{"id":1393,"date":"2024-09-19T19:17:32","date_gmt":"2024-09-19T19:17:32","guid":{"rendered":"https:\/\/founder-exits.com\/?p=1393"},"modified":"2024-10-14T12:37:58","modified_gmt":"2024-10-14T12:37:58","slug":"selling-too-soon","status":"publish","type":"post","link":"https:\/\/founder-exits.com\/selling-too-soon\/","title":{"rendered":"The Perils of Selling Too Soon"},"content":{"rendered":"\t\t
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The simple math illustrating why selling a year too early will harm your sale price.\u00a0<\/i>Unless<\/i>you\u2019re selling to a fellow engineer, then it\u2019s a great time to sell!<\/i><\/b><\/span><\/h2>
\u00a0<\/i><\/b><\/span><\/div><\/div>

Recently, I had a conversation with a seller who was facing a dilemma between two successful projects and needed to sell one of them.\u00a0<\/span>The business he decided to sell was in great shape. It was experiencing growth, had achieved product-market fit, had a solid customer base, and generated about $100,000 in annual recurring revenue (ARR) with a 95% profit margin.<\/span><\/p>

\u00a0<\/span><\/p>

He was trying to sell it for $400,000, a respectable 4x multiple.\u00a0<\/span>However, here’s the catch \u2192 When you’re selling a business for $400,000 that nets $95,000,\u00a0<\/span>but the seller needs to be replaced<\/span>\u00a0by a new developer,\u00a0<\/span>the multiple for the buyer changes significantly.\u00a0\u00a0<\/span>So, how much does it cost to hire a skilled developer nowadays?\u00a0<\/span><\/p>

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Some might say $14\/hour from {<\/span>insert cheap-labor country name here}<\/i>.\u00a0<\/span>(<\/span>Note<\/span>: That’s not exactly a strategy for long-term success, but let’s consider it as a “best case” scenario.<\/i>)<\/span><\/p>

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That would amount to $27,000 in annual costs. Let’s round it up to $30,000 to account for additional expenses associated with hiring a new person (licenses, currency conversion fees, etc.<\/i>).\u00a0<\/span>Just like that, we’re looking at a $400,000 company that would only net $65,000 per year.\u00a0<\/span><\/p>

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Suddenly, with a 6x multiple, it becomes less attractive<\/span>.\u00a0<\/span>And that’s assuming the cheapest and best-case scenario. Personally, I prefer not to solely rely on cheap-labor “<\/span>outsourced<\/i>” engineers to run a business.\u00a0<\/span>So, this option was not suitable for me from the beginning.<\/span><\/p><\/div>

I advised the seller that he was selling too early. The business didn’t generate enough cash flow for most of the potential buyers to replace the seller just yet.<\/span><\/p><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Selling Too Early with No Replacement Plan<\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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These situations of selling too early occur quite frequently on <\/span>certain marketplaces<\/b><\/span><\/a>.<\/strong> The sellers often overlook the fact that they spend 40-60 hours a week working on the project, and the buyer must consider the cost of replacing the seller.<\/span><\/div>

In such cases,\u00a0it would be better to continue running the business for another year<\/b>, aiming for $200k ARR with $175k seller\u2019s discretionary earnings (SDE). This way, the cost of replacing the seller with a $30k developer wouldn\u2019t significantly impact the buyer\u2019s multiple.<\/span><\/p>

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This approach significantly expands your pool of potential buyers,\u00a0leading to more favorable sale exits.<\/b><\/span><\/p><\/div>

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COUNTER-POINT: Selling to Dev's \/ Engineers<\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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There\u2019s always another side to these examples. The business could still make sense for sale at $400,000\u00a0<\/span>if<\/b><\/i>\u00a0it\u2019s sold to another developer.<\/span><\/div>
\u00a0<\/span><\/div>

In my DevDriven Acquisitions<\/span> <\/strong><\/a><\/span>newsletter, I highlight what a fantastic deal this is a developer looking to transition from a corporate job to working on a project that could generate around $100k per year.\u00a0<\/span>While this isn\u2019t a deal I would pursue personally,\u00a0<\/span>it presents a\u00a0<\/b>great<\/b><\/i>\u00a0opportunity for an engineer who wants to own a six-figure business ready for growth.<\/b><\/p><\/div>

\u00a0<\/span><\/p>

Same coin, but two sides\u2026\u00a0<\/span><\/p><\/div><\/div>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

The simple math illustrating why selling a year too early will harm your sale price.\u00a0Unlessyou\u2019re selling to a fellow engineer, then it\u2019s a great time to sell! \u00a0 Recently, I had a conversation with a seller who was facing a dilemma between two successful projects and needed to sell one of them.\u00a0The business he decided […]<\/p>\n","protected":false},"author":1,"featured_media":2014,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[11],"tags":[],"class_list":["post-1393","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-selling"],"acf":[],"_links":{"self":[{"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/posts\/1393","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/comments?post=1393"}],"version-history":[{"count":46,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/posts\/1393\/revisions"}],"predecessor-version":[{"id":2460,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/posts\/1393\/revisions\/2460"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/media\/2014"}],"wp:attachment":[{"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/media?parent=1393"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/categories?post=1393"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/founder-exits.com\/wp-json\/wp\/v2\/tags?post=1393"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}