There’s a good chance the last thing you are thinking about right now is selling your startup. While it may be part of the plan — everyone wants to cash in for multi-millions someday — in the beginning, it’s hard to see how you’ll get to this point. Cash is tight, and you’re working a ton, so it’s hard to look too far down towards the end of the tunnel. Never mind, see the light.
But just because the eventual sale of your business is still a ways away, it doesn’t mean you shouldn’t be thinking about it. Taking the time to assess the value of your business is a useful way of analyzing your current situation. Once you do this, you can determine where to focus more energy to help your business grow.
It’s never too early to start preparing your business for a sale, but it can quickly become too late. Crafting an exit strategy and planning its execution can be beneficial, regardless of whether you eventually sell.
This process allows you to evaluate the current status of your business, identify areas for improvement, and ensure you’re well-positioned for a lucrative sale if the opportunity arises.
Here is what you need to know about assessing and selling your startup.
1. Determine Your Exit Strategy
First, you’ll want to decide which exit strategy you’d like to pursue.
The most common exit strategies are:
- Initial public offerings (IPOs)
- Selling the business to an individual or group
- Merging the company with a larger, similar entity
IPOs are the most profitable. They are the big leagues of exit strategies. But they are also the most unrealistic. Very few startups have an IPO that turns the owners into millionaires.
Mergers are also hard to depend on. You need to wait until a specific organization wants to expand, not just someone looking to make a profitable investment.
If you focus on merging with another organization, you risk trying too hard to fit into their model.
As a startup, you must differentiate yourself, not be a copycat. Now, if a company comes along and makes an offer, that’s a different story. But it’s better to plan for another strategy.
This is why it’s usually best to plan to sell the business to an individual or group. These people are often merely looking for a good way to spend their money to give them a good return.
By focusing on selling your business, you are ensuring you dedicate all your time and energy to doing what makes you successful. It stresses the importance of concentrating on your target audience and the benefits you provide to them. This razor-sharp focus is what helps startups break out and become full-fledged companies.
2. The Game Begins With Sales & Revenue
When determining the value of your business, the starting point will always be the financials. The general rule is that your business is worth 2.5 times your yearly revenue. So, the first thing you want to do is put your accounts in order. Figure out exactly how much you’re bringing in and get a handle on your cash flow situation.
This will give you a number to work from. Other things affect the value of your business, which we’ll go over in a minute, but getting to this number is an important first step.
3. Know Your Customer Acquisition Cost
Once you’ve hammered out your revenue numbers, the next thing you’ll want to do to assess your company’s value is to figure out how effective you are at bringing in new customers and what the cost of doing so is (i.e., know your customer acquisition cost).
Anyone looking to take over a business will want to see a functioning system for bringing in clients that helps support the business’s profitability. They’ll also want to know that the system is sustainable. If you’ve been relying heavily on SEO and plan to keep doing so, what research do you have to support this being the best strategy moving forward? If you plan to branch out into new areas, where’s the proof that this will bring results?
Knowing the answers to these questions will help you get a better idea of how you will grow the company, and it will also make it more valuable, as it shows investors a clear growth path already laid out.
A good exercise to do is to take some time to figure out how much you are spending to bring in new customers. One easy way to figure this out is to take the total amount you’ve spent on marketing and lead generation — this could be SEO, seminars, product samples, trade show presentations, etc. — and divide this number by the number of genuine leads these efforts produce. It’s best to do this throughout a larger period — such as a year — since there will be a time lag for some of your actions. This will give you a general idea of what you are spending on generating each new lead.
However, you’ll want to go a little further than this to figure out things such as the cost per inquiry and the cost of qualifying an inquiry. These numbers will help you get a much better idea as to how much you are paying to bring in new customers.
This is extremely valuable information for your investors and for you as the head of a startup. Keeping track of expenses is essential for any new business, and you want to ensure your investments produce the best possible returns. By giving yourself a snapshot of your lead generation process, you are helping to assess the value of the business and identify the areas where you’re performing well and where you need to reconsider your strategy.
4. How well does your business run?
Building off this, one of the things to look at to help figure out how much your startup is worth is to examine how efficiently it runs. For example, do you know your numbers? How hard would it be to determine the cost of generating new leads? If gathering the data, analyzing it, and drawing conclusions from it would be a major production, then there’s a pretty good chance you need to spend some time optimizing your systems and processes.
Also, an interesting thing to think about is how well the business would run if suddenly you had to step away. While startups need a passionate leader or team of leaders, the operation is unsustainable if it depends too heavily on just one person or group.
Consider how well you’ve defined roles, outlined processes, and invested in tools to help make the company run easier. If you expect things to blow up upon your departure, there’s a chance your business isn’t as valuable as you may think it is. Investors will want to avoid these types of companies; you don’t want to run one like this.
5. Assess Your risks
Another helpful way to determine the value of your startup is to do a full risk assessment. When companies first get going, especially when they start having success, they often get blinded by a false sense of invincibility. This can lead to tunnel vision, and this can cause you to overexpose your business to certain risks.
For example, how dependent are you on one product or customer base? What are some things that could prevent you from selling your product to your customers? Are there any troubling trends in the industry? Or is there any way Mother Nature could interfere with your opportunities? What about potential governmental regulations? Any number of things could affect your business, and you need a clear idea.
Businesses that fully understand where they are vulnerable and have plans to mitigate these risks are more valuable to own. This is true because they are in less danger and demonstrate a company culture focused on ensuring growth well into the future. If you don’t have good contingency plans or diversification strategies, it’s a good idea to make this a part of your planning before it’s too late.
Wrapping up
Taking time to determine your business’s value is a worthwhile exercise for any startup. It helps give you an idea of where the company is and is a good way of determining where you need to focus your energy.
The earlier you start thinking about building value into your business, the better. It will give these strategies more time to work, meaning a bigger payday when it finally comes to sell and walk away.
Editor’s Note: This article is part of the blog series Start Your Business by the marketing team at Unitel, the virtual phone system priced and designed for startups and small business owners.
