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\n\t\tOpinions expressed by Entrepreneur contributors are their own.\t<\/p>\n
Many entrepreneurs see building a company and eventually selling it as the ultimate achievement. My first exit happened by accident, and I didn\u2019t even know I\u2019d had one.<\/p>\n
I was 19, mowing lawns because I\u2019d bought a mower, and walking to jobs cost me nothing. The day I landed a real job with health insurance, I planned to just stop. Tell the customers thanks, move on. Then a guy knocked on my door and offered to buy my client list. I had no idea you could sell something like that. I took the money, walked away and spent the next 20 years realizing how many founders<\/a> never figure out what I stumbled into at 19. A small business<\/a> is an asset, and assets have value beyond what their owners think.<\/p>\n I\u2019ve now sold four companies myself and mentored somewhere between eight and twelve other founders through their own exits. Acqui-hires, fire sales, the occasional clean win. Most of these don\u2019t make the news. When you read \u201cacquired for an undisclosed sum,\u201d half the time it means somebody just dodged bankruptcy.<\/p>\n This article is not for you if you\u2019re trying to engineer a $50 million exit. Above roughly $8 million, you\u2019ll be working with bankers and brokers who handle most of what I\u2019m about to teach you. This is for the founder who\u2019d be ecstatic with a $900,000 outcome and can\u2019t get a broker to return a call because the commission isn\u2019t worth their time. That\u2019s most small business owners. According to BizBuySell\u2019s 2024 Insight Report<\/a>, the median small business sale was around $350,000, with the average SDE multiple sitting at just 2.57 times across all industries. This is the range where the most money gets left on the table, because nobody\u2019s in the room telling you what your business is actually worth.<\/p>\n One caveat, and I want to be clear about it. I do not advise starting a company for the exit. Start it because you\u2019re solving a real problem for real people. But the smartest founders I know do both. They solve the problem and structure the business so that when Google comes calling, they\u2019re ready.<\/p>\n If you\u2019re an entrepreneur with aspirations to exit someday, here\u2019s what you need to know before you sit down across from a corp dev team.<\/p>\n This is the lesson the lawnmower guy taught me. A clean client list \u2014 names, what they\u2019ve paid you, how long they\u2019ve been with you over the last three, six, or twelve months \u2014 forms the basis of almost every small business valuation. You can place a defensible number on those customers based on their average annual spend.<\/p>\n 20 customers paying you $20,000 a year? That\u2019s a $400,000 base valuation before anyone even looks at your operation. Most service business owners have never thought about their book of business this way. They think they\u2019re selling their time. They aren\u2019t. They\u2019re sitting on an asset.<\/p>\n The value of a contract isn\u2019t that the customer is bound by it. The value is that they were willing to sign it in the first place.<\/p>\n I\u2019ve watched two nearly identical businesses get wildly different offers because one had signed agreements and the other had handshake relationships and a long track record. The handshake guy was actually more profitable<\/a>. He still got less money, because the buyer can\u2019t underwrite a handshake. A signature is evidence that the relationship is real, the revenue is contracted, and it doesn\u2019t walk out the door when you do. Put it in writing, even retroactively. Especially retroactively.<\/p>\n This one breaks my heart because I\u2019ve watched it kill deals.<\/p>\n EBITDA (earnings before interest, taxes, depreciation and amortization) is the number buyers multiply to land on your valuation. And what do small business owners do every December? They buy inventory they don\u2019t need. They prepay expenses. They run personal stuff through the business. All of it perfectly legal, all of it designed to lower EBITDA so they pay less in taxes.<\/p>\n It may feel smart in April, but it\u2019s catastrophic at exit.<\/p>\n Buyers want numbers. If you\u2019re planning to sell in the next three years, start showing your real profit and pay the real taxes on it. Your financial statements need to reflect what actually happened in the business. You cannot sell your company for seven times the money you spent three years pretending didn\u2019t exist.<\/p>\n I tell every founder I mentor<\/a> that the day you decide you might exit someday is the day you stop optimizing for tax minimization and start optimizing for clean books. The tax savings are pennies. The valuation hit is millions.<\/p>\n A real customer email list is worth its weight in gold. When I sold Black Helmet to a public buyer in 2016, the deal included a list of nearly 200,000 actual customers. These were not scraped names, not free lead magnets, but actual paying customers. That list alone was enough to push the deal across the threshold the buyer needed to justify it internally. They put a price per name based on what it cost them to acquire one through advertising \u2014 somewhere around $2.50 a head.<\/p>\n Do the math on that. If you\u2019ve got a list with real engagement and real purchase history, that\u2019s a line item on your valuation. Most founders don\u2019t even know what their open rates are, let alone what a buyer would pay for the list. Find out.<\/p>\n Here\u2019s a question every corp dev team will ask within the first thirty minutes: what percentage of your revenue comes from your largest customer?<\/p>\n According to FOCUS Investment Banking<\/a>, when a single customer represents too much of a business, the transaction valuation can be reduced by 20-35%. Most buyers start flagging concentration risk above 15-20%, and above 30% you\u2019re looking at serious multiple compression \u2014 if the deal happens at all. It doesn\u2019t matter how good the relationship is or how long they\u2019ve been with you. From the buyer\u2019s perspective, you\u2019re not selling them a business. You\u2019re selling them one customer, and one phone call from being out of business.<\/p>\n If you\u2019re a year or two away from selling, this is the most fixable problem on the list. Diversify. Push hard on sales. Get your biggest customer below 15% of revenue before you ever walk into a conversation. The work you do this year directly translates to multiple expansion next year.<\/p>\n This is closely related, and equally lethal. If the business cannot run without you in it, you don\u2019t have a business. You have a job that pays well.<\/p>\n Buyers will sniff this out instantly. Who handles sales? You. Who manages the key vendor relationship? You. Who knows where the bodies are buried in operations? You. Every \u201cyou\u201d answer cuts the multiple.<\/p>\n The fix is unsexy and slow. Hire, document, delegate. Write down the SOPs. Put a sales manager in place. Train someone to handle the relationships you\u2019re holding personally. A business that runs without the founder sells for meaningfully more than the same business that doesn\u2019t, even if the financials are identical.<\/p>\n Here\u2019s the leverage most founders miss when they\u2019re being acquired by a much larger company.<\/p>\n Say you\u2019ve built a product doing $1 million a year at 30% gross margins. EBITDA of $300,000. Buyer offers you seven times EBITDA, so $2.1 million. That feels like a real number. You\u2019re tempted to take it.<\/p>\n But now look at it from their side. They have 50,000 customers. Your product, dropped into their distribution, can plausibly add $10 million to their top line in year one. You\u2019re not selling them what you built. You\u2019re selling them what they can do with what you built.<\/p>\n That reframe changes everything about the negotiation. The question isn\u2019t what your business is worth standing alone. The question is what it\u2019s worth inside their machine. If you walk in with the standalone number, you\u2019ll get the standalone price. If you walk in with the integrated number \u2014 with the math, the customer overlap analysis, the realistic year-one synergy \u2014 you\u2019re playing a different game.<\/p>\n If you take one thing from this article, take this: according to BizBuySell<\/a>, the average small business sells for 2.57 times seller\u2019s discretionary earnings. Now look at the SaaS side. SaaS Capital<\/a>, which has tracked private B2B SaaS valuations since 2007, reports the current band sits at 5.5x to 8x annual recurring revenue, with the public SaaS Index median at 7.0x. Same revenue dollars, double or triple the exit valuation.<\/p>\n The difference is predictability. Buyers will pay a massive premium for revenue that shows up every month without you having to re-sell it.<\/p>\n You don\u2019t have to be a software company to get some version of this. You can take a service business and platform-ize it. Build a login, a dashboard, a recurring payment system, a deliverable that lands every month for $500 or $5,000 instead of being a one-off engagement. You\u2019re now selling subscriptions instead of services. The multiple expands overnight.<\/p>\n When a lowball bidder opens with an insulting number, founders take it personally. They get angry. They get defensive. They get rattled, and they walk away from the conversation entirely, not realizing what felt like an insult was just the opening offer.<\/p>\n You may be tempted to turn over the table and walk away, but don\u2019t. That\u2019s literally the job. The buyer\u2019s role is to acquire you for as little as possible. Your role is to know what you\u2019re worth and refuse to flinch. It\u2019s not personal, and it\u2019s not your baby. People don\u2019t sell their babies. They sell businesses. You say $8, they say $1; the truth is somewhere around $4 to $5, and the game has officially started. If you don\u2019t have the data \u2014 the customer list, the contracts, the clean books, the integration math, the answers to the customer concentration and key-person questions \u2014 you\u2019re going to lose that game. They\u2019re experienced. You aren\u2019t.<\/p>\n So before you sit down at the table, sit down with forty other tables first. Send 40 cold emails to corporate development teams on LinkedIn. Four will reply. Two will agree to meet. Take those meetings even if you\u2019re not selling. Especially if you\u2019re not selling. The questions they ask you will teach you what actually matters in a valuation. Then build your business so that when the real conversation comes, you\u2019ve got the answers ready.<\/p>\n That\u2019s the whole game. Build the asset. Know what it\u2019s worth, and don\u2019t blink.<\/p>\n<\/p><\/div>\n Many entrepreneurs see building a company and eventually selling it as the ultimate achievement. My first exit happened by accident, and I didn\u2019t even know I\u2019d had one.<\/p>\n I was 19, mowing lawns because I\u2019d bought a mower, and walking to jobs cost me nothing. The day I landed a real job with health insurance, I planned to just stop. Tell the customers thanks, move on. Then a guy knocked on my door and offered to buy my client list. I had no idea you could sell something like that. I took the money, walked away and spent the next 20 years realizing how many founders<\/a> never figure out what I stumbled into at 19. A small business<\/a> is an asset, and assets have value beyond what their owners think.<\/p>\n I\u2019ve now sold four companies myself and mentored somewhere between eight and twelve other founders through their own exits. Acqui-hires, fire sales, the occasional clean win. Most of these don\u2019t make the news. When you read \u201cacquired for an undisclosed sum,\u201d half the time it means somebody just dodged bankruptcy.<\/p>\n<\/p><\/div>\nYour client list is an asset, even in a service business<\/strong><\/h2>\n
Contracts aren\u2019t bureaucracy. They\u2019re proof.<\/strong><\/h2>\n
The EBITDA tax-avoidance trap<\/strong><\/h2>\n
The email list multiplier<\/strong><\/h2>\n
The customer concentration killer<\/strong><\/h2>\n
Take the \u2018what happens if you get hit by a bus\u2019 test<\/strong><\/h2>\n
Technology acquisitions: flip the math<\/strong><\/h2>\n
Build toward recurring revenue (this is the headline lever)<\/strong><\/h2>\n
It\u2019s not personal. It\u2019s not your baby.<\/strong><\/h2>\n
Key Takeaways<\/h2>\n
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