When You Sell Your Business, What Are You Selling?
When someone is looking to buy your business, they are looking to buy one of three things:
- YOU – your skills, expertise, knowledge contacts
- YOUR CUSTOMERS – or more specifically the cashflows that those customers generate
- YOUR SYSTEMS – or your business model
The biggest price will always be for your systems because they are scalable
When they are buying you, it is really an employment contract.
You will have to continue working in the business
Probably have an earn out on the price, that is the purchase price will be paid out over time subject to performance hurdles.
There is no clean break to do something else.
When people are buying your customers, they are buying the income or cashflows that those customers generate.
The value will be dependent on what those customers have generated in the past rather than the future earnings from those customers.
The earnings will be based at average profit past 2-3 years and the valuation multiple will generally be lower (2-3)
The really big money is when you sell your systems because they are scalable.
They can be applied to bigger markets, they are not dependent on specialised knowledge, they can be incorporated into existing businesses easily.
When businesses are sold based on their systems, the earning potential is based on future profits rather than on past profits.
That is why you see technology & internet businesses sold for such massive values because they are essentially systems that can be scaled.
So what can you do?
Look at where your business sits now – you, customers or your systems.
Look at how your business can be less dependent on you and the development of systems that enable your business model to be applied anywhere in the world.