Table of contents
- Why Should You Sell Your E-commerce Business?
- Getting Ready to Sell Your E-commerce Business
- Should You Sell Yourself or Work With a broker?
- Wrap Up
- Why Should I Listen To You, Ben?
Many entrepreneurs are overjoyed at the prospect of launching an e-commerce venture. But you know what makes them even happier? Selling their company. It’s a significant career achievement because it: a) generates money, b) completes another learning curve, and c) demonstrates their ability to run a profitable business. It’s not as simple as 1,2,3 to sell an e-commerce business. There is a lot to think about, and the process takes time. This article will go over how to get ready to sell your e-commerce business, whether it’s Amazon FBA, D2C, or a combination of the two. We’ll talk about why you should sell, how to prepare for it, and whether you should sell yourself or hire a broker. Ready? Let’s get this party going.
Why Should You Sell Your E-commerce Business?
I get it – your e-commerce brand is your “baby,” which you’ve been nurturing since its inception. You’ve looked after it, fed it. It’s now time to turn the keys over to someone else. It’s a daunting prospect, but here’s another impediment: What if your e-commerce business is profitable? What makes you believe you’ll sell it? Actually, there are a few reasons why an e-commerce business, even if profitable, may be time to sell:
You Need Money
If you need money, it is acceptable to sell your company. That is not cause for embarrassment. Indeed, raising funds for the next venture is one of the primary reasons entrepreneurs sell their e-commerce business. At the moment, I am literally assisting a man in selling his business so that he can sail around the world in a yacht. At this point, you should evaluate your current professional and personal situation. What are your goals and dreams? What are your long-term goals?
Your Business Has Peaked
This is heavily influenced by why you began an e-commerce business in the first place. If you started an e-commerce business with the intention of making it successful (or seeing how successful you could make it), you may want to sell now if your business has peaked. In other words, you can leave while you’re still on a high and not be sorry for not doing more. How do you know when your company has peaked? If your business is two to three years old and profitable, you’ve most likely made a real success of things. Furthermore, a two to three year (or more) old and profitable e-commerce business is very appealing to buyers. If you wait another year and your profits fall, your company will be less appealing. As a result, to get the most money for your business, you may want to exit while the going is good.
You Want to Investigate New Possibilities
Entrepreneurs are energetic, creative people who never stop working. They start one project and go “all-in,” only to realise they want to try something else. There’s also something else. There’s also something else. If you’ve enjoyed running an e-commerce business but want to try something different, it’s time to sell. Again, this is an excellent reason to sell.
You Want to Grow
All entrepreneurs should prioritise personal development and growth. Do you consider yourself an entrepreneur if not? Of course, running an e-commerce business is a great skill, and I applaud anyone who succeeds at it. However, in order to achieve personal and professional growth, an ambitious entrepreneur must learn to navigate and execute an exit.
You’ve Had Enough
There is such a thing as mental (and physical) exhaustion. If you’ve invested in your e-commerce venture but are now unhappy with it, it’s time to sell. I’ve been there and done that. I know what it’s like to put out fires around the clock. It’s time for a break.
How to Value Your Business
The difficult part now is determining how to value your company so that it can be marketed at a price that is acceptable to all parties (but mostly acceptable to you). Let us begin with the Seller’s Discretionary Earnings (SDE). You can determine yours by using the following formula: Profits before taxes + owner compensation For the purposes of this article, this is a condensed version. A good broker will make several financial adjustments to determine the maximum SDE and extract the most value from the business. A low-quality broker or marketplace will not be able to accomplish this effectively. Let’s say your store made $200,000 in profit last year. You paid yourself a salary of $80,000, resulting in an SDE of $280,000 for your store. This equates to $23,333 in SDE per month. It is a proxy for the amount of money generated by your e-commerce business. The SDE multiple must be determined to determine its worth. This is determined by factors such as historical performance and growth, market size, future prospects, the organisation of your business, the economic cycle, and the size of your business. Now, if your company’s value has been declining over the last year or two, and if you’ve neglected it, its annual value could be as low as a 1.3 multiple. If, on the other hand, business is booming and your store is on the higher end of the scale, it may have a 4x or higher multiple. When it comes to pricing your e-commerce business, you have two options:
- You can either talk to a broker about it or do it yourself.
- You can conduct market research.
You could, of course, do both (recommended). A good broker will give you a ballpark figure without pressuring you to work with them. Market research has its own set ofefits. To begin, it displays the prices of similar-sized businesses and what they sell for. The last thing you want to do is compete with the market by underpricing or overpricing your store.
Getting Ready to Sell Your E-commerce Business
Sell Now…or Hang On?
You may decide to sell right away, depending on your circumstances. Alternatively, you could spend the next few months preparing your company to increase its value. What are YOUR alternatives? Let us look at something. Assume your business made $100,000 in pure profit in the previous year. However, you’ve spent a lot of money on it (you haven’t run it on a shoestring budget), and you’ve done almost nothing in terms of marketing. Worse, sales have dropped by 20%. Because of all of these factors, you believe you could sell your brand for a 1.5x multiple. That means you’d get around $150,000 for it if you sold it right now. How much more could you get if you spent the next year preparing it for sale? Increasing marketing spending, improving SEO, reducing waste, and increasing sales and profits are all part of this strategy. After that, you should be able to sell your brand for a multiple of two. The big question now is whether it’s worth it to wait another year and work harder for an extra $50,000, or whether you should cut your losses and sell now. It is not my place to tell you what you should do in this situation. It is entirely up to you, but you should at the very least carry out the preceding exercise to determine how much money you would be losing if you sold now. A good broker will think long term and work with you to help you achieve your objectives. A generic flipper-style broker or marketplace will almost certainly encourage you to sell quickly in order to earn a commission.
Running the business cost effectively
When you first start your e-commerce business, you should plan on investing for the long term. However, if you intend to sell it, you should not do so. What is the reason for this? Because the amount earned by your company in the previous 12 months has a significant impact on the selling price. As a result, any savings can be put towards the transaction. You obviously don’t want to jeopardise your company by cutting corners. You must, however, strike the right balance. Nota bene: A good broker will do more than just value your company over the last 12 months; they should also be experienced accountants who can make legitimate financial adjustments to extract additional value from your company. Boost annual profit Buyers will not be interested in your company until it generates consistent profits. I recommend that you use accrual accounting when calculating your monthly earnings. Also, as a general rule, buyers do not look at businesses with annual net profits of less than $250,000 USD.
The difficulty of a competitor launching the same (or similar) product as yours and devouring your market is referred to as defensibility. If your product is easy to obtain, you have poor defensibility. This may also put off a prospective buyer. Essentially, if your product is too easily available on sites like Alibaba, you must ask yourself: What is stopping others from entering my market and taking it away from me? They only need to create an account and a new listing to begin selling the same product. Aside from selling a unique product, there are a few other things you can do to strengthen your position:
- Managing a brand. Instead of selling nameless “things” on Amazon (or your website), if you have a brand, you may build client loyalty. This is crucial for justification. I did this with the first brand I sold and with brand management. If you have a brand, instead of selling nameless “items” on Amazon (or your website), you may be able to establish client loyalty. This is important for justification. That’s what I did with my first brand, and I’m doing it again now.
- Selling one-of-a-kind items
- Competitors are being sold superior items. They may provide the same products as you, but if they are of lower quality, you will win.
- Even seasoned FBA competitors will struggle to outrank or outsell you if you have a strong brand and a proprietary product. This alone will increase the appeal of your store to buyers. I’m doing it again.
- Selling unique things
- Selling superior products to your competitors. They may be offering the same things as you, but if theirs are of inferior quality, you will win.
- If you have a strong brand and a proprietary product, even experienced FBA competitors will find it tough to outrank or outsell you. This alone will boost your store’s appeal to buyers.
Diversification is another way to boost your worth. What does this mean for Amazon FBA? Prospective customers will examine your store to see what will happen if your Amazon account is suspended. If this occurs, you will lose both your Amazon ranking and all of your customers. Unless, of course, you’ve already broadened your horizons. Diversification entails continuing to run a profitable business even if things go wrong on Amazon. For example, you may sell products on platforms other than Amazon and receive traffic from sources other than Amazon (such as social media and email). It also implies that you sell in more than one niche and, more importantly, that you have a strong enough brand to withstand being banned from Amazon. Too many FBA entrepreneurs are inextricably linked to Amazon. This means that they rely on the e-commerce behemoth for everything. All it takes is a suspension of their account to effectively end their business. It’s similar to being at the mercy of a social media platform like Facebook. If your entire business is reliant on a third party, it will be unappealing to buyers because they know that all it takes for your company to fail is for Mark Zuckerberg to pull the plug. This is why, as I have previously stated, diversification is critical. Here are some ideas for diversifying your FBA business:
- Create traffic from non-Amazon sources. For example, use social media, email, and Google. Purchase advertisements, but also generate organic traffic. This necessitates the creation of an SEO strategy.
- Expand the range of your products. If your company becomes overly focused on a single product, it will suffer if production is halted or a competitor begins selling it.
- Aim for a wide range of niches. Why limit yourself to just one or two options?
- Invest in Amazon pay-per-click advertising.
- Sell via your website, such as a Shopify store.
A prospective buyer will look at your competitors when considering your company. If you’re selling a highly popular product that others are also selling, your rankings could drop at any time. Of course, this implies that your earnings will follow suit. It’s the opposite of what you want and what buyers want. Selling unique or patented products, developing your own products, or diversifying are the simplest ways to eliminate competition and thus increase the value of your business (see above).
Sort Through Your Accounts
Let’s be honest: few business owners can boast that their books are spotless and well-organized. Accounting isn’t always our top priority. However, as you prepare to sell your e-commerce business, you must first prepare your accounting. You can work with an experienced accountant who specialises in e-commerce clients. This will boost your credibility and help you find a buyer more quickly. Any prospective buyer will be turned off if your books aren’t in order – if they’re disorganised and difficult to navigate. Furthermore, they may be sceptical of the figures you provide. This can waste a lot of time and indicate that their price is significantly lower than yours. An e-commerce seller who has organised their books demonstrates that they can also easily close a deal. Of course, a good broker will have e-commerce accounting expertise and can assist in this regard.
Tweak Your Supplier Contracts
A supplier contract is essential when selling your e-commerce firm since it might be the difference between a good deal and a terrific deal. Why? Consider this: If you have a good relationship with your existing supplier and have changed the contract so that it can be transferred to a buyer, your company will be much more enticing. If you don’t have a solid relationship with your supplier and they give you a poor margin, you won’t be able to negotiate a good deal.
Automate Your Business
An automated e-commerce business is another feature that makes an e-commerce business more desirable to potential purchasers (and so helps to improve its value). Assume you do everything yourself, for example. You source the merchandise, manage the inventory, keep the books, and even handle customer service and web design. It’s a lot of work, and any prospective buyer will shudder at the thought of having to do it all. Many of those activities will be outsourced straight away. Wouldn’t it be better if you outsourced those jobs today, giving you the ability to demand a higher price for your services? Obviously, hiring more people means incurring more expenses. However, by automating your business, you will be preparing your e-commerce business for sale. Potential buyers who aren’t interested in running everything themselves will find it more appealing. Furthermore, if you automate your business 12 months before selling it, you will have 12 months to scale and increase your revenue. As a result, you can make up the difference by hiring more people.
Change to Accrual Accounting
Is your accounting cash-based? It really should be accrual-based. Why? Because it provides a clear picture of how well (or poorly) your company is performing. How does it accomplish this? By displaying when expenses and income occurred for you (and potential buyers). Assume a buyer is interested in how your company did in March, April, and May. If he or she employs accrual-based accounting, he or she will be able to see this at a glance. All of this is not to argue that there is anything wrong with utilising cash-based accounting from time to time, for example, for tax purposes. However, it’s a good idea to call your accountant as soon as possible to make the changeover because it could take them a few hours or a week to flip your books. A reputable broker will have e-commerce account experience and can assist you with this.
Prospective buyers of your company will undergo extensive due diligence. This due diligence phase can be fatal if you don’t have the proper documentation. They are looking for flaws in your company. They want to find reasons why they should not buy it. If they discover flaws, they will either withdraw completely or renegotiate the price. This means you will not receive the desired price. So, what kind of documentation do you require? You’ll need the following items:
- A business bank account. This bank account must only contain expenses and income from this particular business. Do not use it for personal gain.
- Account configuration is correct. I strongly recommend that you consult with a professional accountant on this.
- Returns on investment. Serious buyers will want to see your company’s tax returns, so having them ready is essential. Don’t keep them waiting while you’re cooking! Prepare to succeed, or prepare to fail, as the saying goes.
- Registrations for VAT For every country where you do business! This is critical. Many sellers overlook this, and it comes back to bite them when it comes time to sell.
- It goes without saying that intellectual property certificates are required! Strong intellectual property creates a protective moat around your business; buyers want to see this.
- Any product documentation, including safety certificates. Buyers will not invest in your company if they believe the products are too risky or lack the necessary certification.
- Audits and certificates for suppliers, such as ISO standards. Nobody wants to buy a business unless they can verify that the manufacturers are legitimate and adhere to the highest quality, safety, and social and environmental responsibility standards.
It’s not much, so there are no excuses if you don’t have everything in order.
Streamline Your Business Operations
At the outset of this article, we discussed the significance of profits. Improving your efficiency is one of the most effective ways to increase profits. Why? Because the more efficient your company is, the more productive it is. As a result, profits will rise. It’s a good idea, then, to examine your company from various angles by delving into its internal operations. You could get help from an efficiency expert. In either case, you’re looking for areas of your business that are underperforming and thus slowing you down (and bringing profits down with them). Once you’ve identified the areas that aren’t performing well, you can implement new systems to improve the process’s efficiency. This is a very straightforward method of increasing productivity (and revenue). At the same time, it is important to note that it will reduce your operating costs (with the added benefit of not sacrificing quality). Increased productivity combined with lower operating costs will increase the value of your company and make it more appealing to buyers.
Use a Third-Party Logistics Provider
This is especially important for non-Amazon sales, such as direct-to-consumer websites. Of course, fulfilment is critical to an e-commerce business’s success. However, suppose you handle all of your fulfilment operations in a single location. This reduces the number of potential buyers immediately. Why? Because if a buyer in Thailand is interested in your company but intends to run it remotely, they will be unable to buy it if your fulfilment operations are based in a single physical location. It’s a dead end, so you’ll miss out on a potentially profitable exit. Working with a 3PL (third-party logistics provider) is a good idea in this case. A third-party logistics provider customises and fills gaps in your fulfilment solutions (warehousing, packaging, shipping, etc.). It helps to make your e-commerce business more appealing to buyers and can even add a few dollars to the price.
Should You Sell Yourself or Work With a broker?
You should sell with the help of a good broker. Here’s why:
The Dangers of Selling Yourself
So a buyer has approached you. You could also approach a buyer. You could sell directly to them. That, however, is a bad idea.
- a) You Will Throw Money Away
When you go straight to the source, you don’t get the best price or terms. Good brokers will get you the best price for what your business is really worth because they market it to all potential buyers. There is way too much work for you to do by yourself. This should include doing real research in your industry and marketing your business to a variety of buyers as well as the right kind of buyer. Not just sending out a lot of emails to aggregators.
- b) A Good broker Will Do it for You While Earning You More Money
You think you’ve worked hard on your business and given it your all. Try to sell it now. It takes a huge amount of effort. In addition to trying to make the sale, you are also trying to run the business. Think about everything you do for your business. Then add getting it ready to sell, advertising it, and answering all the questions a potential buyer might have (which are numerous). It’s not enjoyable. You need professionals to do it for you, and they have to do a good job.
- c) A Good broker Has Experience on All Sides
You know more about your field than anyone else. But good brokers should also be e-commerce experts who have built, grown, and sold international brands before. AND they should have a lot of M&A experience and know how to do accounting for e-commerce. Good brokers know everything there is to know about e-commerce, which is important when you are looking for the right partners to sell your business to.
The Dangers of Standard brokers
Standard brokers are classified into two types: “Consultants” and “Flippers.”
Flippers basically “post” on their website that your business is for sale. It’s kind of like eBay for companies. You basically agree to sell your business with them, and they pull reports from your sales accounts and website to figure out how much your business is worth. Then they’ll put it on a list. That’s the end of the storey. They are just in the middle. And their prices are very high.
The “consultant model” has become more popular in recent years. This “cheap and cheerful” method brags that its fees are very low. That’s right. So low that a professional broker wouldn’t be able to do anything to help your deal. In this model, the consultant usually just refers your business to their list of buyers and gets a referral fee (usually between $25,000 and $50,000) from the buyer on top of the percentage they charge you. I don’t like that.
The Dangers of Marketplaces
In response to the above three disasters (direct sale, flipper brokers, and “consultants”), a new model has emerged. Enter the “Private FBA Market,” as it is called. This market style says it has found the secret. Even though there won’t be any broker fees, there will still be competition, and the best deal will win. It sounds too good to be true, doesn’t it? That’s right, it is. This model has several problems. First of all, you DO have to pay a commission. Buyers include the fee they pay to the marketplace in their offer and subtract it from the amount they would have paid you. Second, you have to make your own deals. Experienced buyers who want to buy your business for as little as possible on their terms will take advantage of you. This service does nothing but act as a go-between. Lastly, it’s so big that, even though they say sellers are represented by financial experts, they can’t really give you a fully customised service that gives you a full, in-depth assessment of your business’s real value (addbacks and all).
Good brokers do more than just act as “go-betweens” between a seller and a buyer. You need to work with e-commerce experts who can help you position and prepare your business for the best possible valuation, deal, and exit. A good broker should take care of everything. They should check out your company, find the best buyers for you, and even set up M&A legal representation for the final negotiations and deal signing. Simply put, you are selling yourself short if you choose the wrong broker or don’t use one at all. Also, a good broker will want to sell your business when you are ready to do so. That means they should help you get where you want to be over time. This could be for sale in six weeks, six months, or even two years. Neither the people who flip homes nor the consultants do this. They will just sell your business “as is,” which is good for them but bad for you. Good brokers should be able to help you organise your business from top to bottom because they know how e-commerce works and how to do accounting. This increases the value and makes it look as good as possible to a buyer. Lastly, a good broker does a lot more than just list your business for sale or email a bunch of aggregators. After carefully checking out your company, your broker should be able to give you an accurate valuation. Then, and this is very important, they should talk to the right buyers for your business. This means the buyers who are most likely to help your brand grow. This is important because, depending on how the deal is set up, a big part of your payment may depend on how well the new owner does with the brand over the next year, two years, or even longer. Most of the time, the brokers will only show your business to a small number of carefully chosen buyers. This is enough to make a competitive market.environment with only the best players.
If you put your business on the market, someone will make you an offer. Whether or not you take them up on their offer will depend on a few things. If you are working with a good broker and lawyer, they will be able to help you with this. One thing that will be taken into account is how eager you are to close a deal. If you are in a hurry, you will have less power when you bargain. If you’re not in a hurry, you’ll have more time to make decisions. If a buyer offers less than what you’re asking for, you should think about whether they have a good reason. And, hey, you might even know the buyer and trust them to make this work. Because of this, you’re ready to take a hit. What do the rules of the deal say? Will the buyer pay for everything at once or in instalments? Just as important as the price is how the deal is made. Even if you get the right price for your business, you’ll lose if you don’t get the terms you want. You can also sweeten the deal by offering to work as a consultant for a certain amount of time while the business gets used to you. This is a strategic concession, and as the negotiation goes on, you may find that you need to make more of them. There will be a lot of back and forth, and you might be asked to give up something valuable in exchange for something else valuable.
Selling your online store is a big step. It’s important to figure out first if this is the right step for you. When the time comes, you can use the information in this guide to get your business ready, figure out how much it’s worth, and negotiate a deal that works for you.
Why Should I Listen To You, Ben?
I built, scaled, and sold a seven-figure international e-commerce business. Now I’m doing it with a few new brands. I work with e-commerce companies to help them get clear, take control, and scale. And I co-founded Ecom Brokers, a brokerage run by e-commerce professionals for e-commerce professionals.