So, you’ve worked hard, been a great business owner, and have managed to build a successful eCommerce business from the ground up. But, for one reason or another, you feel like it may be time to sell. For some business owners, the ultimate goal for starting a business is to make it successful and then sell it. For others, selling their business is a last resort. Whatever your reason for wanting to sell your business, the process is not as simple as you may think. Let’s dive into the actual process of what you need to do in order to sell your eCommerce business and how to do it right to get what you deserve.
How to Calculate the Value of an eCommerce Business
When it comes to eCommerce businesses, valuation can vary due to the wide range of business sizes and types. According to DigitalExits, the average sales price of eCommerce businesses in 2018 was $1,338,151; but, the median sales price was $475,000. In order to properly value your eCommerce business, you need to understand a few key terms.
You’ll first need to know the seller’s discretionary earnings, or SDE, which is equal to the business’s pre-tax annual profits plus the owner’s compensation. In order to turn that number into a sale price for your business, you need to find out what number to multiply it by, which is called a multiple, through determining your business value. Business multiples are usually between 1.5 and 3 times the SDE. Your multiple can be determined by weighing several factors:
- Historical growth and performance
- Volume of sales required to reach your revenue
- Market size and future prospects
- Revenue distribution across inventory
- Organization and defensibility of the business
- Working capital required to run the business
- Industry’s economic cycle
With some factors, there are general rules you can abide by when understanding your business’s multiple. For example, a better ROI with lower risk and time involved will give you a higher multiple. Additionally, larger businesses typically have higher multiples.
To properly value your business and determine the right multiple, you can consult with a broker or use an online marketplace like Flippa, which has a free valuation tool that will suggest a reasonable value, as well as their own broker network to connect with.
When is it a good time to sell?
Timing is everything when trying to sell your business, so make sure that both you and the market are ready. There’s a few key signs to pay attention to when thinking about selling your eCommerce business.
- Your business has grown faster than you can handle. Business is booming and your online store is more successful than you ever thought it could be with no signs of stopping; but, you don’t have the time, energy, or resources to keep up with it all. Your growing business will be exactly what buyers want, meaning that selling your business might be the best option.
- The industry is changing. The industry you started your business in may look different today than how it did before, which may disinterest or even threaten you and your venture. If you foresee your business becoming outdated in the future without making changes (that you might not be willing to make), then it’s probably time to sell.
- You’re eager to get started on a new business project. While some can maintain multiple business ventures at once, it might end up causing both of your businesses to decline. If you have a new interest and are done with your old business, it may be time to start up that new venture and sell.
- Your business experiences seasonality. Most eCommerce businesses see a noteworthy rise in sales around the typical shopping periods, usually lasting from October to January. A buyer may not be interested in your business if they buy off-season and will have to wait months before they see significant sales increases.
How to Start the Sale Process
Once you’ve weighed all of the options and determined that it’s the right time to sell, then the next step is to begin the sale process. It’s crucial that you don’t gloss over anything, because dotting the i’s and crossing the t’s will ensure that you’re protected, selling your business to a trusted buyer, and getting the money you deserve. After all, this is the business that you worked long days and nights for and put blood, sweat, and tears into; it deserves the upmost attention to detail.
Valuating your Business
Before you start selling your business, you’ll need to figure out how it should be priced. Using the information and resources that we discussed earlier, like Flippa’s free valuation tool, see where your business stands in market value. It’s also a good idea to do some market research into businesses for sale that are similar to yours in industry, scale, etc. to get a better idea of value. Additionally, evaluate how much your inventory is worth because this is sometimes included in the sale price.
Preparing your Business for Sale
You next need to make sure everything about your business looks great and is running smoothly, because serious buyers will be examining every detail of your operations. Since your sale price is determined by the prior 12 months of earnings, be sure to run with as little expenses as possible during that period of time to get the highest sales price.
Your business’s accounting and financial records should be in order and look presentable, because messy books usually have a negative impact on both sale price and terms of the deal. The idea here is to make sure your business is able to go for the highest sale price possible by making it attractive to a buyer.
Writing a Sales Prospectus
A business’s sales prospectus is a document that acts as an extremely detailed sales brochure. This document will be the first thing you send out to interested buyers. Your sales prospectus will include:
- Detailed business history
- Reason for selling
- Detailed financial records (minimum of 3 years)
- Web traffic and analytics
- Product mix (the contribution of your top 25 products to total sales)
- Competitive strengths and landscape
- Opportunities for a new owner
- Business infrastructure and operations
When writing your sales prospectus, you want to steer clear of adding too much detail. While it’s typical to make anyone who wants to read this document sign an NDA (non-disclosure agreement), those are notoriously hard to enforce. To protect your business, be sure to leave out details that are critical to your mission, such as your best-selling products, names of your suppliers, and anything that can be highly proprietary.
Listing your Business for Sale
For eCommerce businesses, there are several ways to list your business for sale online. One of the best ways to do this is with Flippa, which allows business owners to list their eCommerce businesses for sale and get matched to buyers. Their service offers over 120,000 active buyers that will see your store listing, with this amount growing by 3,500 buyers monthly. You can begin by using their valuation tool for free, but at $15 a month, their platform will offer the following features:
- Submitting your listing in less than 5 minutes
- Access to free and secure transactions with Flippa Escrow
- Matchmaking within a global network of verified buyers
- Support available 24/7
- Connection to your Google Analytics and accounting data
- Optional Broker Matching service
- Optional Dynamic Auction service
Additional fees to consider are their “Success Fees,” which are dependent on your actual sale price and are determined after the buyer’s offer is accepted.
- 5% when you sell between $1 million and $5 million (and up)
- 5% when you sell between $500,000 to $1 million
- 10% when you sell between $1 to $499,000
- 15% if you choose to be matched with an external Broker Partner
The process of listing your online business for sale on the Flippa marketplace is one of the fastest and easiest out there. After you find out your business’s value, you list and merchandise your business with financial information and a sales prospectus (or Information Memorandum) onto the marketplace. You’ll also be able to use this service to help find a broker, who can help you along the way to potentially get better offers and make the process easier if you so choose. Flippa will match buyers to your store’s listing, and from there, you’ll be able to start evaluating them and their offers.
Assessing Potential Buyers
Once you list your business for sale, you’ll start getting interested parties giving you offers to buy. However, don’t jump at the first offer that you get; some buyers aren’t legitimate, and you don’t want to waste potential months of your time on a deal that falls through. In order to determine that you can trust a buyer and find out whether or not they’re actually fit to buy your business, you’ll have to do some digging.
- Find out if the buyer has experience in running, buying, and selling businesses.
- Look into whether or not they have a professional business background or body of work online that you can evaluate.
- Ask yourself if this buyer communicates well and follows through with what they’re asked of.
If you use Flippa to list your online store, you will only be interacting with buyers that have been verified by them to be legitimate. However, it’s always better to be safe than sorry, so don’t neglect this step.
Creating & Signing a Letter of Intent
After you decide on a buyer and would like to go through with further developing a deal, both parties need to sign a letter of intent, or LOI. This document needs to cover a few key things so that both the buyer and seller are on the same page.
- Deal Structure: This outlines the elements of the deal itself, including the purchase price and financing details.
- Timeline of the Deal: This clarifies how long the buyer has to conduct their due diligence and close on the deal.
- Contingencies: These are the circumstances by which the deal can be terminated.
- Items Included: In eCommerce businesses, this typically includes websites, trademarks, and inventory.
- Post-Sale Details: This will determine how long the owner is willing to be available after the sale for transition and training.
- Exclusivity: This determines whether or not the seller is able to have other deals open simultaneously with this deal during the closing period.
- Earnest Money: Upon signing the LOI, buyers will pay earnest money, which is meant to indicate their seriousness and intent to close the deal and buy the business. The LOI will specify how much is required and whether or not it’s refundable if the deal doesn’t close.
The Due Diligence Period
Signing the LOI then prompts the buyer to enter the due diligence period, which refers to the time when a buyer dives deep into your business to check that everything on the sales prospectus is accurate. Buyers do this to make sure that there aren’t any problems or issues with the business that haven’t been disclosed, which may lead them to cancel the deal. The due diligence period can take anywhere between 30 days to 6 months depending on the store’s size and the sale’s details.
During this period, there’s some key information that you, as a seller, should be ready to hand over to the buyer:
- The past year’s bank and credit card statements
- The last 3 years of business tax returns and financial statements (with breakdowns of expenses)
- Access to all software or SaaS apps that the business needs
- Permission to see any of your current standard operating procedures and processes (SOP)
Closing the Sale & Transitioning
Once the buyer finishes conducting their due diligence and no contingencies are met, closing day can come and both the buyer and seller sign the final asset purchase agreement. This agreement is an official legal document that both parties sign to officially close the deal and transfer ownership from the seller to the buyer. For this, it’s a good idea to find an attorney to preside because this is a legally binding document that lays out all the aspects of the transaction in detail.
After this, funds from the buyer will be wired to the seller, and your business officially has a new owner. It’s not uncommon for a buyer to want their funds held in an escrow, which is a protective third party, until things like domain and cart ownership have been transferred. If you’re using Flippa, you can utilize their proprietary escrow service for this. You’ll also need to update any necessary information to reflect the change in ownership.
Prior to closing, you lined out how involved you’re willing to be during this transition period and whether or not you’ll provide training for the new owners in the LOI. At this point is where training may occur, usually consisting of showing the new owner how the business is run, how employees should operate, etc.
Selling your eCommerce business can be a long and arduous task, but if you have the right tools and resources, all parties will end up satisfied. If you know for sure that you want to start the process of selling your business, then start laying down the groundwork for your next steps today and check out Flippa to start your free business valuation.