By boosst Team
This might seem like a stretch, but let’s do the math to be sure.
Let's see the simple math…
Let’s say, after three years of grinding on Amazon, you’ve reached an annual revenue level where you’re able to pay yourself $350,000 as income while you invest the rest back into the business.
How?
You do this for three years and take home:
$50,000 the first year
$100,000 in the second year
$200,000 the third.
Summing up to $350,000 in three years.
You’ve got $200,000 tied up in inventory, and let's say your seller's discretionary earnings (SDE)* are about $400,000.
Let’s take a conservative estimate and say that you sell your business for a 2.5 multiple.
That means a sale of $1,000,000 (before factoring in inventory).
In case you missed it, you just made three times more on the day of the sale of your business than you did throughout your business’ entire lifetime. Feel free to play with the numbers.
What is SDE?
*SDE - “Seller’s Discretionary Earnings”, online businesses are not valued on cash flows but on SDE.
Some may call this adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), but the generally accepted term is SDE.
What just happened?
In the story above, you just sold your store for a multiple of 2.5, but in the reality of today’s market, buyers are more than willing to pay a multiple ranging from 3 to 6+, given that you prepared accordingly for the sale.
It turns out that what you will make on your exit day will, in almost every case, be more than your profits and salary.
And the compensation could be even more than you expected. As we saw in the example, we chose the lowest multiple of 2.5, but with the right preparation, you can reach much higher multiples.
So why is this so important?
Because it implies that, with the proper planning, you can significantly increase your exit price when you sell (or even before).
How do you start preparing for your future exit?
Where to begin?
Step #1 - Define your price range and goals.
Step #2 - Check the multiples in the market for businesses like yours.
Step #3 - Learn about the factors that can increase your multiple.
Step #4 - Create your “exit strategy."
Finding out what price range the market will support is the next step because the market determines how much you can sell for.
If the market isn't likely to support your target range, research the value drivers in your industry and see if you can improve them to reach your goal exit range.
Some examples are:
Growth trends
Stability and diversity of earnings
Diversity of SKUs
Trademarks and Brand Registry
Strength of the Supply Chain
And more….
(We will cover some of them in our next article)
If the market isn't likely to support your target range, research the value drivers in your industry and see if you can improve them to reach your goal exit range.
The bottom line
Simple math - You can make more money selling your business than running it.
Your exit - one way or another—could be inevitable, so why not prepare for it? Why not make it incredible?
Knowing the value of your most valuable asset is the first step.
There are many factors that can dramatically affect your business' valuation.
Why did we build boosst?
boosst is a fintech startup that helps eCommerce sellers get ready to grow and sell their businesses.
It can be a very difficult process to exit a business, both financially and emotionally. We built boosst so you would never feel alone in the process.
We believe that we can empower founders and give them insightful data in order to create their future according to their terms.
You can join here to our product waiting list here and receive access to our articles.
Thank you for “The Exitpreneur's Playbook” by Joe Valley for inspiring the example used in this article.