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Sell Your Ecommerce Business for Maximum Value: Your Complete Exit Guide
By Ian Drogin
Selling your ecommerce business is a significant decision that has far-reaching implications on all aspects of your life—personal, professional, and financial. As such, it’s important to do your research in order to craft an effective strategy to help you reach your exit goals. Typically, those goals include maximizing value, negotiating favorable deal terms, and experiencing a smooth transition.
In this article, we discuss several important elements to be aware of when selling your business. These include:
- Steps you can take to maximize value and prepare for a successful exit
- How to determine your business’s value
- How to choose the right business broker
- Where to list your business for sale
Five Things to Do Before You Sell Your Ecommerce Business
The process of selling your ecommerce business starts well before you actually list it for sale. In fact, it’s best to plan 12-24 months ahead to ensure you’re taking the right steps to maximize value and ensure a smooth transition.
Here are several key steps you should complete before going to market:
- Get your financials in order
- Establish clear documentation
- Make sure your business can be easily transferred to a new owner
- Focus on high-growth activities
- Reduce business risks
Get your financials in order
Your financial statements play a critical role in all aspects of selling your ecommerce business. First of all, without them, it’s impossible to perform an accurate valuation.
Your financial statements reveal key elements about the performance of your business, each of which is used to determine its value. Therefore, before a valuation can take place, it’s important to make sure you’re able to provide monthly profit and loss statements on an accrual basis.
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If you’ve currently been using cash accounting, this step can take a bit of work. Typically, it’s best to hire a professional bookkeeper who specializes in working with ecommerce or Amazon FBA businesses. CapForge is one such company with extensive experience helping ecommerce owners implement effective bookkeeping practices.
“Your financial statements reveal key elements about the performance of your business, each of which is used to determine its value.”
The reason accrual accounting is important is it reveals a more detailed picture of your business’s performance. For example, by looking at monthly P&L statements on an accrual basis, you could potentially identify trends and seasonality data that would otherwise be overlooked if you’re only relying on cash accounting. Not surprisingly, these details are essential when it comes to identifying your business’s growth trajectory, as well as its opportunities and weaknesses. All of these are important for potential buyers to understand when evaluating acquisition opportunities.
Additionally, effective bookkeeping practices provide you with invaluable insight while you’re still the owner. When you have a clear dashboard that shows revenue and expenses in an organized manner, it’s significantly easier to understand what’s happening in your business. The added visibility bookkeeping provides enables you to make smarter decisions that lead to growth and sustainability.
Establish clear documentation practices
Bookkeeping is just one element of documentation, which plays a critical role in your business’s value.
Just as financial statements tell your business’s story, third-party documentation proves that story is true. In other words, it’s not enough to put together a pretty spreadsheet showing your business’s P&Ls. While that step is essential, you also need to back up the numbers with clear documentation.
During due diligence, the buyer will want to verify your financial statements using third-party documentation. For ecommerce businesses, documentation typically includes banking statements, Amazon Seller Central reports, supplier invoices, ecommerce website reports, and advertising reports, to name a few items. Essentially, anything that verifies your ecommerce metrics should be included in your documentation.
If you haven’t been keeping track of these documents, it’s important to spend some time creating organized folders for each documentation category. Doing so will save you significant time and energy when you’re in the middle of negotiations. Additionally, effective documentation instills confidence in potential buyers.
Documentation also refers to your standard operating procedures. Generally, it’s best to document all of the operational activities that take place in your business. This enables you to provide a sort of “owner’s manual” to the buyer, allowing them to have a clear road map for operating your business. Not only will they appreciate this step, but it will also make your job significantly easier during the training and transition process.
“Generally, it’s best to document all of the operational activities that take place in your business.”
Make sure your business can be easily transferred to a new owner
Building a profitable business is great, but it’s also important for it to be easily transferable. Before going to market, you should take some time to remove any barriers that could prevent your business from easily transferring to a new owner.
Fortunately, a lot of ecommerce businesses don’t have significant transferability barriers. This is especially true if your business is built primarily on an established ecommerce platform such as Amazon or Shopify. In today’s investor environment, there are plenty of buyers who have the experience and skill set to scale an acquired brand.
Certain ecommerce brands, however, can encounter transferability challenges. For example, if your brand is intimately tied to your personality and likeness, that could be an issue when trying to sell your ecommerce business. Typically, buyers are going to shy away from businesses that require a particular individual to constantly drum up brand awareness.
If you find yourself in that situation, it’s best to remove your likeness from the business’s branding. Instead of relying on your social media profiles, perhaps try to focus on content marketing, Google ads, or affiliate marketing. This will make your brand less dependent on your personal presence, making it more appealing to buyers.
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Focus on high-growth activities
Focusing on high-growth activities is a great way to maximize SDE and establish positive trends in your business. Both of these elements will go a long way in helping you maximize value and attract interested buyers.
There are many ways to grow your ecommerce business, including:
- Increasing your advertising campaigns
- Launching more products
- Implementing content marketing
- Improving email marketing
- Expanding to new markets
- Partnering with affiliates
“Focusing on high-growth activities is a great way to maximize SDE and establish positive trends in your business.”
Of course, these are just a few possible avenues for growth. Each business is different, so it’s important to identify the most promising opportunities for your particular brand. If you can plan 12-24 months ahead, there’s a lot you can do to maximize your trends before it’s time to sell your ecommerce business.
Minimize risks in your business
Minimizing risks in your business is another key step that can help you increase value and appeal to more buyers. There are several steps you can take to reduce risks and increase stability:
- Launch more products
- Eliminate single points of failure
- Secure your branding and any IP
- Sell in relatively stable markets
If your business relies on just one or two products for the majority of revenue, that could be an issue. If one of those products stops performing, your business could be in trouble. Offering many different products online, on the other hand, ensures that your business isn’t overly reliant on a single SKU.
Similarly, try to look for single points of failure in other areas as well. For example, if one supplier manufactures 90 percent of your products, consider branching out to other suppliers. Or, at the very least, establish backup suppliers that can step in if something happens to your supply chain.
Additionally, make sure your brand is trademarked and any other intellectual property is protected properly. Doing so can help reduce the chances of an infringement against your brand.
Lastly, businesses that sell in relatively stable markets can enjoy an added level of security. Products such as bath towels may not be flashy, but it’s unlikely that people are going to stop taking showers anytime soon. Generally, deciding on a category is something that happens early on in your business’s lifecycle. It’s still something to keep in mind when launching new products, however.
Understanding the Value of Your Ecommerce Business
Your business is likely your most valuable asset, so shouldn’t you have an idea of how much it’s worth? Understanding the valuation process allows you to make smart business decisions that steer you in the right direction.
How ecommerce business valuation works
Like most online businesses, ecommerce brands are valued using the SDE multiple method.
SDE stands for seller’s discretionary earnings and is your business’s profits taken before taxes, interest expenses, owner’s benefit, noncash expenses, one-time investments, and any unrelated income or expenses. Essentially, SDE reflects how much money your business generates for a single owner.
To calculate SDE, an Advisor reviews your financial statements and makes a detailed list of the expenses mentioned above. This list is referred to as an add-back schedule because it’s “added back” to your business’s net profit to determine SDE.
Because there’s a lot involved in knowing which expenses qualify as add-backs, it’s best to get help from an industry professional (i.e., a broker) when going about the process. Even missing just one add-back expense could cost you tens of thousands of dollars in SDE. Once the multiple is applied, that number could double or triple (or more), leading to a significant loss in value.
“Essentially, SDE reflects how much money your business generates for a single owner.”
After establishing your SDE, that number is multiplied by the multiple. For example, let’s say your business has $500,000 in SDE and is valued at a 3x multiple. Based on this, your business is worth $1.5M ($500k x 3 = $1.5M).
There are four primary elements that determine the multiple. At Quiet Light, we refer to these as the Four Pillars of Value. They include growth, risk, transferability, and documentation.
Growth and Risk
We discussed each of these elements above, but they’re worth mentioning again. All else being equal, your business will be worth more if it has a positive growth rate. Additionally, it’s important that your business has growth opportunities.
For example, when you’re selling your business, make sure to understand how the next business owner can continue growing the business. This could include identifying product launch ideas that could be easily executed, including a digital product. Or, it could mean crafting an ecommerce marketing strategy the prospective buyer can implement following the purchase. The more growth history and potential you can demonstrate, the more valuable your business will be.
Just as growth leads to a higher valuation multiple, risk has an opposite effect on the multiple. Therefore, you always want to find ways to minimize risks in your ecommerce ecosystem before going to market.
Transferability and Documentation
All else being equal, businesses that are easily transferable and have strong documentation practices will be valued at a higher multiple. As such, it’s important to spend some time to ensure your business is well organized and easy to manage. Even if that doesn’t lead to an immediate increase in profitability, the value will come back to you when it’s time to sell.
“Just as growth leads to a higher valuation multiple, risk has an opposite effect on the multiple.”
Where to Sell Your Ecommerce Business
Once you have a broad understanding of the sales process, it’s time to move forward. There are two general paths you can take when going to market: sell directly to a buyer, or work with a broker.
Selling your business directly to a buyer
Some owners consider selling their business directly to a potential buyer without the help of a broker. If you choose to go this route, you’ll likely need to list your business on an online marketplace. Once you start getting inquiries, you must then screen potential buyers, negotiate, complete due diligence, and close the deal. Unless you’ve already been through the process several times, it can feel a bit overwhelming. Needless to say, there’s a lot at stake when selling your online store.
Selling your business yourself can be a smart move if it’s a relatively small brand (e.g., <$100k in value). However, for larger businesses with a higher cash flow cycle, there’s significantly more at stake. This makes it extremely valuable to have support and guidance throughout the process (more on this below).
For Amazon businesses, it’s not uncommon for an FBA roll-up company (a.k.a. aggregator) to reach out to sellers directly. When this happens, they’ll generally request that you not work with a broker or list your business for sale publicly. While it can certainly be tempting to sell your ecommerce business to the first interested party, sellers should be very wary about pursuing such deals. You wouldn’t sell your home to the first person who comes knocking on your door, so why would you sell your business that way?
Selling to an aggregator
Selling your FBA business to an aggregator can be a great choice. If other buyers don’t have the opportunity to make offers, however, you’ll likely receive less value and less favorable deal terms at closing.
Before signing a purchase agreement with an aggregator, it’s best to publicly list your business for sale. Doing so allows other potential buyers to make offers, thereby putting upward pressure on the purchase price. You can still sell your ecommerce business to an aggregator if you’d like, but at least they’ll be forced to pay fair market value.
Working with a broker
Another option is to work with an experienced broker who specializes in online business exits. While this route requires you to pay a success fee at closing, the added value and confidence they provide more than compensates for the fee you pay.
Typically, a skilled broker can help you receive more offers, a higher purchase price, and more favorable deal terms. Not to mention, they’re able to provide support and guidance through the many complexities that accompany the selling process. Some of the core activities they help with include:
- Providing a fair and accurate valuation
- Offering guidance on how to increase your business’s value
- Creating a marketing package
- Providing access to a large network of qualified buyers
- Screening potential buyers to help you avoid “tire kickers”
- Negotiating and structuring the deal
- Facilitating due diligence and closing
“A skilled broker can help you receive more offers, a higher purchase price, and more favorable deal terms.”
How to Find the Right Business Broker to Sell Your Ecommerce Business
Given the importance of the selling process, you want to do your research to ensure that you choose the right broker when selling your ecommerce store. There are a few key elements to pay attention to when making your decision about whom to work with.
Experience and qualifications
It’s best to work with a broker who has extensive experience selling ecommerce businesses. If they have proven success selling businesses similar to yours, that’s a promising sign.
If a business broker has experience with ecommerce exits, they’ll understand what elements buyers care about the most. This knowledge allows them to help you take proactive steps to maximize your business value and appeal before going to market. In some cases, this can mean helping you implement a few small but high-leverage changes. In other cases, it may include crafting a longer-term strategy to help you sell your ecommerce business in 6-12 months from now.
“At Quiet Light, all of our brokers are experienced entrepreneurs who have been in your shoes.”
Brokers who specialize in brick-and-mortar businesses, on the other hand, will likely be unable to evaluate your small business with the same level of detail. After all, knowledge about ecommerce SEO and advertising isn’t relevant for most brick-and-mortar businesses. Even if they understand the general selling process, they probably won’t be equipped to provide personalized recommendations and guidance.
In addition to their experience as a broker, you should also pay attention to other business experiences they might have. Have they built and sold an online business themselves? At Quiet Light Brokerage, all of our brokers are experienced entrepreneurs who have been in your shoes, either as a buyer, seller, or both. Our team fully understands what it’s like to go through the process because we’re entrepreneurs, just like you.
Honesty and integrity
Business brokers should always conduct themselves with absolute honesty and integrity. They should have your best interests at heart and provide you with helpful and actionable guidance to sell your ecommerce business. Sometimes, this means advising you to hold onto your business for another year or two to maximize value. At other times, it means sharing disappointing information about how much your business is worth.
Unfortunately, not all brokerage firms act in the best interests of their clients. In certain cases, brokers will inflate valuation figures in order to lure clients into working with them. That can lead to listing your business for sale at an inflated initial offer price, only to be forced to drop the price later. If a broker immediately spits off a high valuation without thoroughly examining your business first, that could be a sign that they’re not being honest.
If you work with a broker who has integrity, on the other hand, they’ll let you know what they believe your business is truly worth. Armed with accurate information, you can make a fully informed decision about whether or not you want to go to market. After all, it’s your business, and you should be the one calling the shots.
Thinking of Selling Your Business?
Get a free, individually-tailored valuation and business-readiness assessment. Sell when you're ready. Not a minute before.