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WEB/DIGITAL So its finally done! Biz Sold!

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MJ DeMarco

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:banana:

Well folks I'm happy to say its finally done. For 3 years, I've been trying to sell my business and its been ONE LONG ORDEAL. In those 3 years, I've received multiple offers varying in range from $4 million to as high as $7 million. The buyer pool ran the gambit from people with rich relatives, to Silicon Valley Sand Hill Road VC's to small publicly traded companies, to private equity firms scattered throughout the country.

All accepted LOI's (Letters of Intent) resulted in LONG due diligence processes that took months of time, energy, and scrutiny. Instead of running and growing a business, I spent countless hours running data reports, financials, traffic metrics, doing interviews -- all sideline activities that lechered my time away from doing my core job -- growing a business.

On Friday the sale finally closed and I received 7 cashiers checks totaling millions of dollars -- this had the instant effect of doubling my liquid net worth - all in a matter of seconds. (Although the *process* certainly wasn't instant).

So like with all my stories, I like to post the learning process -- what things I've learned and what things you can take from my experience.

#1) Making big monthly cash flow doesn't equate to happiness. My reasons for selling my business was because the business WAS NOT ENJOYABLE anymore. Sure I was netting six-figures monthly, but the industry was no longer appealing to me. The thought of hiring, firing, and management was unappealing.

I am an entrepreneur - I build and create things. After the building and creating is DONE, I sell. Management, hiring, firing, CEO activities, etc does not appeal to me. Even though I removed myself from the company's daily hum-drum, it always existed for me mentally.

As far as I was concerned, I achieved all I wanted to achieve over 3 years ago. I felt I was Michael Jordan and trying to retire "at the top of my game" -- this is why the business went up for sale 3 years ago.

Unfortunately, the business didn't sell quick although it drew tons of interest. In the following 3 years trying to sell, I semi-retired. I didn't work very hard and started to ignore the business and live off the cash-flow.

#2) When you ignore your business, especially a technology business, (no matter how automated) its growth will stall and reverse. If you ignore something long enough, it will disappear. During my semi-retirement and zeal to sell for these 3 years, my business lost MILLIONS in valuation. Selling at the top wasn't as easy as "placing a stock order" or "putting the property in the MLS" .. selling a business is long process that takes months, sometimes years. My business is rather simple and it took 5 1/2 months. A complicated business can take a year or more.

In hindsight, ignoring your business is this diligence time frame really is a big risk.

#3) Its harder to sell businesses that are "Passengers in the Fastlane" vs "Drivers".

My difficulties in selling the business promptly was due to the source of my revenue stream. Although I was "driving in the fastlane", a small portion (20%) of my revenue stream was derived from a "super-affiliate" (which is being a "passenger in the fastlane".) A super-affiliate is someone who sells your product/service and does so at a super pace. This meant, if the super-affiliate quit, my revenue would be impacted by 20%. This scared potential buyers as I did not control 100% of my revenue stream. This also meant that any sale would have to include this super-affiliate as a lynch-pin in the deal. It gave someone with ZERO ownership in my business, a certain level of power. Very frustrating.

At some point in the future, I will elaborate on this "Passenger" vs "Driver" in the fastlane concept. If you manufacturer a product and Walmart is your only customer, you are a "passenger in the fastlane" -- Walmart dictates your revenue stream and their business decisions will hold your company hostage. Being a "passenger in the fastlane" can be very lucrative -- but its risky and affords you as an owner, little control giving you the illusion that "I am the boss".

#4) Revenue is almost as important as profitability.

Another difficulty I faced is that my company was operating on very high margins - it was very profitable when correlated to revenue.

Which company do you think is worth more?
Company A:
Revenue: $30,000,000
Profit: $1,000,000

Company B:
Revenue: $3,000,000
Profit: $1,500,000
In general, Company A is worth more despite it making LESS. If my company operated under a different revenue model which resulted in higher revenues, yet, experienced the same profitability, it would have been worth 5X more.

#5) What is said vs written are two different things.

Whatever is negotiated in person and verbally is irrelevant. The matters is the legal document that describes what was discussed. If there is a dispute on terms, no one will care, including a judge, what was said at Starbucks or Applebees over coffee -- what matters is the legal terms written in the documents. Be very careful with these documents and ensure they are reviewed by a competent attorney. Hidden language can sweep your rights underneath a rug.

I remember I agreed with a potential buyer on a 30 day provision. When the document came, it said "30 business days" which translates into 45 days, not 30 days. This is how these documents can be tricky. If my attorney (or me) didn't spot this ONE WORD "business", it legally altered a verbal deal.

So whats next for me? I'm taking a mental break and will continue to write. I still have to work with the new owners in transitioning the business and assist them to get it to the next level. I'm excited to have sold - but I'm also excited for the new owners (An investor group consisting of angels and private equity). After a month or so under new ownership, I will probably buy back into my business as an equity investor.

MJ

PS: I will disclose the business once the company is transitioned and my confidentially period expires.
 

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Diane Kennedy

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#1) Making big monthly cash flow doesn't equate to happiness.

I am an entrepreneur - I build and create things. After the building and creating is DONE, I sell. Management, hiring, firing, CEO activities, etc does not appeal to me. Even though I removed myself from the company's daily hum-drum, it always existed for me mentally.
Congratulations on the sale! And thank you for the great lessons you've posted.

I think this one is particularly brilliant because you recognized something about yourself. Russ H. and I were talking about this very thing yesterday. There are so many entrepreneurs that start a business and then self-sabotage just so they can create again.

Typically the person who creates is not passionate about the systems. Know your strengths and your passions, and be true to them.

#2) When you ignore your business, especially a technology business, (no matter how automated) its growth will stall and reverse.
Oh, man, I'm giving you rep++ just based on this one. It is SO TRUE. I took my eyes off my company, Tax Loopholes, to work on a start-up and to clear my over-committed writing projects. (I was a little too flattered when McGraw Hill and Wiley got in a bidding war...and overcommitted. NEVER again.) I'm back to my main company, Tax Loopholes, revenue has jumped and I'm much much happier.

Keep your eyes on the prize.

#4) Revenue is almost MORE important than profitability.
Interesting MJ. I have to think about this one. This is new to me and I LOVE learning new things.

#5) What is said vs written are two different things.
Amen! We say a verbal agreement is worth the paper it's written on - ie NOTHING. Even if all parties are completely honorable (which who knows in a new relationship if that's true or not), you still might think you agree, but you really don't. Get it in writing.
 

Runum

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Congrats and thanks for your insight on your experience. Looking forward to hearing more.:cheers:

Greg
 
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MJ DeMarco

MJ DeMarco

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I almost forgot ... one HUGE critical factor in my desire to sell.

#6) Cash NOW > Cash LATER
When you build a business from nothing (well, I bought this business for $250K) and then sell it -- the lump sum gains are taxed at long term capital gains of 15%. (Assuming you don't get hit with AMT)

So from a financial perspective, selling a business for 1, large lump sum pays extra dividends as the sale from the gain is taxed at only 15%, PLUS you get money now vs money later. Due to the present value of money, $10mm now is always better than $10mm received over the course of 5 years.

Cash flow from the business was being taxed at 40%. Almost half of my business profits were going to the government.

So hypothetically, if you own a business that cash flows $100K/mo, you will be taxed at 40% on that income (35% Fed, 5% State). At these tax rates, cash accumulation is slowed. Drop in the present and future value of cash, the decision to sell was a no-brainer.

When you sell a business, the lump sum is acquired INSTANTLY and taxed at only 15%. Its a total acceleration of net worth, both in terms of taxes (less taxes) and present value calculations (Cash NOW > Cash LATER).

So the concept here is the acceleration of your net worth in the form of getting 1) CASH NOW and 2) TAXED LESS -- I could have held the business and continued to cash-flow while enduring high tax rates OR I could sell the business and experience an acceleration of net worth, at the price of less taxes and more time.

Compare these hypothetical situations ....

Sell business for $6,000,000

Advantage
1) Sale is taxed at 15% long-term capital gains vs 40%.
2) Acceleration of net worth - money received NOW vs over the course of 3-6 years.
3) Gain of time, our most precious asset -- don't have wait to accumulate cash via cash flow.

Disadvantage
1) Loss of business appreciation (could have grown business by another 50%)
2) Loss of cash-flow​

Keep business, reap cash flow

Advantage
1) Monthly cash-flow
2) Focus on business growth for a future sale

Disadvantage
1) Cash-flow taxed at 40%
2) Slow accumulation, money later is not as good as money now
3) Cash-flow not guaranteed as business environment can change.

The point is this: Building a business, growing it, and selling it is FASTLANE. You accelerate your net worth by three aspects: 1) Building a business grows your net worth by its valuation 2) You pay less taxes on the sale and 3) You get money now (sale proceeds) vs money later (business cash-flow)
 
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MJ DeMarco

MJ DeMarco

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Congrats MJ!

I don't quite understand what you were trying to say with #4 though.
When valuating businesses, top-line revenue is as important as profitability. It may pay to increase revenue at the expense of profitability. In my case, I would have been better served to increase revenue $2MM at the expense of $500K in profits.

If my company had $30 million in revenues instead of $5 million, yet earned 1/2 of what it earned, I could have sold to the first buyer at my door and for more money. Of course, this is not a hard-n-fast rule (very industry dependent) but its something to think about.
 

Russ H

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My heartfelt and sincere congrats to you, MJ.

I want to use a special word that describes how I feel for you right now . . . but none are coming.

How about just very, very happy? :cheers:

Wishing you health, love, and laughter,

-Russ H.

#4) Revenue is almost MORE important than profitability.
It took us 2 years to figure this out. Can make a MAJOR difference in selling price.

We might want to start a thread on this. :)
 

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Luke12321

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When valuating businesses, top-line revenue is as important as profitability. It may pay to increase revenue at the expense of profitability. In my case, I would have been better served to increase revenue $2MM at the expense of $500K in profits.

If my company had $30 million in revenues instead of $5 million, yet earned 1/2 of what it earned, I could have sold to the first buyer at my door and for more money. Of course, this is not a hard-n-fast rule (very industry dependent) but its something to think about.
Is this because the potential buyer views higher revenue as an easier avenue to increase profits? Ex. Cut cost by 10% = 3mm per year increase.
 

integrate

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MJ, Im new to this site but a long time member on some of the car, watch sites on the net. Lambo-power being one of them. I wanted to congratulate you on the sale of your business. I also hope to read and learn a lot that I didn't learn in college.

So far I love some of the posters and threads on the site!
 

Rawr

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Congratulations, MJ, I am very happy for you.

And the insights are invaluable, I (we) are learning a lot from them, thank you
 

Shawn

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Congrats on the sale, it sounds like the company was a beast to run. I would have sold it too :)

I know what you mean about the time, seems a lot of 'bigger' companies take forever and a day to do anything.

What are your plans now? Do you intend to start a new company and sell it again or just invest what cash you have now and play around with the investments?
 

M-M

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Congrats!
 

andviv

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Congrats!!!
Rep++ for sharing.
I hope your confid period expires soon.
 

Yankees338

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When valuating businesses, top-line revenue is as important as profitability. It may pay to increase revenue at the expense of profitability. In my case, I would have been better served to increase revenue $2MM at the expense of $500K in profits.

If my company had $30 million in revenues instead of $5 million, yet earned 1/2 of what it earned, I could have sold to the first buyer at my door and for more money. Of course, this is not a hard-n-fast rule (very industry dependent) but its something to think about.
Thanks! I understand now.

Again, congratulations on your success. Wish you nothing but the best for the future.

Also, great points in original post...thanks!
 

WheelsRCool

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Congrats PHX!!

I have a question though about building a business, and then building another one: can't you start a business, build it up, then hire some professional managers to continue running it and growing it, and you move onto foundng and building another business, which you would then hire professional managers to run and grow more after a certain point, etc...

For example, Richard Branson and Russell Simmons both own multiple businesses, which they found, and then eventually hire professional management to run, I believe. And sometimes they sell (for example Branson sold Virgin Mobile for $1 billion, Simmons sold his hip-hop clothing line for nine figures, though I believe he still controls it, etc...).

I wonder about this because I have ideas for multiple companies I intend to start.
 

HenkHolland

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:banana:

#4) Revenue is almost as important as profitability.

Another difficulty I faced is that my company was operating on very high margins - it was very profitable when correlated to revenue.

Which company do you think is worth more?
Company A:
Revenue: $30,000,000
Profit: $1,000,000

Company B:
Revenue: $3,000,000
Profit: $1,500,000
In general, Company A is worth more despite it making LESS. If my company operated under a different revenue model which resulted in higher revenues, yet, experienced the same profitability, it would have been worth 5X more.

Congratulations, MJ.

Excellent information. Rep++

I can relate to your point 4.
At some point I was working for a small but very profitable operating company of a publicly traded company. With 25 employees we generated 30% of the revenue and twice the amount of profit that one of our sister companies generated with 175 employees. Nevertheless, when the two companies were sold to a buyer that buyer paid twice as much for our less profitable sister company than they paid for us. For the sake of completeness I need to mention that the assets of the companies were almost equal.

The IMHO erroneous explanation that the buyer gave, was that due to it's almost 3 times higher revenue our sister company had a "bigger safety cushion" than we did. They forgot or did not realize that our sister company had much higher operating cost and that with their lower profit margin they could end up on the loss side much quicker if there would be a (market) hick-up.
Our corporate board could not get the buyer to change their mind and decided to sell anyway since the activities of these two businesses did not belong to the core business anymore.

Henk
 

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Antonio.

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It's glad to know that you finally sold your company I know you've been trying to for a while now. Thanks for sharing all the infomation.
 

kimberland

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The IMHO erroneous explanation that the buyer gave, was that due to it's almost 3 times higher revenue our sister company had a "bigger safety cushion" than we did. They forgot or did not realize that our sister company had much higher operating cost and that with their lower profit margin they could end up on the loss side much quicker if there would be a (market) hick-up.
Because the acquiring company is not using the existing expense structure,
they're using their own (especially if the acquiring company is larger than the buy)
and then factoring in economies of scale.

When I evaluated acquisitions,
I'd look at the volume and revenue of the potential buy.
Then I'd look at my current company's cost structure
and factor in
(across the ENTIRE new company)
economies of scale savings.

So say I'm currently selling 1,000 widgets
and I buy another company which sells 200 widgets.
With the extra volume,
I can beat my suppliers down (or fully use lines or reduce staff or... )
by 10 cents a widget.
Suddenly I'm saving $120 in economies of scale discounts alone
(not to mention the savings in the purchased company).
Now I look at another company which sells 100 widgets.
That will only give me 2 cent a widget savings.
The savings drop to $22.

Profit does play a factor
but revenue and volume are key.

: )
 

andviv

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kimberland, excellent point. This now makes a lot of sense. I tried to give you Rep++ but the system is telling me I already gave you recently. Again, great information.
 

HenkHolland

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Kimberland, thank you for your explanation regarding the economies of scale benefits.
In this particular case these benefits were overrated as I understood from one of the buyer's board members a few years later.
 

LightHouse

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Congratz Mike, I am with Russ, Not sure what to say other than i am happy for you! How is that Cuban drawing? :)
 

John

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Congratulations! :cheers:

Once you're able to share I'd love to hear more details about the process of negotiating the deal, going through due diligence, any tips or potential pitfalls, etc.
 

Poudda

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Point 4: The technical terms are volume strategy (high revs, lower margins), and Margin Strategy (lower revs, high margins). There are books dedictated to each. Both are great strategies. ie Lambo = Margin Strategy, Wal Mart = Volume Strategy. Most of the time Volume strategies work better, which is not to say that margin strategies are bad.

Anyhoo, congrats MJ. My curiosity is totally peaked. Make it a big sticky annoucement when you are allowed to divulge the name of the company.

Cheers, Dave




PS: Thanks for the rep Yankees338!
 

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