For many eCommerce store owners, the thought of selling the business they’ve worked so hard to build has never even crossed their mind.
However, for those entrepreneurs that have had their eyes open to the possibility, and the large cash infusion that happens when they sell a successful eCommerce store, wanting to sell turns from a dream into a reality.
Before you rush out and start listing your eCommerce business for sale, you are going to want to understand how the process works.
Knowing what you’re getting into before you list the business for sale can help you prepare yourself, and your business to ensure you’re going to get the highest value possible and get the business sold as quickly as possible.
Balancing making a quick sale while avoiding leaving any money on the table is one that many entrepreneurs have problems with. Some sell quickly by lowering their sale price, while others will hold onto the business far too long because their asking price is above the market norm.
This article is going to break down what you need to do before you list the business for sale so your chances of maintaining that balance are higher than they would be if you simply listed the business for sale right now.
Why Selling Can Be A Good Move
One of the questions you’re going to have to answer for yourself, and for your investors when you’re working through the negotiation process is “why are you wanting to sell your business?”
You’ll want to know so you can reassure yourself that you are making the right move, and your investors are going to ask to make sure you’re not trying to dump a failing business on them and haven’t hidden anything that could cost them big once they’ve acquired the business.
Here are some of the more common reasons entrepreneurs decide to sell:
- They’ve identified new opportunities they want to capitalize on.
- They have grown as an entrepreneur and have gotten bored with their business.
- They want to experience what making a profitable exit feels like.
- They’re burned out from devoting so much effort to growing the business.
On top of the many different good reasons people decide to sell, there are also a few things you should keep an eye on when you do start preparing your business for an exit.
What most entrepreneurs don’t consider when they’re wanting to sell is:
- Selling a business can have high transaction costs associated with it.
- Selling your business can be more stressful than flying on a plane with a baby.
- Selling your business can often take quite a bit of energy and time to complete.
- Selling your business will leave you with ample amounts of free time and money.
While that last one may seem like a benefit, having a large amount of free time available to you, along with a large amount of money can be a recipe for disaster — leading you to fill your spare time with spending money.
You’re going to need to figure out how you’ll spend your time once the business has been sold, and ensure that you’re adequately prepared for getting into the sales and negotiation process.
How To Value Your Business
In general, most eCommerce businesses that are generating less than $1,000,000 per year in sales are going to be valued at a multiple of their SDE, or seller’s discretionary earnings.
Your SDE is calculated by combining your pre-tax profits and your own compensation.
To give you an example, if your business generated $200,000 in profits last year after giving yourself a $75,000 salary, your seller’s discretionary earnings would be $275,000.
Investors will use your SDE to determine how profitable the business is and how much they can expect to realistically earn if they buy the business from you.
When it comes to using your SDE in placing a value on your business, you can expect between 1.5 times your SDE to 3 times your SDE. The multiple your business receives depends on a few different factors.
Each of the factors that affect your SDE are:
- How your business has grown and performed since its inception.
- The size of your market and your future prospects for growth.
- How you can defend the viability of your business model.
- How you have organized and structured the business.
- How much involvement you’re required to have to keep the business running.
- Your profit margins and the level of working capital your business requires.
- How in-demand your business is, and the current market trends.
- The size of your business — larger businesses tend to fetch higher multiples.
A business that has experienced declining revenues over the last 3 years, has poorly organized financials and systems in place, and has been mismanaged could receive offers of 1.2 times the yearly net profits.
On the other side of that same coin, a business that has built a strong brand, has proprietary products, and has shown consistent growth over the last 3 years could fetch a 3 times multiple, or higher in some cases.
As you can see, there’s a lot that goes into figuring out how much your business is worth. If you don’t have experience putting a value on your business, reach out to investors you know, or speak with a broker that can help you work through the valuation process.
Preparing Your Business
It’s always best to give yourself plenty of time to get your business sold. If you realize that selling your business may be a good move for you, you’ll want to give yourself at least 6 to 12 months before you put the business on the open market.
Properly preparing your business before you list it for sale can mean the difference of hundreds of thousands of dollars.
When you’re entering into the planning phase, you’re going to want to start running the business as leanly as possible. Start focusing on dwindling down your expenses, putting systems in place to operate the business even if you’re not a part of it, and maximize your revenue.
Focus on getting detailed about your accounting and financials. Investors want to clearly see how your business is performing, and will submit lower offers if they have to work to understand your financials and accounting.
The key factors you should focus on are making the business as attractive to investors as possible. While you’re going over your business if you spot something you think could potentially be a problem, address it because your investor will see it as a problem, too.
Decide How You’ll Sell It
Actually getting your business sold comes down to one of two different strategies: either selling it yourself or working together with a broker to get it sold.
For most people, especially those with zero experience selling businesses in the past, working with a broker is always going to be the best strategy to use.
There are different pros and cons to working with a broker you’ll need to think about, though.
Pros Of Working With A Broker
- They have a network of investors that are ready to submit an offer on your business.
- They understand current markets, trends, and valuation multiples.
- They can guide you through the entire sales process.
- They can assist with creating your sales prospectus.
- They can help you negotiate the sale with your investor.
Cons Of Working With A Broker
- They charge a small fee based on the final sale price of the business.
- Some brokers will want to get the deal done as quickly as possible, costing you money.
- Finding a reputable broker is critical to you being happy with the sales process.
- They’ll communicate on your behalf which could cause some “lost in translation”.
Even with the cons, working with a broker is a great way to hit that balance of getting the business sold quickly while still maximizing your asking price.
Closing The Sale
Once you and your investor have finalized the transaction, you will need to help them transfer into owning the business themselves.
You’ll want to plan on giving them at least 3 months to properly transition into their new role.
During this time, you’ll be expected to keep your lines of communication with them open to make their life as easy as possible.
Knowing this, though, make sure you set a time limit, too. Some investors can keep you tied up for 6 to 12 months, easily, and never take responsibility for their new role as the business owner.
As long as you know this, in advance, you can properly document your business and limit the amount of communication you need to maintain with the investor.
Following this quick start guide, and working with a broker is a great way to make a profitable exit from your eCommerce business one day down the road.
Author bio: Jock Purtle is a successful entrepreneur and Founder of Digital Exits, a leading website brokerage.