An In-Depth Guide to Selling Your Business
Selling a business is the ultimate goal of many entrepreneurs. It’s an enormous milestone, can provide a nice cash infusion and is an incredible learning experience.
It’s also an extremely lengthy process fraught with land mines and emotional ups and downs that are not for the faint of heart.
What follows is a crash course on selling your eCommerce business. Most will be highly applicable to selling a non-eCommerce business as well, particularly if it has a strong online presence.
While impossible to cover every facet of getting a deal closed, my goal was to create a guide that will give you a solid understanding of the process and the confidence to move forward.
This post also includes copies of key documents (like LOIs and asset purchase agreements) I’ve used in my own deals for your reference, so you can better understand what’s legally required.
There are undoubtedly people far more qualified to write this guide than myself, but I do have a bit of experience in the space. I spent a couple years working in the M&A (mergers and acquisitions) space in corporate finance after college and, since getting into eCommerce, I’ve sold two stores (details here and here).
This is a doozy of a post clocking in at more than 8,500 words. So in case you don’t want to read it straight through, I’ve broken it down with convenient links:
Why Selling Is a Good Idea
I use to think people were bat crazy for selling their eCommerce businesses. Why would someone sell a perfectly profitable business for 2x or 3x earnings when you’d be hard-pressed to get a return like that elsewhere?
What was wrong with people? Couldn’t they do basic math?!?
Then I ended up selling both of my eCommerce businesses and realized there was a lot more to consider than just a raw ROI calculation.
So why sell?
Better opportunities elsewhere
Entrepreneurs have limited bandwidth and if you have great opportunities elsewhere, it makes sense to sell your business to focus on other areas. That’s why I sold TrollingMotors.net.
At the time, I was running three businesses and TM.net was the one I thought had the least potential. Selling it was the right decision, as it freed up bandwidth to invest more heavily in my other two ventures, which yielded a better long-term ROI.
To mature as an entrepreneur
I sold my second business, Right Channel Radios, in large part because I was ready to move on.
It was a drop-shipping business and one I had run for close to a decade. I didn’t see the ability (or have the desire) to meaningfully grow the business and was ready for a new challenge, especially one around building a proprietary product. So I sold.
To experience an exit
This may be a vain reason, but having a successful exit is one of the ultimate milestones in the entrepreneurial journey. It feels great to accomplish, you learn a lot and it can lend credibility when you’re looking to partner with others in the future.
Put frankly, it’s a nice feather to have in your hat as an entrepreneur.
Dealing with burnout (or apathy)
The best businesses are those where the owner is deeply committed to the business. When an owner mentally checks out — or even worse is facing burn out — it’s only a matter of time before things start to deteriorate, even if that process plays out slowly over a number of years.
It’s far better to sell a business you’re not excited about or committed to running well than to let it die a slow, painful death over time.
Why Selling Is a Terrible Idea
Convinced you should sell your baby? Not so fast. Selling a business can be a royal pain and the absolute wrong decision. Here are a few reasons to think twice before moving on.
Massive transaction costs
I had a painful realization halfway through the process of selling my second business that I want to highlight so it’s not a shocker for you. Put briefly, selling a business hurts your ability to generate cash flows, even if you reinvest the funds in another asset.
Let’s say you have a business making $250,000 per year and it’s worth/sells for $750,000. After taxes (we’ll assume 20% at capital gains rates) and paying a 10% broker fee, you’re left with $540,000.
Assume you want to reinvest that money in a new business. Can you buy a business similar in size to the one you just sold? Not even close! You’ve lost nearly 30% of your purchasing power in the deal.
You went from owning an asset that generated $250,000 in income to cash that could only purchase a similar business that could generate (assuming the same multiple) $180,000.
This stung for me when I realized it, so make sure you’re considering it when deciding whether to sell.
And this is just an analysis of the financial costs. You’ll have to commit months (and in some instances more than a year) of your time to selling the business, which is work you won’t be compensated for.
It’s more stressful than flying with a toddler
That’s a lie.
Nothing is more stressful than flying with a squirmy toddler who grabs at everything (and everyone) and requires three messy diaper changes in a tiny bathroom during turbulence. (Can you tell I’m scarred for life?!?)
But it can be an incredibly stressful event and takes an emotional toll even in the best of transactions.
It takes a massive amount of time
To run a sales process and get maximum value takes a looooong time.
You need to prep the business for sale, list it on the market, find a good buyer, convince them your business isn’t a lemon, negotiate closing and train them without you both killing each other.
And that’s the best-case scenario. Often it takes going through this process with multiple buyers before you find one who can close the transaction.
You can do a firesale in a month or two, but you’ll leave 35–50% of the business value on the table. Doing the entire process right can take six months minimum, if not 1–2 years.
The dangers of selling just for a payday
One thing I’d caution against is selling solely because you’re excited at the thought of getting a big ol’ pile of cash.
Sure, getting that wire transfer at closing is a pretty exhilarating moment. But that excitement wanes quickly and you’re soon left with a full bank account and no business to fill your professional life with challenge, purpose and excitement.
If you’re the type of entrepreneur who can build a meaningful asset to sell, I’m guessing it’s something that’s important for your mental well-being. So make sure you consider why you’re selling and what you want to do after the sale.
For more on this, see the section on “Dealing With Regret” later in this post.
Most eCommerce businesses with under $1 million in earnings will sell based on a multiple of something called Seller’s Discretionary Earnings or “SDE.”
SDE = Pre-tax profits + owner compensation
If your business made $200,000 last year in profits after paying yourself a salary of $75,000, the company’s SDE would be $200,000 + $75,000 = $275,000.
SDE is a proxy for how much money the business is generating for the owner, including any salary.
The value of the company is based on a multiple of SDE, usually between 1.5x on the low side and 3x on the higher side. The multiple in question depends on a lot of different things, including:
- Historical growth and performance
- Market size and future prospects
- Defensibility of the business
- How organized the business is (financials, systems, etc.)
- Level of owner involvement
- Margins and levels of inventory/working capital required to run the business
- Economic cycle and how in-demand businesses are (buyer’s or seller’s market)
- The size of the business (larger businesses get a better multiple)
A business that has had declining revenue for the last three years, has disorganized financials and is poorly run could sell for a low 1.2x multiple. A business with a strong line of branded, proprietary products and consistently growing profits could sell for 3x or more.
I sold TrollingMotors.net for a 2.7x multiple and Right Channel Radios for a 3x multiple, which were both on the upper end of the multiple spectrum. I attribute those multiples due to financial results on the upswing, organized operations and financials, and a high trust factor between both buyers and me.
Why are multiples so low?
A lot of people are shocked to find out their business is only worth 2x to 3x SDE. Why so low?
The 2x to 3x SDE multiple is a little misleading because it doesn’t value the owner’s time to run the business. Let’s look at an example of a store making $100,000 in profits and selling for a 2.5x multiple for $250,000.
That’s an effective 40% return on your money each year, right? ($100,000 annual return/$250,000 investment = 40%).
Not if you consider the opportunity cost of your time. If you’re spending 40 hours per week running your new business, you’re giving up what we’ll assume is a $75,000 salary.
So you’re actually spending $250,000 to earn $25,000 more than you normally would if you were employed. You’re actually spending $250,000 to generate $25,000 in incremental profits.
This still may make sense. There are a lot of benefits to running your own business and 10% isn’t an awful return. Plus, most importantly, you should be able to dramatically increase those revenues and may not need to contribute 40 hours per week of work to run the business.
But the fact that the owner’s salary isn’t included makes a big difference when calculating returns.
Secondly, small eCommerce businesses are far, far riskier than other investments. Many small businesses for sale are — to be frank — a mess. The financials aren’t accurate, there are no solid systems and it can sometimes be difficult to tell the true opportunities from the nightmares.
So this risk premium helps drive down multiples.
Pricing your business
Pricing your business is as much an art as it is science, due to all the factors that go into the decision. But here are two ways to make an educated decision:
Talk with a broker
Chatting with a brokerage firm will give you a good sense of what’s a reasonable price/multiple for your business.
You should be able to get a rough estimate without having to commit to selling through the broker. A good broker will understand you’ll be back if they make a good impression and will try to convince you they can offer value in the deal.
Spend time researching the market
You’ll absolutely want to spend time studying listings of other business for sale to get a sense of market multiples. You’ll soon get a sense of where valuations are for businesses similar to yours.
Here are a number of sites you can study to get a sense of pricing and market multiples:
Get feedback from the community
If you’re a member, the eCommerceFuel Private Community is a great place to get feedback. Our members have collectively sold countless businesses worth tens — if not hundreds — of millions of aggregate dollars and can provide solid guidance.
If your business has inventory, its sale value is usually negotiated separately from the value of the business.
A business that generates $150,000 in SDE and is for sale at a 2.5x multiple would sell for $375,000. If they had $25,000 in inventory that would usually be added to the total price for a total transaction price of $400,000.
But this is a general guideline and NOT a hard-and-fast rule.
The level of inventory relative to the income the business generates can have a massive impact on the multiple.
I recently looked at a business to buy that generated about $250,000 in SDE but required $1 million in inventory and working capital to run. The capital required to generate the returns was so massive that in my opinion the business wasn’t worth the value of the inventory.
Further, not everyone thinks that inventory should be tacked on to the purchase price.
Some buyers will insist that inventory is included in the price. Their reasoning goes that you need the inventory to operate the business so it shouldn’t be sold or negotiated separately.
At some point it’s all semantics.
Most eCommerce stores will require a certain level of inventory to operate. Whether you negotiate the value of the inventory separately and pay a smaller multiple or include inventory in the purchase price and pay a slightly higher multiple, it often comes out similarly in the end.
If you do negotiate inventory independently, it should be sold to the buyer at cost.
The one exception is if you have a lot of excess or old inventory that hasn’t moved in a while. A savvy buyer will ask (and you should probably concede) a discount on this inventory as it’s going to be harder to move and will be worth less money.
Determining and negotiating what constitutes “excess inventory” is an exercise unto itself! But it’s probably pretty safe to say that product that hasn’t moved in 12 to 18 months could be considered excess.
I covered a lot of different caveats and approaches to valuing inventory, so here’s a good rule of thumb:
Price your business on a fair multiple of SDE and add the value of any inventory that’s moved in less than one year to the purchase price. You’ll be hard-pressed to find a buyer who thinks you’re being unreasonable with this approach.
Prepping Your Business for Sale
If you have the foresight and ability to prepare for a sale six to 12 months ahead of time, the return on your planning can be enormous. When selling Right Channel Radios I spent the proceeding 12 to 18 months working toward the sale.
While it took more time, the decision added hundreds of thousands of dollars to the final sale price. It’s not uncommon to be able to sell your business for 50% to 200% more if you have the foresight to plan.
Here’s what you should do to get the most money out of your business:
Run as leanly as possible
There’s a time and a place for making long-term investments in your business. The 12 months before a sale isn’t that time.
Why? Your sale price will be determined based on the proceeding 12 months of earnings. So any dollar you’re able to save (and add to your bottom line) will return to you anywhere from 1.5x to 3x as much in the transaction.
You don’t want to shortchange your business or do anything unethical that will hurt the future prospects of the business for the buyer. But you want to delay as much discretionary spending as possible.
Prepay your subscriptions a year in advance to get that 20% discount. Cancel things you aren’t regularly using. Take a good, hard look at your expenses and cut anything that isn’t absolutely necessary.
Being intentional about your expenses leading up to a sale will have a big payoff.
Get your accounting in order
If you’re like most businesses, your books probably aren’t as clean and tidy as they should be. One expense that’s worth incurring in the lead-up to a sale is a good bookkeeper to help get your financials in order.
This will pay off in spades once you go to sell.
Not only will it make the process of advertising your business and writing a sales prospectus easier, but it will speak volumes to potential buyers.
Messy books mean a potential buyer will need to do a lot of diligence to effectively re-create your income statement to figure out what’s going on in the business because they don’t trust your numbers. This will have a negative impact on the deal terms and price offered.
It reminds me of a section from The Hitchhikers Guide to the Galaxy, where the importance of carrying a towel for interstellar hitchhiking is emphasized. Apart from its practical applications, the towel serves as a massive psychological signal:
“What the strag [non-hitchhiker] will think is that any man who can hitch the length and breadth of the galaxy, rough it, slum it, struggle against terrible odds, win through, and still knows where his towel is, is clearly a man to be reckoned with.” — The Hitchhikers Guide to the Galaxy
It’s the same with accounting.
A seller who has his books in order despite the myriad distractions a business throws at him signals that he’s organized, trustworthy and capable of getting a deal done. It also provides comfort to the buyer that the business is likely “as advertised” and the buyer won’t find any nasty surprises once she opens the hood during diligence.
So get your books in shape before selling. (And don’t forget your towel on your next trip to Alpha Centauri A!)
Break out shared resources
If you run multiple businesses you likely share resources across your ventures. You may be using a single help desk, phone number or hosting provider for multiple stores.
When you sell, buyers will want to support their new business with independent services. You’ll need to create new accounts dedicated solely to the business. You’ll also have to recast your financials to account for the new venture absorbing 100% of the cost of those resources.
This can be a cumbersome process but it’s important to do. If you can do this six to 12 months before a sale, there will be less confusion and a longer history associated with the new accounts, which should make things easier during the sales process.
Understand the costs of a firesale
You can almost always get a higher price for your business if you plan ahead. But that doesn’t always mean it’s the best option for your specific situation.
You should do some basic calculations to see if the payoff for spending 12+ months to prep your business for sale is worthwhile given your circumstances.
Let’s say you have a business that made $200,000 in profit over the last year. You haven’t run the business very leanly, you’ve dropped the ball on marketing, and sales are down about 15%.
Because of the downward trend and some other factors, you guess you could sell the business for a 2x multiple. So you’d get $400,000 in a sale today.
Firesale Price = $200,000 SDE * 2x = $400,000 Sale Price
Now consider what you could do with a 12-month prep window.
With a renewed focus on marketing and cutting unnecessary costs, you think you could turn revenues around and get profitability up to $275,000. With that new positive income trend, you could likely also get a 2.75x multiple in the sale.
After 12 Months of Work: $275,000 * 2.75x = $756,000 Sale Price
Is it worth a year’s delay and some investment work on your end to make an additional $356,000?
That’s a decision that only you can make. Regardless, it’s an exercise you should do to get an idea of how much money you’re potentially leaving on the table if you decide to sell quickly.
Selling Yourself vs. Hiring a Broker
When selling your business you have two choices: sell it yourself or hire a business broker. There are pros and cons to each approach.
Pros of Hiring a Good Broker
- They usually have a list of interested buyers to promote your business to
- They’ll understand the current market trends and multiples
- You’ll have someone walk you through the process from beginning to end
- They’ll assist with creating a sales prospectus for your store
- They’ll help in the negotiating stage and with vetting buyers
Cons of Hiring a Broker
- It’s more expensive. Brokers usually charge a 10% fee based on the sale price.
- The way brokers are paid can incentivize getting a deal done vs. maximizing the price you get
- Quality of brokers vary widely and finding a reputable one is paramount to a good experience
- There’s often value and clarity in being able to communicate directly with a buyer vs. through an intermediary
If the thought of selling your business on your own sounds intimidating or you simply don’t want to bother with the process, a good broker will likely add value and earn his/her commission.
If you have a strong financial background, have existing leads for potential buyers, or simply want to run the process yourself, I’d encourage you to give it a shot.
I can personally recommend QuietLight Brokerage if you’re looking for a reputable brokerage in the eCommerce space. It is one of (if not the) best known brokerage firms for eCommerce businesses, and I know multiple people who have had good experiences with QuietLight.
FE International is another reputable firm in the space that does a mix of eCommerce, SaaS and other deals. Software entrepreneurs like Rob Walling and Patrick Mackenzie have sold their businesses with FE and have been happy with the experience.
If you do go with a broker, make sure to ask for references. Also ask to see a recent prospectus the broker created (discussed below) for a similar business to get a sense of what kind of quality you can expect.
Writing the Sales Prospectus
The first step to getting your business on the market is to create a sales prospectus.
You can think of the sales prospectus as an insanely detailed sales brochure for your business. This is the first thing you’ll send out to interested buyers.
Sales prospectuses vary widely in quality, comprehensiveness and effectiveness.
A good one can grease the wheels for an effective sale, while a bad one can send a negative signal to buyers. Or worse, it can prematurely disclose things about your business that you don’t want anyone but a committed buyer in the diligence phase to know.
A good prospectus should take some time to create. The sales prospectus I put together for TrollingMotors.net took close to a week to assemble, format and finalize. Spending extra time here can easily add 20% to 30% to your sale price.
Here’s what a solid sales prospectus should include:
- Why it’s for sale
- Detailed financials
- Minimum of 3 years of financials (income statement, balance sheet and cash flow statement if available)
- Detailed summary of expenses
- Inventory details ($ value on hand, # of turns per year)
- Detailed explanation of add-backs or incremental expenses for a new owner
- Traffic and analytics
- Sources of traffic
- Overall traffic trends
- Conversion rate & average order value
- Revenue and conversion rates by source
- Product mix
- Contribution of top 25 products to total sales (but hide product names)
- Business details
- Competitive strengths
- Opportunities for a new owner
- Competitive landscape
- Business infrastructure and operations
- Tech stack and software used
- Team and owner involvement
- Number of suppliers and relationship detail
Understanding add-backs & adjustments
Add-backs are expenses you add back to your income. They represent unusual or on-time expenses that shouldn’t be recurring and therefore shouldn’t deduct from the value of the business. Examples could include a costly one-time website redesign or a fancy trip you expensed but that really wasn’t necessary.
Add-backs are a delicate area. There’s a strong incentive to add back as many things as possible to boost profitability and increase your potential sales price.
But it’s a huge red flag to a buyer if they dig into your add-backs and discover you tried to include a number of legitimate business expenses.
My advice is to keep your add-backs to a minimum. The best strategy here is to run your business as leanly as possible the preceding year in preparation for a sale so you don’t have to modify your financials.
When you do include the add-backs, make sure they are legitimate and you have a strong case to back them up.
I’d recommend also deducting from your income any financial adjustments or costs you know the new owner will incur that you didn’t.
An example: Let’s say you’ve been using your $50 per month help-desk software to run all three of your businesses. You know the new owner will need to spend $50 per month for a new, dedicated help-desk account. So you should deduct this from the earnings of your business.
Apart from being transparent and the right thing to do, it helps build trust between you and a buyer. Surprises erode trust and are the enemy when it comes to closing a deal.
Don’t let a potential buyer find out about incremental expenses in the diligence period. That will make the buyer wonder what else you’ve conveniently forgotten to mention and will lower confidence in you and the business.
Things not to disclose in the prospectus
Your sales prospectus will include a LOT of details you’re not accustomed to disclosing. You’ll require anyone who views it to sign an NDA (non-disclosure agreement, more details below), so the details will be semi-private.
But I know from personal experience that a lot of people a) don’t respect NDAs like they should, and b) regularly look at prospectuses to get ideas and/or intelligence for their own ventures.
So don’t share mission-critical details someone can learn simply by signing a difficult-to-enforce NDA. These would include a list of your specific best-selling products, the names of your suppliers or anything highly proprietary.
I’d recommend keeping those close to the chest until you’ve signed an LOI with a buyer who has put down earnest money. Or, at a minimum, disclose them only to select interested parties who you feel good about if they haven’t signed an LOI.
If using a broker, always make sure to review and approve the prospectus put together for you before it gets sent to the broker’s list to ensure you’re comfortable with everything being shared.
Listing Your Business for Sale & the NDA
Congratulations on finishing your sales prospectus, your business looks downright amazing! Now it’s time to put it on the market.
If you’re working with a brokerage, it should handle everything at this stage. It will email a high-level summary of your business to its buyers’ list to generate interest. Parties that are interested will sign an NDA and receive your prospectus to review.
If you’re listing the business yourself, you’ll be responsible for marketing it and generating interest. You’ll want to post it for sale on BizBuySell, a site where owners can post businesses for sale. If you have an audience or other connections online, consider leveraging them to help spread the word.
You can consider listing it on the business auction site Flippa, but I wouldn’t recommend it unless your business is smaller, you don’t mind disclosing a LOT publicly and you’re comfortable with a short-term auction process.
Unless you take the Flippa route (again, usually not recommended for larger stores), you’ll want to require anyone who asks for your sales prospectus to sign an NDA, or non-disclosure agreement.
When people sign an NDA, they commit to keeping the sensitive details of your business confidential and not passing your prospectus around to others.
As I alluded to earlier, NDAs are by no means perfect. They can be difficult to enforce and hard to determine if people violate. But they’re definitely better than nothing.
Here’s the actual NDA I had people sign who asked to see the TrollingMotors.net prospectus. Feel free to modify the language to create your own NDA, or you can find a number of prewritten ones online.
You could hire a lawyer to create a custom NDA but I’d recommend saving your money for the asset purchase agreement, which in my opinion is a better investment of legal fees.
Evaluating Buyers & Offers
Offers can vary dramatically in terms of their strength, and the purchase price is typically not the most important thing you should consider.
As pessimistic as this sounds, I’d recommend approaching every offer with a healthy dose of skepticism. Getting a deal done is a complex process requiring stamina, attention to detail and the ability to secure ample financing or cash.
And that’s not something everyone is able to do, even if they’re making a play for your business.
There are two things you should look at when evaluating offers: the financial details and the person making the offer.
There are a number of different ways a buyer will pay for your business. The most common are:
An all-cash deal is, of course, what every seller hopes for. If you can get 100% cash I’d recommend being a bit more flexible on price. It will expedite closing and reduce financing contingencies, and makes for a cleaner transaction.
If someone does make a cash offer, it’s a good idea to ask for proof of funds to make sure they indeed have the cash on hand.
Owner financing is when the seller finances part of the purchase price for the buyer. The buyer will bring a portion of cash to closing with the rest to be paid to the seller over time. Effectively, the seller is acting like a bank and loaning money to the buyer.
I’m not going to mince words here: I hate owner financing.
For me, selling my businesses in the past partially came down to avoiding risk. I’m choosing to sell a cashflow at a 3x(ish) multiple to lock in those gains and avoid the chance the business tanks over time. So why in the world would I finance a purchase for the buyer and assume MORE risk? As a seller, you’re assuming all downside risk (apart from any interest) without any of the upside of ownership.
No, thank you.
I’m not saying you should never accept a deal with it. But it’s my least favorite form of deal financing as a seller, unless you have a lot of faith in the future of the business AND the ability of the new owner to execute on it.
Bank and SBA loans
These are a much better option than seller-financed offers but still carry some risk, especially if the buyer hasn’t been pre-qualified.
Banks understand how to make car and bank loans. But loaning $750,000 to buy a business that sells widgets on the internet? This is totally outside a traditional bank’s comfort zone.
Just about any bank loan to buy a business (SBA or otherwise) is going to require collateral. And even then, sometimes the application isn’t approved due to the exotic nature of internet businesses or a borrower’s personal financial history.
So make sure to think about the buyers’ ability to get approval. If they aren’t pre-approved, I’d be asking questions about their credit history and score, net worth and any discussions they’ve had with lenders before accepting an offer.
For more details on the different financing options available, check out this eCommerceFuel podcast episode on Buying Businesses With Other People’s Money.
An “earn out” is where the buyer holds back a portion of the purchase price contingent on the business hitting certain financial goals. These goals are usually tied to revenue or net income.
Should you agree to one? It depends.
An earn out could make a lot of sense for a business that’s growing extremely quickly. Perhaps a buyer is worried that the business won’t maintain the rapid 50% year-over-year growth rate you’ve had over the last 18 months, especially if you’re pricing the deal based on the assumption of growth continuing.
If you have confidence in the continued growth of the company, you might consider taking part of the purchase price as an earn out instead of taking a straight-up cut in the value of the deal.
Like all things, it’s negotiable and may or may not make sense for your situation.
Evaluating a potential buyer
Financing details are crucial. But perhaps more important is deeply understanding the person behind the offer.
Closing a business purchase is a complex, highly technical process. Even the best deals are a lot of work and require a strong sense of trust and rapport in addition to well-thought-out contracts.
You want to work with a buyer who you ideally both like and trust. Someone who isn’t an arbitrary stickler and will work with you in good faith. Someone who has integrity and with whom you can build a strong rapport.
I’d easily take an offer for 90% of my asking price from a well-qualified buyer I trusted and liked versus a full-priced offer from someone I felt uneasy about. One of the worst things in the world is spending three months trying to close a deal only to have it fall apart and have to start again at the beginning.
A few things to consider:
- Does the person have experience running/buying/selling businesses in the past?
- Do they follow through with what they say they’ll do, even in small things?
- Do they have a professional background or body or work online you can look at and evaluate?
- Do they communicate well, both on the phone and via email?
This is a great time in your life to be picky and judgmental. Read into things. Trust your gut.
If someone writes sloppy emails, doesn’t get back to you when they say they will or is late getting on calls it should be a HUGE red flag. Small problems you see early on will be magnified 10x down the road when the sale and diligence processes get more complex and stressful.
There’s a lot to think about when weighing offers and deciding whether to accept them. Make sure not to fixate solely on the purchase price and you’ll likely avoid a lot of heartache.
Signing a Letter of Intent (LOI)
Once you’ve come to an agreement with a buyer on basic deal terms, it’s time to sign a letter of intent, often referred to as the LOI. The LOI serves as an agreement to help the buyer and seller lay out basic deal terms and move toward an official closing.
Here’s what a good LOI should cover:
- Deal structure: The purchase price and all financing details
- Timeline: How long the buyer has to conduct diligence and close the deal
- Contingencies: Under what circumstances the buyer or seller can terminate the deal
- What’s included: Websites, trademarks, inventory, etc.
- Post-sale details: How long the owner will remain available for consulting or training
- Exclusivity: If the seller can entertain other offers during this closing period (usually not)
- Earnest money: How much is required and if/when it is refundable in case the deal doesn’t close
It’s important to understand what an LOI is not. First and foremost, it is NOT a binding agreement to purchase the business.
Most LOIs have very open-ended contingency clauses that allow buyers to walk away if they find something they don’t like and/or feel was misrepresented. So an LOI is really just a document that helps get both parties on the same page, allowing them to take a formal step toward closing the deal.
But it’s by no means a guarantee of a sale.
Deals fall apart after LOIs are signed all the time. This is why picking a buyer you trust and feel good about is so important. You’re trusting the good faith of the buyer at this stage and need to bank on his/her good faith and interest in the business.
You can download the actual LOI the buyer and I signed for my sale of TrollingMotors.net right here to see what one looks like.
I’ve removed the buyer’s name and a few personal details but the vast majority of it is there and should provide a good sense of the level of detail and structure required.
Earnest money is what buyers pay upon signing the LOI to indicate their seriousness and intent to close a deal. The amount you should ask for depends on the size of the deal.
The TrollingMotors.net sale price was in the low six figures and I asked for $5,000 in earnest money. I didn’t ask for earnest money selling Right Channel Radios because I was very confident with the buyer’s desire to close.
I’m not sure if there’s a set rule for the amount, but the higher the deal value the more money you’ll want to ask for. Also, make sure to clearly define in the LOI under what circumstances the earnest money is (or isn’t) returned if the deal falls apart.
The Diligence Period
The due diligence period occurs after an LOI has been signed when the buyer does a deep dive on your business. Buyers do this for two reasons:
- To make sure everything represented in your sales prospectus is accurate
- To make sure there aren’t any problems or issues that haven’t been disclosed
The buyer will want to see just about everything. And unless you have some really good reason, you will need to provide it. A savvy buyer doing a good job on diligence will ask to see vendor agreements, bank statements, tax returns, multiple years of accounting statements and more.
A prospective buyer will likely come on site to do extensive research on your operations as well.
One could write an entire book on how to conduct a thorough diligence process to ensure you’re not buying a lemon business. Fortunately, as a seller, the onus is largely on the buyer to ask for everything he/she might need. You just need to provide things in a timely manner.
You can expedite this process by having a lot of this information available on Day 1 of the diligence period. Things that are a good idea to collect and have ready to hand over include:
- Bank statements from the past 12 to 18 months
- The last 3 years of your business tax returns
- Credit card statements from the last 12 to 18 months
- Merchant and credit card processing statements
- Access to all important software/SaaS apps (create a Lastpass account for them)
- Access to any of your working SOPs or processes
- Detailed financial statements for the last 3 years with line-by-line breakdowns of expenses
Dealing with confidentiality during diligence
Confidentiality can become a real concern at this point if you have a team. They’ll undoubtedly notice someone new poking around the business and will wonder what’s going on.
What should you tell them?
The majority of owners choose not to disclose that they’re selling the business. The reasons vary but include not wanting to spook key employees, to keep knowledge that the business is for sale from leaking and many other legitimate reasons.
Personally, in both of my business sales I told my (small) team about the upcoming sale. I trusted them, didn’t think the knowledge would cause them to leave, and it helped make the diligence process much simpler as they could be involved with providing information to the buyer.
But I’d say this is the exception to the rule.
It’s really up to you. The bigger your team and the larger the consequences of third parties’ knowing, the more likely you’ll want to keep the reason for the diligence process a secret.
Length of the diligence/closing period
The time between signing the LOI and closing the deal will vary based on the size and complexity of the business. For stores with little inventory and a small team that are being purchased for cash, the closing period could be as short as 30 days.
For larger stores with lots of inventory and a sizable staff, the closing period could be substantially longer, especially if the deal is being financed by a third party. The diligence and closing period could take three to six months or more under those circumstances.
When negotiating the LOI, make sure you leave reasonable — but not excess — room for closing. You want a buyer to be motivated to close on a reasonable timetable. Because in the painful case where a deal falls through, you want to know as soon as possible so you can start the process of finding another buyer.
The Asset Purchase Agreement
The asset purchase agreement is the official legal document you sign to close the deal and transfer ownership from the seller to the buyer.
Think of it as an LOI on steroids. The LOI is a short, semi-formal agreement that lays out the basic terms two parties can move forward with in good faith.
The asset purchase agreement is a firm, legally binding document that lays out ALL aspects of the transaction in (sometimes painful) detail.
Depending on your past experience and comfort level, you can often get to this point in the deal process without involving a lawyer. But when it comes to drafting the asset purchase agreement, I’d recommend involving a good attorney.
To find one, tap your network for recommendations on someone who specializes in buying/selling businesses. Or if you’re an eCommerceFuel member you can check the Legal category in our Service Provider Directory, where a number of lawyers are reviewed by fellow members.
One party will usually offer to draft a first version of the asset purchase agreement.
If you can, I’d recommend you offer to do it. It will cost you a bit more money (as your lawyer will be starting from scratch), but you gain the benefit of drafting an initial version that is written with your benefit and protection in mind.
Once you have an initial draft, it will get passed to the buyer (and likely reviewed by their attorney) to make changes and revisions. The process goes back and forth until you have a document you both agree upon.
This process can take two to three weeks in the best of circumstances, so I’d recommend getting a draft of the asset purchase agreement going at least one month before closing.
I spent about $3,000 to $4,000 for the asset purchase agreement to sell Right Channel Radios. This included a v1 draft and two to three rounds of revisions and reviewing the changes made by the buyer.
An actual agreement
While you could conceivably modify this for your own deal, I would strongly recommend using them only as examples to get a sense of what an asset purchase agreement looks like.
In the long run, spending a few thousands dollars in lawyer fees to make sure you’re protected is well worth the expense, especially with a larger deal.
Asset purchase agreement vs. stock purchase agreement
(Relevant to deals done in the United States.)
There are two main ways you can structure a deal when buying/selling a company: as an asset purchase or as a stock purchase.
Most (if not all) eCommerce deals I’ve seen are structured as an asset purchase agreement, but it’s good to know the differences between the two.
In an asset purchase, buyers are only buying only the assets of the company. They are not liable for any problems, issues or lawsuits that might arise from previous operations of the seller. The assets being purchased are moved from the seller’s legal entity (like an LLC) to the buyer’s entity when the deal closes.
With a stock deal, buyers are purchasing the stock of a company. This means that, among other things, they assume liabilities for any past actions of the company. This is less common, as the business needs to be set up as a C-Corp or an S-Corp, which many eCommerce stores are not.
There are other implications, including on how gains are taxed for a seller, but I could write an entire article on this topic. So I’ll simply say that an asset purchase is the best type of structure for most eCommerce deals, but I’d recommend talking with your tax attorney and accountant to be sure.
For a more involved discussion on asset sale vs. stock sale please see the article here.
Closing day is when the buyer and seller both sign the final asset purchase agreement. The buyer wires funds to the seller and the business officially has a new owner.
A few thoughts on closing from the couple of deals I’ve done:
You (or the buyer) will never be 100% ready
Closing a sale is similar to launching a newly designed website: It doesn’t matter when you schedule the site to go live, you never quite feel 100% ready to pull the trigger.
With so much going on, there’s likely to be a few loose strings. Sometimes these can legitimately delay a deal, like if the financing isn’t finalized. Often they are smaller, less critical items that can be wrapped up after the close.
I’d suggest not letting a few minor things hold up a closing date, as you can likely settle them after closing and during the transition period.
Obviously, this will be at the discretion of the buyer and will depend on the rapport you have. But if you wait until every single one of your ducks are in a row, you may push your closing out weeks or even months past the scheduled date.
Should you use an escrow service?
Deciding whether to use an escrow service to hold funds during closing is a personal decision the buyer will need to make.
Some buyers will demand that their funds sit in escrow until all the necessary deliverables (domain, cart ownership, etc.) have been transferred. And given how much money they are spending, it’s a valid request.
With both of my deals, I had a strong enough working relationship and rapport that the buyer wired the funds directly to me after we’d signed the asset purchase agreement without using an escrow intermediary.
So it’s a personal decision and will depend on your relationship with the buyer.
Transition & Training Period
Congratulations! You (in theory) just sold your business and now have a nice chunk of change sitting in your bank account!
While you’ve finished with the risky part, you still have to help the new owner transition into the business and provide support to make sure they are set up to succeed.
How much transition and training help you’ll need to provide should have been negotiated in the LOI. At a minimum, you should plan on helping for at least a month’s time.
It can be tempting to check out at this point, given the money is in the bank, but I’d strongly recommend doing your best to help the new owner succeed. Not only because it’s the right thing to do, but you also want to get a great reference from the buyer, which can help you buy/sell businesses in the future.
The 30–60 days after the sale is a good time to:
- Do scheduled training on critical operational aspects of the business
- Be on call to help the owner with questions that arise
- Update the billing information on any subscriptions or SaaS services
- Change ownership on all accounts to the new buyer’s email login
- File government paperwork to ensure the business is no longer associated with you (if you were previously using a DBA along with a parent company)
- Close any old bank accounts you’ll no longer be using
After your transition period is up, the level of obligation you have is up to you.
Most savvy buyers will understand that at some point problems or issues that arise with the business are now their responsibility and will stop pinging you after a two- to three-month window. But it’s still nice to help a buyer out if they lob a question occasionally, even if it’s been six months since the close.
Occasionally a buyer won’t understand what’s an appropriate level of post-transaction involvement and may continue to ask for a high level of support well past the initial training period. You may have to have some frank conversations about how willing (or not) you are to provide ongoing support past the agreed upon timeline.
You may offend or upset the buyer. But so long as you provided the amount of training after the sale that you committed to, it’s up to them to take ownership of the business and run with it without leaning on you on an ongoing basis.
What to Do With the Money
Obviously this is going to differ from person to person, based on circumstances. But these are three things I’d strongly recommend.
Have fun with a little of it
I’m a pretty financially conservative guy, but what’s the point of working like a mule to build, grow and sell a business if you don’t get to have a little fun at the end?
As a way to celebrate, I bought a very nice mountain bike that my otherwise frugal self never would have purchased. Perhaps it’s a trip in business class for you and your significant other. Whatever it is, do something you otherwise wouldn’t with a small portion of the proceeds to celebrate this massive milestone in your career.
Be responsible with most of it
If you play your cards correctly the proceeds from a good sale can dramatically alter the course of your life for the better. Or it can buy you a fun and flashy year or two and be gone.
Something to think about.
Most importantly, take your time
Someone I respect told me after selling my second business, “It can be a dangerous time when you sell and have a lot of cash. Take your time deciding what to do with it.”
If you have a well-thought-out plan (or need) for your new funds, than by all means act on it. But if you’re not sure what to do, don’t stress out and act prematurely just to earn some yield.
No, you don’t need to invest immediately.
No, you don’t need to be earning 10% on your money from Day 1.
No, you shouldn’t invest 50% of the funds in your brother-in-law’s revolutionary earwax removal system.
It’s far better to give up a little upside then to misallocate a massive pile of cash because you felt rushed into “putting it to work.”
Dealing With Regret
A couple weeks before the scheduled closing of my Right Channel Radios deal, the buyer called to tell me financing wasn’t going to come through.
I should have been distraught that the deal was probably dead.
Instead, I was somewhat excited.
I’d been having seller’s remorse and would lie awake at night thinking of all the reasons why selling was a terrible decision.
Ultimately financing came through and the sale did close. And now that some time has passed I’m very happy with my decision to sell. It was the right call given my long-term goals.
But I’d be lying if I said I never have the occasional twinge of doubt or questioning if I made the right move.
It was also a difficult process deciding what to pursue next in the year following the sale. I’m not sure if I’ve ever struggled with a decision as much in my life. The uncertainty and back-and-forth was taxing.
It turns out a lot of entrepreneurs regret selling their business at some point, aren’t sure what to do next or struggle with filling the void, challenge and sense of purpose their business provided.
If you experience any of this, just know that you’re not alone.
The best thing you can do is to make sure your reasons for selling are sound, don’t put pressure on yourself to build the next Google, and realize it’s something a lot of entrepreneurs deal with.
Cracking a cold beer and checking your bank balance one more time doesn’t hurt either. :-)
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Special thanks to Bill D’Alessandro, Dana Jaunzemis and Mark Daoust from QuietLight Brokerage for their direct input on this article and/or their support during past business sales or evaluations. Photo by Wiertz and used under creative commons.
Originally published at www.ecommercefuel.com on May 1, 2017.