As an entrepreneur you’ve have spent a lot of time, money and other resources to build and grow your ecommerce business, that you want to sell now. But, how do you proceed with the sale? Pointers below will help you to prep-up for the sale of your eCommerce site.
Selling a business successfully is a benchmark that almost every entrepreneur seek to achieve. It provides a nice monetary reward, is an incredible learning experience and lends a great deal of integrity to them for future endeavours.
The process of selling an eCommerce business is complex and challenging. This article will outline the whole process involved. Thus, will make you more confident to move forward with the sale of your ecommerce business.
For easy and quick understanding, the article has been divided into following sections:
- Why sell your eCommerce business?
- Do valuation of your eCommerce business.
- Prepare your eCommerce business for sale.
- Hire a business broker
- Get ready with marketing materials like prospectus.
- Listing your eCommerce business for sale.
- Evaluating Buyer Offers
- Signing a Letter of Intent(LOI)
- Due Diligence
- Purchase agreement
- Closing the sale
- Transitioning period
Why sell your ecommerce business?
1. Motivations can be many
May be the entrepreneur has a limited bandwidth or maybe there are better business opportunities where you want to invest your money and time. Whatever, maybe the motivation behind the sale of an eCommerce business, you get to experience exiting a business successfully. This will contribute to your growth as an entrepreneur.
Massive transaction costs are involved in selling a business. For instance, if your business earns $300,000 a year and is selling for 3X multiple, then you can safely assume that you’ll be paying $180,000 plus a 10% fee to your business broker leaving you net $648,000.
Hence, if you set out to buy a similar business or asset with that cash inflow you will get one that generates $216,000 a year. So, plan not to lose on your earning capacity while selling your eCommerce business.
3. It’s an intensive process
It takes a minimum of 6 months to sell an eCommerce business. Preparing the business for sale, listing it on the markets, inviting buyer offers, convincing them that it is a good deal, closing the transaction and transition with the ownership - all this takes time. But, a business broker can effectively reduce this time period by leveraging his experience in ecommerce deals and extensive network of ready buyers.
Do valuation of your ecommerce business?
Seller’s Discretionary Income(SDE) is profit before tax plus owner’s compensation. Ecommerce businesses usually sell for a multiple of SDE. Let’s say, a business makes $200,000 in pre tax profits and the owner withdrew a salary of $100,000 then the SDE will be $300,000.
Typically the multiple of an ecommerce business varies between 15X to 20X. But, due to messy financials, future competition, and owner dependence, small ecommerce businesses are considered to be risky investments. Hence, it’s multiple lowers down a bit.
3. What does the multiple then depend on?
The multiple depends on the following factors:
1. Growth and performance history
2. Future prospects
3. Market Size that can be tapped
4. Entry Barriers
5. Organized financials and processes of the business
6. Owner’s involvement required - so that a new owner can also run the business easily
7. Health of profit margins
8. Management of working capital
9. Size of the ecommerce business - larger ones command higher multiples
4. Valuation of inventory:
Only if the business has more inventory than its usual level of operations, then its value will be added over and above the multiple based valuation. For example, if the company typically holds 50% of its monthly sales as inventory, and at the time of sale, if the inventory level is more than 50% of sales, the excess value will be added separately to the valuation.
Prepare your eCommerce business for sale?
You may add a lot of dollars to the final selling price, if you start preparing 6-12 months before time. Because of your foresight and planning, you may add up to 50%-100% to the final price. Do the following, to get the maximum reward out of your eCommerce business for sale:
1. Lean operations: The owner of an eCommerce business should not make any long term investments in the business in 12 months leading up to the sale. Because the more dollars you save, higher are the chances to get return anywhere between 1.2X to 3X in the transaction.
Also if, you use any softwares or subscriptions then you can buy an annual package of it to get discounts, or you can altogether cancel things that you normally don’t use in the business.
2. Organising books of accounts: If you want to send the right signals to prospective buyers of your ecommerce business, then you may hire a good bookkeeper. Buyer will require less diligence to recreate your financial statements and hence they’ll be able to offer you better deal terms and sale price.
Hire a business broker
Hire a business broker, if you are unable to dedicate your time to the sale process. They’ll hand hold you throughout the transaction from beginning to end especially when they’ve experience helping sell multiple ecommerce businesses in the past. They will help from preparing sales prospectus to getting and evaluating a buyer
Get Ready with the Marketing Materials.
To smooth out a sale transaction, firstly you need to prepare a sales prospectus which is basically a very detailed sales brochure. This can give a prospective buyer, a good and deep understanding of your business. A good sales prospectus can again add more dollars to the final selling price of your ecommerce business.
A good prospectus should have, history and origin of your business, reasons behind selling your business, detailed financials, expenses,list of vendors and suppliers and traffic analyses, inventory with turnover rate, technology used and list of products and prospective opportunities for growth.
DON’T disclose things like your best selling products, your suppliers or anything crucial which is proprietary to your business or trade. Share this only if you’ve received signed letter of intent(LOI).
Listing your eCommerce business for sale
You can list your business on multiple investment banking platforms or sale sites or take your business broker’s help for the same. A business broker will generate interest of prospective buyers in his network by sending them a high level brief about your ecommerce business for sale.
Evaluating Buyer Offers
There are 2 things you should look at while evaluating buyer offers which is financial details and the person making the offer.
Let us first take a look at financing.
Financing: This includes the modes in which buyer will pay you.
1. All cash deals: In this case, you get upfront cash payment from buyer. It makes a clear cut transaction that is closed quickly and leaves you with no unpredictable financial junctures. It is usually good to ask for the proof of funds to double check them.
2. Owner financing: In this, seller of the business essentially lends the money to the buyer for purchase of the business which will be paid back in installments. It’s recommended to avoid this mode, even though it brings in interest payments additionally.
3. Bank loan: This is less risky than above two options. You’d need to ask the buyer about their credit history and net worth to check if they can take loan from a bank to successfully buy your business.
4. Earn Outs: The payment is structured as earn outs, when the seller’s valuation expectations are much higher than the buyer’s offer, to meet the future growth targets.
Evaluating a potential buyer: It's best to also know the person or entity that has made the offer to buy your business. You’d ideally like to sell to someone you can trust and can have a well thought out contract with.
Signing the letter of intent(LOI)
It’s time to sign LOI once potential buyer agrees with the deal structure and terms. After this you’ll move towards due diligence and finally official closing.
What an LOI should cover?
LOI should cover final price and mode of finance of the buyer. It should include, due diligence time period before closing, conditions on which deal is terminating. Market materials, website, inventory, training period, procedural funds and refund time in case the deal doesn’t go through- all this is mentioned in a Letter of Intent.
It is important that important issues are disclosed in the initial stages of discussion itself rather than waiting for the due diligence stage. Deals fall off even after signing LOIs as it allows the buyer to walk away from it if they find something unfavourable or manipulated in the business.
Next, the buyer will conduct a due diligence to examine the facts stated in the sales prospectus and will look for hidden or manipulated facts. Be prepared to answer every question related to vendor agreements, financial statements, marketing campaign performances etc.
Previous year’s bank statements, detailed financial, tax returns and expenses statement,detail of system and process used for eCommerce business, all software accessory and tech. Keep all the documents and things ready for the buyer’s diligence.
There are two ways in which one can purchase a business, either Asset purchase or Share purchase.
Share purchase happens when the buyer simply buys the shares of the company and in turn gains control of the company. Asset purchase happens when buyer just buys the assets which are valuable for the company and not the shares.
Most small businesses are sold through asset purchase rather than sale purchase.
Depending upon the type of purchase, the owner will first draft an initial version of the agreement, with the help of an attorney.
The document goes back and forth between two parties till they arrive at some mutual agreement.
Closing the Sale
If the buyer and seller both agree to sign the final asset purchase agreement, the deal comes to a close. You may hold the funds in an escrow from the buyer before you have delivered all necessary deliverables to the buyer.
You’re done with the complex part of the deal process. You may choose to train the new owner of the business and help them transition into the new role. It gives you goodwill in the market for future business sale/purchase transactions.
Crux: Don’t rush in exit planning and assessing your website’s value.Take the time to understand how you can raise your site’s salability. Be confident that the time, money, and skills you free up by selling are put to a good use.
Fuel additives are fuel-soluble chemicals added in small quantities to enhance the properties of the fuel, improve fuel handling and fuel performance. The rapidly increasing demand for hydrocarbon fuels from transportation and power industries have
Facility Management (FM) refers to the use of a third-party service providers to maintain a part or entire building facility in a professional manner. It is increasingly gaining popularity amongst commercial as well as residential clients driven by
Automobile industry facing a tough time as vehicle demand is sluggish. Valuations of companies on the lower end. Autocomponent industry is also expected to witness a flat growth this fiscal because of weak automobile demand. The industry will remain
Fitness industry in India is worth Rs.4,500 crore and is growing at 16-18% annually and is expected to cross Rs.7,000 crore by 2017. The industry is fragmented with majority of the market dominated by unorganized and independent gyms outlets. The
Low utilization rates and weak demand from realty and infrastructure sectors is driving consolidation in the Indian cement industry. More mergers & acquisitions are expected in the medium-to-long-term as valuations are attractive to buyers and
Demand for electronics hardware in India is projected to grow at 25% compared to only 15% growth in production, expected to create a demand supply gap of Rs.14.8 lakh crores by FY20. This creates a unique opportunity for electronics companies
The ecommerce space in India is still evolving and companies have limited history. Many of them function at negative operating cashflows and are dependent on investments from venture capital firms. Using traditional valuation methods like DCF
The food processing industry in India is getting a shot in the arm with increased focus from the governement and policy makers, higher involvement of scientists to help increase food processing productivity, and establishment of mega food parks
The Staffing Industry includes companies which list employment vacancies, place applicants in employment, supply temporary workforce and all other employment related services. Market size of the Indian staffing industry was INR 26,650 crore in 2014
Global acquisitions by Indian IT firms rising with a majority of the transactions happening in Europe and North America. Primary reasons driving these acquisitions are increasing local presence in the US and Europe, acquiring employees with a
Advertising spends in India are expected to grow 12.6% year on year to Rs 48,977 crore for the year 2015. The ad spend in 2014 was Rs. 43,490 crore, which reflected a 12.5% increase over 2013. Firms in the advertising industry prepare advertisements
The worldwide ERP software grew by 6.4% in 2014 to reach $27B market size. The segment is anticipated to garner $41 billion in sales by 2020 with a CAGR of 7.2% during 2014-2020. ERP software is second fastest growing segments within Enterprise
It is widely believed that India has not fully leveraged its strength in the Manufacturing sector in the last decade, but the sector is expected to emerge stronger in next decade as companies innovate and adopt new business models. To support this
Pharmaceutical industry seems to be entering a growth phase after a muted growth over the last few quarters. Valuations of pharma companies fairly high as they are expected to perform. Indian Pharmaceuticals industry is the world’s third largest in
The Indian restaurant industry is highly unorganized and fragmented but is getting rapidly organized with Quick Service Restaurant (QSR) segment leading the way. Private Equity and Venture Capital firms have shown increased interest in this sector
The salon industry in India is largely unorganized but is getting organized at a fast pace. The average per person spending on salons in India is a miniscule of spending in other countries such as the US, China and Malaysia. Even a small growth in
India is world’s second largest producer of textile and apparel after China. China is slowly reducing its focus on textiles and this has had a positive impact on the Indian textile and apparel industry. But not everything in the garden is rosy as
Since we are an online platform running at a large scale, we do not do in-person meetings and would not be able to resolve queries over phone calls in an ad-hoc fashion. We request you to create a profile on SMERGERS with the link below, so the concerned analyst can get in touch with you for any clarifications required before activating the profile.
Alternatively, if you already have a profile on SMERGERS, we request you to send us your question over email (email@example.com) so the appropriate team can revert with proper resolution or contact you over phone to clarify your doubts. It would be difficult for us to assign the right person without knowing your queries.
We noticed that you have disabled cookies on your web browser. In order to login and get a good experience on the platform, we suggest that you enable cookies. Click here to see how to enable cookies on your web browser.
Customize for your location
You are currently viewing the results from SMERGERS worldwide. Click below to select your location.