This post is by Victoria Duff, founder and CEO of business consulting firm, aBusinessPlan.com.
In the beginning, you read books and articles and researched products as you planned your entry into ecommerce – a very personal investment of hundreds of hours of work and many sleepless nights. Your business is your creation and you were thrilled when you booked your first revenue.
Over time you made some mistakes, but also had moments of genius, and now you are wondering how you can take advantage of all this hard-earned experience to expand your enterprise. Perhaps you are also wondering if you should just cash out, take the money, and run.
In a normal year, I evaluate at least 250 web-based businesses – Amazon, Shopify, eBay, and independent ecommerce websites. I work with the people who are selling those businesses and I also work with the buyers. Although mergers and acquisitions of web enterprises are still a relatively new business activity, there are emerging industry standards and good business strategies that you should know about as you make plans.
Why sell your business?
1. To raise capital
One of the most prevalent reasons I have found among web business sellers is a need to raise capital for another project. Often an owner doesn’t have enough cash flow to expand the current enterprise and wants to cash out and start all over.
A lack of capital can limit product offerings, marketing activities, and even your entry into offshore markets or expansion to additional ecommerce platforms. Low cash-flow can delay inventory replacement, too. Sellers often recognize mistakes made during the planning and development of their ecommerce businesses and feel a fresh start or the acquisition of a successful existing business is the answer.
2. Personal reasons
Some owners get bored and just want a change after years of running the same business. Other sellers are raising money for a big purchase like a house or to add to their retirement savings. And of course, some owners get sick or die and their families want the money more than they want the business. After all, a web business is an asset that might have value.
It always amazes me how many people don’t realize that a web-based business is an asset that can be sold, so they neglect it until it is only fit for deletion. I even find accountants, business consultants and estate attorneys who don’t take web businesses seriously and have no idea that they can be sold.
3. Planned from the start
Another class of sellers are serial entrepreneurs who buy and sell web businesses like any other investment in stocks or real estate. Flipping, or building web businesses to sell, is how many people make a living. The IRS currently considers a small business to be a capital asset and proceeds from its sale can qualify for a lower tax rate if it was held for longer than a year, which makes building, or buying and renovating a web business financially attractive to professional web developers and tech-savvy individuals.
The marketplace for web businesses is active and growing, and that is a good thing because it provides business owners with liquidity and it also attracts plenty of buyers who are looking to own and operate their own business, or to buy for an institutional investment portfolio.
The difference between income and capital
A starving man owned a goose that laid eggs of gold. Eventually the goose stopped laying eggs and the man continued to spend the gold on food and other living expenses until all the golden eggs he had accumulated were gone. This left him with no money to even buy food. Every day he checked to see if his goose had laid any golden eggs, but was always disappointed. One day he was so hungry he asked his neighbor for some food, and the neighbor replied by asking him why he didn’t slaughter and eat his goose. In shock, the man replied, “I can’t do that. I need the golden eggs!”
This is a good parable for business owners. The human tendency to hang on, waiting for more golden eggs, can be destructive in business.
One of the main things I learned from working with successful serial-entrepreneurs is not to develop a personal relationship with your business. They launch and build a business until it is successful and has significant exit value. Then they sell the business and put the capital proceeds into another business. In this way they grow a capital base that acts like a savings account they use to expand their business empires. They also pay themselves a salary out of revenue – the income that pays their monthly living expenses and improvements to the business.
The sale value of the business is capital, and it has a long-term purpose in developing wealth. Revenue produces income and is a short-term lifestyle subsidy.
Capital comes from improving the value of your business through good management, brand-building, and expansion. However, as any business owner knows, changes in the economy, customer buying habits, and market factors can cause even the most successful business to hit a performance plateau and even decline. Successful entrepreneurs recognize this as a normal business risk and cash out the capital while the business is still growing, before a plateau and decline happens.
Businesses can be sold at any stage
Serial entrepreneur Pamela Wasley warns:
Business owners should always be looking to exit their investment. Not because the company may be in a bad place but because it is a smart business decision.
Her advice makes a lot of sense when you consider the five stages of small business growth. Each stage has associated risks. Smart owners sell before risks become unmanageable and take down the company.
The 5 Stages of Small Business Growth
|First:||Creation, Launch||Crisis of leadership, funding|
|Second:||Survival||Crisis of market penetration, funding, operational organization|
|Third:||Success, Disengagement or Growth||Crisis of direction, funding, business cycle, changes in marketplace|
|Fourth:||Take-off||Outside investment, reorganization for expansion, ownership transition
Crisis of over-expansion
|Fifth:||Maturity||Crisis of relevance|
A lot of time, research and work goes into creating and developing an ecommerce business. Common challenges involve the quality of decisions regarding the product mix, ecommerce platform, marketing, and management of expenses.
One recent client came to me wanting to sell an Amazon store that carried one product – a top-quality boxed-set espresso coffee maker with cups and spoons. The store was a year old and had fairly stable revenues of just under $1000 per month, but the owner had taken a new job that left him with no time to devote to his ecommerce business.
It sold very quickly at his asking price because it had been developed and managed well, and the seller had kept excellent records. It was very attractive to the type of buyer who was looking for an easy entry into a “starter” Amazon store.
The takeaway here is the store had value because it was more than 12-months old, had exhibited stable performance, and had been well-managed.
This is the stage where it becomes clear whether you have chosen the right product mix and have taken wise advantage of features offered by your ecommerce platform. This is also the stage where a significant number of owners run out of money.
Another Amazon seller decided to carry certified organically grown, fair-market cocoa nibs, acai berries, and coffee beans. While he had a good idea for appealing product, he had allowed his ego to spend too much money designing packaging and marketing materials. He also discovered that his products were expensive to source and delivery was slow and unreliable.
The result was that he sold out his first inventory and couldn’t afford to replace it all even though his products were popular. Again, the site was sold quickly because it represented a good “starter” entry into selling on Amazon. These kinds of ecommerce stores are sometimes appealing to larger retailers seeking new products to expand their offerings.
This stage marks a tipping point where it is clear that the store has survived successfully and has hit a performance plateau where more money, time, and effort will be required to continue growth.
Many owners decide to sell their businesses at this point because they can still show stable growth, good revenues, and a good product mix over several years of operation. Instead of investing more money in expansion, they limit risk by “selling at the top” and generally for significant capital gain.
Larger retailers and portfolio investors tend to buy these businesses. Unlike the inexpensive starter stores that usually take a month or two to sell, these more established and, therefore, expensive listings require lengthy due diligence, negotiation of terms, and other delays that can take many months before the sale closes.
The stage of rapid expansion or “take-off” is generally precipitated by an investment of money, the purchase of a complementary business, or change of ownership.
The risk at this stage involves keeping the expansion under control so it doesn’t burn-out the resources of the company.
When a company has achieved a strong degree of market share it is considered a mature company. The risk is in maintaining that market share.
Changes in technology and consumer buying habits are the biggest sources of risk, and this prompts owners to get out while the going is good. Larger retailers and portfolio investors are the primary buyers of mature companies, often for their customer base and vendor contacts.
Evaluate your business situation
I find that business owners always wonder what their business is worth, so I will give you a simple explanation of what adds value to a web business, how to estimate what it might sell for, and approximately how long it is likely to take to consummate a sale to a new owner.
Start with a classic business decision-making tool: the SWOT analysis, and take an honest and brutal look at the strengths, weaknesses, opportunities, and threats with respect to your business.
Write out your answers and keep them for future review. SWOT analysis is a dynamic tool that should be repeated every few months. The following SWOT template covers common topics. Feel free to add your own questions as they arise.
- How long has your business been in operation?
- How much has your production grown since inception?
- Is your product unique? Do you serve a niche market?
- How stable is revenue production?
- What is your Amazon Sales Rank, or similar?
- If you have an independent ecommerce site, what is your average monthly traffic? What country does it come from? Is it primarily organic search or do you pay for traffic?
- Are there any warning signs of possible change or decline in market share, revenue production, vendor performance, or customer buying habits?
- Is competition growing in your market niche?
- How are changes in your ecommerce platform, its rules or technology, affecting your business? Does this represent any future risk?
- Is your cash-flow adequate to maintain inventory?
- Do you keep good business records and efficiently manage your operations and money?
- How relevant is the economy to your business performance?
- Can you expand by acquiring a competitor?
- Are you accumulating profits that can be used to improve your business through new technology, consulting services, new product lines, advertising, etc.?
- Has someone offered to acquire your company or establish a partnership?
- Customer buying habits
- Rules and regulations
- Availability of operating cash
- Cost of inventory
- Uncertain availability of popular products – vendor performance
- Returns and refunds
- Marketing effectiveness and cost
- Personal ability to actively manage the business
You can assign plusses (+) and minuses (-) or points to help you evaluate the analysis by adding up the positives and the negatives. Often just reviewing your answers will give you a good idea of the health of your business and its future potential.
Consider where your business stands with respect to the 5 Stages of Small Business Growth, and decide whether you should consider selling.
What to expect when selling your business
While it is possible to sell your business yourself, I recommend using a broker. Preparing your business for sale, valuing your business, finding a buyer, conducting negotiations, dealing with the buyer’s due diligence process, executing the proper legal contracts, closing the sale, and transferring ownership all takes a lot of time, money, and effort that you could be using to keep your business performing optimally. Most sellers resort to using a broker, and are glad they did.
There are several established web business brokers. They can be found by searching for “web business broker”.
I can’t comment on other brokers, but I will describe the process of buying or selling a web business that I’ve experienced as a broker, which should give you an idea of what to expect from other web brokerages. The following outline might not match the exact order of things that you experience, but it will give you an example of what to expect.
When you make your first contact with a broker, expect to be asked about:
- Your monthly and annual revenues, expenses, and profit.
- Your historical performance.
- Problems you have encountered.
- The type of products you sell, which are the best and worst selling, how you operate your business, how long the business has been operating, and other details that will describe your business to the broker. Be honest. Glowing falsehoods will not help you get a good price or sell your business quickly.
Expect to provide proof of these figures, such as screenshots of your Seller Central analytics, and any other data you have such as Google Analytics, bank statements, etc. Also expect to update your revenues, expenses, and profit figures monthly.
The broker will take down the information and develop an idea of the potential value of your business. The value depends on:
- The amount of traffic or transactions.
- The age of the business.
- The stability of revenue production over time.
- Services and assets included in the sale e.g. fulfillment, marketing, acquisition of inventory, referring websites, social media presence, etc.
- Profit margin.
Valuation rule of thumb:
- Smaller, younger businesses – 2x to 3x annual EBITDA/profit (earnings before interest, taxes, depreciation, amortization).
- Established businesses (3 to 5 years minimum) – 3x to 4x annual EBITDA.
- Top-tier businesses – 4x to 5x or more annual EBITDA.
Note: Actual selling price might be lower if you are in a hurry to sell, the business has marginal performance, or is of a type that has limited buyer interest. Be skeptical if the broker quotes a higher price and gushes about how many buyers are waiting to snap up your business.
Fees and commissions
Small brokers will charge commission in the region of 15% of the selling price which includes marketing and administrative costs. It is paid by the seller and comes out of escrow funds.
Finding a buyer
You will be required to sign a listing agreement – usually for 6-months exclusive representation. Read this carefully because it outlines your responsibilities and the responsibilities of your broker. When the listing agreement is signed your broker will list your business on the website and will begin marketing your listing to approved buyers.
Give your broker any suggestions of potential buyers. You might have had offers to buy your business or you might have a feeling that one of your competitors has been watching your performance. Anything you can do to help your broker find potential buyers will benefit you in terms of the time it takes to sell your listing.
You will also be required to fill out a listing questionnaire. Keep your answers conservative and authentic. You are selling your business not promoting your products. Do not use claims of “the best” or “poised to take-off” or similar because experienced buyers will not be impressed by hyperbole.
Keep in touch with your broker. Communicate any changes and any contact you have with potential buyers. It might take a full 6 months or longer to sell your business, so don’t stress out during the first month or two. Don’t neglect your business during this time as it will lose value.
Be prepared to talk about your business with prospective buyers. Some advice:
- Have all your analytics, finances, software details, and vendor information at hand.
- Talk about why you started the business, what opportunities prompted you to start the business, and how you have managed the business over time.
- Answer the buyer’s questions simply and authentically.
- Again, avoid hyperbole.
- Your broker will help with this.
Making the sale
The buyer will first present a letter of intent. At any point in the process be prepared to negotiate price. Your broker will help with this, so take advantage of the advice and service.
You will need to compile a due diligence file. Collect all your analytics, product invoices, service invoices, service contracts, employee contracts, information on any software you use to manage operations, vendor information and contracts, financials such as profit/loss statements, bank statements, etc. in a file that you can provide to serious buyers. Remember that sometimes the buyer will decline after doing due diligence.
When it comes to the sale transaction, the sale price will be agreed, money will be deposited to escrow, and a contract for sale will be signed. You will receive the money in escrow, less the broker’s commission, when the sale has closed to everyone’s satisfaction.
Your post-sale responsibilities include completing all the necessary account and asset transfers quickly. Your broker will advise you. Then you will need to train the new owner to operate the business.
A good broker earns every penny of the commission. A lot of time and money is spent on researching your marketplace, your competitors, contacting potential buyers, and the preparation and distribution of marketing materials.
If you start working with a particular broker, stick with that broker. If you don’t like your broker, honestly convey your concerns to that broker before you consider switching. The brokerage firm might transfer your account to a broker you like better.
What’s your next step?
The first thing to do is to make a decision by using the tools and information contained in this article. Consult people who can provide good advice, such as successful ecommerce retailers, your attorney, your accountant, and evaluate what they tell you.
Decide whether you might be interested in investing in another web business, and discuss with your broker. I maintain a list of buyers and their requirements, and watch our listings for appropriate offerings to show my clients. I work with both buyers and sellers and am always available to help.
This post was by Victoria Duff, founder and CEO of business consulting firm, aBusinessPlan.com, specializing in new venture planning and launch for public and private companies under $500 million.