Understanding Your Score

This refers to your systems, processes and SOP’s. Being systemized means that you have a standard process for everything that happens in every aspect of your business. It also means that these processes are recorded and repeatable by someone other than you.

Your business needs to be completely systemized, meaning that everything is done in a specific, well-defined and repeatable way. And everyone in your business needs to be aware of the systems. In order to make this happen, you need to write your systems down. This allows you to free yourself from the business daily operations, train new employees and easily transfer the knowledge of running your business to your buyer.

Things you want to systemize are:

• Processes
• Procedures
• Policies

Areas you want to systemize are:

• Product development, production & fulfillment
• Software development & testing
• Sales & Marketing
• Customer service & support
• Business administration
• Financial management

This is important for a number of reasons. First, it helps you run your business more effectively and efficiently. There’s nothing like systemizing a process to show you the inefficiencies. And if it’s a repeatable task, then you should not be doing it yourself in the first place. Once it’s documented, you can outsource it.

Secondly, it increases your Exit Score because it gives potential buyers the confidence that they will be able to take over your business and run it without you. You know your business inside and out, but a buyer is seeing it for the first time. Systems, processes and documentation are like an operating manual for your business. The better the manual, the more easily a buyer can see themselves owning your business.

Another hidden benefit is that having all your systems and processes documented reduces your post-sale transition support significantly. Instead of having to come to you with every question, the buyer can reference your documentation instead. If it’s not documented, you will either have to do it for them or walk them through it. And continuing to work in your business is the last thing you want to do once you’ve sold it.

Systems and documentation provide the most return on investment of time of just about anything you can do in your business both now and in the future.

One easy way to think about systemizing and documentation is this: If you’re going to repeat a task more than once, document it!

The best way to document a task is to create a document that goes step by step through the entire process and with each step include either a screenshot or a video screencast. For simple tasks, you can make a single video screencast for the whole thing vs. one for each step.

The easiest way to make sure you’ve captured everything is to actually perform the task, while you’re creating the documentation. At the end, you should have completed the task. This gives you the checks and balances to make sure you’re documenting correctly. And once you’re done, you never have to perform this task again. Next time it needs to be done, you can outsource it. And now it’s ready for the future buyer, as well.

This refers to all contracts (vendors, customers, employees and contractors), and your revenue. Some contracts are transferable, some are not – it depends on the language in the contract. You may need to talk your attorney to determine the state of yours.

The second component is the revenue. Are your merchant accounts transferable? Stripe, for example, makes transferring an account in the event of a business sale fairly simple. Some merchant accounts are not transferable at all. Again, you’ll need to check with your specific merchant provider to determine this.

For your business to be sellable it must be transferable. Hopefully, your contracts are transferable, but it’s not an absolute deal breaker if they’re not. However, this means the new owner would need to get all new contracts signed, and this could lead to losing some customers. So non-transferable contracts represent risk for a buyer and will impact your valuation.

If your revenue is not transferable, that’s is a different story. This is most likely a deal breaker. If the buyer can’t simply take over or transfer your merchant account, then they will have to get all the customers to enter their credit card numbers again. This almost certainly would result in significant lose of revenue due to people either not being willing to, or simply not receiving the notifications. So it poses a significant risk that would decrease the valuation and potentially kill the deal.

The easiest way to make sure your revenue is transferable is to use a merchant account that allows for transfers. Again, Stripe makes this very easy, so if your merchant provider does not, you should consider switching now. It’s a lot easier to migrate customers over time, (for example, as their current cards expire), than it is to migrate the entire customer base at once. Be proactive about this so when you’re ready to exit, your revenue is ready, too.

Regarding contracts, you can be proactive here, as well. You could begin one by one going to existing relationships with non-transferable contracts and ask them to sign new ones that are transferable. Explain that you’re not selling now, but you plan to exit at some point and you want it to be as seamless as possible for them when that time comes.

This speaks to the future potential of your business.

• How big is the addressable market?
• How many new marketing channels can be added?
• Are the opportunities to add more products or services to the current offerings?
• Can existing products & services be enhanced or expanded to increase the pricing?
• Could economies of scale be achieved with higher volume?
• Are the inefficiencies that can be removed?

The other aspect of opportunity is an assessment of the competitive landscape.

• How do you stack up against the competition?
• How crowded is the market?
• Are the ways to differentiate that haven’t been implemented yet?
• Is growth through acquisition, or even consolidation an option?

A business is valued based on past performance, but the opportunity and risk is measured by future expectations. So if the buyer doesn’t see any opportunity to increase revenue or decrease expenses, the business becomes less attractive to most buyers.

Some buyers like a stable business in a mature industry, so if your business sits in this niche, then future opportunity is not as important. But for most businesses and most buyers, it is.

The best thing you can do for your business right now and in preparation for a future exit is to assess the opportunities it has. Look at the list of questions for “What it means” and spend some time coming up with solid, data-driven answers to them. You may find that you want to execute right away. But even if you don’t, having this information prepared for a buyer will increase you ability to sell your business.

As with everything related to your business, you are the expert. Buyers will have ideas of ways to improve and add their own “special sauce.” But you’ll have much more insight into the industry than they will. So if you provide them with a roadmap of all the opportunities you’ve uncovered, you’ll open their eyes to the true potential of your business. And that goes a long way towards getting the deal close (which is what your Exit Score is a measure of – the likelihood of a successful exit from your business).

This is a measure of how difficult is it to start a business like yours from scratch. There are a few main categories that represent the major barriers for most businesses.

• Technology: Have you developed a proprietary technology that would take the competition months or years to replicate?
• Contracts: Exclusive contracts with suppliers or manufacturers also present a barrier to entry for someone who might want to get into the same market or niche.
• Proprietary Knowledge: Even without exclusive contracts, you can protect your business and increase the value by developing successful sales processes they can replicate. Things that are not easily copied from the outside are:

• • Optimized Sales funnels
  • Successful Ad Campaigns
  • Actionable Customer Data

Barriers to entry help reduce the risk for a buyer. Knowing it will be difficult or in some cases nearly impossible for new players to compete gives them a moat around their new business, allowing them to focus on growth, expansion and optimization vs. getting caught in a race to the bottom on pricing.

In addition to increasing your Exit Score, and the value of your business, this also prevents potential buyers from thinking, “Why should I buy this business? I can just start my own for free and get the same products from the same suppliers.” 

Some businesses inherently have a higher barrier to entry – AI projects for example. But even a low-barrier business, like drop-shipping, can be protected. Securing exclusive contracts and developing proprietary systems and processes will add value to even the most simple business. Building a brand and social media following can help, as well.

The quality of your website is a combination of design, content and user experience.

• Design: This is simply the overall look and feel of your site. Is it modern? Professional?
• Content: This is the information contained on your site in text, audio or video format.
• User Experience: This is the qualitative experience people have when they visit your site.

Design

Even though design changes can be a relatively easy fix, if a buyer comes to an otherwise perfect site and sees a site design from 2001, they are likely going to discount their valuation based on the cost of a redesign.

Content

The content of your site says a lot about your business to potential buyers. This is important to all businesses, and even more important in sites that are solely monetized via advertising and rely on the content to keep the user engaged and returning to your site.

Likewise, if you run a SaaS site that has an associated blog, keeping your blog up to date with stellar content might not be as important to the overall valuation. That being said, if a buyer feels that corners have been cut in one part of the business they will generally start asking questions and be more sceptical regarding other areas, as well.

User Experience

User experience is often overlooked by business owners, but experienced buyers look at these metrics carefully. Not only can a good UX translate into more conversions and customer satisfaction, but it can also help with search engine rankings.  

Google keeps track of user behaviour and if users are not spending enough time viewing your site or immediately bounce back to the search results page, this can be a ranking factor telling Google the site is low quality. 

1. Perform a site redesign with conversions and user experience in mind within a year, at most, of when you want to sell your business so your buyer sees a fresh, modern design. The one caveat here is that some buyers like an “ugly” website because it’s considered “low hanging fruit” for an easy lift.
2. Review all the content on your site (this includes sales copy and content) and ask yourself if this is the best version of the information you can produce. If not, then consider going back though and re-writing or deleting the post altogether.
3. Watch your “Bounce” and “Time on Site” metrics, as these will give you an indication of how engaged users are with your site or content. Depending on your niche, your “acceptable” bounce rate can vary. Use SimilarWeb.com to get an idea of what you competitors bounce rate is and see if you are in-line. Generally a bounce rate of under 50% means you are doing a good job of engaging users. You can also use “related articles” at the end of content to engage users deeper into your site.

This is simply a measure of the diversity and quality of traffic coming to your website. Quality means that the visitors coming to your site are not just leaving as soon as they arrive – that they are converting into leads and customers. And diversity means a mix of visitors coming from paid ads, organic search, other websites and social media.

One of the biggest “valuation killers” is relying on a single source of traffic, especially if the source is outside your control – like organic search traffic. Google has made a series of updates to their algorithm that can drastically change rankings for websites overnight, and this uncertainty and associated risk will reduce your valuation if your site relies too heavily on organic traffic.

Paid traffic has it’s pros and cons when it comes to Exit Score and valuation. Some buyers think if you’re paying for traffic, then they could just start their own business and pay for traffic to a new site, but this misses the point. The fact that you’re having success with paid traffic means you’ve cracked that code and figured out how to get that traffic to convert, so this really is a benefit.

However, some buyers are highly skilled in running paid campaigns and want to be able to apply this knowledge for an instant ROI on the acquisition. But if you’re already having success here, there’s no new opportunity for them.

Regardless of this, you need to have a diverse mix of traffic sources to reduce the risk profile for buyers, and thereby increase your Exit Score and valuation.

To maximize your Exit Score and valuation, you want to aim to have your traffic spread across at least 3 sources, and not have 1 source that makes up more than 50% of your traffic.

Different sources produce different quality of traffic so it is important to monitor and compare your traffic performance in your analytics account to make important decisions about your future investments.

Once you start receiving over 100 visits/day you should be implementing “goal tracking” in analytics. By setting this up early you are establishing an auditable history that will be extremely valuable to a buyer while conducting their DD. This can be done easily by someone with moderate technical skills, but if you don’t feel comfortable setting this up, it will likely be worth the cost to pay a professional to set it up for you.

When optimizing your site for SEO, concentrate on ranking for a lot of long-tail keywords over trying to rank for one or two high traffic keywords. This tends to level out your search traffic since the rise and fall of a single keyword won’t have a drastic effect on your traffic. Also, since these keywords don’t have a ton of traffic, the competition isn’t nearly as tough so it will be easier to rank for them.

And start engaging in social media. You can get traffic to your site from Facebook and LinkedIn simply by participating in Groups and posting high-quality content – even if it’s not your own. If people find you interesting, they’ll look at your Profile and click on your site listed there.

Simply put, how many other sites are linking to your site? And how much authority do these sites have both in general and in your specific industry?

In addition to that, what signals are being received by Google telling them you are an authority in your industry:

• Do people return to the search results and view another page after viewing yours?
• Are you getting traffic from social media?

All of these things together create your domain authority.

In addition to the benefits to your business, like free traffic, analyzing backlink profiles have become a common and necessary step in the Due Diligence process. And you can’t fake it. Google has put much tighter controls and thresholds around anchor text ratios and has cracked down on paid and spammy links, so if your site has a backlink profile that appears to be unnatural many buyers will view the risk as too high, especially if a large percentage of your traffic is organic. 

Create as many “brand links” as possible to your domain prior to considering a sale. A “brand link” is considered a link with anchor text that matches your company/business name or is the naked URL. Google has put much more weight and authority on being a brand so to get maximum valuations this is a requirement.

Do you have teams in place or are you a one-person show? How much time are you putting into running the business on a daily basis vs. making high-level decisions that other people carry out? Are you working “in” your business or “on” your business? This distinction is the difference between being self-employed and being a business owner.

Besides the obvious benefit of making your life easier, and giving you the ability to scale your business beyond what you can do on your own, this also makes your business much more sellable. There’s nothing wrong with a lifestyle business, but they are generally not sellable because buyers want to acquire a business versus buy a job. So the more you can remove yourself from the daily operations of your business, the better. This will increase your Exit Score and your valuation.

In order to reduce the management overhead, follow this process:

• Delete
• Automate
• Delegate
• Do

Delete

First, figure out everything you’re doing that’s non-essential to your business and simply stop doing it. Essential elements are:

• Activities that bring in money (directly or indirectly)
• Business administration (bookkeeping may not be fun, but it has to be done)
• Management (employee, customer & vendor relations, etc.)

Anything that doesn’t fall into one of these categories, is non-essential and therefore doesn’t need to be done. The less work you have to do in your business on a weekly basis, the easier it will be to sell.

Automate

Once you’ve determined the things that are essential to your business, see if you can automate them. Automate as much as possible to eliminate it from your plate and to make your business more attractive to buyers. You’d be surprised how much can be automated using built-in connections and tools like zapier to connect apps that don’t have a native connection.

Delegate

Next, after deleting everything you can and automating as much as possible, delegate everything else (or as close to it as you can). This is where the process of systemizing and documenting pays off. If you have a system for every process and procedure, and you’ve documented them in an easy to follow way, you can outsource most of your daily tasks. This could either be to an in-house employee or to an outsourced VA.

Doing this frees you up to focus on the activities that earn you the highest return on your investment of time. And it makes the business much more attractive and easy to sell.

Do

What you’re left with after the above 3 steps is what you have to personally do to run your business. And this is the same left-over set of task the buyer will have to do. You want this set to be as small and as easy to manage as possible. So having a system for your own tasks is just as import and for the tasks you delegate. This way your buyer and step in and feel confident about running your business and continuing the success you’ve had with it.

This is everything that’s include with the sale of your business in 3 main categories:

• Brand: Domain, logo, website, content, social media accounts, etc.
• Physical: Real estate, equipment, infrastructure, furniture, fixtures, etc.
• Intangible: Customer & prospect databases, recurring revenue, IP, etc.

Without assets you don’t have anything to sell. And the higher the quality of your assets the higher your Exit Score and valuation. Most valuations, and all financial valuations are based on a multiple of EBITDA, but the multiplier changes based on the quality of the assets. For example, recurring revenue with a monthly churn rate of 2% will be valued higher than recurring revenue with a monthly churn of 15%. Additionally, things like email lists, social media accounts and IP might not increase the valuation, but the will increase your Exit Score and make your business easier to sell.

Everything that you should already be doing to improve your business for yourself will also increase your Exit Score:

• Build your email list
• Develop your social media presence and following
• Secure your revenue by reducing churn
• Optimize your sales funnels and paid advertising

This is a measure of both how easy your business is to run and how easy it will be to transfer the knowledge required to run it to a buyer. It covers every aspect:

• Finances
• Systems, Processes & Documentation
• Legal
• Tools & Resources

First, organizing your business makes your life easier and allows you to focus on building your business instead of getting bogged down in constantly searching for what you need.

Secondly, when it comes time to sell your business, the knowledge transfer will be infinitely less complicated if everything is organized.

And finally, if your business isn’t well-organized you might not be able to sell it at all. Due Diligence is a cumbersome process under the best conditions, but buyers have a threshold and if you can’t produce information and documents in a timely fashion, they will lose patience and you will lose the deal.

Entity

Make sure you have a legal entity in place for your business. Most sales will be asset transfers, but occasionally there’s a case for selling the entire business. Plus it’s a good business practice to have an actual legal entity formed (such as a LLC or Corporation). Talk to your attorney about what kind of entity is best for you.

Finances

Verification

One of the most important factors in the Due Diligence (DD) process is verification of financial history. Your output P&L reports will get a buyer interested, but they will want to make sure the numbers are real during the DD period. You can make this easy on yourself by using an online service like Xero for accounting and bookkeeping, and an online gateway like stripe for payment processing. Your accounting software can connect to your bank and your payment processor to reconcile all the transactions. And then your buyer and easily see that bank statements, payment processor statements and your P&Ls all match up.

Isolation

Another extremely important factor is isolation. You need to keep all your businesses separate from each other and from your personal finances. Any business that you ever hope to sell should have it’s own bank account that is used for nothing but that business. If you’re co-mingling businesses or personal finances, it will be extremely difficult for the buyer to sort through the bank transaction history, and they may ultimately give up and back out of the deal. So even if you’re not ready to sell now, get your business isolated now because if you wait until you are ready to sell, it will be too late.

History

There isn’t anything you can do to increase the “age” of your website or domain, but you can make sure that you have a full and complete history of the profitability of your business.  Likely, the “valuation” will be based on the TTM (Trailing Twelve Months), but the multiple that is used will increase if you can show 2+ years of accounting.   

Based on how your business is structured, it can also be important to show tax returns for the business as this is a more trusted number since you have an incentive to keep revenue low to avoid tax liability.

Transferability

Are there contracts essential to the business? Can they be transferred or assigned when you sell.  Start thinking about this early on when negotiating contracts and make sure you include a clause that allows for the assignment. 

The other key is payments and subscriptions. Many website owners use Paypal to process subscriptions because of its ease of use. Unfortunately, these subscriptions can not be transferred without transferring the entire PP account. This can be done, but it can be very difficult to accomplish and can take significant time. The best solution is to use a payment processor (like stripe) that allows the subscriptions to be transferred and allows for an easy path for transferring accounts to your buyer.

Documentation

All the documents you created above should be well organized so they are searchable. If you use a help desk, like zendesk or Help Scout, you can create internal help files. You can also use wiki software or even just Google Docs. You could create a single document in Google Docs with a table of contents for each process documented, or separate docs for each one. There are even online tools specifically for this. Whatever platform you choose, just make sure you standardize the naming conventions and provide some method for easy searching so it’s obvious what’s been documented and your buyer won’t need to ask you where to find it.

Legal Agreements

Make sure any and all legal agreements that will affect your buyer (such as supplier and manufacturer contracts, JV agreements, employee contracts, etc.) are organized and easily accessible. It’s best to use a service like Hellosign to manage all your legal agreements, but if you’ve done them on paper be sure to scan and upload them to an online storage service (Google Drive, Box, Dropbox, etc.).

Tools

It’s important to make use of the many tools available to help organize, run and manage your business. This also makes it easy for a buyer to take over, as they don’t have to figure out how to manage the different aspects – simply give them the passwords to the accounts and it’s done. Something to think about is using a special email address for these accounts so it’s easy to transfer (like accounts@yourdomain.com). You can also use a password manager and turn over a profile inside of it that contains all the passwords to every tool the business uses.