Tips for Local Businesses to Increase their Value: Preparing for an Exit Strategy
With the number of online sales growing every year, thanks to more consumer trust for online retailers and increased accessibility, more local businesses than ever have taken to the internet to increase their bottom line. If you haven’t made the move online, yes, you are late to the party, but rejoice! The night is still young.
…So you’re still on the high of running your first online business, and you’ve been doing it successfully for 3 years. It’s been an enormous and rewarding journey and you may plan on running your business for the rest of your life, yet unfortunately, as it always does, life happens.
You may have a family emergency and need an influx of cash. Another irresistible opportunity could cross your path and you need to clear out some mental space. A larger company could poke their heads in for a look. If you aren’t properly prepared for these scenarios, you may be left with a business that suffers a slow and painful death due to lack of available resources. Or just simply miss out on a lot of cash.
That is why it’s important to ALWAYS create a business built for an exit. It will not only make you more money in the meantime by following smart business practices, but prepare you for a happy ending.
I’ll be covering 3 topics, namely newbie mistakes to avoid when setting up an online business, tips on creating long lasting and valuable traffic sources, and why buying established online businesses are becoming more popular as an alternative investment option. Whether you have yet to expand online, just started, or have been online for 10 years, I hope these tips prove useful.
Newbie mistakes to avoid when setting up an online business
The domain name is essentially the storefront of your online business. It’s the first thing that people see, and will hopefully be remembered the next time they search for similar products and services. It’s also plays a role in search engines sending traffic your way. Accordingly, it should be short and relevant to your niche, coupled with the more popular TLDs (top-level domain) .com, .net, and .org.
Consider these two: bestonlinestoreforcheesegraters.biz and cheesegraters.org. Which would be easier for you to remember? Which would you trust more to purchase from just based solely on the name? You guessed it. By the way, cheesegraters.org is available for $7.99 as of January 14, 2012.
Granted, getting your hands on a generic (plural is preferred if available), properly spelled category domain name like basketballshorts.com or carinsurance.org will require some cash. But with proper patience and negotiating, you can get the right domain for your business at the right price. An attractive store front is worth the cost in the end.
A key to any successful exit and making a business more valuable in the eyes of a buyer is its structure and level of automation. For example, take a look at these two businesses that came across our desk last year:
Business A is a 3 year old e-Commerce company that sells sports merchandise. It gets most of its traffic from search engine results, products are drop shipped by the supplier, and the FAQ section is thorough to keep customer inquiries down. Business B is also a 3 year old e-Commerce, but it sells health products, gets a majority of its traffic from unsustainable traffic sources i.e. paid Youtube and Craigslist campaigns, the owners do their own fulfillment from home, and overall time commitment to run the business on a daily basis is high. We listed both for sale; one sold for a healthy multiple in less than a month, the other went unsold and eventually fell off the face of the internet. Not hard to figure out that Business A’s exit was a success!
Why? Because most buyers of web based businesses aren’t looking for another job, they’re looking for an investment that can run without their direct involvement. Therefore, when setting up your online business, take yourself out of the equation from the beginning. Here are a few tips:
- Automate your traffic by running safe SEO, social media, and paid traffic campaigns that are not only sustainable in the long term, but can be scaled up.
- Save time and effort by finding a supplier that offers drop shipping. Yes they take their cut of the profits, but who really wants to take over a garage full of products and have to deal with packaging and shipping every day.
- Outsource daily management (customer service, project management, etc.) duties by hiring a virtual assistant. Solid native English speaking professionals are available all over the world. If you want U.S. based you can find one for around $10/hour. Other countries that we’ve seen success with are the Philippines, Pakistan, and Indonesia.
- Same goes for services. If you are the primary service provider, there is no clear way to transfer over the business to new ownership, unless you want to create your new boss.
Know your audience – Tips on creating lasting and valuable traffic sources
Making money with an online business is all about traffic and conversions, just as it is with your brick and mortar store. The majority of people will walk by, some will walk in and browse, a few will purchase. What we want to do with our websites is create a consistent stream of real people interested in seeing what you have to offer on a daily basis, and make purchases. Here are some tips:
- PPC (Pay Per Click) marketing and other paid traffic methods can be key to the long term sustainability of your business, because it can offer you further control of your traffic (with proper strategy and testing) when coupled with other traffic methods.
- SEO (Search Engine Optimization) social media (Facebook, Twitter, etc.) marketing are free and can offer very targeted visitors. However, one size does not fit all when it comes to a successful campaign. Be sure that who you hire – or the work you do yourself if you choose – complies with Google and Facebook best practices (http://insidesearch.blogspot.com/2012/04/another-step-to-reward-high-quality.html) or else that wonderful traffic source you see today, could be gone tomorrow (http://www.seomoz.org/google-algorithm-change).
- Avoid any “grey or black hat” traffic sources such as comment spam, craigslist postings, bulk traffic packages, etc. Not only will they be mostly useless in terms of quality, they are very often against TOS and will be detrimental to your business in the long run. Always wear your white hat.
- Diversify where possible. We suggest to not have more than 25% from one source. Consider marketing your business to targeted email newsletter lists by purchasing a solo ad, buy a banner ad for cheap on a relevant site by contacting the owners directly and negotiating (instead of going through a network like buysellads.com), send out press releases on new products or services, post in forums and other online communities, and be a guest contributor on other people’s sites.
To sell or not to sell? Why buying established online businesses is becoming more popular as an alternative investment option
Selling a business is never an easy decision. You’ve put in countless hours of stressful contemplation, execution, and have seen your fair share of defeat and hopefully success. When it comes time to sell, for most people it’s emotionally difficult, for others it’s strictly business. If it is part of the plan all along, as it is with serial entrepreneurs, it’s like lying back on the couch after a delicious and filling meal.
However, for those stuck on the decision, consider the positives. It will mean a cash advance. For example many online businesses in today’s marketplace will sell for 18x to 24x the average monthly profit. For the sake of simplicity, a healthy 2 year old business making $1,000 a month will most likely sell for $18,000 to $24,000 (but as with everything there are variables such as the niche, traffic sources, etc.). This cash will give you a buffer in time and mental space to work on a new and exciting project, or simply to rest. Emotionally speaking, it’s tough, but worthwhile for most of the sellers we work with.
Looking at it from a buyer’s perspective, we see the same lines of thought. People looking to escape the 9-5 approach online based business as a means to free up their time, location, and income. Investors are looking for passive income streams to add to their portfolios. Established online businesses typically offer less overhead, stress, and time requirements in comparison to traditional offline businesses and investments.
As a brokerage, we saw established web-based business sales quadruple from 2011 to 2012, and we expect the overall trend to continue (http://www.ibba.org/Portals/0/MARKETPULSE_Q2.pdf).
The future looks bright for owners of websites, so start preparing your business for an exit today, even if it’s not yet on the calendar.
About the Author: Ryan Sorensen is a Senior Broker and Partner with Flipping Enterprises, Ltd., a mid-size ($10k-$2M) web-based business brokerage firm that has helped clients in a variety of businesses including e-Commerce, services, affiliate, blogs, information products, and others. We are committed to quality service and helping both buyers and sellers succeed in today’s volatile and competitive marketplace.