Here’s an unconventional suggestion: you should always have a number in mind.
The goal of the parallel entrepreneur is not to take a company public. It’s probably not even to raise money. Your goal is to grow and then graduate your business into someone else’s hands. After you sell your business, you keep building more.
To make your exit as smooth and fast as possible, you need to do the following from Day 1:
- Make everyone who works with you sign a PIIA. Failing to do this can kill a deal.
- Track your expenses carefully and diligently. Clean books make a clean sale.
- Keep your files organized. Everything you sign needs to be saved! Every contract, employment or contractor agreement, and partnership deal.
- Comment your code as much as possible while you’re writing it, and also have as much test coverage as is reasonably possible.
- Keep your CRM updated. An acquirer will want your CRM too and may pay a premium for a well-kept archive of all your customers, prospects, and related conversations.
While you may not be motivated to build your business to sell it, you’re going to need an exit strategy if you want to continue on your path as a parallel entrepreneur. An exit strategy will give you a framework for deciding when to let go of a business to make room for a new one.
There’s a strong market for profitable B2B software businesses. Exactly the kind of business I described in this book. There’s a growing number of investors, entrepreneurs, and private equity firms seeking to buyout sub-million-dollar-revenue businesses. I’ve spoken to a lot of them, and turned down offers to buy Toofr in a few cases. In the process I’ve learned there are a few things they all look for.
Keep your margins steady and as high as possible
High margins indicate a healthy business. The people who buy small profitable B2B software businesses expect to see margins in the 85% range. Fight your way there if you’re not there already. Negotiate lower variable costs. Be creative if you can and be brutal if you have to. The financial benefits will be well worth it.
If you can’t keep your monthly growth steady, be sure to keep your quarterly growth consistent. Acquirers love to see “up and to the right” charts in your income statement. When you have high margins and growing revenue, you can expect to get 3-4X multiples on your revenue. So For example, if you’re making $30,000 per month, $360,000 per year, and your margins are 85% and you have consistent growth, you can sell for over $1 million in cash.
That’s the reward for running a tight little business. It’s important to keep this in mind as you build and grow. It’s also why SEO is so important. An easy way to grow your business is to grow traffic, and the way to grow traffic is to rank on a larger set of keywords.
Have a number in mind
“I’ve never met a founder who regretted selling his business, but I’ve met plenty who regretted not selling.” — A friend who works in private equity.
Pick a number that would be a meaningful exit. It might be what you have left on your mortgage, or your parent’s mortgage, or the cost of your childrens’ college expenses. Whatever that number is, that’s your number. As soon as you can sell your business for that number, sell it.
Don’t get greedy and hold out for a higher offer. You can and should try to fetch as high a price as possible, but if you land at or above your number, then you need to take it.
Don’t worry about seller’s remorse. You’re a parallel entrepreneur. You can and will spin up another business. Or two, or three. You’re going to do this again, so don’t think about what might have been. Be elated that you took a business from the ground and built it up, extracted a living out of it for a while, and then sold it for a profit, allowing you to start a new business.
Parallel entrepreneurs love to build. That’s why you’re doing this. In order to keep building, you have to let some businesses go. Some will never make it, and you’ll shut them down. Others will do really well, and you’ll sell them. After you sell them, you may have the resources to buy businesses with product market fit so you don’t need to start them from scratch.
Nathan Latka, an entrepreneur, author, and host of popular business podcast TheTop, says, “It’s way smarter to buy a company than it is to start one.” For most of us, though, we need to start and sell a business before we can afford to buy one.
That’s the beautiful cycle of building, running, and selling businesses on the internet.