When you first started your e-commerce business, you had hopes and dreams, but did you ever give thought as to what you’d do after you achieved your goals?
An exit strategy is a must for all e-commerce sellers, unless your dream involves peddling the same products and services for the rest of your life. The fact is, you worked hard to build your business into the monument that it is. You should be paid handsomely for your work as you break free in exchange for bigger and better things. An exit strategy can make that happen, and you should have a plan in place if you hope to retire on the beach of your choice in the near future.
Why Sell in the First Place?
Selling your e-commerce business for double or three times your earnings may not seem like a wise move, but what if you get other opportunities down the line? What if your aspirations change, and your life goals become altered by a major life event, like marriage or having a child? Selling your business will give you a significant cash infusion, allowing you to live life to the fullest without being encumbered by the day-to-day of the business you worked so hard building. One day, you’ll appreciate that you have a plan in place to sell, even if it’s only because you’re bored with the whole e-selling process.
Selling will not only be a profitable venture, if you do it correctly, but you will learn a valuable lesson that isn’t taught in most schools. The experience you gain will allow you to replicate your results with other e-commerce businesses, if you have the time and desire.
Prepping Your Business for Sale
The first thing you will notice when you begin selling your e-commerce business is that it is a time-consuming process. You must prep your business for sale, list it on the open market, find a buyer, convince that buyer that your business is valuable, negotiate a closing agreement, and train the buyer to take over without you. That’s assuming that everything goes smoothly. Hopefully, you don’t end up repeating steps and courting several buyers before those deals go through.
No matter what happens, it’s always best to plan for contingencies so that you’re never left frustrated with the desire to quit mid-deal.
If your e-commerce business does less than $1 million in earnings, your business will usually sell according to a term known as Seller’s Discretionary Earnings or SDE.
SDE is calculated by taking the pre-tax profits and adding the owner compensation. So, for example, if your business earned $250,000 in profits last year after paying yourself a salary of $75,000, the company’s SDE would be $325,000.
Basically, SDE signifies how much money the business is generating, including any salary.
The actual value of your company will be based on 2xSDE or 3xSDE, depending on historical growth and performance, defensibility of the business, the market size and future prospects, and the size of the business, to name a few factors.
If your business has been declining in revenue for the past few years, and you haven’t been keeping the books very well, your business may only sell for 1.2xSDE, for example.
Dealing with a Broker
You have a choice when selling your e-commerce business as part of an exit strategy. You can sell it yourself and keep all the profit, or you can have a less stressful time with a broker while paying a commission (such as 10 percent of the purchase price).
A broker will give you a good sense of what is a reasonable price for your business and can help you find a buyer, while also easing you into the process. Furthermore, getting in good with a broker can grease the skids later on if you ever decide to build and sell another e-commerce business down the line.
Whether you work with a broker or wish to sell your business on your own, do your due diligence and get a sense of where valuations are for businesses similar to yours. Sites like WebsiteProperties, EmpireFlippers and BizBuySell are excellent places to start.
Valuing Your Inventory
If your business has inventory, its sale will usually be negotiated separately from the business itself. The inventory price is usually added to the SDE for a total transaction price. For instance, if your business does $250,000 in revenue and you draw a $75,000 salary and your inventory is worth $25,000, your total transaction value would be $350,000. Keep in mind that this is just a general guideline and is not set in stone. Your total value may be calculated differently depending on a variety of factors.
Getting Your Books in Order
Since your sale price will be based on the previous 12 months of earnings, you’ll want to delay as much discretionary spending as necessary. In other words, learn to run your business “lean” by canceling services you’re no longer using and choosing to prepay subscriptions a year in advance to get a discount, just to provide a couple of examples.
Whatever you do, make sure your books are in order. Even though you are trying to cut expenses, never be afraid to hire a bookkeeper to help keep your financials in tip-top shape. This will have the double benefit of making it easier to sell your business, and it looks great to potential buyers.
Write Your Sales Prospectus
A sales prospectus is a detailed analysis of your business that you will send to interested buyers. Take some time creating this document, as it can make or break the sale of your business.
The prospectus should include a brief history of your business, detailed financials, expenses, a list of inventory, traffic, analytics and other big data, and any other business details, such as competitive strengths and opportunities for the new owner.
Putting Your Business on the Market
If you are working with a brokerage firm, your broker will handle the listing of your e-commerce business for you. If you are selling yourself, you will be responsible for marketing the sale and generating interest. You can post your business on BizBuySell, for instance, but don’t forget the NDA if you have to divulge sensitive details to buyers. For these reasons and others, it’s probably best to go with a broker the first time around so that you know how the process is handled from start to finish.
When offers come in, don’t become so fixated on going with the best purchase price. Instead, a prudent e-commerce seller approaches every buyer with skepticism, regardless of the proposed valuation. Since the selling process takes so long, you will want to make sure the buyer’s offer makes sense financially and logistically before you commit.
Buyers can buy your e-commerce business with an all-cash deal or they can finance your business over time. With an all-cash deal, you might want to consider being more flexible on price. That’s because financing your business over time presents numerous opportunities for headaches, such as the business failing under the new owner and the funds no longer being available to pay the finance charge.
A buyer can also get a loan from the Small Business Administration (SBA) or bank, but these organizations are sometimes apprehensive about lending money to online businesses.
Another option is an Earn Out, where the buyer will hold back a portion of the purchase price until the business meets certain financial benchmarks. If the business is growing, this type of transaction might make sense, but again, you’re dealing with a new owner, so tread lightly.
Sign the Letter of Intent
Once you have come to an agreement with a buyer, you will sign a letter of intent or LOI. This agreement will act as the closing document and lists the deal structure, timeline of the sale, post-sale details, and how much money is required and refundable if the deal doesn’t go through.
Once the business is sold, you must then train the buyer to run the business without you. This can take time, so you might want to put together a training program to streamline the process once funds have been exchanged.
As you can see, a lot can go into selling an e-commerce business. Yet, with the U.S. Department of Commerce showing massive growth in the e-commerce market with no signs of stopping, as long as you are aware of the risks and prepare accordingly, the time might be now to prepare your ecommerce business for an exit sale.
Ryan Gould is the vice president of strategy and marketing services at Elevation Marketing, a B2B marketing agency. Gould helps medium and large brands improve sales and market share by developing integrated marketing experiences distinguished by research, storytelling, engagement and conversion.