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Thinking about selling your business? If you’re an entrepreneur you already know that most of the fun comes from the thrills and challenges of creating and growing a business. The day-to-day management quickly becomes boring. In this article we’ll describe the best eCommerce business exit strategy for 2019.
Before diving deeply into how to cash out for maximum profitability, first let’s skim through the reasons why you should sell your business.
When to sell an eCommerce business, and why
You’ve probably put a lot of time, money and sweat into building your online baby. Here are 3 good reasons that should drive you to sell:
- Changes in the marketplace, or in your personal life
- Lack of a long-term plan
- Investors want to liquidate their investments, or they offer a fat buyout
Change is inevitable
Everything in life changes sooner or later. Unless your business model evolves enough to remain profitable, eventually you’ll become a dinosaur.
Do you remember the Great Recession? Anyone who didn’t tiptoe out the door early enough lost their investments.
Smart entrepreneurs see the writing on the wall early in the game. If you smell upcoming changes in government regulations or Amazon policies that might restrict your business model or chop down your profits, head for the exit now.
Don’t worry about missing the peak profitability of your industry. Past financial crashes have proven that sellers always achieve max profitability when eager buyers think a boom will last forever.
Get out when the winds of change first begin to blow. That way you’ll have plenty of cash to start a newer, more exciting venture in a different niche.
Or, maybe you’re just tired of running the same old business. In any case, it’s best to plan your eCommerce business exit strategy long before it becomes an urgent need.
Remember your family members
Also keep in mind you’re not alone in the world – take a breather for personal needs. Many online entrepreneurs forget about wives, girlfriends and kids until it’s too late to repair the damage.
Online businesses are easier to replace than family members.
Is the wife jealous because a business takes all your time? Think about selling now, instead of waiting for a divorce court to sell at a much lower price.
Investors want to cash out, or they make an offer you can’t refuse
Some entrepreneurs borrow money to launch their online businesses, or for expansion. Investors want to know how and when they’ll be repaid.
If you can’t find the money to pay off an investor, then you may need to sell your business.
On the other hand, if an investor offers a buyout for significantly more than you think it’s worth, take the money and run. You’ll soon find other exciting opportunities.
Pump before you dump – the bigger the better
Once you’ve decided to sell, how can you get the most money? As always, the key is to plan far ahead.
The timing of the sale and the size of an online business are the most important factors in determining how much you’ll get.
First let’s look at some statistics – eCommerce businesses are usually sold for prices ranging from a few thousand up to many millions of dollars.
Recent research indicates that about half of the sales in 2018 and 2019 were for $500,000 or less.
The average sale price for an independent online business is about 3x annual profits.
Those are important metrics to keep in mind. They imply that the best way for a small business owner to maximize the sale price is to take steps to boost sales and make the business appear larger during the three-to-six month accounting period before any planned sale.
You’re probably thinking “But I constantly try to increase my sales. What more can I do for an extra boost before selling?”
No worries. Even without resorting to accounting tricks, you can still maximize your sale price.
For example, if your business is seasonal, obviously you want prospective buyers to see the sales numbers increase a few months before you sell.
Because of ego, buyers are likely to think their numbers will be even better going forward.
Selling at the peak of your seasonal cycle is a much better exit strategy than selling at the bottom of a “slow season.”
Well-planned promotions, discounts and other common sales tricks will help by temporarily boosting revenue.
Here’s a word of warning – Even if your buyer is a newbie, don’t “cook the books” or try anything shady to artificially increase the numbers. Your buyer probably has an attorney or adviser who isn’t so foolish. ‘Nuff said.
Smart buyers are looking for certain characteristics
Use the obvious methods mentioned above to increase sales and make your organization look bigger.
Also make sure that your sale prospectus highlights the following important characteristics and metrics that smart buyers look for:
✔ Current marketing plan focused on increasing traffic from diversified sources
✔ Plenty of well-known suppliers, plus some backup suppliers
✔ High percentage of repeat visitors
✔ High percentage of repeat customers
✔ Clean legal and regulatory history
✔ Good reputation and brand without copyright or trademark issues
✔ Well-documented operating protocols and processes
Bigger businesses sell for higher multiples
Another point to keep in mind is that larger online businesses tend to be sold at higher multiples of their annual profits. This is partly due to the psychology of “depth of organization.”
Larger companies are often perceived as more credible and more stable. Buyers are afraid that a single case of flu or traffic mishap can sideline a tiny enterprise.
Even if your business is a one-man shop, it pays to give prospective buyers an impression that your team is much larger.
For example, instead of using a simple “[email protected]” email address, try fleshing out your ghost team with multiple accounts for different roles, such as “[email protected],” “[email protected],” “[email protected]” etc.
These are all good ways to make your company look bigger on paper when you’re thinking of selling.
Likewise, give your organization greater depth by showing more avatars on your site’s “About Us” or “Team” page. Even your helpers with relatively minor roles can still be shown with their photos or avatars and more-important-sounding titles.
This trick may be hard on your ego, but it increases the apparent value of your business in the eyes of buyers.
How to value your eCommerce business for sale
When it’s time to sell, the value of a business is mainly based on two factors – Inventory and “goodwill.”
Goodwill simply means the intangible value of having an established website, customer base and existing brand name that people already know about and buy from.
Goodwill may also include the valuable industry contacts and wholesale sources that you’ll be introducing to a new buyer. Be sure to highlight these in your prospectus.
Inventory is the tangible value of your business, which means the physical objects being sold, as well as such things as servers and office equipment if included.
For eCommerce businesses that sell merchandise, inventory is usually the main asset. An online business is generally sold together with at least enough inventory to operate the business for one month.
Be sure to include in your sale price any extra inventory or unclaimed custom-made items that a new owner can eventually sell.
As part of the negotiation process, you and the buyer must decide whether inventory will be valued according to:
- Original invoice costCurrent replacement (i.e. reorder) cost
- A percentage of retail price, or
- A professional outside appraiser.
As long as you’ve been keeping “clean books” for the business, methods (1) and (2) are the quickest and easiest way to assure the buyer of true value.
Of course, if you must rely on the services of an impartial professional appraiser, then you’ll net a bit less because of their fees. Worse, you might end up with a significantly lower inventory value than expected.
That’s why it’s best to keep the books squeaky clean when you’re planning ahead for a possible sale.
Immediately before the sale closes and a new owner takes possession, it’s customary for buyer and seller to do a “walk through” together to check a final detailed inventory of merchandise and other items included in the sale.
If your inventory has changed significantly during the due diligence process, you may need to adjust the final sale price up or down. Plan ahead to avoid any surprises that might worry the buyer.
How and where to find a buyer for your eCommerce business
Once you’ve decided to sell, and written the prospectus, the next step is to decide how to sell, and where to find a buyer.
Depending on your goals, there are several possible avenues toward selling the business:
- Merger or acquisition
- IPO or ICO
- Private sale
Mergers & acquisitions
A merger with or acquisition by a similar business is one way to sell your online business.
When you want your business to grow but don’t have enough time or money, a deep-pocketed operating partner can do the job with you, or for you.
This has the advantage of letting you watch – and perhaps participate in – the process of taking your brainchild to the next level.
If you want more consumers to benefit from your business, and you don’t care about having absolute management control, this method can be very rewarding.
However, even if you stay aboard with a managerial role, you won’t have the day-to-day autonomy that most entrepreneurs crave. Your brand will also be diluted.
Another drawback is that the acquirer will probably insist that your existing employees must leave. That’s the price to be paid for combined efficiency.
IPO or ICO
Another viable eCommerce business exit strategy is an initial public offering (IPO) or initial coin offering (ICO). With this method, you could sell a big chunk of the business yet still participate in its future growth.
For example, you could trade your equity for a combination of cash and cryptocurrency. You’d stay aboard as an owner while still benefiting from having a professional management team do the day-to-day work.
IPOs and ICOs can work well, yet the drawbacks include regulatory hurdles and microscopic financial scrutiny of the business.
The typical eCommerce business exit strategy for most website owners is a private sale to another individual or company.
Keep in mind – If you’re thinking of selling your Amazon FBA business there are special buyer requirements, so that topic is covered in a different article.
In any case, you probably already know some eager competitors who would jump at the chance to absorb your customer list into their own.
Assuming you receive a fair offer, and also assuming that you’re not thinking of starting another similar business soon, this is a great strategy for cashing out.
It works especially well when you have a trusted employee who wants to take over. You can structure the buyout process however you wish, and stay aboard as long as you like.
By selling to the right person in a private sale, your customers will be well-served. Also, you’ll have the satisfaction of seeing the enterprise you’ve nurtured grow up to the next level. Many owners looking toward retirement choose this method.
Brokers can sell your eCommerce business
Of course, you don’t need to limit yourself by selling to an employee or known competitor.
There are many business brokers who specialize in matching buyers and sellers in various niches. They typically charge 10% to 12% of the sale price.
Or, you can sell the business yourself by posting it on industry and community forums.
Summary of the sale process
To summarize all the above, here’s the best protocol for selling an eCommerce business:
- Make the decision to sell
- Appraise or value your business
- Make a prospectus with all the important facts and figures
- Locate potential buyers
- Negotiate the sale price and terms
- Due diligence – The buyer verifies your facts and figures, and you verify the buyer’s credibility and financial capability
- Exchange your business assets for the buyer’s money
- If agreed as part of the terms, help train the buyer and new employees learn to run your business
It may be hard, but once you’ve made a decision to sell, the process of planning and executing your eCommerce business exit strategy is straightforward.
Best of all, if you’re a serial entrepreneur you’ll now have plenty of time and money to create another new venture from scratch. Wash, rinse, and repeat!