Employees – If you have employees, you will want to consider their futures, too, as you negotiate a good deal for the sale of your business.
Before you sit down to negotiate with a potential buyer, it’s a good idea to have a bottom line price as well as other non-negotiables in mind. Don’t be afraid to walk away from an offer if you believe the price or other components of the deal would not be in your or your employees’ best interests. You can certainly make concessions, but don’t give away the business you worked hard to build just because someone asks you for it.
The Legal Stuff
Legal ramifications vary depending on the country and state where you incorporated your business, the country your buyer comes from, and the country you are making the deal in. For many global nomads, selling a location independent firm is much like negotiating a complex multinational treaty. Since many countries’ laws and policies are different, sellers and buyers alike should consult attorneys, accountants, auditors, tax preparers, and other professionals with experience in selling a business across geo-political borders.
In many countries, a seller and a buyer need at least a non-disclosure agreement and a purchase agreement. The more complex a business’ operational structure is, the more legal components will need coverage. Laws vary so widely that it’s best to make no assumptions. What is true in one location may not be true in another, and what was true five years ago, may no longer hold validity.
In all cases, sellers should consult a qualified attorney in their home country and in the buyer’s country before closing the deal.
Closing the Deal
Motivational speaker and businessman Zig Ziglar used to say, “To get what you want, help others get what they want.” He was right about that.
Closing the deal is the scary part of selling anything especially a business you worked hard to build, but it’s also the most important component of any sale. Deals frequently fall through at the last minute. Sometimes, a buyer cannot get financing. At other times, a legal issue prevented the sale. And occasionally, a buyer backs out due to personal reasons or simply reconsiders their offer.
How do you prevent a sale from falling through?
John Holland, Chief Content Officer of Customer Centric Systems, wrote in Entrepreneur, “The biggest issue is that the achievement of pipeline milestones is based upon seller opinions rather than buyer actions.” He means your optimism about the sale is not as important as the actions your buyer has taken throughout the sales process.
Holland lists five ways to prevent sales from falling through.
- Know the buyer’s goals. If you understand why your buyer needs what you have to sell, you have a great chance of closing the deal.
- Know who makes buying decisions. Have you been communicating with the person who can sign the purchase agreement?
- Create key player visions. Help your buyers understand the barriers to leading a location independent lifestyle. Then, show them how owning your business helps overcome those barriers.
- Establish a compelling value. Your buyer needs to understand, at an emotional level, that they will earn money by investing in the purchase of your business.
- Don’t assume a proposal will sell your business. Proposals, letters of interest, and even unsigned contracts are not closed deals. Assume nothing and keep driving the sale of your business until all pieces of the purchase are in place, and the money is actually in your hands.
To close the deal, keep in mind that you are helping your buyer get what they want—an opportunity to enjoy the location independent lifestyle you have lived for the past several months or years. In selling them your business, you are helping them achieve an important goal.
You sold your business, what now?
Deciding to sell your business and then actually completing the deal may have consumed months or years of your life. Now, something you invested time and energy into has disappeared from your radar. Your first feeling may be a rush of euphoria that you finished the job. But after that emotion fades, you may feel isolated, purposeless, or adrift.
An article in the Harvard Business Review says, “When you spend years architecting your life around a business and suddenly it’s gone, you’re probably going to have an identity crisis and some post-partum depression.”
Some former owners need help with financial planning now that they have liquidated a major asset. Others just want to find a new purpose. Even if you know what you are doing next, life will be different for a while, and that can take some getting used to.
If you need financial planning after the sale of your company, don’t hesitate to reach out to a personal financial advisor. These professionals can help protect and grow your assets until you are ready to launch a new business, buy a home, or make an estate plan to benefit your family. For help with the personal fallout that accompanies any major life change, try finding a mentor who can help you make a plan for the next six months, join a community that adds meaning to your life, and start to find a sense of purpose in a new undertaking whether a business, a family, or a personal mission.
Selling your location independent business can be a challenge, but a thoughtful, unemotional approach can help bring you a good reward for your work. Let us know how we can help at Dynamite Business.