Deciding when is the right time to sell an eCommerce business can be a challenge for the owners. As the revenue and profits increase yearly, the company grows in value.
But life is also happening, and the most successful transactions occur when sellers have the time to find the right buyer and negotiate favorable terms.
Waiting until you can no longer run your online business and then trying to find a buyer seldom results in a favorable outcome.
I’m happy to speak with potential sellers years before their planned exit.
What are the Valuation Multiples for an eCommerce Business?
Business owners often ask me to value their companies. In my practice as a business broker, I think of a business valuation as a stake in the ground intended to bring a buyer and a seller together and enter into a complex transaction resulting in a business exit.
Most eCommerce companies will sell in a range of 2x-6x cash flow.
The key value driver of E-Commerce Businesses is the amount of predictable cash flow the business can generate. What differentiates the 2x companies from the 6x companies is both the predictability of the cash flows and the rate of growth in cash flows, year to year.
The more you can convince a new buyer of the business’s ability to produce cash flow five years into the future, the more that buyer will be willing to pay you for it today.
Deal Structures Matter in eCommerce Business Sales
The deal structures can become complex, and a focus on cash at closing (risk-free) vs. seller notes (secured upside) and earn-outs (unsecured upside) can help bring into focus how the risk and rewards are being shared between the buyer and the seller of the business.
As I work with my clients, we will identify and work to minimize these areas of risk in the business. Risk reduction helps my clients attract more buyer interest and receive higher offers.
Timing the Sale of Your eCommerce Business
Sell on the Way Up
You’ll want to sell your business when your financials are trending upward and you have at least three years of stable or growing cash flow.
It is possible to sell a company with negative cash flow or downward trending financials. The potential buyer pool for a declining business is significantly smaller than the buyer pool for a growing business. The reduced buyer interest in declining cash flow results in considerably lower valuation multiples and a lower final sale price.
Business Buyers Require Actual Results, Not Forecasts
Buyers calculate the value of a business from the financial statements and tax returns. Rarely will the seller’s talk of ‘potential’ be reflected in the amount of cash received at closing. If the future potential is obvious, earn-out structures can be used to capture some of the future earnings for the seller.
How to Sell Your eCommerce Company
The question of how to sell an eCommerce business often comes up. It’s a common misconception that if you have a profitable company, then it will be easy to find buyers for it. The truth is, there are many different types of buyers, and each type has its list of concerns and requirements to identify attractive acquisition candidates.
Once you understand the buyer landscape and how your company compares to the other online businesses currently for sale, you realize the pool of potential buyers is not unlimited. Care must be taken to make a solid first impression.
Sell Your eCommerce Business by Yourself
If you are comfortable with the business exit process and know how to interact with professional business buyers, then you can sell your eCommerce business yourself. Here are a few options and areas to consider before posting the “For Sale By Owner” sign on your company.
Sell Your Business with an Online Business Broker
Many marketplace websites allow business owners to place a listing for their business. This is a low-cost way to reach many interested buyers. The online business broker listing fee frequently includes access to a valuation tool. Expect to receive tens to hundreds of inquiries from your advertisement. Most inquiries will come from non-serious buyers interested in improving their companies by benchmarking to a competitor. You’ll need to communicate with each buyer to quantify their access to cash and commitment to closing a transaction. Qualification is critical because the sale of a company is time-consuming and potentially expensive.
Sell Your E-Commerce Business to a Competitor
If you know your competitors and have an excellent personal relationship with the owners, selling your online business to them could be a good option. The competitors will know of your company and products. They may also be interested in accessing your customer list for cross-selling purposes. Frequently, competitors will be able to merge the two companies, reduce some expenses and increase the annual profits of the combined company. The reduced costs often justify a higher selling price but may eliminate some of your current employee positions.
Drawbacks of Selling Your Online Business Yourself
It is time-consuming to sell a business, especially if you do not already have an extensive network of known buyers. Each potential buyer will require a 10-15 minute screening call, and you can expect to receive hundreds of inquiries for a profitable eCommerce business. Just the initial screening calls will require a considerable commitment of your time.
The qualified buyers will then request financial and operational information about your company. If you aren’t prepared in advance for these requests, it will start to become a regular cadence of building spreadsheets, charts, and documents as each of the potential buyers request something new.
While all of this pre-LOI diligence is occurring, you’ll still need to run your business and protect the confidentiality of your exit plans from your employees and suppliers.
Sell Your Online eCommerce Business with a Broker
If you’re an entrepreneur looking to sell your online eCommerce business, you need to consider selling it through a broker. There are many benefits to using a broker that I will discuss below.
You Get Access to More Potential Buyers
You may not reach all potential buyers when you sell your eCommerce business without a broker. Most brokers will maintain a database of eCommerce business buyers who they will contact to generate interest in your company. With so many low-quality listings on online marketplaces, many buyers prefer to work exclusively through business brokers and bankers. In their view, the engagement of a broker or banker indicates the seller is serious about getting a deal done with a realistic valuation and terms.
Brokers Know What Works
Many think brokers take money from their clients while adding little value to the transaction. However, this isn’t true at all. They spend significant time researching and speaking to buyers and sellers. The brokers are in the market all the time and know what standard terms are used to get deals done and protect their client’s interests.
Brokers are Experts
Brokers are experts when it comes to buying and selling businesses. They understand the industry’s ins and outs and how to negotiate the best sale price for your business. Because of this, they can offer you a better deal than you would get on your own.
Brokers Help You Avoid Mistakes
One of the biggest mistakes entrepreneurs make when trying to sell their eCommerce business is trying to do everything themselves on an as-needed basis. This leads them to make mistakes such as not providing enough information to potential buyers or not being prepared with a well-designed selling process.
Brokers Save You Time
Researching and learning how to sell your online business takes a lot of time. In addition to that, you also have to put a lot of effort into finding the right buyer. Using a broker saves you a lot of time. They already know how to find qualified buyers.
Brokers Operate with Differing Incentives
Not all brokers operate the same way. You should decide which type of incentive structure is most appropriate for your planned business sale.
Retainers drive some brokers. This is the monthly or upfront fee that gets charged while they look to identify a buyer for your firm. The retainer reduces the risk for the broker and allows them to earn a fee independently of selling the business. These brokers will focus on challenging to sell companies or companies being sold at premium valuations. These brokers will have lower success rates than commission only brokers but can take on more challenging and less realistic clients.
Some brokers are commission only. These brokers earn their fees based on the deal closing. As such, commission only brokers will be highly selective about their clients. If the broker isn’t confident a deal will get done, they won’t pursue the listing.
How Much Time Does it Take to Sell an eCommerce Company?
I tell my clients to expect the entire process to take 9-12 months. While most deals are done faster, sellers should be prepared for the inevitable delays in this process.
David Jacobs is a Licensed California Business Broker for Software and B2B Service Companies — Predictable, transparent and orderly exits for business owners across the USA.