• Hot Take 😥 Selling Too Soon

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Hot Take 🔥 - Selling Too Soon

The simple math illustrating why selling a year too early will harm your sale price. Unless you’re selling to a fellow engineer, then it’s a great time to sell!

Recently, I had a conversation with a seller who was facing a dilemma between two successful projects and needed to sell one of them.

The business he decided to sell was in great shape. It was experiencing growth, had achieved product-market fit, had a solid customer base, and generated about $100,000 in annual recurring revenue (ARR) with a 95% profit margin.

He was trying to sell it for $400,000, a respectable 4x multiple.

However, here's the catch → When you're selling a business for $400,000 that nets $95,000, but the seller needs to be replaced by a new developer, the multiple for the buyer changes significantly.

So, how much does it cost to hire a skilled developer nowadays? Some might say $14/hour from {insert cheap-labor country name here}. (Note: That's not exactly a strategy for long-term success, but let's consider it as a "best case" scenario.)

That would amount to $27,000 in annual costs. Let's round it up to $30,000 to account for additional expenses associated with hiring a new person (licenses, currency conversion fees, etc.).

Just like that, we're looking at a $400,000 company that would only net $65,000 per year. Suddenly, with a 6x multiple, it becomes less attractive.

And that's assuming the cheapest and best-case scenario. Personally, I prefer not to solely rely on cheap-labor "outsourced" engineers to run a business. So, this option was not suitable for me from the beginning.

I advised the seller that he was selling too early. The business didn't generate enough cash flow for most of the potential buyers to replace the seller just yet.

Selling Too Early with No Replacement Plan

These situations of selling too early occur quite frequently on certain marketplaces. The sellers often overlook the fact that they spend 40-60 hours a week working on the project, and the buyer must consider the cost of replacing the seller.

In such cases, it would be better to continue running the business for another year, aiming for $200k ARR with $175k seller's discretionary earnings (SDE). This way, the cost of replacing the seller with a $30k developer wouldn't significantly impact the buyer's multiple.

This approach significantly expands your pool of potential buyers, leading to more favorable sale exits.

COUNTER-POINT: Selling to Dev’s / Engineers

There's always another side to these examples. The business could still make sense for sale at $400,000 if it's sold to another developer.

In my Dev Driven Acquisitions newsletter, I highlight what a fantastic deal this is a developer looking to transition from a corporate job to working on a project that could generate around $100k per year.

While this isn't a deal I would pursue personally, it presents a great opportunity for an engineer who wants to own a six-figure business ready for growth.

Same coin, but two sides...

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Best of X

IFF you care about your business, customers, and team…then who you sell to matters.

If you don’t care about any of those things, go with the nameless PE firm.

I assess this by asking “is the person I’m talking to during negotiations the same person I’m going to be talking to the day after closing about operations?”

If no, it’s a nameless PE-like firm. Even if they say they aren’t.

If yes, that’s who I want to sell to most of the time.

petelehrman hits it right on the head with these three issues, especially #1 “Business Underperformance during the Sale Process”.

Do not stop running your business full time when you start the sale process.

Buyers notice.

It creates doubt that “this business only takes 10 hours a week to run” and trust starts to erode too early in the negotiation process.

More from Michael Frew of Founder Exit’s

• 📣 Miss last week's newsletter? Check it out here...

• 📰 My favorite quote of the week “Remember, for you its personal, for the buyer, its business.”

• 🎤 I did a quick appearance on the Multiple Streams of Income podcast.

💡 How I Can Help

Whenever you’re ready, here are a few ways for us to work together…

1. Got Questions? Schedule 1:1 consulting with me on those specific seller questions that you can’t find answers to online.

2. Accredited Investors - Don’t miss the opportunity to invest in SaaS with me at WebStreet.

3. Interested in Acquiring?

   1. Check out my Dev Driven Acquisitions newsletter.

   2. Got Buying Questions? I also do Buyer Consulting for acquirers.