If it all sounds a bit cliche, well…it is. It’s a story as old as the idea of free enterprise itself except that today entrepreneurs can do it without building a skyscraper, laying down a transcontinental railway, or putting a million cars on the road.
The majority of entrepreneurs build their businesses to, one day, sell them. You dream of the big exit, that payday that will line your pockets with enough cash to validate all your work.
Since selling a business is a complex process, there are many obvious pitfalls and mistakes that you can make.
Some of these mistakes can cost you a lot, as you’ll read below, but the good news is that the majority of them are pretty easy to avoid with a little advance planning.
What Are the Top Mistakes?
While this list is by no means exhaustive, below are some of the most common mistakes we see at Empire Flippers when people list their businesses for sale.
#1 Don’t take your foot off the gas
Many entrepreneurs seem to check out once they list their business for sale. They put up the “For Sale” sign and wait around for a big paycheck.
This is one of the worse things you can do.
Unless your business is truly passive, this attitude will result in a revenue slump. You take your foot off the gas and the business starts tanking.
The next month, when you need to update earnings with depressed revenues, be ready for a wakeup call – the value of your business has fallen.
When a potential buyer finds sees the downward revenue trend, they’ll be much less open to paying the asking price. You’ve provided leverage for them to negotiate the price down, or simply deterred them from considering your business in the first place.
The lesson here is simple: Work on your business as if you are not selling it.
It’s common sense, but many entrepreneurs often forget this piece of advice while daydreaming about their big exit.
#2 Don’t wait until the last minute to implement analytics
Every digital, online business should have tracking installed to validate how much and what kind of traffic they are getting.
The two most trusted forms of analytics are Google Analytics (Free) and the third party analytics company Clicky. These are what we use.
The more analytics history you have, the better.
You’ll also want to be diligent about annotating your traffic and accounting for any huge spikes or dips in traffic.
For example, write clear notes if a spike in traffic from three months ago came from a Facebook ad experiment. That way, a potential buyer can understand the history of the business.
You need at least six months’ of analytics history, and the longer your track record the better off you will be.
#3 Don’t skimp on proof of income
Screenshots are great. They are also very easy to photoshop.
Depending on the business, there will be different ways to verify income. A seller should have a way to allow the buyer to see the business’ cash-flow, as well as the expenses tied to the business.
If you have an AdSense or Amazon affiliate site, for example, you could give a potential buyer view-only access permissions to your account.
This is an excellent way to help a potential buyer verify your earnings and build trust between you and the buyer.
Of course, how you show proof of income will vary depending on the monetization strategies you are using. An Amazon FBA business, for instance, would need a detailed P&L (Profit & Loss report).
Whichever monetization strategy you are using, make sure you have some sort of verifiable proof of income.
#4 Don’t list too soon
If your business has only been around for three months, it is unlikely anyone is going to purchase it.
Does it happen? Sure, but not often and the task of selling a business that young is very difficult.
Similarly, asking price and track record have a strong correlation. A business valued at seven figures is going to need a lot more history to attract a buyer than a business priced in the four or five figure range.
At the end of the day, the more history your business has, the better. Not only will it create more buyer confidence, but it can help improve your multiple as well resulting in a higher valuation — which is what we all want.
#5 Don’t overprice
With new sellers especially, selling a business on potential is a super common issue.
There is a lot of emotional investment in the business that doesn’t translate into actual value. It’s easy to overprice your business because of this, and could have an adverse effect on potential buyers.
It is best to sell your business based on what it is doing right now. You can feel free to highlight growth channels that a new buyer can use, but it shouldn’t be the main selling point.
Instead, frame your business so that the right buyer can imagine the potential growth channels themselves.
If you’re hung up on the potential, then don’t sell it yet!
#6 Don’t ignore your business’ shortcomings
One of the best ways to help a buyer realize the growth opportunities for a business is to highlight the flaws.
Many entrepreneurs shy away from this, but a lot of buyers find businesses with flaws extremely attractive – they see opportunity in the untapped potential.
You should be totally transparent with everything about your business, especially the parts where you feel the business is failing.
If you have a SaaS business that has a healthy cash-flow but no marketing whatsoever, then that is a huge opportunity for the right marketer.
If you have a giant content site where the majority of the articles have no internal links pointing towards them, then that is a huge win for an advanced SEO.
More often than not, your business’ flaws can become one of the greatest selling points.
#7 Don’t forget documentation
Running your business, any business really, requires some proprietary knowledge. The clearer the path is for a buyer to take over and get ramped up quickly, the easier it will be for you to sell.
One of the best techniques is to have detailed standard-operating-procedures (SOP) for every position and role in your company — the more detailed, the better.
If you have a team in place that you will be taking to your next project, this is even more important.
#8 Don’t dig your heels in during negotiations
Nothing kills a deal faster than a seller unwilling to work with a buyer.
Selling your business is all about how willing you are to make a deal. Think outside the box, with your end goal in mind. The higher your asking price, the more flexible you need to be with deal terms.
There are other forms of negotiations outside of price. It will come down to what you can get in exchange for the cash you’re asking for upfront. Here’s a short list of considerations in exchange for cash:
Equity – you can keep some equity or shares in the business in exchange for less cash.
Royalties – you can collect a percentage of every sale in return for a lower upfront price.
Monthly payment plan – you can spread out a chunk, or all, of the selling price over a set term.
Include less – you can adjust what’s included in the sale price to meet a buyer in the middle.
#9 Don’t neglect qualifying Buyers
You should have some kind of system to minimize “tire-kickers” who aren’t really qualified to buy your business.
You could have a deposit process like we do at Empire Flippers, where every buyer needs to put down a refundable deposit before they’re allowed to look at the intimate details of the business.
This will help get rid of the “lookie-loos,” and leave you with just the more serious potential buyers.
You can qualify buyers in other ways, of course, such as by having extensive Letters of Intent (LOIs) in place.
The majority of business brokers will take care of the qualification process for you, but if you are selling on your own, you definitely want to make sure you have some kind of process to weed out unqualified buyers.
#10 Don’t ignore professional brokers
Obviously, I’m a bit biased when it comes to using a professional broker. The broker industry can be a shady place, with a lot of fly-by-night brokerage businesses.
Despite this, a good, legitimate broker can make the entire process of selling your business far easier.
Here are just a few benefits worth considering:
Buyer reach – most private sellers will not have an email list of tens of thousands of hungry buyers looking for good deals.
Negotiation & deal structuring – brokers literally live and breathe the deal making process, which can take a lot of pressure off the seller.
Qualifying buyers – remember mistake #9? Pretty much all good brokers have processes in place to make sure only quality prospects are looking at your business.
Market valuation – not sure what your business is actually worth? Brokers are some of the few people around that have their pulse on the market and how much a digital business is going to be worth.
Migrations – this is something we’re about to talk about below, so keep reading.
Every case is unique and this should be a decision you think critically on before selling a business — or buying one, for that matter.
#11 Don’t neglect the transition details
One of the most tedious aspects of selling a business is migrating everything over to the new buyer.
Before you sell your business, you should really consider HOW you are going to transfer the business over.
Create a checklist of everything a new buyer is going to need or want to know when it comes to taking over the business.
Outline everything — content, domain, hosting, product inventory, the various services you are currently paying for that will need to be switched over, etc.
You will also want a way to mitigate fraud here, especially in smaller deals where fraudulent activity is likely to be more common.
The last thing you want to do is to push your business’s website domain to the new owner and have him or her fail to pay for the business, while reaping the rewards of owning the domain.
One way you can mitigate this is by using an escrow service. Even then you want to be careful, because many escrow services will not be overly familiar with the online business space and could make some very bad mistakes.
To come back to our previous mistake about sellers not using brokers, most professional business brokerages have a migrations process already in place.
This takes a ton of weight off your shoulders and is definitely worth considering, depending on what kind of business you will be transferring.
Preparation Is Key
As you can see, these 11 mistakes can really make or break the business sale process.
That is one reason we created a totally free valuation tool, which can give you a rough estimate of what your business would be worth.
Have you sold a business before? Are there any mistakes you see other sellers potentially making?
Leave a comment below and share your wisdom with other entrepreneurs looking to make their big exit to a successful payday.
In our last post we learned that people will potentially pay to file their health care claim forms online, enough to support a business at least. Wahoo!
Now we build everything, right? Absolutely not. Hold your horses, buckaroo, and put that hammer down.
The data told us that a good number of people want this problem solved, and will pay enough to make it worthwhile for us. Now we need to make sure a real product can be built to support this business.
In other words, I want to know: Is our core idea technically possible?
WARNING – PLEASE don’t skip validating if a product and service can actually be built to solve the core problem. I made this mistake a few times in the past, and wasted months and years of time and money as a result.
ClaimSender.com requires a few things to work, some business related, some technical
Business items to confirm:
We need to make sure that insurance companies will accept our claim forms when we fax them in.
Since we’ll be storing health information, we need to make sure our hosting is compliant and affordable.
Our app will fax in claim forms, and that process needs to be HIPAA compliant and affordable.
Technical items to confirm:
The main value proposition of the product is speed and convenience, so we need to collect information from user, and write it onto an existing claim form – then deliver it as a complete PDF.
We will also need to collect a digital signature from the end user, then write it onto an existing claim form PDF.
Let’s walk through these issues one by one, and answer them with the least amount of time and cost.
Issue: Will insurance companies accept faxed in claim forms with a digitally-created signature?
So I called up my healthcare company and asked if I could fax my claim form in. They said yes, and gave me their fax number.
With that in hand, I headed over to HelloFax.com. I uploaded the claim form PDF, filled in the claim info, and signed electronically.
I faxed the form in and held my breath. Ok, I didn’t hold my breath, because claims can take 7 days to make it through the insurance companies’ claims department.
A few days after faxing my claim in I logged into my email and saw a “New claim processed” email from my insurance company. Boom! Success. Total cost? $0. Time spent? 20 minutes.
To make sure the digital signature would count as a legal signature, I pinged Earth Class Mail’s Chairman, Jonathan Siegel. He founded RightSignature, an electronic signature company, so he knows the space well. He gave a big thumbs up.
If you don’t know any experts in the space, UpCounsel.com can serve as a good resource. VALIDATE.
On to the next issue…
Issue: Do cost effective HIPAA web hosting solutions exist?
Storing people’s health information requires the utmost security and care. This requires ClaimSender be HIPAA compliant. I won’t bore you with the details of HIPAA compliance.
In general it means you follow a bunch of strict guideliness on storing and transmitting health information.
A few hours of web searching turned up a few options, including HealthCareBlocks.com, which isn’t too expensive. That works, on to the next issue.
Issue: Can we find a HIPAA compliant fax API?
ClaimSender will fax in healthcare claim forms. Healthcare claim forms contain a lot of of sensitive personal information. We need to make sure our fax provider sends this information securely.
A few more hours of web searching revealed a few candidates, including Phaxio.com. After some back and forth with their excellent support crew, they confirmed their service can pass HIPAA muster when set up correctly.
Their pricing pleases too, so consider this answer a “yes”.
Issue: Can we collect information from users, and write it onto an existing claim form PDF?
I wrote code in a former life, and still fancy myself a developer. A “pretend” coder if you will. Real developers won’t call my code pretty, but I can code enough to test a concept.
To answer this question, I wrote a simple ruby script (I love rails) to see if I could write fields onto a PDF. I tried a few different ruby gems, and landed on the prawn and combine_pdf gem.
I kept the script as simple as possible, just coding enough to confirm I could place text onto an existing PDF. After an hour or so, my script gave me the “yes” I hoped for.
Before we move on, notice what I didn’t do…. I skipped creating a new rails project. I left data design for a later day. I bypassed everything except validating my core question.
My natural tendency is to start building the end app at this stage. After years of learning the hard way, I finally learned to focus on just answering the core question.
Issue: Can we collect a digital signature from the end user and write it onto an existing claim form PDF?
This question proved beyond my meager coding skills. To answer it, I created a small project on Upwork. Upwork runs a freelancer marketplace, and provides a great tool for one off tasks.
They have a ton of developers, which made getting this question answered quick and cheap (< $50).
Do research before posting your project so you can specify as much detail as possible. For our project, I made sure I captured our key requirements before posting the job on upwork:
I knew the solution should use prawn and/or combine_pdf for the PDF manipulation.
A little research led me to this github project to accept the end user’s signature – https://github.com/szimek/signature_pad.
Using what I learned above, I wrote a specific job description with as much detail as possible.
I prefer to post my small projects as a set fee, instead of hourly. That gives me confidence on how much I will pay.
After posting our project, I read the reviews and explored the work history of any applicants.
I can’t stress this enough – READ THE REVIEWS.
If someone doesn’t have reviews yet, proceed with caution. I like working with individual developers instead of companies. I find I pay less and get stuff done faster.
I often ask applicants to write a tiny bit of code using the language & tools asked for in the job to make sure they know what they’re doing.
This also shows you how responsive they are, and how they communicate. Make this something tiny, so you don’t waste their time. I posted my project, chose a freelancer a day later, and within a few hours he delivered validation that things would work.
Boom! That makes us five for five on our questions.
Now what? How can we find out if people will really buy this? Great question. Let’s dive into that with our next post.
In many ways managing a social media presence has become just another thing all companies do, a mindless daily task to cross off your to-do list.
Partly that’s because doing it well requires a lot of time and effort. The activities that tend to take up a bunch of time don’t always result in value for the business.
Earth Class Mail is no different, so we took a lean and focused approach to managing our social channels.
There are a few basic fundamentals you want to build your social media presence on:
Listening – tracking what others are saying about you, your industry, and your competitors.
Engaging – communicating directly with others.
Sharing – building an audience that can relate to and appreciate content that you broadcast.
To execute them effectively we had to make some compromises, be clever, and maintain control while allowing for applications to take over some of the tedious work.
Key 1: Admit your limitations, and focus on one or two channels
Yes, many will scoff at this compromise, but it’s completely necessary unless you have a full-time resource dedicated to engaging across a lot of networks.
If you don’t, then you’re just turning in a half-hearted effort on many channels instead of a world-class effort on one.
That’s the triage decision we made, to focus exclusively on Twitter where our largest and most engaged audience has been.
Frankly, it was an easy decision. We have more followers on Twitter than any other network, we have been using it as a customer service channel for years, and Twitter is just easier to build an audience on than most other networks.
You may have a similarly obvious decision to make, or it may be more difficult. If you’re not sure, ask yourself a few questions:
Where do I hear from customers most? i.e. customers reaching out to you, or mentioning your company by name.
Where are my competitors most active?
Which network am I the most comfortable with? i.e. if you’re already a Facebook power user, follow many brands etc. and get the ecosystem then that could be for you.
Which network is most suitable for my skill set? i.e. each network has a basic premise that is hard to ignore. Twitter is all about short headlines and news. Facebook is extremely image and video heavy. Instagram is all about creating visual stories etc.
In the end, we decided to focus our efforts where we felt they could be most impactful – you should do the same.
Key 2: Automate as much as you can
Anything that you do on a set schedule or with a repeatable process can be automated. We decided on a basic toolset for our needs, here it is:
HootSuite – we use the Free version. There are more features in the paid versions, but we just need this to listen for certain keywords and occasionally reply to mentions or DMs. There are lots of alternatives: Sprout Social, TweetDeck, and Buffer to name a few.
SocialOomph – this is the foundation that everything rests on. It’s the only tool we’ve found that allows you to recycle posts and inject spun content, so that the network doesn’t bounce it back as duplicate. There are no great alternatives that we’re aware of.
Flutter – a great tool, still early in development, but it really helps automate posting content that you can’t easily get from something structured like an RSS feed.
Buffer – you can do a lot with this tool, but we use it primarily as a medium to post content that is being pulled from a structured data source like RSS feeds.
IFTTT – a great, free, conditional logic tool that lets you automagically post stuff to your social profiles via a tool like Buffer. (there’s a lot more you can do with IFTTT)
It’s critical that you take some version of this step to automate your workflow so that you can free up time for the activities that really need a human touch. Auto-replies to mentions and DMs always come off as robotic, so spend your manual time there and let the machines take care of the rest.
HootSuite, Buffer, and IFTTT are all incredibly well documented. We won’t spend time detailing how we use them here, but there’s lots of content already available with a quick search.
Get the most out of your existing content
Queuing up a bunch of content is day one of intermediate social media management, but we took it a step further by putting the content to work for us into perpetuity, or close to it.
That means if we have a slow content month, we don’t need to scramble to fill up our queue again or risk that deadly black hole of silence on Twitter.
SocialOomph actually makes it really easy. They use standard spun content schema, so if you’ve done something similar on the SEO side of digital marketing then you should be really familiar.
Basically, we load up the content of our post and format a bunch of alternate text variations that the program then randomly chooses to Tweet out.
We then set a recurring schedule for posting the content and voila! Suddenly our entire content library is on permanent repeat with multiple unique variations of the post. If you’ve been managing social media for a while, this tool is a game changer.
Use third-party content to improve your profile
Automating re-posts of content from RSS feeds is really easy. That’s how we use IFTTT and Buffer, it’s actually a standard integration you can just plug and play.
Getting content from a non-RSS source posted to Twitter automatically was a totally different challenge. We struggled for a while before accidentally stumbling on Flutter.
Flutter is a pretty basic tool, still being worked on so it’s rough around the edges, but extremely powerful for this use case.
It works by allowing you to choose a CSS selector (the id of an “element” on a page) that it will scrape on some recurring schedule and post to Twitter, or push to Buffer if you choose that option.
This is honestly amazing! You can scrape content from the web version of a newsletter, a subreddit, a blog without an RSS feed, and basically anything else.
Imagine how much more content you have access to that you won’t have to pull and share manually anymore.
Key 3: Communicate with others in a real, human voice
Since you aren’t wasting time with all those tedious tasks anymore, thanks to automation, you can start to have real conversations with others.
As a customer service channel, Twitter has been a great network for us. It’s really easy to react to negative feedback quickly and correct issues, or find those customers that are primed to become brand ambassadors.
We also take the opportunity to just engage with others in a conversational tone. It’s great for prospecting new customers, or simply developing a brand personality that’s relatable to your target audience.
The best part about this approach is the freedom it provides to focus on growing your audience instead of constantly keeping up with maintaining the content. That by itself was worth the initial effort to set it all up.
Simply put, a demand test is an experiment you run to see if there is anyone in the market for your product or service.
It can take many shapes, but for our purposes we focused on setting up a simple lead funnel by buying ads on Google AdWords and pointing those users to a landing page with a lead form.
This type of test is great because:
You can simply buy exposure to users likely to be interested in your product, very inexpensively. That means you don’t need to organically build an audience and you don’t need to have a product, just a pitch.
You can use the landing pages to funnel users through the various value points of your product, from a high-level pitch down to pricing. That means you can gain insights into what exactly is drawing people in or turning them away.
Most importantly, it’s really easy to setup. A focus group or even a basic functioning product are way more expensive and time consuming.
Step 3 – Did Any Customers Show Up?
Congratulations! If you’ve made it this far, you ran some ads to a landing page. Now let’s dig in to the results.
To refresh your memory, we want to answer a few simple questions to better understand if our business idea will be a success:
Question: How many potential customers exist looking for a solution to this problem?
Answer: Ad impressions
Question: How well does your business solve the problem for potential customers?
Answer: Ad click-through-rate (CTR)
Question: How many potential customers can you get to your front door?
Answer: Ad clicks
Question: How many potential customers are interested in pricing for your product?
Answer: Landing page CTR
Question: How many potential customers indicated they would pay you money?
Answer: Pricing button clicks
Question: How many potential customers are ready to buy now?
Answer: Email leads collected
Question: Can your business be profitable? How profitable?
Answer: The metrics from your demand test will help build an initial forecast
Let’s dive into our data to see what it tells us.
The very first question is probably the most important, how many potential customers exist looking for an answer to this problem?
In our test this data is easily accessible, and there’s good news for the future of ClaimSender. Google AdWords shows that there are thousands of daily searches related to healthcare claim forms.
We dig in a bit more and find that our $50/day budget produced 48 clicks/day, with an average CPC of $1.08 (this data is for one day, but it’s representative of the other days in our test).
Our limited keyword test produced a solid number of impressions. A bunch more search volume likely exists for a few reasons:
We set our daily budget at $50, and hit that somewhat early in the day.
Adwords budget alerts told us we could double our budget to get double the clicks at the same cost per click.
We can expand our keyword set to include other health care companies and more niche terms.
This is good news. It means we have plenty of room to grow through paid acquisition.
A quick trip to Google Trends tells us there’s perhaps at least double the volume if we include other healthcare companies besides United and Aetna.
Adding Cigna alone would produce a lot more volume, and a bevy of others exist – Humana, Centene, HealthNet, WellCare, Molina, Magellan, etc.
So the answer to our question is: “enough to keep learning”. No red flags on this step, let’s keep moving.
How well does your business solve the problem for potential customers?
I’ve seen click through rates from 0.01% up to 8% for AdWords campaigns. Our ads clocked in at a robust ~2.9%, a great result for a first attempt.
Hitting nearly 3% on our initial go shows that our ads appealed to people searching for a remedy to their health care claim filing pain.
We struck a nerve!
You can always improve on your first attempt, so the answer here is two strong thumbs up.
How many potential customers can you get to your front door?
Don’t sugarcoat this number. Is it enough to support a business if we convert a reasonable percentage of tire-kickers into customers?
Our ads delivered ~50 clicks per day.
However, our budget and keyword set constrained us. If we cranked our budget up and expanded our keyword set to include other healthcare companies, we could likely make that 50 turn into 150-200 per day.
Pencil in a conversion rate of 0.5% – 2% (some rule of thumb averages, your mileage may vary) and you have your likely customers per day.
If we get 200 interested people to the site, and convert a handful to paying customers, will that be enough to build a business? Perhaps, but let’s cover that in the spreadsheet section. Stay tuned.
How many potential customers showed interest in seeing how much your service cost?
Here’s what they saw after clicking an ad and landing at http://try.claimsender.com/
26.67% clicked the “Get Started” button, one-in-four is not bad at all.
How many potential customers indicated they would pay you money?
As the saying goes, “the proof is in the pudding” and it’s pudding time. We’ll measure this by looking at two things:
Unique users clicking on one of the sign up buttons
The specific sign up button they clicked
These actions tell us the person showed interest in signing up, but you can’t count your money yet. The best thing to do here is to apply a reasonable conversion percentage to calculate signups.
More importantly, looking at which pricing plans people clicked on tells you a bit about what they would pay.
Using the data from Unbounce, we can see that 24% of people that hit the pricing page clicked one of our pricing buttons. Nice!
Diving into Google Analytics to look at the events reveals which pricing tiers prospects clicked on. Most clicked on our free plan (some free will convert to paid when they hit usage limits), a few clicked on the $29/mo option, and one clicked on the $9/mo plan.
The clicks on the paid plans are encouraging. The data lacks enough volume to be valid, but even this amount of data is enough to show that we have something worth further investigation.
How many potential customers are ready to buy now?
These prospects display the strongest interest in your product. Three of the nine people who clicked on the pricing buttons left their contact info for us. Not bad at all.
Even better, it gives you a list of prospects to email so you can rack up some easy signups when you launch.
One thing did surprise me – two of the leads were from 10-25 person healthcare companies. Perhaps there’s a business-to-business product here?
Can your business be profitable? How profitable?
Time to break out the spreadsheets. I’ve created a simplistic one here for you to look at. Our example is a software-as-a-service (SaaS) based business that charges people a recurring fee per month.
For this type of business, we want to model the following numbers:
What we plan to spend on ads
How many customers we can acquire for that cost
How much each customer pays us per month
How many customers leave us each month
The resulting numbers give you the money you’ll be left with to pay for everything else. Those things include every other cost of running the business – per unit costs (if any), all provider costs (hosting, email, rent, software, support tools, etc.), taxes, compensation . . . you get the idea.
By playing with the assumptions in the spreadsheet, we get a sense of how profitable the business can be, and what it takes to make it so.
If we use monthly ad spend of $1,500, a CPC of $1, 1% conversion, an average of $12 per month per customer, and 3% churn, we break even in month 10 and generate a positive $337 in month 12.
If we use monthly ad spend of $6,000, a CPC of $1, 1.5% conversion, and 2% churn, we break even in month 5 and generate a positive $7,563 in month 12.
Results vary DRAMATICALLY with changes to each of those numbers. It’s impossible to know what they will be at this point, but we can use this template to get a sense of what’s possible, and what it will take to make that happen.
Let’s Drop Everything and Build Our Site! Right Now!
No Larry, hold your horses. It’s not time to build yet. Stay strong, and FIGHT THE URGE TO BUILD, BUILD, BUILD. Let me repeat myself, DO NOT BUILD ANYTHING YET.
Let’s dig into the data to deduce our most intelligent next step
Here’s what we learned:
We can buy plenty of clicks at a reasonable cost.
A lot more keywords, forms, categories (dental, vision, pharmacy) and providers exist than we tested.
The strong CTR on the homepage and pricing buttons show demand lurks, ready to turn into signups.
That’s a solid foundation to build on. Let’s make an action item to research how much more search volume exists, and note that optimization can improve our conversion rates significantly over time with testing.
Our financial model gives us a sense of how big this can be. On the low end it appears to deliver a few thousand dollars a month after many months of ramping up.
A more generous interpretation of AdWords demand and conversion rates gives us a nice solo lifestyle business.
Getting leads from small healthcare companies surprised me. Perhaps these types of companies need a solution? Mark down another research item.
This data told us that a good number of people want this problem solved, and will pay enough to make it worthwhile for us to solve.
To paraphrase my good friend and investor in Earth Class Mail, Jonathan Siegel, “the best investments have little risk and high return”.
If we channel our inner Jonathan, what questions do we need to ask to reduce the risk and build confidence in a profitable business?
I want to know:
Is our core idea technically possible?
Is our core idea legally possible?
Will people really buy this? For real? For really real?
How can I get those questions answered most simply?
That’s it for today, but stay tuned for our next post where we dive into the questions above.
At some point or another, most businesses need funding. Maybe you’re just starting out and living off credit cards. Or, maybe your business is in a slump and you need cash to pay everyone.
It’s important to both know your options, and understand them enough to choose the best one for your situation.
Earth Class Mail has a lot of personal experience with this. If you’ve done some searching, you probably found an article or two on the bankruptcy of a “once highly touted Oregon startup”, that would be us.
The most important lesson we learned, and one you can learn from, is not to take on too much debt even if it’s offered.
The second most important lesson, is to clearly understand the type of debt you are taking on. You can read a little more about it in our CEO’s letter, and we’ll come back to it again in an upcoming series.
3 Basic Categories of Funding
Bootstrapping, the badge of honor so many startup founders aspire to wear, is easier said than done. Few are lucky enough to have the savings to do this, and even fewer reach meaningful revenue before they run out.
The benefits of cash are clear. It’s interest free, it’s liquid (i.e. easily accessible), and you don’t have to give up equity.
Cash definitely has its drawbacks too. You’re personally investing much more than you would via leveraging. If you don’t get profitable in time, you will run out of it.
Is this a good idea? It really depends on your run rate, how much savings you have, and reasonable expectations for the growth of your business.
At a minimum though, if you have cash, you should build that into your funding model so that you don’t need to give up as much collateral or equity to other investors.
Probably the most common form of small business financing. To borrow money from an institution or individual you put forward some sort of collateral, then you agree on terms of repayment such as the interest rate and payback period.
If you both agree then you get some money, and they get payments to cover the principle and interest every single month.
It doesn’t matter if your business isn’t profitable, or if you’re making money hand over fist. Those terms are locked in.
Debt financing is a complex field, but here are a few shapes it can take:
Family and friends
It is often easiest to ask those close to you for small amounts of money, relatively that is. Make sure to draw up a formal agreement, no need for lawyers with apps like Shake.
A common option for new entrepreneurs and freelancers because of the ease of access. It’s really only a good option if you have cash flow issues and can repay before the interest charges hit.
If this fits your needs, many credit cards offer cash back so you can easily reduce overall expenses and get other benefits.
Peer to peer
It’s the 21st century after all. There are lots of notable services out there, like LendingClub.com, that will let you secure a personal loan from one or multiple individual lenders. They aren’t investors, you are establishing a lender-debtor relationship.
Line of credit
This can come either from a bank directly, or from a service like Kabbage.com. It’s a lot like a credit card, but with a much higher limit and generally needs to be paid down to $0 each month.
The interest rate is likely adjustable, higher than a fixed rate loan, and payback terms are usually shorter than traditional loans.
A/R Lines or Factoring
If you’ve managed to generate revenue, and have some recurring or expected payments coming from clients then you can leverage that to fill any gaps in cash flow. A great example of this is if your business signs up clients for contracts.
It may take you a year to collect that revenue, but if you need money now you can take that to a lender and say, “give me a little bit less money now and I’ll give you my receivable later”.
Small Business Loans
This is a big category, with lots of sub categories, but we’ll focus primarily here on Small Business Administration (SBA) and Traditional loans.
There are lots of services out there that can take the hassle out of securing a loan, like Fundivo. The service is actually really unique in that it searches multiple lenders for proposals, then negotiates on behalf of your business for the best rates.
Whether you use a service or go at it alone, there are some important things to understand. Firstly, the SBA is a government organization that insures loans for small businesses, much like the FHA does for home mortgages.
Because of that insurance, it’s a lot easier to secure an SBA loan.
They have softer requirements and reduced rates. Traditional loans will be harder to secure, but can have preferential and more creative terms for established businesses.
Most importantly, these types of loans are going to be collateralized. Meaning, some assets will be needed to guarantee repayment in case of default. Think of things such as cash on hand, equipment, and inventory.
Often times, small business owners will have to personally guarantee the loan. So the lender can come after your personal assets to collect on a debt if you default.
That’s not meant to scare anyone away, but it’s a fact of how business loans work. It’s no different than your mortgage being secured by the title on your home, or you car loan secured by the title to the car.
This is the one that makes the headlines you see in your Twitter feed. It’s rare to see something like “new startup secures $100,000 SBA loan”, but you will see stories like “startup raises $50,000 seed round” almost daily.
There are a lot of reasons equity sounds sexier than debt financing, but that doesn’t mean it’s the best idea for every business. It can definitely be a reckless decision to give up equity and control of your company.
Investors do take on all the risk, but in exchange they become business partners. You share your profits, and make big business decisions together.
Equity financing is generally broken down to the stage of business maturity.
This is the earliest stage, often pre-product even. Usually founders at this stage have an idea, a strong business plan for their current stage, and a committed team.
Investors at this stage are often considered Angels, as they are individuals with independent sources of capital. These rounds tend to raise small amounts of money, usually less than $100,000.
All of the product and team caveats aside, you are giving up a lot of equity here because the Angel is taking on a lot of risk. Angel investors will probably lose money on 90% of investments, but that one winner is worth the risk to them.
It could be a great idea for you, or it could be a big mistake. Giving up a ton of equity just because you don’t want to dip into cash might cost you millions in the end.
A company might skip seed funding entirely, or this could be a post seed round. Usually, this round will attempt to raise up to $5 Million and attract professional investors, both individual and boutique firms.
There are a lot of mistakes you can make here. Stock sales are nuanced, and lawyers are expensive.
If you are trying to rapidly grow a company and don’t like the risk associated with debt, this could be a good option.
Series B, C & Beyond
Once a business has grown more established and needs to scale past a certain threshold, it will hold additional financing rounds. There is less equity at stake here, mainly because there is less risk and much of it has been given up already.
Usually a business has proven itself here and already achieved major milestones. This is also a time when most big Venture Capital firms will get involved, as they are looking to invest large amounts into high growth potential businesses.
The most important thing you can learn from this article is that you need to make prudent, clear-headed decisions about your financing options. Most businesses will blend these methods to hedge against the risk of each.
If your business is just starting, slower growth might be ok. If you want rapid growth, but can’t secure an investor – ask yourself why? Don’t immediately turn to debt because it’s easier or more available.
Financing can help you grow a good business faster, but it can’t help a bad business succeed.