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Outsourcing is the business buzzword of the 21st century, since Tim Ferriss heavily advocated it in his book “The Four Hour Workweek”. Outsourcing can save you a lot of time, a lot of hassle, and can free up a few hours here and there to do other more important things.
But when it comes time to sell your online business, two important factors come into play – how high the profit is, and how much time it takes to run the business. Investors like low-effort high-profit businesses.
To maximize your profit, you would have to keep all of the work in-house and do the work yourself to avoid paying outsourcing fees. But this raises the amount of work needing to be done on an ongoing basis, which makes the business unattractive to any potential buyer.
On the other hand, outsourcing work will lessen the workload, and make the business look better to the investor – but will eat into your profit margin, since outsourcing firms don’t work for free. A classic business catch-22.
So how do you maximize your value by outsourcing the right things without reducing your profitability too much?
Striking The Right Balance With Outsourcing
Let’s have a quick remedial lesson: most online businesses are valued by using the cash flow multiplier. This basic formula takes your earnings (profits) and multiplies them by a soon-to-be-determined multiple. This multiple is influenced by several factors.
What factors influence a multiple? Well, there are a lot of them, but for this article I want to talk about one major factor: the hours needed to work on the business.
Is it better to outsource and reduce the workload, or is it better to keep everything in-house and keep as much money as possible? It’s tempting to outsource everything to everyone if you like an automated lifestyle, but at what cost later down the road?
Let’s examine some situations where outsourcing might make sense.
Can Someone Do This Particular Task Better Than I Can?
Nobody is perfect. Therefore thinking you are capable of doing every single task to perfection is just plain arrogance. Adopting this mindset will stop you from taking advantage of specialists who live and breathe certain subjects, and would be able to whizz through those tasks faster than you.
Examples include SEO (Search Engine Optimization), PPC (Pay-Per-Click), and website analytics. Even someone who can type faster than you could get the soul-destroying, but necessary, paperwork squared away without breaking a sweat.
I Want To Sell. But Will The Buyer Think I Am Too Much Of The Business?
There are a lot of businesses where the owner is the business. And if they leave, the business collapses because the seller takes their talents, knowledge, and name with them. So it is understandable that a buyer may be having anxiety attacks about this happening to them.
How do you head that concern off at the pass? Prove the business is bigger than one person, by outsourcing to someone on a temporary basis to do your job. If they can do the job effortlessly without any damage to the bottom line, then you won’t hear any more complaints in this area. Strike two for outsourcing!
Is My Role As Business Owner a Highly Technical Or Specialized One?
A new owner wants a business which is high-profit, low-maintenance. So if they see they would have to step into a role where they will have to wear technical or specialized hats, they may decide to back out, and look for easier opportunities elsewhere.
So it may be savvy business sense to outsource the technical and specialized stuff to outside companies and individuals. This will prove to a potential buyer that the owner doesn’t have to be in those roles for the business to succeed.
Is This Work As Tedious As Watching Paint Dry?
Not everything connected to a business is glamorous. Just look at doing the accounts during tax time to see a classic example. But there are also many other tasks within the company where watching grass grow would be considered more interesting and exciting. Tasks which may not add anything to the appeal factor when it comes time to selling.
Maybe it might be practicable to outsource those? That way, a buyer will see that they won’t have to spend their days packing orders, licking stamps, and making constant inventory updates to the website.
How Much Are You Working For, Per Hour?
We’ve just looked at some situations where outsourcing would make sense, for your sanity, and for when it comes time to sell up. But at the same time, if you are losing money hand-over-fist to the outsourcing companies, then a potential buyer down the road is not going to look too kindly on seeing their profits marching out the front door. Outsourcing doesn’t always make sense. You need to balance the cost against the actual time you are saving to run the business.
So before outsourcing everything to live a life of luxury, it’s time to break out the calculator and do some hard sums. Yes, it may actually make more financial sense to do some work yourself. So what do you need to do? Work out your hourly rate.
It’s not difficult. Let’s take a look at Bob Jones, who runs Widgets R’Us. Bob spends 10 hours a day, 6 days a week at his job, which comes to 60 hours a week. His average monthly earnings is $10,000.
$10,000 a month means $2,500 a week (widgets are a very profitable business). If he is working 60 hours to make $2,500, then his hourly rate is just over $41 an hour.
So why was it necessary to figure out Bob’s rate? Well, let’s say you are doing the bookkeeping every month, and it is taking up 20 hours of your month. For Bob, that would be the equivalent of $820 ($41 x 20). Now let’s say that John Smith of Happy Accountants comes along, and offers to do the books for $500 a month. If Bob takes John up on his offer, even though he would lose $500 in profits every month, he would still be saving $320 in time, which he could use in some other area of his business.
Are You Really Being Efficient?
But before signing any agreements and breaking out the cash, first ask yourself if you could do the job, but faster and more efficient. The books are taking you 20 hours a month – is there anyway to do them faster? Can you find automation scripts online to make things go faster? Can you take a crash course in Excel to make the cells automatically calculate everything for you? Is it worth investing in software such as Quickbooks?
Even customer service can be automated and scaled down to a certain extent by maintaining an extensive and detailed FAQ on your website. You would be amazed how many people will find the answers to what they are looking for there, and not bother you with a pointless email.
If you don’t want to hire anyone to do the technical and specialized aspects of the job, to reassure buyers, how about writing a detailed manual for them instead? You can even include pictures.
Will Doing X Make My Business Look Good To a Future Buyer?
Doing the sums to figure out your hourly rate is always good information to have. But sometimes you have to put aside the advantages in terms of time and earnings, and instead look at it in terms of transferability. This means how easy or difficult it is to move the business to new owners as seamlessly and effortlessly as possible. It’s obviously the number one concern with investors, who don’t want a messy handover.
So even if it makes no sense to outsource, you may end up having to do it anyway in order to make the business look good later. Tough decisions come with being an entrepreneur. The trick is to make the right decisions.
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