I decided to sell my web design company when we were a top 3 agency within our province for medium-sized websites. We were profitable, had 17 employees and life was good. Naturally I believed I’d find a buyer easily, but I was wrong.
Even though I eventually sold the company to a competitor, I could have saved myself a lot of effort and made a lot more money if I had planned ahead.
This article will talk about the lessons I learned selling my web design business and how you can position yourself to get the most money when cashing out.
Can you sell your web design business?
If your business ceases to make money the moment you personally stop designing websites, it’s nearly impossible to sell.This is especially true if you’re working your butt off and putting in 60+ hour working weeks.
In order to sell your web design business you need profit that’s completely independent of you and won’t require a lot of work from the new owner. It was this realization that changed everything for me, and put me on the path to building tangible value within my company.
Ask yourself honestly, can your web design business be sold? If not, read on.
Assets you can’t sell
Let’s start by looking at the assets someone is not willing to pay for:
- You: not to be harsh, but the buyer won’t give a hoot about you personally. They won’t be willing to pay a nickel for the blood, sweat and tears you’ve spilled building up your business. Don’t take it personally, but the hard truth is that buyers are only looking for tangible value.
- Employees:Â in some cases, where the buyer wants to continue to operate your business (i.e. a turnkey business), they will value employees. They’ll also value employees if they don’t currently offer web design services. But most likely they will want their own people to handle the client work, while laying off any redundant staff.
Even if another company is interested in keeping your team together, it’s almost certainly cheaper for them to hire your staff directly, leaving you with an unviable business (see NDNC below). And if your team has a strong working relationship with your clients, you can expect them to follow; clients almost always follow ‘the talent’.
- Your brand: you may have the sweetest logo out there, and you may even have built up some brand recognition. But unless your brand is so powerful that you can charge a significant premium for your services, nobody will pay for it. After the sale, your brand will slowly disappear and be absorbed into the buyer’s.
- Proprietary software: on the off-chance they don’t already have something similar in-house, they won’t want to pay for your intellectual property unless you can prove it’s profitable or can be patented.
Assets you can sell
Here’s what someone may be willing to part with cold hard cash for:
- Long-term contracts with clients: this is by far the most valuable asset you can bring to the table. People value this because it’s guaranteed revenue.
- History of recurring revenue: this is different than having a long-term contract because it’s not guaranteed. If you can prove that your clients consistently invest a certain amount of money in their website, buyers will pay for this. But expect the buyer to pay less for this kind of revenue because it carries a higher risk.
- Client list: there are two variables that matter, quality and quantity. Someone will pay for recognizable brands that provide prestige, but not so much for ho-hum clients. If you have lots of regular clients, this will also add value.
- Qualified web traffic: you can sell your website’s organic traffic if it has consistently converted into quantifiable leads. If you’re in the first five results on Google for top keywords, you can charge a premium for this.
- Furniture, fixtures and equipment: these items depreciate substantially but can still be valuable to the buyer.
- Strategic value: if you want to get rich from web design, this is where you want to focus. An example of strategic value would be having a dominant market share within a vertical (e.g. realtor websites or e-commerce storefronts).
Identifying potential buyers
There are three types of company that buy web design businesses:
- ad agencies or communications firms looking for in-house resources;
- complementary service providers looking to upsell their services (SEO, I.T. services, print shops, etc.
(In some jurisdictions you’ll find a fourth buyer: countries with strict controls on immigration such as the U.S.A. permit foreign nationals free entry provided they invest a certain amount of money in a local business; if you’re in such a jurisdiction you may find yourself a wealthy foreigner who will buy your business whole, in order to receive a green card. In those cases almost everything you have is a valuable asset because the buyer is starting from scratch.)
If you’re a smaller shop with less than three employees, it’s best to stick to your local geographic area. If you’re bigger, you can have success pitching companies across the country. In this case your angle could be giving them a satellite office in your city.
You’ll also want to consider your areas of specialization, such as Drupal, WordPress, Magento, Linux etc. If you’re a Drupal shop, you won’t have much success pitching an agency specializing in a proprietary Windows CMS.
Once you’ve got a general framework for the types of companies you want to target, the next step is to build a spreadsheet with 20 or more potential buyers along with the names of their decision makers.
Reaching out to potential buyers
The biggest issue you need to overcome is trust. If the buyer doesn’t trust you, they won’t do business with you.
What’s absolutely the worst way to build trust? Cold calling. Do not cold call your list of decision makers. I can’t stress this enough. Of course, if you need to sell your business quickly, cold calling may be your only option. This is why it’s so important to start early and begin this process months, if not years, before you want to sell.
The best way to reach out to your list of decision makers is to build a relationship beforehand. This is a lot harder than it sounds, but will pay off when you approach them about a sale. Here are some ways to build a relationship:
- Introduce yourself in person: cyberstalk them to find out what associations they belong to, what their hobbies are, and the events they’ll be attending. Then construct an opportunity to meet them in real life.
- Communicate through social media: don’t be weird about it, but instead be casual and try to get their attention once or twice a month. This can be as simple as tweeting at them or responding to comments they make on Linkedin or Facebook.
- Comment on their blog: people like being flattered, and a positive comment will increase their opinion of you.
You don’t need to become best friends with them; you just need to avoid being considered a stranger. Even if you don’t sell them your business, having a relationship can be mutually beneficial over the long term.
Now that you’ve got all your hooks in the water it’s time to create a plan of attack. Here’s the process I followed:
- Initial contact: if you’ve built a relationship this should be a ‘warm call’ and will hopefully pique their interest. The objective is to get them to sign the NCND (see below). I avoided talking about a potential sale by saying I had a business proposition, but needed a signed NCND before we could talk about it.
- NCND agreement: a non-disclosure and non-circumvention agreement will prevent them from disclosing your intentions, or approaching any of your clients or employees.
- Your pitch: this is where you outline your saleable assets along with any liabilities.
- Negotiation: hopefully you’ve got more than one company interested, so you have leverage and aren’t at the mercy of a single buyer. Even though the first offer I received was low, I got a sale price higher than anticipated because I was able to pit different interested parties against each other.
- Letter of intent: once you reach a general agreement, the key points are summarized in a non-binding letter of intent.
- Due diligence: this is where the buyer confirms all the facts that you’ve presented during your pitch. This can include contacting your clients and bank, reviewing financial statements, tax returns, website analytics, and client contracts. Make sure you have everything ready beforehand to avoid any delays that could kill the deal.
What to expect
If you’ve done a good job identifying potential buyers and pitching your saleable assets, you should get an offer. The following issues are also likely to come up, so you should think about them beforehand:
- Non-compete clause: this would prohibit you from selling your business and then starting up in competition within a set geographical area over a set period of time (e.g. two years).
- Not allowed to contact old clients directly: the buyer will probably be concerned with the possibility of you convincing old clients to come back to you. This type of clause would prevent you from actively trying to attract them.
- Receiving a percentage of sales in addition to a lump sum: the buyer will probably be concerned with the reliability of income and will want to link payment to future revenue. This is risky because if the buyer does a poor job and runs the business into the ground, you’re left holding the bag.
How to get top dollar for your web design business
By creating the right kind of value within your business you’ll also be building yourself a nice nest egg for the future. Here’s how to build a web design business someone will want to buy:
- Get long-term contracts: try to get ongoing service agreements in writing. If you can’t prove it, it’s worth a lot less.
- Build long-term relationships with your clients: if you lose a client, you lose their resale value.
- Regularly upsell your clients: not only will you make more money on a monthly basis, you’re also improving the client’s resale value.
- Be organized with book-keeping: this will make it a lot easier to prove consistent recurring revenue from your clients. Make sure you save cheque stubs and you itemize cheque sources on deposit slips.
- Build strategic value: a common way to do this is to gain dominant market share in an industry vertical.
Have you sold a web design business? Do you have one you think you could sell, what makes it valuable? Let us know in the comments.
Featured image/thumbnail, business sale image via Shutterstock.