As many website properties see substantial growth after the first year or two of operations, many business owners feel that adding more overhead will help support their growth. However a business model with less overhead can result in a higher website valuation for a comparable business that is much more capital intensive.
Part of the desire for most to own an internet based company is that most can be run with minimal overhead that brick and mortar business models simply can’t compete with.
As a website business broker, I have seen dozens of internet based businesses that begin with a strong start, see substantial increases in revenues, but because they add on additional (sometimes unnecessary) overhead, the bottom line sees hardly any growth.
In 2009, I have seen many business owners trying to drastically cut back on overhead they once thought was necessary, but as the saying goes, “sometimes more is less”.
For example, one of the most common unnecessary overheard expenses we see is office rent. Sure having a physical presence helps with credibility, but is it really necessary to maintain an internet company’s success? Could the business bring in the same sales revenue without an office?
For most businesses, especially those without inventory or employees, having a $20,000 annual expense for office rent in the financials is definitely going to hurt the valuation in the long run. There are plenty of examples of internet based companies that have office space because it really is crucial to the core operations of the business, but for those who don’t fall into that category, it may be time to consider how to grow revenues with less overhead.
However those who wait to cut back on overhead right before they decide to sell will probably not reap the same reward as they would if they had 6-12 months of financial history to show the positive effects after the cut backs have been implemented.