Have you considered boarding the ‘WordPress acquisition’ express and cashing in on an exit? Best start preparing early. In our new Gamechangers article, serial entrepreneur Erick Danzer explains how to sell your WordPress business by putting measures in place long before you even consider going to market. He also shares when to sell your WordPress business, since the seeds you plant in the beginning require a special mix of time and tending before a successful exit can be achieved.
Erick is proof that when you take action early to sell your WordPress business, it strengthens the company and its prospects, and ultimately paves the way for profitable exits when it’s time to sell.
Speaking of which…
When Is the Right Time to Sell Your WordPress Business?
“The right time to sell your WordPress business is when you’ve got certain variables all moving in the right direction. This produces maximum value,” Erick says. “Ironically, when everything’s going great is precisely when you will want to sell the least. But it’s also then that you’ll get maximum value.”
According to Erick, most owners are looking to go through a WordPress acquisition for two reasons. Either they’ve grown tired of the business or they’ve made a calculated choice to cash in.
Whatever your reason, there are very predictable things you can start doing years in advance to ensure you get the most possible value when you sell your WordPress business.
It’s obvious that preparations are key to ensuring a smooth sale, but how soon do you need to start structuring to sell your WordPress business in the future?
Preparing to Sell Your Business (AKA How to Make Future You Thank Current You)
In the early days of hustling hard to get your company off the ground, your last concern will be putting measures in place to sell your WordPress business. But while the process involves admin up front, getting a headstart and learning how to sell your business will outweigh the hassle you’ll be faced with in a few years.
“Once it’s done, it’s done, and you won’t have to worry about it again,” Erick says. “When the time comes, you’ll be prepared to sell your WordPress business. Otherwise, this is exactly what’s going to happen:”
You’re, say, two years in, and you’re ready for a business exit, but your financials aren’t clean because they’re not separated from your personal finances. You won’t be able to sell it.
Better to avoid this ☝️
Think that procrastinating on business exit planning is not as painful as Erick makes it out to be? We’ve got news for you…
The Two-Year ‘Sale Tale’ of NextGEN Gallery
If you’re looking to sell your WordPress business, take heed of this cautionary tale:
In 2018, Erick decided it was time to pull the trigger on selling NextGEN Gallery only to find that he would need to legally and financially restructure Imagely for a profitable WordPress acquisition. This unwelcome bombshell forced him to spend two years getting everything in place to net his anticipated value in 2020, proving the importance of preparing to sell your business early on.
But why did NextGEN Gallery’s sale take so long?
“Once you’ve got your affairs organized correctly, from that point forward, you’ll still need to keep it up for at least a year before someone’s going to write a check to buy you.”
On that note, what’s the first step of preparing to sell your business?
Bake In Exit-Ready Practices
In terms of business exit planning, Erick believes that the first point of order is putting your company in an LLC. An LLC (limited liability company) is the American version of a private limited company, with the tax benefits of a partnership and the personal liability protection that a corporation offers.
Once you have an LLC in place, it’s important that you separate your personal finances from the business’s finances. Create a bank account specifically for revenue and pay yourself from it in a predictable way.
Because it’s not your private spending money in the account, you’ll start thinking of it as its own business. It has revenue that comes in and expenses that go out, all of which can be tracked.
When it comes to selling your business, it’s also important to prepare monthly financial statements. Once you have an LLC, make sure that they’re showing up on your tax returns as a separate entity.
Although this procedure may differ based on your geo-location — whether within the US or outside of it — the concept remains the same:
- Keep the records of your business’s profits and losses clean, separate them from your personal accounts, and run the numbers through accounts exclusive to your business.
- Collect government tax returns validating those numbers to ensure that all’s legal and above board.
“No one messes around with submitting financial numbers to the US Government. You just don’t do that,” Erick stresses. “And when you’ve been submitting multiple years’ worth of tax returns to the IRS (Internal Revenue Service) for your business, it will give a potential buyer confidence that the numbers you’re reporting are real.”
But while getting your financial affairs in order for a single product is straightforward enough, things get tricky when you own multiple brands (or in the case of WordPress, usually plugins or themes).
Nobody ever said learning how your sell your business would be simple 😉
Keep Different Brands Financially Separate
Some entrepreneurs choose to sell certain brands and carry on running others. In this case, it’s important that each brand has its own financial statements and bank accounts.
Why? Because if revenue for all of these brands has been clearing into one account, a potential buyer will have no indication of how much revenue the brand they’re interested in is generating, making it that much more difficult to sell your WordPress business for a tidy profit.
In fact, this is the exact problem that Erick faced when he wanted to sell Imagely in 2018. And, as mentioned, he had no other choice than to spend two years rectifying the issue. Simple as it may sound, separating each brand’s financials means that you can confidently provide a potential acquirer with correct financials.
In many cases, however, buyers are not the only ones who need clarity on your product’s money affairs.
Buyers Often Need Loans to Facilitate a WordPress Acquisition
Establishing a separate LLC in advance helped Erick sell his business to a buyer who needed an SBA (small business administration) loan to purchase.
The SBA is a US Government-funded entity that assists small businesses. It stands to reason that when the SBA is considering lending money to a buyer, they need to have access to concrete financial data.
In my case, I submitted tax returns for the LLC to the SBA to assure them that the last couple of years of tax returns proved my company was profitable and growing. The buyer could then prove that the financial metrics they’d received matched what was on the tax returns.
The truth is, most people don’t have the money lying around to fund a WordPress acquisition in cash. For me, selling Imagely would not have happened without these organizational structures in place.
Credible financial records are clearly the starting point for taking a business to market, but how do you determine its value for an exit?
On Profit, Multiple, and Preparing to Sell Your Business
When it finally comes time to sell your WordPress business, neither bank nor buyer will be willing to write out a big check if there’s no financial transparency. The baseline is that you need to make sure it’s credible. But Erick says that after you’ve established credibility, it comes down to focusing on profit and multiple to sell your WordPress business for a good number.
While different profit formulas — some simple, some intricate — are used to calculate business earnings, multiples are used to “compare a company’s market value (price) with its earnings”.
“‘How is profit determined, and what is the multiple I’m going to get?’ are the two critical questions you as a seller need to be asking yourself. There are levers that allow you to maximize the profit number either short-term or long-term by doing different things. Likewise, they can also help you maximize the multiple, if you know what components will influence it going upward or downward.”
But multiples aside, there are different ways of calculating profits in different markets.
How Is Profit Determined When Selling WordPress Businesses?
Erick says that two metrics are usually utilized to calculate profit for WordPress businesses.
“If you’re in a big company or you’re doing a merger and acquisition for $400K to $500K, profit is determined by using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). But in most of our industry, they use something called seller’s discretionary earnings.”
Seller’s discretionary earnings (SDE) is a formula that is often used to calculate profit for smaller businesses and solopreneurs. Besides the actual profit reported by a business, it also factors in the owner’s take-home pay. This point is especially important if you’re looking to sell your WordPress business for maximum profit.
Let’s say you have a $50K plugin company and you’re running it by yourself. You’re doing all the support and everything. You might pay, say, $10K annually for hosting and maybe some marketing or affiliate fees. So if you’re generating $50K in profit of which $10K goes towards expenses, you’re making $40K out of it. If all of that goes into your own pocket, your SDE is $40K. That’s the starting point. And it’s actually a pretty healthy number for a $50K plugin company.
While SDE is an effective formula for solopreneur sellers, it presents difficulties for people like Erick with a team onboard.
The More the Merrier? Not Quite
Selling WordPress businesses for a profit requires trimming down to keep expenses low.
“What you probably don’t want to do is go hire a bunch of people if you’ve been running the business by yourself,” Erick warns. While almost all businesses will reach a point where founders will need to think about scaling, salaried employees will considerably lower SDE for smaller businesses.
When preparing to sell your WordPress business, you need to be aware that most buyers aren’t interested in running your company themselves. Instead, they’ll hire senior employees so that they can continue focusing on growing their portfolio. Ultimately, this will impact your business’s resale value.
To illustrate this point, Erick refers back to the example of the solopreneur plugin business that generates $50K in revenue, of which $10K goes towards expenses and $40K ends up in the developer’s pocket.
“You’re looking to sell your WordPress business and I’m looking to buy it, plus I already have a developer. I’m going to dedicate half of their time to running your business. But that means I’m also going to have to allocate at least another $30K to their salary. So, now the SDE has dropped from $40K to $10K. If we’re working with a 3X multiple, the value of the company has suddenly dropped from $120K to $30K. Just like that.”
What have you done, multiple??
It’s not all doom and gloom, though. Sophisticated buyers understand that there will likely be a big difference in their appraisal of the company versus what the seller thinks it’s worth.
“If your value is $120K and mine as a seller is $30K, it means that we’ll need to meet somewhere in the middle.”
Getting a sales price of — for argument’s sake — $60K from a company that pays you $40K annually is not a bad deal. That being said — what preparation method can you follow to get the highest possible sales price for when you want to sell your WordPress business?
Cut Back for More Money (If Your Conscience Allows It)
Erick says that big companies usually begin by trimming down staff to get to a skeletal team structure. If the company is able to run this way for six months, the financial records will show that profitability has increased, which will help to secure a bigger sales price.
But for smaller companies — where you’re more emotionally invested in the people you employ — laying off employees to sell your WordPress business in the future is not going to be easy. Try to avoid this scenario by:
- Running operations by yourself for as long as possible, especially if you already have plans to sell your WordPress business.
- Keeping your expenses as low as you can to maximize SDE.
Once your profit margin reaches optimal levels, what you really want to do is focus on securing the best multiple.
Multiple Literally Means More
Remember when Erick mentioned the 3X multiple that turned $40K SDE into $120K for the seller and $30K for the buyer?
Depending on a product’s growth and revenue projections, multiples can be as high as four, five, or even six times SDE. Based on the $40K SDE example, this means that a 6X multiple will be worth $240K to you, and $60K to the seller. Meeting halfway would equal a sales price of around $120K.
What Metrics Can Help You Determine Your Multiple?
“First, establish that your revenue is predictable,” Erick advises.
Moving towards a recurring revenue model as opposed to a single model will make a huge difference. The reason is that without recurring monthly revenue, you’ll start at zero every month and will have to make new sales to achieve the same level as the previous month. That’s very difficult. But with recurring revenue, even if you don’t make a new sale this month or the next, you still have the same amount of sales in place. This is what makes your revenue predictable.
In addition to his ongoing involvement with ShowThemes, Erick also works at Reactr and WPRealEstate, lending him the experience to predict the multiple a business could potentially get.
“You need to establish whether your revenue is growing, declining, or stable. If it’s declining incrementally, you’re okay. You’re probably looking at a 1X or 2X multiple on your SDE. But if it’s declining too much, it will be hard to sell your WordPress business,” Erick explains. “But let’s say you have recurring revenue and it’s flat. Out of the gate, you’re most probably looking at a 3X multiple.”
And if revenue is going up?
“You’re looking at three to three-and-a-half, maybe four. It’s very hard to push above four. You need to have a really high growth rate or something else that’s very promising to get to that level.”
But besides revenue, there are other factors that will determine your multiple when prepping to sell your WordPress business:
- What is the quality of the brand?
- Is the software up to date?
- Will the buyer need to rebuild any part of the business from scratch?
- Is the product itself obsolete? In other words, will a buyer be interested in facilitating a WordPress acquisition for another asset, such as your clients?
From LLCs to SDEs and multiples, Erick has offered plenty of sage advice on how to sell your business. In case you’re feeling overwhelmed…
A Recap on How to Sell Your WordPress Business
To summarize Erick’s veteran business tips for selling your business:
- As obvious as it may be, you need to ensure that your enterprise is profitable if you want to sell your WordPress business for a good price.
- Establish your business as a separate entity. Make sure it has an exclusive bank account, tax sheets, and a payment processor. Be sure to separate this from unrelated personal or product finances and data.
- After you’ve separated your company’s financials, try to maintain positive growth for at least one year, drive your profit up if you can, and meticulously document income, expenses, taxes, and all types of conversion and churn.
- After keeping this up for a year, you can start looking for a potential buyer to sell your WordPress business to. Before doing so, you need to determine your multiple. For solopreneurs and small companies, this can be calculated by multiplying your SDE by 1 to 2 if your profit is declining, 3 if your revenue is stable, 3 to 4 if you’re growing, and 4 to 6 if you’ve got something really special to offer.
You need to tick all the boxes to be successful at mergers and acquisitions 😉
On top of this tried-and-tested template, does Eric have any other advice to sell your WordPress business?
Take a Good, Honest Look at Your Business
Difficult as this may be, you need to ask yourself whether you have something that you can actually sell.
If you take a house, that’s an asset with actual, tangible value. But if you own a WordPress business, its value becomes more difficult to determine. You won’t know what it’s worth until you take it to market. But if you’ve created a consistent, credible foundation and you’re profitable in a recurring, stable way, then the answer is yes. You’ve got an asset that actually, truly, genuinely, sincerely has value, and you can go out in the marketplace and you can sell your WordPress business on Flippa for X-amount in 30 days. Or you can work through a broker and try to get a higher multiple by doing a little bit more front-end work to get things prepared.
If you enjoyed this article from our mergers and acquisitions series that explores how to sell your business, be sure to check out Chris Lubkert and Artur Grabowski’s advice about the importance of networking and what Syed Balkhi thinks you should know to chart a lucrative WordPress business exit.