In this episode, we talk about business sales from the seller's perspective. James Schramko of SuperFastBusiness.com walked us through many of the elements that were relevant to him as he built and sold his businesses.
02:19 Built and sold two businesses
04:59 Prepare your staff for the sale
06:54 Build a business for sale
09:40 Learn to balance this fine line
12:17 Be aware of the surprises in place
14:47 Build a checklist for the transition
18:23 Get your financials and contracts in shape
21:54 Get started today
24:10 Build a business that works without you
25:51 Build your business with the perfect buyer in mind
26:59 Quick Recap
Joanna: Hi! It’s Joanna Oakey here and welcome back to the Deal Room Podcast. Today we are talking about business sales from a seller’s perspective. So I have on this episode a special guest who I think it is fair to say is a guru in online marketing. James Schramko from SuperFastBusiness.com. Welcome along James!
James: Thanks for having me! I think pretty much anyone who is an expert in any market outside of Indian style things doesn’t love the name guru. I certainly don’t call myself that. It doesn’t say that on my front door.
Joanna: OK. All right, so not the guru in online marketing then, James Schramko. How about that? Is that a better intro, James?
James: I don’t know. It’s probably equally as bad just because it could be misleading and deceptive. But it’s funny it’s like those words “thought leader” and stuff. They seem a little bit wonky but I have bought and sold a few businesses and built some so if that’s what we’re talking about I’m in my comfort zone.
Joanna: That’s what we’re talking about today. So you have bought and sold two businesses that you built from the ground up, and so I guess I wanted you on our show today to talk specifically about how that process went from a seller’s perspective.
When I first met you, I think you just recently sold not one, but two businesses that you’ve been building for many years. And for many business owners that’s the pivotal point, that they have been building for forever in their business. And then sometimes they retire. But then sometimes they’ll continue on and do things after that. But often it is years and years of building businesses before business owners really understand what it’s like to sell their business and what the important elements are that they should be thinking of as they’re growing their businesses. But maybe we can start off perhaps by you giving us a little bit of background before we begin about what your business is worth that you sold.
Built and sold two businesses
James: Sure. Well one business was a website development business and other people might call it a WordPress shop if you’re in the industry. Basically we just built websites for people. And then the other business was a search engine optimization company. And by the end of its lifecycle I was mostly providing wholesale SEO services to other people who are reselling that as agencies to end customers. And in some cases they were even reselling it to other bigger agencies who were selling it to the end customer. So we were the supply source. We were creating the SEO at the raw source. So they were the two businesses. One was much larger than the other one. The SEO business was significantly larger. And both of them had been running for around about seven years in different iterations.
I didn’t start with those. I just ended up growing them. One of them was out of a need for me in the beginning and then my customers continually needed websites. So that made sense and I’d already started. When I started online which is about 12 years ago, I used to sell a lot of website development software. And when that software was starting to become superseded, we needed a solution to make our website so I started contracting some suppliers and they were good and then I brought it in-house. We did this vertical integration and then I ended up with this team of 10 developers and we built thousands of websites so that was that one.
The SEO one, quite an interesting one, because I used to be very good at SEO when I started online. I learnt that skill and I loved the immediate satisfaction of knowing I’ve done a good job if I could type something into Google and they ranked my site first then I was getting a tick. And it’s kind of this appraisal machine if you like. It will say yes you’ve done well or no you haven’t.
And once I got the knack of it, I started doing this for clients and then I wanted to have more than one or two clients so I needed to get some supply and this overseas company actually approached me to contract their supply to me. And I was actually running a workshop and we were looking for an idea to create a business and the students there didn’t really have any useful ideas. So I said how about we create an SEO service. So right there and then in this workshop, live over two days, I started this SEO business from scratch, using the external supply and then over time my team who were building other websites they got really good at SEO as well. And then we took over the work from the contractors and vertically integrated that and I ended up with my own team. So with both of these companies and my existing coaching business we ended up having over 60 people directly working for us full time.
Prepare your staff for the sale
Joanna: That’s a significant number of staff then that you have to think about in the transition process as you’re considering a sale I guess. So were there any specific issues that you hadn’t been expecting in relation to that staffing side or preparing for transition as you were looking to sell these businesses?
James: I think I navigated it well because I did a lot of research. One of the things I did was interview a lot of business brokers on my own podcast so that I could ask them a zillion questions and learn all the ins and outs and the gotcha’s and the traps and what the mechanics of selling a business are. I’ve also been involved in almost selling my business and almost buying a few businesses and actually buying and selling businesses before. So I’d seen the process run out so I actually prepared myself quite well.
With the teams, I indicated to them quite early that these business units were going to be sold and that I would be considering how they’re going to migrate to the new owner of the business. And I actually rejected an offer from somebody who was actually one of our original sort of contractors wanted to buy my SEO business and they had no intention of taking the team. They were just going to cut the team and keep the customers and the business and then bring that business into their own business. And I rejected that deal because I didn’t want my team to be made redundant. So I made a values-based decision there.
So one of my selling criteria was that the buyer would offer everyone in the business a job in the new iteration of the business because I had already realized that generally when someone buys the business they’re going to say it’s going to be more of an asset sale where they’re going to take the bits they want and it’s a good opportunity for them to leave the bits they don’t want. And I wanted to make sure that my team were set up properly because they become very important to me and culturally I think it’s a good thing to do.
Build a business for sale
Joanna: And so then you told your staff before you even started looking for a buyer. Is that how the order of progression went?
James: I think the order of progression is on a macro scale. I’ve sort of, before I even left my job nine years ago, I knew that I wanted to create an asset. I needed to build my own business and I wanted the business to be beyond just a job like function, which is what a lot of people tend to do. They just build themselves a job or buy a franchise. So I always had this idea of building an asset so from the very beginning I built this thing as if it’s going to be something I can sell. And then I went through this phase of why would I sell? So I read a few books about selling businesses I read “Built To Sell” and I read another book by a guy called Garson, which is along the lines of building a business to sell. They talked about the reasons why he would and wouldn’t sell and this inevitable situation you get to when you’re just about to sell and you feel like you don’t really want to or it’s scary.
But I also went through this phase where you know what the website development business is definitely not my passion and it started to make me quite angry at times because I’m not a website developer and website developers are a special breed of human. They tend to be attracted to technical roles because they’re not often great with communications with people so they’re quite shy and they prefer to hide behind a keyboard. And they like to just think in zeros and ones and they can be difficult to communicate with. That drove me crazy if they’re messing a customer around or just hiding from the customer, these sort of things. So I wanted to sell it. I just basically came up with this feeling that the business was not worth having because it didn’t make me happy even though it was making me a good profit, my life wasn’t better off because of this business. I’d be better off without it.
So at that point, yes, I communicated to the team that at some point we’re going to package this thing up and we’ll find an appropriate buyer and I’m looking for a buyer who’s going to take them on and that it would be a good opportunity for them because whoever takes on this business is definitely going to be more passionate about the business than I am and that they should celebrate this because the other option is that I just wind it down if I can’t find a buyer and that’s not really winning for me. Definitely not good for my pride. It’s not good for my bank balance and it’s not good for my team. It took us a little while but not too long to field some buyers and to find the right buyer. And we were able to migrate the whole team across. And you know even now, a year and a half later, most of them are – the significantly good ones – are all still there and a couple haven’t made it past that point.
But also, you know, when we handed over the team I also handed over my notes as to who’s who and who should be kept at all costs and who maybe should be checking on their performance because they are marginal. And so I sort of gave my performance notes across. So here’s the team but this is what you want to watch out for.
Learn to balance this fine line
Joanna: It’s really interesting hearing your approach to this because the clients that we deal with appear to be in one of two camps, either your camp or the other camp which is this veil of secrecy around the whole sale process and the prospect that there will be a sale, which of course can create issues I think often for buyers who are coming in when the staff then become aware of the transaction. And of course staff then don’t feel at all a part of the process if they are finding out essentially when the deal is done and when the new buyer is about to walk in the door. It’s really interesting the way you talk about it because I think it’s a good approach and certainly it is a better approach I believe to create a better end result for the buyer of the business at the end of the day.
James: I think I also approached it in terms of seniority. So with the much larger business where there was 38 people involved in that. Obviously my huge risk and concern is that if they don’t like this idea of going to work for someone else they might just all quit. And then my asset goes up in smoke. I mean we don’t have plant and equipment in our business. It’s completely online. So if the team doesn’t want to work for the new owner they could just go and get another job and leave me with nothing. No buyer and no business.
So I definitely approached the senior level early and built them into the idea of how this will work and gave them reassurances. My word really that they’re going to get at least the same scenario they’re on now or a more favourable one. And then we went down a few layers and then closer to the sale then the last batch will know. But you need to balance that fine line between scaring people off or shocking them. And especially in the culture that we’re predominantly working with which is in the Philippines’ culture. They don’t deal well with surprises. And I’d say even in the western world employees generally don’t like to get too surprised. It’s nice to feel like you’ve been an insider than an outsider in your own company.
Joanna: Yeah. And you talk about the specifics of an online business but I really think everything that you’re talking about here is as relevant to any service business, not just online businesses. Any business where there’s a high dependency on the staff and the staff staying on and the knowledge bank of those staff in a new buyer taking on the business into the future. So what surprised, if anything, what surprised you about the process? Obviously you had done a lot of research before the sale as you’ve spoken about, to understand the whole sale process. But was there anything in the process that you found surprising?
Be aware of the surprises in place
James: I think I sort of anticipated most of the things. I imagine the things that might surprise other people would be that almost always when you’re selling a business there can be a sliding scale of how easy or difficult it is for handing over that business or agreeing, before you hand over, agreeing on the sale terms. So obviously there’s your price, and then there’s what do you actually get, and then there’s the legal paperwork side of it, and the trust factor and the payment terms – these sort of things can get interesting.
Generally, I’ve found you can get green lights through most of the process. And then one or two things will stick or hang to the point where you almost call it off. It has happened to me a few times and I now look for that. And I think it would probably shock first time sellers that it can all seem like it’s going great and then there’s one little hook or gotcha or third party or legal technicality or advice from a lawyer or accountant that throws a curly one through the system. I’ve experienced it a couple of times where you get right to that last little bit when it is really hoping it’s all done and dusted. And then there’s this one more sticking point. And it makes you feel frustrated. So close and then these little things happen. So I would expect that. Look out for it.
You’re going to go through a lot of emotion because through the process of making your business very attractive for someone to buy as an entrepreneur we often see all the opportunity and all the extra potential because to sell a business often we’re going to show the buyer how much potential there is just lurking under the hood that can be tapped with very little effort. And then we start thinking what if I keep it and do these things? Am I insane? Would I buy this business? And sometimes we’d say yeah, I’d actually buy this business. Why am I selling it? And we get right to that sort of psychological battle of having to let go.
So I looked for other reasons why I’m selling to really reinforce that, which are also great ways to help your team feel good about it too. So for me a significant one was the split focus that I had between multiple business divisions. And I know that whoever was buying a business if they just focused on that, could do a better job with it than what I was doing, spending a fraction of my time on the business. Then I looked at other things like you know if I keep the business and things don’t change or the market changes unfavourably I could significantly reduce my asset here. So it’s time to get out for that. But I would just say the biggest surprise people could expect is for things not to run smoothly throughout the process.A checklist can help the business sale process run quite smoothly. Click To Tweet
Build a checklist for the transition
Joanna: You pick up on a number of things that I have seen time and time again. The sale or purchase of a business is quite an emotional process for many people. In fact most buyers and sellers because there’s this wave of commitment, non-commitment sometimes by the seller or the vendor as they wave in and out of this wanting to sell it to be on their own terms and then perhaps suddenly not feeling like they may want to sell. And from the buyer’s perspective I am concerned about risk. So this is often the emotional rollercoaster for a buyer often a concern about risk as they go through the process. It is fascinating hearing you talk about it from your perspective because that’s certainly what I’ve witnessed from my side of the fence. And did you end up using a broker? You talked about having brokers on your podcast to talk about as you got to understand the sale process before you went through a sale. So what was your decision at the end of the day in relation to how you conducted your sale?
James: For me selling is a strength and it turns out that I knew the buyers so there was no need for a broker. The only thing a broker might have offered me is potential exposure to more buyers for a fee of course and they might have also held my hand if I wasn’t so strong with the process. So I think a broker makes a lot of sense in many scenarios. It’s just in my case I’m OK with the process of buying and selling and I had the buyers so there was less requirement for a broker. But of course they educated me tremendously and I was able to exchange huge value for them too and give them exposure by being on my podcast. So because of speaking to the brokers and preparing checklists, I already had a pretty comprehensive asset register like a list of everything that’s going to be included in the sale which really was an indicator of what sort of things could potentially go wrong. So we were able to cover all our bases.
For example when you list down the email database then that reminds you they’re going to have to communicate this sale properly to them. And when you list all the website properties you’re going to have the reminder to transfer from one server to another successfully. When you list down payment methods then you’ve got to remember things like how to migrate shopping carts and set up. All of those things ran quite smoothly because we had listed them all out in advance and worked them off literally as a checklist. I actually opened up a document that I shared with the buyers, separate buyers for each business, and went through the checklist of all these things and we just tick tick tick tick by certain timelines until it was effectively completely handed over. And that just left a little tiny little inconvenience of some money shuffles every now and then.
So twice a month I have to send off some money that I collect in trust for legacy accounts that were in Paypal or my credit card facility that customers just stick into because of how long ago I set up the business. I didn’t have a stripe account that I could have just handed over. It’s really really hard to handover Paypal account vs. a stripe account. So if I were to do this all over again I would probably have a separate entity for any business that’s collecting a significant amount of money and have its own bank account and then you could just hand over the lot.
Joanna: Very sensible advice. I think that makes the transition a lot easier. And how about your accountant? Because the Deal Room, many of our listeners are brokers and accountants as well as businesses that are buying and selling. Were there any recommendations that you would have for accountants who were dealing with businesses in the sale process about the sorts of things that you were looking to your accountant for assistance in?
Get your financials and contracts in shape
James: Absolutely. I mean you’ve got to have an accountant and a lawyer involved in that process you’ll be pleased to hear. From the accountant’s perspective, obviously the buyer is going to want to see the numbers so you absolutely have to have your numbers in shape. You’ve got to have your profit and loss. You’ve got to know all your income sources. It’s all going to be up to date. Tax returns, all that sort of stuff would be good verifiable data or data depending where you are. You also have to be able to sort of show historical financials so you’ve got to go back for years. And the other thing that’s really important and maybe not talked about so often is how you treat the sale from a financial perspective can make a significant difference. So in Australia having the business in a certain entity can make a big difference and then you can also, depending on the business size, there are huge things that you can do that if you have a good accountant they can tell you about.
In my case I was able to put a large lump sum of sale price into my superannuation or as Americans will call 401K and get a capital gains discount. So basically your accountant can help you pay less tax on the sale amounts by telling you where is a good place to put it. The motivation isn’t to save on tax necessarily but it’s about putting that money in the right area that’s going to work better for you in the long term. So for me at my age and with the way things are set up it’s quite nice for me to have a little lump sum sitting there in the background at a lower tax rate than burning all that cash right now in my bank account. So there’s that side of it.
And then from the legal perspective, I think sale contract would be a very good idea. And often if someone is coming to you with the offer and the contract, it will almost always be stacked a little bit in their favour. So your legal representative will be able to help you even it out a little bit too. And so I found quite often you have to do some education with your buyer to explain to them that their lawyer is being a little bit over the top greedy, that their lawyer’s version of what they want is all biased towards them having zero risk. And then explain to them that when you’re actually buying a business, there will be some risk and that if the lawyer can’t be more flexible on that there will not be a sale on those terms. So it’s really now a question of are you buying or not? Not that there’s any chance in hell that I would accept those terms.
Joanna: I think a lot of the important elements in making sure these deals get across the line is good communication. Good communication skills is really fundamental to being able to navigate this argy bargy between the fact that draft contracts often will be biased to one side. But there’s a reality – both parties are trying to get the deal across the line at the end of the day in a way that has to work in some way for both parties. Otherwise, the deal won’t get across the line.
I guess what’s your advice to business owners in relation to when to sell? And I think this is an age old question because many business owners when they go into business are thinking about going into the business but they’re not thinking about the exit of the business. If they don’t think early enough about the exit element, often they are in a situation where they might have to exit quicker than they planned and they’re not able to then prepare their business properly for exit. And that can impact the sale price. When do you think business owners should think about selling or preparing for sale?
Get started today
James: Right now. Today they should know their number immediately.
Joanna: And how do you view that then in your current businesses? Are you building your current businesses now to sell one day in the future?
James: One of my businesses is 100 percent built to sell today. I take a cheque for it today and hand it over and like here’s your website, here’s your customers and maybe some SOPs and possibly even a team member to go with it. That’s potentially a scenario. So I’ve built that one to sell. There’s zero personal input from me on that and on that project.Start preparing your business for sale now. There's no better day than today. Click To Tweet
My other businesses is definitely more tied to me. However, if someone cut me a cheque for the right amount, they could have the lot and I would put in a plan to migrate it out of being so personally dependent on me. And I nearly sold one of them before and I also tested a different way of doing business for the other one and it was a success so I actually feel that if I had a long enough lead time which I think would probably be around 2 years to 3 years, I could migrate myself completely out of the business. But I would definitely take a cheque for it now and then pay it off, do the work for two or three years if the cheque was enough. So I think it’s good to know what your number is and the number might be what you would plan to sell it for in the future. And if you could get that today without having to do all that work then why not?
Joanna: Well, it’s a really good point, isn’t it? Why not? That’s it.
James: It’s just a number. It’s like if I said to you I’d like to buy your house, you would probably say no thanks. You know you’re all set up, your kids are there. It’s comfortable. It’s convenient. You’ve got your own plants in the garden and all that. You decorated it. And then I might say well what if I cut your cheque for ten million dollars? You might start thinking hmm maybe I would sell my house for 10 million dollars. And now without knowing exactly where you live and I’m presuming you probably don’t live in a 10 million dollar house, but I might be wrong. If it’s like double the value of what it would be worth to anyone else, you might think well gosh that’s enough for me to build my dream home from scratch in a bigger property right next door or whatever you might think OK well I’ll roll with that so it really does come down to a number with the business. And then it’s just a matter of how much has to be changed for it to work for someone else. Like how much of a business is it versus a job.
Build a business that works without you
Joanna: You’ve talked about building a business to sell and of course that is the mantra generally in relation to businesses that are intended one day for sale. But what does that actually mean to you in relation to how you approach building your businesses or coaching businesses now? Because obviously that’s one of the things that you do at the moment which is coach businesses.
James: It means that it works without you. That’s a business you can sell.
Joanna: That’s nice and simple, isn’t it?
James: Yeah. If it doesn’t work without you, it’s a bit more job-like. You definitely have to allow a commercial salary for whatever it is that you do in the business. But if you’re a consultant with a team of one and you want to sell that then the entire income is tied to your input which means your commercial salary is pretty much the profit of the business. So you have a very low multiple, maybe of one or less, and it will be a hard sell to find a buyer who wants that job. That’s almost what franchises are.
Joanna: Yeah. And so what are you doing differently now, if anything, in your current businesses in light of anything that you discovered as part of the sale process of your previous two businesses?
James: Mostly around just handling money but most other things I think we covered well, like you would have in your website terms and agreements that the database could be transferred to a buyer if the business were sold. These sort of things that might be gotchas for other people. So anything that collects money I think it’s got to have its own account. That would be ideal. And we document every process in our business so that if we do sell one of our websites tomorrow, we could hand over the user manual. So here’s how it works. It’s all there.A business that works without you is a business you can sell. Click To Tweet
Build your business with the perfect buyer in mind
Joanna: Yup. OK. And then I guess just to round it up then. Do you have any general advice that you would give to businesses that are looking to sell in the future in relation to the sale process as a whole or in particular increasing their sale value for that final day of the sale.
James: Yes. So think about, after you’ve thought about your number, think about who this business is going to be perfect for and start building it for them in advance before you even tell them. It’s like Apple making the iPod before people knew they needed an iPod. A great buyer for your business would be the person who should have built what you built for them. It’s perfect for them. They just look at it and think “Oh, we need that”. Like Facebook buying WhatsApp or Instagram. They’re saying “Oh, we should have done that. Let’s buy this business.”
So build your business with the perfect buyer in mind. And that’s, you know, if I retrospectively look at the businesses I sold, I sold my businesses to people who really needed what I had. But wanted to short cut the path to getting it. Instead of waiting several years and going around it the hard way, they could just acquire it instantly for some money.
Joanna: Thank you so much for your time today James! Just a quick recap. In this episode, we talked about business sales from the seller’s perspective. James Schramko from SuperFastBusiness.com walked us through many of the elements that were relevant to him as he built and sold his businesses. And many of the elements that he talked about I think are really important for our business listeners to bear in mind about:
- building your business with the sale in my mind at the end of the day;
- bringing your team along with you;
- building checklists of the steps to transition the business once you’ve got the buyer in place;
- being aware of surprises in the process and that surprises will occur along the way so they don’t derail you;
- knowing your number that you’re aiming for; and,
- building a business with the perfect buyer in mind.
So thanks James so much for coming along. I think it’s been a really useful discussion today. Where can people find out more about your businesses?
James: Well SuperFastBusiness.com is a great place to start because that’s where I publish lots of information. There’s several podcasts on this topic that can be found in the list of all the podcast episodes or the search tool. You might also find your good self there. We did a series about this because it’s so important.
Joanna: We did.
James: Yeah, that’s part of my education process was getting information from the very best.
Joanna: And if you’d like more information about this topic can head over to SuperFastBusiness.com and check out some of James’ podcast or head over to our website at thedealroompodcast.com where you will be able to get a link to James and SuperFastBusiness.com and you’ll also be able to download a transcript of this podcast episode if you’d like to read it in more detail.
There you’ll also find details of how to contact our lawyers at Aspect Legal if you or your clients would like to discuss any legal aspects of sales or acquisitions. We’ve got a great range of services that help businesses both prepare for a sale or acquisition and also to help guide businesses through the sale and acquisitions process. So finally if you enjoyed what you heard today please pop over to iTunes and leave us a review. Thanks again for listening in. This is Joanna on thedealroompodcast.com and James Schramko. See you next time!
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