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.