Tuesday, March 17, 2015

How to Sell 'Ecommerce Business' For Maximum Value?

You have an ecommerce business that you’ve put a lot of time, effort, and sweat equity into growing, and now you’re looking to sell. Your objective is to get maximum value and you’re assessing steps to prepare for the sale. There are a multitude of variables to consider and in this post, we'll cover them all to maximize the price you receive when exiting.

Let's get right into it.

What is your ecommerce business worth?
What an ecommerce business is worth is relative to your individual business, the market and what potential buyers are willing to pay. However, there are some common questions to consider, including:
  • What are the sales?
  • What is the profit?
  • What are the growth trends?
  • What is driving new sales and is that sustainable?
  • What channels do new customers come from and what is the breakdown of each channel?
  • What is your market position?
  • How reliant is the business on the owner?
  • What systems and processes are in place to run the business?
Part of the valuation process is looking at historical sales of ecommerce businesses and comparing your business to those. The following graphs represent 245 sales with a total transaction value of $117 million (sum of all the businesses) between 2010 and 2014.

The most important figure in this data is the 2.51 average multiple. This is the average multiple of yearly profit that the average business sold for. For example; if a business sold for $100,000, with a multiple of 2.51, that means that the business was making was $39,840 in profit per year ($100,000 divided by 2.51)

The multiples range from 0.5X to 6.6X in this distribution graph. This means if you have a business that makes $100,000 in net profit per year, the valuation range is from $50,000 to $660,000. Visually what you can see from the graph is that most businesses sell between the 1.5X – 3.0X range. This backs up the commonly held belief that a small to medium business sells in the 2-3X valuation range.

What makes an ecommerce business worth more?
The amount a buyer is willing to pay for your ecommerce business will all come down to one thing, return-on-investment (ROI) and relative risk. The lower the risk, the higher the price and vice-versa. With that being said, what really makes your ecommerce business worth more is mitigating the risk of the business failing in the future by having the following characteristics associated with your online store:
  • Predictable key drivers of new sales
  • Stable or growing traffic from diversified sources
  • Established suppliers of inventory with backup suppliers in place
  • Traffic stats (Google Analytics or other) with a long history
  • High percentage of repeat sales
  • High percentage of repeat visitors
  • Clean legal history
  • Brand with no trademark, copyright or legal concerns
  • Documented systems and processes
  • Growth potential
What does the average ecommerce business sell for?
Ecommerce businesses can sell for as little as a few thousand dollars to hundreds of millions if not billions of dollars. This graph shows the data we analyzed which are typically businesses in the $100,000-5m revenue range. However, don’t worry if you have a smaller business than this. We discuss tactics and places to sell a smaller ecommerce store as well in this post.

Are bigger ecommerce businesses worth more?
In general, the larger the ecommerce business, the more that it is worth. Here is how you understand this graph below. Let’s say that a business sold for $75,000. On average that would mean that it’s yearly profit was $32,500 ($75,000 divided by 2). Another example would be a business that sold for $500,000. On average that would mean that it’s yearly profit was $208,000 ($500,000 divided by 2.4). Similarly, a business that sold for $2 million or (learn what makes a million dollar ecommerce business in this article), on average that would mean that it’s yearly profit was $770,000 ($2 million divided by 2.6)

When is the best time to sell your business?
There is never the ‘perfect time’ to sell your business. Sometimes you are forced to sell because of external circumstances; sometimes you get presented an offer that is too good to be true. However for the scope of this article the best time to sell your ecommerce business is when there has been sustainable growth. Growth is tracked in yearly increments. Let’s take the following example:

- Year 1 - $180,000
- Year 2 - $365,000
- Year 3 - $780,000
- Year 4 - $690,000

In the above example, the best time to sell would have been late in year three. You don’t want to make the mistake of selling your business once you've lost interest, and the business is starting to decline. This can significantly impact the size of the offers your receive.

How does the selling process work?
The selling process if fairly straight forward but can be more complex and take more time depending on the size of the business. In general, most sales will be structured like this:
  • You decide to sell
  • You get a valuation of your business
  • You develop a prospectus (all the facts and figures about your business)
  • Find potential buyers for your business (whether you use a broker or sell it yourself)
  • Negotiate a price with potential buyers (total price and also terms of the deal)
  • Transfer the assets & money
  • Help train the new buyer to run your business
  • How long will it take to sell your business?
The time it takes to sell an ecommerce business depends on individual business and terms of the deal. Generally though, larger deals (over $1 million) will take longer to sell than smaller deals (under $200k) because of the complexity of the business and also the risk that a buyer is taking. If your business is a micro business (under $50k) it might only take a week or two to sell privately on a marketplace like Flippa. 

The graph below represents the summary of all the deals that we have completed and the time it took to complete them on average. As you can see, over 50% of deals close within 90 days and over 70% close within four months.

Where can you sell your business?
Small Business Marketplaces – best for smaller businesses (under $100k) – Smaller business and micro-businesses are usually best sold privately by the owner through forums or classified websites.

To sell your small business, check out:
  • Flippa - the best marketplace for buying and selling small ecommerce businesses
  • Shopify Forum - the Shopify forum is also a good place to list your smaller ecommerce business
  • Experienced People Forum - a forum about buying and selling websites
  • SitePoint Forums - the original place that you could post your website for sale before flippa.com
  • Warrior Forum - one of the original internet marketing forums a great place to find potential buyers for your business
  • Broker – best for medium businesses ($100k - $5m) - Medium sized businesses in the $100k-$5m are best sold through brokers who help with finding buyers, negotiating and structuring the deal. 
To sell your medium sized business, check out:

Digital Exits
- Investment Banks – best for large businesses ($5m +) – Larger businesses are best sold through investment banks or merger and acquisition companies.

To sell your large business, check out:

- Founders Investment Banking - great if your business is making over $3m dollar profit per year.

Who will buy you business?
They are a lot of potential buyers on the market for ecommerce businesses. Through experience, many of them fall into one of the following personas: 
  • Corporate Guy – This is someone looking to buy his or her first business. They usually are a high paid employee or C-level executive with disposable cash, IRA, savings or access to an SBA loan.
  • Baby Boomers - As the “baby boomer” generation retires, there has been a spike in new tech-savvy individuals looking for new investment opportunities as new projects or ways to fund their retirement.
  • Established Internet Entrepreneurs - Individuals who have been in the industry for a while and have a good understanding as to what it takes to run a digital business. They are either fresh off the sale of their last business or looking to add a business to their portfolio.
  • Established Brick and Mortar Entrepreneurs – Generally brick and mortar entrepreneurs who have exited or still own their company and are looking for a move into the digital space.
  • Private Equity Companies – Companies that look to keep the existing management in place and grow the business through varying sized stakes in the business. Usually, private equity firms purchase larger businesses.
  • Media companies – Similar to private equity companies but they have more of a specialization in digital companies and media. A large public example is demand media’s recent ecommerce acquisition.
Why do buyers say "No"?
Sometimes a sale falls through or a buyer says “No”. Some common reasons include:
  • They don’t like the business
  • They don’t like the niche
  • Something wrong with that stats or data
  • A buyer finds something that makes them reconsider their offer
  • Seller wants more money than buyers are willing to pay
  • Trends with particular business or market
  • Issues with transferability
  • Financial, branding or product condition of the business
  • Or maybe the funding for the buyer just falls through
  • Tips On Getting The Best Deal And What To Avoid
When deciding to sell your ecommerce business, consider the following tips to ensure to receive maximum value and offers: 
  • Deal terms matter much more than total price. For example you could sell your business for $500,000 to one buyer and finance the wholesale and risk not having the repayments being made OR you could sell your business for $400,000 and receive it all in cash upfront. I would personally choose the cash in most cases.
  • Sell your business when you are still growing to ensure you you get the highest valuation and sales price.
  • Competition helps. Having more than one offer not only increases your chance of closing a sale but also helps increase the offer of other parties looking to secure the deal over their competition.
  • Seller financing offers typical receives a higher overall selling price.
  • Use anchoring in your negotiations. Start at a higher asking price and negotiate down. Make sure everyone feels they win the negotiation, you will have to work with this person for a period after you sell the business.
  • Be patient, especially in negotiation. Pushy selling and sales tactics don’t work when selling a business.
  • Document everything in the purchase agreement. Everything that you have negotiated needs to go down on paper. You will have no legs to stand on down the road when trouble starts to happen in the deal and you have a verbal agreement on something.
  • The value of your business can go down in due diligence if the buyer notices problems in the business. Be aware that the offer might change after the due diligence period.
Selling your ecommerce business can be a difficult decision for many entrepreneurs. No matter the reason, there are multiple options for you to find a buyer and sell your business and following the tips in this post will ensure you receive maximum value for your business. 

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