Selling Your E-Commerce Business for the Maximum Value
So, you’re the proud owner of an e-commerce business that has seen increasing revenue, and now you’re looking to sell. You have probably put in countless hours of hard work and equity to build a profitable site and now your objective is to get the maximum return on your investment. Well, if you’re looking to best prepare your e-commerce website for the sale, then you’ve come to the right place. In this guest post from brokerage expert, Thomas Smale of FE International, we will explore the options that you have when looking to sell, and how to maximize the overall sale price of your business.
What Is My E-Commerce Business Worth?
E-commerce businesses are valued using a variety of metrics. Typical factors which are often assessed when determining the multiple for your business might include the volume of sales required to reach your revenue, revenue distribution across products, the cost base, marketing spend and the multiples achieved in precedent deals. The average sale price of an e-commerce business is approximately 2–3x annual net profit for businesses in the $20k-$2m range.
E-commerce businesses can require a more detailed valuation compared to other business models due to the variety of costs involved in running the business. Some of these include wholesale costs, processing fees, shipping, fulfilment, marketing (paid and organic) and the cost of employees. Most businesses are valued using seller discretionary earnings, thus removing one off costs and the owner’s compensation, although the latter would vary depending how heavily involved you are in the day-to-day running of the operations. Combined, these facets make valuing and selling an e-commerce business more complicated than other niches, but fortunately, e-commerce is one of the more popular business models with buyers.
An experienced website broker can give you the most accurate valuation by combining industry knowledge with a thorough analysis of the unique aspects of your business. At FE International, we have sold nearly 350 online businesses and have the most data-points in the industry, ensuring our valuations are the most accurate.
Tip: be aware of brokers that provide exaggerated valuation multiples. This is a tactic employed by some brokers to entice sellers into long-term representation agreements and often leads to no offers or sale being achieved. Also beware of brokers using “ready willing and able” buyer clauses. This may leave you out of pocket for thousands of dollars if you choose to not accept an offer/sell your business.
What Makes an E-Commerce Website Valuable?
The main reason an e-commerce business has a value is because a buyer can expect a return on investment (ROI). The value of an e-commerce business is dependent upon many business-specific factors, but the amount a buyer is willing to pay also depends on the relative risk involved. Buyers look to make their money back in the quickest way possible — they will pay a higher or lower amount for an e-commerce business based on the perceived risk and likelihood of turning a profit, and whether this is worth the time involved. Put simply, the lower the risk and time involved, the higher the multiple you can expect to receive for your e-commerce business and vice-versa.
How Can I Increase the Value of My E-Commerce Business to Buyers?
You can increase the value of your e-commerce business by reducing the risks to a buyer. The simplest way of doing this is by having the following characteristics attributed to your e-commerce store:
- Aged site — at least 12–24 months old
- Predictable key drivers of new sales
- Diversified traffic sourcesg. PPC, organic, referral and social
- Traffic stats (Google Analytics or other) with a long history
- Brand with no trademark, copyright or legal concerns
- An engaged and growing mailing list
- Clear growth potential
- A history of stable or growing revenue
- High percentage of repeat visitors and sales
- Diverse revenue base (i.e. no one product making up 100% of sales)
- A growing niche or industry
- Strong gross profit margins
- Low physical stock/cash requirements
- Streamlined and scalable systems and processes
- Proven warehouse/dropship/fulfilment ordering processes
- Proven team in place
- Use of CRM and sales software
- Strong relationships with established suppliers with backups in place
For some further reading, take a look at this post on Entrepreneur.com about doubling the value of your online business.
When Is the Best Time to Sell My E-Commerce Business for the Highest Valuation?
The best time to sell your e-commerce business is dependent on both your personal goals and the situation of the business. If you’re serious about selling and looking to achieve the highest possible multiple, the importance of planning the right exit time should not be underestimated.
E-commerce businesses that attract the highest multiples are those which satisfy the criteria already discussed. This is often not achieved in a short period of time, so selling due to short-term personal goals or external factors may leave value on the table.
Consult with an online business broker well ahead of time to see what you can do to increase the value of your business. The exercise of exit planning (even if you aren’t selling) can often lead to minor improvements in efficiency in several areas that can add up to a big change in profits.
Tip: avoid selling straight after a seasonal high period. You may often get more value by selling just before or during a seasonal uptick, as buyers will be reassured by the strong numbers and may want a quick execution to capture some of the higher revenues for themselves (thus reducing the time taken for a return on their investment)
Where can I sell My E-Commerce Business?
Classified websites, marketplaces and forums — best for smaller businesses (under $20k) — Smaller business making less than $1k per month are usually best sold privately by the owner through classified websites or forums such as:
· Shopify Forum — A great place to communicate with smaller scale buyers and sellers. They also have a useful e-commerce discussion area for everything from feedback on your store to tips on crowdfunding.
· Flippa — Arguably one of the best marketplace for buying and selling small ecommerce businesses.
· Warrior Forum — One of the original internet forums and a good place to connect with potential buyers and those with an interest in online entrepreneurship.
Website Brokers — best for medium sized businesses ($20k — $5m) — Medium sized businesses in the $20k-$5m range are best sold through an experienced website broker. They will have a substantial list of qualified buyers and the experience in negotiating and structuring a superior deal than you might make on your own. A website broker can also provide guidance on how to maximise the value of your business during the exit planning stages in preparation for sale. Click here if you are interested in selling your business.
Private Equity — some Private Equity firms actively engage in buying online businesses. Try WeBuyWebsites who are known to buy established websites from private individuals on a regular basis.
How Long Does It Take to Sell An E-Commerce Business?
If you choose to use a website broker, the time it takes to sell an e-commerce business usually depends on the individual business and the terms of the deal. As you would expect, larger deals (over $1 million) tend to take take longer to sell than a smaller business. This is attributed to the complexity of the business and the level of due diligence involved. At FE International, 85% of online businesses sell within 60 days.
Smaller websites with less moving parts tend to be sold much more quickly. If your business is a micro business (under $10k) and you have decided to sell it through a marketplace, it might only take a few weeks to sell.
What Could Stop a Buyer From Putting In an Offer on My E-Commerce Business?
We have covered the steps that you can take to ensure that you receive the highest valuation for your e-commerce business. But it’s also important to understand why a buyer might not be interested in your site or pull the plug on the deal. We have listed some reasons to be aware of:
- The wrong business model or niche
- Your stats or data that doesn’t add up
- A buyer finds a problem that makes them reconsider their offer
- The seller wants more money than buyers are willing to pay
- Trends with particular business or market (e.g. unfavourable products, niche, ‘fads’)
- Issues with transferability
- Financial, branding or product condition of the business
- Buyers funding falls through
The decision to sell your e-commerce business isn’t an easy one to make. No matter what your reason is for selling, following the tips in this post will ensure that you receive the maximum valuation for your e-commerce business.
Originally published at ecommerce-platforms.com on October 26, 2015.