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Maximizing the Value of Your Internet Properties

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This presentation is from Affiliate Summit East 2017 (July 30 - August 1, 2017 in New York).

Session description: This session will dissect what motivates buyers to acquire an online business. I’ll provide practical advice anyone can use to increase the value of their business.

Published in: Business
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Maximizing the Value of Your Internet Properties

  1. 1. 1 Maximizing the VALUE of your INTERNET PROPERTIES. Mark Daoust
  2. 2. 2 What Drives Acquisitions? Financial Return on Investment Lifestyle Niche Appeal
  3. 3. 3 Earnings Multiplier Approach The most common method of estimating a business’s value Discretionary Earnings x Multiple = Est. Value
  4. 4. 4 What are Discretionary Earnings? The pretax, pre-interest profits, minus: non-cash expenses, one owner’s benefits, true one time investments, and non-related income or expenses with further added expenses buyers will reasonably incur. Technical Definition Seller Discretionary Earnings (SDE) are the earnings that a seller has to spend at their discretion.
  5. 5. 5 Tip 1: Remove Unnecessary Expenses
  6. 6. 6 Audit Your Expenses For every $1 you save in expenses, you add, on average, $2.50 - $3.00 in value for your business. ● Remove unoptimized advertising campaigns. ● Cut expensive vendors or work to reduce their cost ● Cut down on personal benefits ● Business intelligence tools ● Avoid significant investments in your business The goal: About 1 year before selling, be more lean with your business to maximize discretionary earnings. How a Dating Site Added $160k in Value 2014 - $125,000 in PPC Spend 2015 - $85,000 in PPC Spend This savings of $40,000 added $160,000 in total value to the business.
  7. 7. 7 Avoid This Graph When cutting expenses, do not cut expenses at the cost of revenue, even if the net effect is an increase in earnings. Even though earnings are up, buyers will be suspect of declining revenues.
  8. 8. 8 A Requirement Accrual basis accounting recognizes the full value of your business, not just cash. For an ecommerce business with inventory, this makes a HUGE difference in valuation. Tip 2. Use Accrual Accounting.
  9. 9. 9 Cash Basis Revenue 1,220,867 CoGS (450,591) Expenses (592,646) Addbacks + 2,847 SDE $170,476 Tip 2. Use Accrual Basis Accounting. Both financial summaries are for the same company. The only difference is the financial basis they use to report their earnings. Accrual Basis Revenue 1,220,867 CoGS (313,679) Expenses (592,646) Addbacks + 2,847 SDE $317,389
  10. 10. 10 Valuation Impact 86% Increase in value Side-by-Side Comparison How much can accrual basis accounting impact your valuation? Here are side-by-side calculations using our earnings multiplier approach. Valuation Comparison Multiple 2.8 SDE $170,476 $317,389 Valuation $477,432 $888,689
  11. 11. 11 Part 2. HOW TO Maximize Your Multiple.
  12. 12. 12 What Does a Multiple Measure? The multiple is influenced heavily by bank lending, economic health, and industry health. General Market Health Your multiple also reflects how valuable of an asset you built with your company. Your Asset Value Risk Growth Ability to Transfer Documentation
  13. 13. 13 What Does a Multiple Measure? The multiple is influenced heavily by bank lending, economic health, and industry health. General Market Health Your multiple also reflects how valuable of an asset you built with your company. Your Asset Value Risk Growth Ability to Transfer Documentation
  14. 14. 14 Minimizing Risk
  15. 15. 15 Common Areas of Risk Single Points of Failure Any aspect of your business where, if it fails, will have a major impact on your business. Lack of Barriers to Entry Competition and the commoditization of a niche can restrict future growth and hamper existing successes. Key Person Risk Technically a single point of failure, key person risk occurs when a single person in your business becomes irreplaceable. Dependencies If your business is dependent on the rules or success of an external business, this is a dependency. Market-based Risks Threats to the broader niche such as the niche being outdated, replaced by a newer niche, or restricted through laws.
  16. 16. 16 Traffic Concentration Avoid being dependent on one source of traffic such as Google or Social Media. These environments can change rapidly. Concentration Risks Common Risks That Turn Buyers Away Key Person Concentration This can be in your company, among your vendors, or among your clients. Don’t let your business depend on one person.
  17. 17. 17 Maximizing Growth
  18. 18. 18 Growth Prospects are Not Potential Here is the difference Potential is a word business owners use when they do not have specific plans for growth. It is often the same as a dream. Growth Potential Growth prospects are clear paths to growing your company. A new owner just needs to tap into the known prospects to unleash growth. Growth Prospects
  19. 19. 19 Why Haven’t You Grown? Three possible explanations for not tapping into growth You’ve achieved a balance. Not every entrepreneur is motivated by money alone. In fact, most online entrepreneurs crave a balance between financial freedom and freedom from workloads. You are pursuing growth Some growth takes time to realize. It’s possible you’ve laid the groundwork but have not yet reached the point where that has paid off. It’s actually just potential It’s easy to confuse growth prospects with potential. A common reason we do not pursue growth prospects is that they are more potential than realistic.
  20. 20. 20 The strongest influence on growth prospects is a history of growth. This means timing your exit is crucial to maximizing your multiple. The Best Indicator of Growth Buyers see recent history as a strong indicator of growth (or lack of growth)
  21. 21. 21 Ability to Transfer
  22. 22. 22 Personal Branding Keep your personal brand out of your business Our client’s business shared his personal name. All branding efforts were around his name which made the product and the entire company Business named after our client If he were to sell his business, even in an asset sale, he’d be required to sell his personal name. How do you transfer your name?
  23. 23. 23 Personal Relationships Keep relationships under contract While there is nothing wrong with getting to know vendors and employees, if all of your key contacts are from your personal network, not only will they probably not transfer well, but there are questions as to what their true cost should be. What’s the True Cost? Our client had personal relationships in every aspect of his business. His parents helped maintain the books, his suppliers were old family friends. Every aspect of his business had personal ties. Personal Relationships Everywhere
  24. 24. 24 Personal Expertise Are you what drives your business? Being talented or an expert in a field is not a bad thing, but failing to document and explain what you know creates a significant disadvantage to the next owner. Systematize as much as you can. Is Your Buyer as Talented? Our client was an expert at logistics. Rather than use FBA, he maintained a warehouse and kept his costs extremely low with great efficiency. Expert at Logistics
  25. 25. 25 Clean Documentation
  26. 26. 26 What You Should Document Clean financials add significant value to your business. Keep your financials organized, accurate, and separate from other activities. Your Financials Documenting standard operating procedures does more than make your business more transferable - it gives buyers insight into how your company is run. SOPs Map out your business’s structure and organization. This will help a buyer immediately see where they should investigate your business. Business Structure All vendor relationships and agreements should be documented when possible. Contracts & Relationships
  27. 27. 27 On the Impact of Clean Documentation “Some small business owners just don't have their shoelaces tied. We're entrepreneurs--we run down the street at 60 miles an hour leading the charge--but the mess behind us takes a culture of discipline. I've walked away from deals right from the start because it's not organized. The organization let's due diligence go smoothly because any concern you have--the answer is right there.” Walker D.
  28. 28. 28 Thank youFeel free to reach out for a complimentary valuation and analysis of your business. mark@quietlightbrokerage.com

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