Valuing online businesses – How to Buy a Business – How to Sell a Business

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hey there everyone it’s a david barnett from the investlocalbook.com where i talk about buying and selling businesses and you know local investing personal wealth issues related to entrepreneurs and and really you know systems things how to run a better business and anything else that people want to ask me about today I’m making this audio recording and it’s about valuing online businesses and the reason why I’ve wanted to make this one is because just in the last two weeks have had a couple of different clients online business owners come to me looking for help on putting a price on their business and I’ve also had several clarity calls from people who want to talk about you know looking at what a business might be worth that they’re looking to buy etc and I thought that it would be a very good time to do a video about this because there’s a lot of misunderstanding out there in the world even in the world of people who value businesses I’ve actually had to look at a valuation report that was put together by someone for an online business that didn’t earn any money but the report still insisted that the business was somehow worth a million dollars which which I’m going to explain to you just isn’t quite possible so first of all I want to address businesses that are online that are making money of some sort and so what this means is that we’re not talking about pre-revenue startups which is another whole ball of wax in fact what I’ve done this recording I’m going to make a recording about valuing pre-revenue online startups I won’t call them businesses because they lack the most important thing that I feel a business has and we’re going to talk about that in a moment and so you can tune in next week and hear that one so the online business what makes an online business any different from a real-world business like a retail store or a service business or something like this in my mind not a heck of a lot except if it’s something that could be scaled up to an enormous you know capacity to serve millions upon millions of people without an equivalent increase in the resources that you know so if you had a ten million percent increase in sales you wouldn’t have a ten million percent increase in costs okay so so that’s that’s like the Holy Grail that’s your your Facebook you know your YouTube your Amazon etc grow the business enormous ly without an equivalent increase in cost and you can have this enormous Lea growing money machine so what though is a business because this is something I want to reiterate and I’ve talked about it before in other recordings and in my online courses and my workshops that I do with people that are being a live in person so basically a business is three things that work together capital people and a place they work together to produce a cash flow now if that cash flow is less to the owner the total amount of money they get as an owner is less than what they would get if they went out and got a job doing the same work for somebody else then I don’t use the word business to describe that thing going on okay yeah if you work hard at something and you don’t get paid what your labor is worth it is not a business what you own is a hobby okay so guys who sit in their basement building model railroads and you know playing with trains they are not earning money they know that they’re spending money doing something that gives them pleasure right so they know they’re involved in a hobby but I meet a lot of people who are in business who don’t earn what they could earn working for somebody else and then they’re horrified when I tell them that they don’t have a business they have a hobby now if you work at something and the cash flow available to you as the owner operator is equivalent to what you would earn if you work for somebody else then again you still do not have what I would call a business you all own what is termed a job so you run into this a lot when you’re talking about solo trades people you know like the plumber who works by himself maybe with a helper or the you know the guy who swings a hammer he works on roofs does small renovation jobs and at the end of the year you know probably ends up with the same amount of money that he would earn if he worked you know under a contractor but he enjoys freedom I mean there’s certain benefits to doing that but if you’re just earning in your business what you would get in a job then you own a job you don’t earn a business if if you’re able to pay yourself the same salary that a stranger would pay you for what you do every day and then there’s other profit left over at the end of the day to represent you know profit to you as an investor over and above the money you earn as a worker in your business now we’re talking about a business okay a real bona fide business in my eyes anyway so whether the business is in the real world like a retail store or service business or what have you or whether it is in the Internet okay it doesn’t really matter a heck of a lot because if you’re going to settle that business right the buyer of the business has to be able to see how they’re going to do three things out of the cash flow that the business provides they have to be able to pay themselves a salary they’ve got to be able to service any debt they take on to buy the business and they also have to get a return on the cash that they invest in buying the business so they’ve got to be able to do those three things out of the total cash flow what we call the sellers discretionary earnings so if you have an online business that you think that you want to sell or if you’re a buyer looking at one of these businesses then you have to ask yourself who is going to buy this business because unless you have one of those you know software-as-a-service type businesses which is ultimately scalable where the same 50 people that built the thing whether they serve a thousand clients or a million it’s still the same 50 people working unless you have something like that and you have scaled it so you’ve proven cash flows there then the buyer of your business if they you know look at the track record or results they’re going to say okay if I buy this business I’m going to be the guy doing the work what’s the cash flow going to be how does this make sense right how am I going to be able to pay myself a salary etc and what ends up happening is that the businesses whether they’re online or not get valued the same way that real-world businesses always have been and what’s worse about online businesses than real-world businesses if you want to compare an online retailer to say a local pizzeria right is that the local pizzeria obviously competitive things can change there can be competitors move in you know neighboring businesses could close meaning there aren’t as many customers around or what have you bad things can happen with the with the online world someone like Google could change the algorithm that drives customers to the website and all of a sudden you could have a massive decline in sales that’s completely unforeseen right so the risks in the online business can be even greater than the risks in the real world business and in the real world we often have capital assets and equipment and things that could be liquidated so you know a buyer who buys a business if it doesn’t work out there’s always that Plan B you know how do they get out with at least some money right in a lot of these online businesses unless they’re a seller of goods with an inventory in stock you know there’s really not much there that could ever be sold there’s like a used computer and some website properties and things like this so what I have seen is that businesses whether they’re online or not are still selling in the same value range as real-world businesses when they are in fact small to medium sized businesses it doesn’t actually matter if it’s online or not all that matters at the end of the day is the cash flow what is the cash flow and what is someone going to be willing to pay for that of course that’s going to be determined by the level of risk that somebody perceives in that business now if you’ve been listening to my audios or watching my videos for a while you’ve probably also heard me talk about how people don’t generally sell profitable businesses there’s this notion or idea of the big cash out liquidity event where people sell their business and get walk away with millions of dollars because businesses sell for such relatively low valuations most people will look at it and go jeez if I just kept the business for the next two or three years I would have the same money so why would I sell and the answer is always the same people sell small businesses that good profitable small businesses because of pressing personal needs or concerns so we’re talking about divorce the retirement poor health the need to relocate or burnout and fatigue and so it’s been what since the mid 90s that the internet has really been ubiquitous it’s been since the mid to late 90s that people have figured out everyday people have figured out how to make money online by selling stuff or you know by doing intellectual property things like what I do you know selling online courses that kind of stuff ebooks and so we’ve now been in it long enough that there are beginning to be people who are getting burned out tired losing interest etc in the online business that they have built and they have a legitimate personal reason for wanting to sell it and this is why I believe that I’m finally starting to see more of these deals coming across my desk because you know the businesses have been there but like I said people don’t go looking to sell unless they have a need to sell because guess what people want the revenue that’s why people get into business because they need a cash flow to provide themselves a paycheck it just makes sense doesn’t it anyway I hope that that gives some idea about you know sort of the online business space when people look at these super huge companies that are selling in Silicon Valley Valley for millions upon millions of dollars see I don’t even call them businesses I call them speculative ventures and I think that the best way to to relate that in your own mind is if you think about an oil company you know that owns a refinery in turmoil into gasoline versus a junior Wildcat oil drilling company okay so the oil company buys oil produces gasoline they have customers and every month they’re turning oil into gasoline and every month they’re selling it and every month they’re paying their employees and every month they have a profit the Wildcat oil field drillers they go out there and punch a hole in the ground in the hopes of finding oil right so they amass capital they borrow money they get investors etc they buy the equipment they go out there and they drill a hole and they keep their fingers crossed they hope that they hit oil that is the kind of way that you should be looking at some of these big internet you know stories like these guys put tons of investment in they attract all these angel investors venture capitalists etc they’re all putting more and more and more equity into these things and why not debt because they have no cash flow no one will lend the money they wouldn’t be able to demonstrate how they could service debt so it’s all going to be equity they’re selling shares in the hopes of one day building something that can make money so Facebook for instance for years didn’t make money it used up money and they built themselves bigger bigger bigger and only in the last few years have they really figured out how to turn their social platform into a money-making thing that you know through the advertising a lot kind of stuff and so you know what the risk that investors took has paid off because they’ve been successful but it’s only when they start to produce that cash flow that I would consider them a business like the oil company before that they were more like the people drilling for oil in hopes of finding it anyway if you find my stuff interesting if you want to learn more and especially if you want to and buy yourself a business you should be taking my online course at business buyer advantage com where you can learn the intelligent safe practical way to buy analyze find make a deal negotiate etc for a small to medium-sized business and make yourself a good deal and not get into trouble and if you haven’t already go to David C Barnett com sign up for my email list the people on my list get all of my new recordings and videos before they go public so you get my stuff earlier and you also get notices of live events etc this summer and fall I’m going to be all over the place Orlando New York City Toronto and st. John’s Newfoundland find out if you know if I’m going to be somewhere close to you come on out and see me live it’s always a great evening or you know daytime as it may be I’d love to meet you David C Barnett comm we’ll see you later bye you