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Congratulations, Rob, it's nice to see counter-examples to the "it's all chance" worldview. I looked at the FE International listings, and I have to ask of tho

by rfrey 11y ago

Congratulations, Rob, it's nice to see counter-examples to the "it's all chance" worldview. I looked at the FE International listings, and I have to ask of those who know about these things: What would lead somebody to sell a going-concern business for 2x earnings? There were several examples. I don't want to go straight to "scam!" but that seems too good to be true.

rwalling 11y ago
Thanks! Re: valuation - reputable online businesses are typically valued in the 2-3.5x annual net profit range. See http://feinternational.com/blog/how-do-you-value-an-online-business/ http://feinternational.com/blog/how-do-you-value-an-online-b... for more info about valuations. But honestly, it comes do to what the market is willing to pay for a financial (as opposed to strategic) acquisition.
- petercooper 11y ago
  When I realized this, I knew I'd stick with my business for the long haul (at least until any interest went above 'FU money' level). If I can make $1m profit per year to take out as dividends, selling it for a once-off $3m seems bizarre unless I had a rapid need for money elsewhere.
  - charlesdm 11y ago
    This depends on the tax situation of the country you live in. If you do the math, you might realise to get $1m in personal income by declaring dividends, you actually need to earn $2m in corporate profit. So to get $3m (capital gains from a sale), you would need to earn $6m in taxable income. Meaning it would take you 4/5/6/7 years. Also, if you then reinvest that $3m in more traditional assets (stocks/bonds/property/alternatives), you can earn 5-10% on that capital ($150-300k per year), WHILE working on something new. Capital is awesome.
    - petercooper 11y ago
      Boring calculation for people in the UK (as I am, and I've thought about this quite a bit ;-)). Under certain conditions you can use "Entrepreneurs' Relief" to only pay 10% capital gains on your sale of a business (up to a limit of £10m), so a £3m sale could net you £2.7m in hand. Depending on many circumstances, £1m in dividends (per year) should net you around £750k. So it would take about 3.6 years to make the same as selling for current 3x annual profit. However, if your profits were increasing by more than 10% per year, it would be a wash.
      - charlesdm 11y ago
        You also don't need to pay corporate tax when booking a capital gain on your shares, so the tax advantage is actually a lot more. £1m in corporate income is taxed at 20%, so you're left with £800k after tax. Then you declare a dividend, and pay a dividend tax. That'll be 25-30%, so you'd be left with £800k - 30% = £560k in pocket. To earn £3m (in pocket), you would have to generate approx. £5.25m in pretax corporate profit. Whereas with a share sale, you will be taxed at 10%, meaning you're left with £2.7m (if you sell for £3m). A significant difference. I live in Belgium, where the difference is even larger. Capital gains on share sales are tax free, corporate income + dividends are taxed at about 45%.
  - bdcravens 11y ago
    Obviously this assumes market conditions will remain stable. Moreover is the issue of the developer/entrepreneur: if you want to stop working for a period of time, the cost to replace your job roles in the company usually means increased cost/decreased profit, so the calculus changes given those factors.
ThomasSmale 11y ago
Our average sales multiple is nearer 3x but this is still a good question. Often businesses (especially those selling nearer 2x) are relatively young so the valuation reflects the risk. We have a very stringent pre-listing due diligence process so while it remains the buyer's responsibility to conduct their own due diligence, none of our listings are scams. I wrote a little more about why people sell businesses last year: https://www.linkedin.com/pulse/20141023121347-71653461-6-reasons-why-entrepreneurs-sell-profitable-businesses?forceNoSplash=true https://www.linkedin.com/pulse/20141023121347-71653461-6-rea...
- rfrey 11y ago
  Thanks, Thomas. I really didn't mean to suggest any of your listings were scammy, that was poor wording on my part.
  - ThomasSmale 11y ago
    No issues at all - it's a common question! If you look elsewhere in the market (especially marketplaces) your comment regarding scammy listings is certainly valid. Part of the reason we have done so well is our pre-listing due diligence, serious buyers don't have to waste their time on scam/very poor quality listings and sellers get exposure to serious buyers who aren't tired by trawling through all the junk :)
patio11 11y ago
There's a range of answers to this question, but the simplest answer to "Why take N years of earnings today and give up the business?" is "Because then I get N years of earnings today and can spend my next N calendar years doing something else." The exact setting for N comes down to a variety of factors, market conditions, and a negotiation between a particular buyer and a particular seller. As someone who happens to be long SaaS companies at the moment I would prefer N=50 but I know SaaS owners whose lives would be improved by a sale at 2. (As mentioned in sibling comments, market right now is 3ish.)
- jacquesm 11y ago
  I was more than happy to score a 20 and I would have settled for 10... but don't tell the buyers.
  - dennisgorelik 11y ago
    Do you mean your buyers paid 20x your business' yearly profits? Why?
    - jacquesm 11y ago
      Excellent question! But I don't have the answer for you.
      - dennisgorelik 11y ago
        But did you actually sell at 20x yearly profits?
        jacquesm 11y ago
        No, I sold at 20x turnover.
        dennisgorelik 11y ago
WillyF 11y ago
There's also a tax benefit in the U.S. Taking the capital gain can be far more favorable than taking the profits of the business as regular income.
peacemaker 11y ago
I sold my software business with FE International earlier this year and hit about 3x yearly earnings for a 1.5 year old company. Comparing it against the rest of the market, particularly Flippa and Empire Flippers I felt that it was a good deal. Plus you get great guys like Thomas to handle everything for you. Note: reading that back almost sounds like an advert but I'm not affiliated in any way, just a happy customer :)

by rfrey 11y ago

rwalling 11y ago

Thanks! Re: valuation - reputable online businesses are typically valued in the 2-3.5x annual net profit range. See http://feinternational.com/blog/how-do-you-value-an-online-business/ http://feinternational.com/blog/how-do-you-value-an-online-b... for more info about valuations. But honestly, it comes do to what the market is willing to pay for a financial (as opposed to strategic) acquisition.

petercooper 11y ago
When I realized this, I knew I'd stick with my business for the long haul (at least until any interest went above 'FU money' level). If I can make $1m profit per year to take out as dividends, selling it for a once-off $3m seems bizarre unless I had a rapid need for money elsewhere.
- charlesdm 11y ago
  This depends on the tax situation of the country you live in. If you do the math, you might realise to get $1m in personal income by declaring dividends, you actually need to earn $2m in corporate profit. So to get $3m (capital gains from a sale), you would need to earn $6m in taxable income. Meaning it would take you 4/5/6/7 years. Also, if you then reinvest that $3m in more traditional assets (stocks/bonds/property/alternatives), you can earn 5-10% on that capital ($150-300k per year), WHILE working on something new. Capital is awesome.
  - petercooper 11y ago
    Boring calculation for people in the UK (as I am, and I've thought about this quite a bit ;-)). Under certain conditions you can use "Entrepreneurs' Relief" to only pay 10% capital gains on your sale of a business (up to a limit of £10m), so a £3m sale could net you £2.7m in hand. Depending on many circumstances, £1m in dividends (per year) should net you around £750k. So it would take about 3.6 years to make the same as selling for current 3x annual profit. However, if your profits were increasing by more than 10% per year, it would be a wash.
    - charlesdm 11y ago
      You also don't need to pay corporate tax when booking a capital gain on your shares, so the tax advantage is actually a lot more. £1m in corporate income is taxed at 20%, so you're left with £800k after tax. Then you declare a dividend, and pay a dividend tax. That'll be 25-30%, so you'd be left with £800k - 30% = £560k in pocket. To earn £3m (in pocket), you would have to generate approx. £5.25m in pretax corporate profit. Whereas with a share sale, you will be taxed at 10%, meaning you're left with £2.7m (if you sell for £3m). A significant difference. I live in Belgium, where the difference is even larger. Capital gains on share sales are tax free, corporate income + dividends are taxed at about 45%.
- bdcravens 11y ago
  Obviously this assumes market conditions will remain stable. Moreover is the issue of the developer/entrepreneur: if you want to stop working for a period of time, the cost to replace your job roles in the company usually means increased cost/decreased profit, so the calculus changes given those factors.

ThomasSmale 11y ago

Our average sales multiple is nearer 3x but this is still a good question. Often businesses (especially those selling nearer 2x) are relatively young so the valuation reflects the risk. We have a very stringent pre-listing due diligence process so while it remains the buyer's responsibility to conduct their own due diligence, none of our listings are scams. I wrote a little more about why people sell businesses last year: https://www.linkedin.com/pulse/20141023121347-71653461-6-reasons-why-entrepreneurs-sell-profitable-businesses?forceNoSplash=true https://www.linkedin.com/pulse/20141023121347-71653461-6-rea...

rfrey 11y ago
Thanks, Thomas. I really didn't mean to suggest any of your listings were scammy, that was poor wording on my part.
- ThomasSmale 11y ago
  No issues at all - it's a common question! If you look elsewhere in the market (especially marketplaces) your comment regarding scammy listings is certainly valid. Part of the reason we have done so well is our pre-listing due diligence, serious buyers don't have to waste their time on scam/very poor quality listings and sellers get exposure to serious buyers who aren't tired by trawling through all the junk :)

patio11 11y ago

There's a range of answers to this question, but the simplest answer to "Why take N years of earnings today and give up the business?" is "Because then I get N years of earnings today and can spend my next N calendar years doing something else." The exact setting for N comes down to a variety of factors, market conditions, and a negotiation between a particular buyer and a particular seller. As someone who happens to be long SaaS companies at the moment I would prefer N=50 but I know SaaS owners whose lives would be improved by a sale at 2. (As mentioned in sibling comments, market right now is 3ish.)

jacquesm 11y ago
I was more than happy to score a 20 and I would have settled for 10... but don't tell the buyers.
- dennisgorelik 11y ago
  Do you mean your buyers paid 20x your business' yearly profits? Why?
  - jacquesm 11y ago
    Excellent question! But I don't have the answer for you.
    - dennisgorelik 11y ago
      But did you actually sell at 20x yearly profits?
      - jacquesm 11y ago
        No, I sold at 20x turnover.
        dennisgorelik 11y ago

WillyF 11y ago

There's also a tax benefit in the U.S. Taking the capital gain can be far more favorable than taking the profits of the business as regular income.

peacemaker 11y ago

I sold my software business with FE International earlier this year and hit about 3x yearly earnings for a 1.5 year old company. Comparing it against the rest of the market, particularly Flippa and Empire Flippers I felt that it was a good deal. Plus you get great guys like Thomas to handle everything for you. Note: reading that back almost sounds like an advert but I'm not affiliated in any way, just a happy customer :)