Selling your e-commerce business is a major endeavor that can be intimidating and tricky to navigate, no matter if it’s your first time selling or your fifth. Hiring an experienced M&A advisor helps make the process more manageable. Still, it pays to be well-prepared with an understanding of what the exit process looks like and how to best prime your e-commerce business for it. Whether you’re ready to sell your business or not just yet, the tips in this post are best known and implemented sooner rather than later to ensure your eventual exit goes as smoothly as possible.
Know Your Numbers
The financials of your e-commerce business are essential to its successful sale, so it’s crucial to understand these numbers from the start. Before you embark on the exit process, you should be clear on every aspect of your business, including all revenue sources, the cost(s) of sales, and all your operating expenses.
It’s also vital to have a strong understanding of the flow of goods within your business, including the supply chain and how these goods get to the end consumer. Knowing these ins and outs will give you a clearer image of how much you spend on each sale, ensuring your cost-of-goods-sold (COGS) calculations are accurate and less time is needed for due diligence.
You will need to be able to put together an accurate profit and loss statement for your e-commerce business, as this will inform prospective buyers’ valuation methods and due diligence. Your profit and loss statement should have accurate numbers for these three key categories:
During the due diligence process, it’s likely that prospective buyers will look to convert COGS (and potentially revenues) to accrual basis if they’re presented in another format. Accrual basis accounting is ideal for investors because it gives them a better picture of your e-commerce business’ financial trends and margins.
As part of understanding your business’ numbers, it’s critical to collect all the financial and supporting documentation to prove the financial performance of your e-commerce business. This will help verify your figures and serve as the starting point for the buyer’s due diligence process. As you prepare to sell your business, pull these files together in one place. You will want to gather monthly bank statements, credit card statements, merchant processor statements, and inventory and shipping invoices.
Standard operating procedures (SOPs) are valuable when managing a business but are even more essential when taking on a new business and getting oriented to new processes. Help the new owner(s) of your business get acquainted by providing them with detailed SOPs. To do so, you will want to review and modify your existing SOPs and create new ones as needed. It’s likely that as your business has grown, new processes were added, and you may not have gotten around to writing detailed guides for these processes. Now is a good time to write them.
Security and Compliance
Security is more vital than ever before, especially for your e-commerce business. An Accenture/Ponemon Institute study reported that most business leaders (68%) believe their cybersecurity risks are on the rise. Because of this, security and compliance will likely be top of mind for potential buyers. Knowing you are focused on security will leave them with one less thing to worry about.
Buyers will be keen to learn what steps you are taking to protect your customers’ information. Not sufficiently doing so could lead to complications during the due diligence process and potentially result in a deal falling through. By putting security and compliance measures in place, this can easily be avoided.
One of the most important pieces of information for any transaction process is the seller’s reason for sale. Know your reason for selling—it is one of the first questions a buyer will ask, so you need to be able to articulate your motivation. Your answer needs to be honest and, ideally, shouldn’t express any urgency.
Buyers expect to hear reasons such as selling to move into another niche, financing an offline endeavor or paying down debt. Red flags are raised if the sale rationale seems ambiguous, unsure, or connected to the underlying performance of the e-commerce business.
Other Considerations for Your E-Commerce Exit
When preparing to sell your business, you can take several other steps to position your e-commerce business for greater success. For instance, you will want to ensure you have contracts in place with suppliers outlining their commitment to supply specific products for a set period of time.
Additionally, it’s fundamental to protect your intellectual property by having trademarks and patents in place for the goods your company sells. Patents, trademarks, and exclusivity agreements with suppliers are all selling points that make your business more attractive to investors. Organize all related documentation as buyers will be interested in this information.
Potential buyers also customarily look for businesses that emphasize developing and maintaining customer reviews. If your products are sold on Amazon, earning Amazon’s Choice badges is also viewed favorably.
Most buyers are looking to acquire a business—not their next full-time job. As such, the owner’s involvement in running the business should be limited. If you are currently heavily involved with your e-commerce business, we advise that you take steps to delegate mundane tasks to a team that is willing to transition with the business when it is acquired. This will make your business more appealing to potential investors and will help streamline the transfer process.
However, if you do not have a team in place, it is not always necessary to hire one as it is possible to find a buyer who is looking to run an e-commerce business like yours. Also, if you operate your own warehouse, we recommend that you explore third-party logistics (3PLs). A 3PL makes scaling easier, effectively creating a higher demand for e-commerce businesses that use one.
When it comes to compliance, different regulations apply depending on the niche you operate in. Complying with these requirements is critical. For example, if you sell a product with small pieces, you will want to check that these parts do not present a choking hazard. It is also wise to keep up with industry best practices and align your product offerings to fit them. Potential buyers will be on the lookout for e-commerce businesses following best practices and will be wary of ones selling products that do not meet compliance requirements.
It’s also crucial to resolve any open legal matters before you sell your business. Potential buyers will be more inclined to purchase a business without these types of issues, as they are a headache no investor wants to deal with. We recommend gathering all legal documents prior to the exit, as failing to do so could slow down the audit and listing processes.
We touched on SOPs earlier, but there are procedures specific to e-commerce businesses that you should document before you sell your business. These include processes related to inventory and packaging. Outlining these procedures for the new owner of your business will ease the transition process.
Lastly, take stock of your inventory and your plans for the business. If possible, leave some powder in the keg (in the form of a new product, supplier, etc.) for the new owner. This will be appreciated by the buyer and will help facilitate a smooth transition period. Additionally, you will be paid for inventory, so this will not be money wasted.
The E-Commerce Buyer Landscape
When preparing to sell your business, it is worthwhile to have a sense of the types of investors most likely to be interested in acquiring your business. Depending on the specifics of your business, these potential buyers may include individuals, private equity firms, strategic businesses in your market, aggregators (roll-up companies) and larger, sometimes public companies that sell similar or adjacent products on a different scale.
Soon you will be in conversations with these potential buyers, so it can be helpful to have some background on who they are and what they are looking for. Working with an M&A advisor can help you prepare for these important discussions.
How to Value Your E-Commerce Business
As you prepare to divest, it is helpful to understand how your business’ valuation will be calculated.
The first step in arriving at an accurate valuation of an e-commerce business is to determine earnings or “net income.” For companies with an estimated value of $10 million or less, the Seller’s Discretionary Earnings (SDE) method is used almost exclusively. For businesses with an estimated value above $10 million, the Earnings Before Interest, Taxation, Depreciation, and Amortization (EBITDA) formula is almost always used to calculate earnings.
Once your earnings have been determined, it’s time to find the earnings multiple. This multiple is calculated after reviewing a variety of factors that are specific to e-commerce businesses; namely:
Understanding these factors and how they influence your e-commerce business’ valuation will help you learn what makes an e-commerce business valuable to buyers and how you can maximize your valuation.
Run the Business
Don’t forget to run the business—even if you are actively trying to sell it. The sale process usually takes several weeks, by which time you will likely have another reportable period of numbers. Time and again, buyers ask for these updated numbers during marketing or due diligence, and it’s a far superior message to report stable or improved numbers than ones that have slumped from seller neglect. It’s an unfortunate fact that a good month of numbers isn’t likely to improve your sale price, but a bad month may open the door for renegotiation.
Integrity and Credibility Are Essential
The common thread running through this exit planning overview is credibility. If you want buyers to move forward, you must show respect by being open, honest and accurate about everything regarding your e-commerce business—the good and the bad. Misrepresentations and conflicting statements will always be identified (we’ve never seen it otherwise), so it’s best to be completely transparent from the outset.