Why & When to Sell Your Business
E-commerce, in all its forms, is such an important part of society’s everyday shopping habits, but many e-commerce business owners don’t necessarily realize what a valuable asset they have.
In 2022, e-commerce is expected to account for 21% of global retail sales, and investors are increasingly keen to get involved in this highly lucrative sector. An e-commerce business that is profitable, potentially scalable, and shows positive performance trends is considered a highly desirable asset for any buyer.
If you are an e-commerce owner looking to take advantage of a strong market and a profitable exit plan, there are a few things to take into account before you look at selling your company. Whatever your motivation for selling, your business has already taken a lot of planning and equity, so naturally you want maximum value when you decide to sell. You’re probably asking yourself, ‘How do I know if it’s the right time to sell my e-commerce business, and how do I get started?’
We can help! BRANDED’s team of experts have compiled this handy guide with lots of valuable insights on 1) how to get your business completely ready for sale, 2) what you can expect as you go through the process, and 3) how to go about getting an accurate valuation before sale.
Give Your Business a Health Check for Maximum Value
A vital first step to selling is to determine what your e-commerce business is worth, and how much you can realistically ask for. To achieve the maximum value possible, you will need to make sure your business is in the best health possible, performing well and is attractive. A buyer will want to see that your business is viable and that there is credible scope for growth and ROI.
Review the reliability of your suppliers, your contracts, and secure any assets or IP rights you might have. Evaluate each element of your business carefully; the amount of risk involved in buying your e-commerce business will affect its value – the higher the risk and the more time needed to grow the business the lower the price you can expect. Conversely, if your business is already in a profitable, healthy state with room for expansion, the higher the earnings you can expect.
There are several important valuation drivers buyers will take into account when determining a valuation for your business:
Trending Business Performance
- Financial performance: Fast growing business with healthy margins. Having organized, reliable financial data is crucial in the valuation process. Finding an accountant that is familiar with e-commerce is critical
- Age of business: 2+ years of business track record ideal, to prove the sustainability of the business and understand its trajectory
- DTC metrics: Site traffic and conversions from marketing activities are important to understand your brand positioning & following
- Customer numbers: Subscribe & save, email list, demographic insights
Category & Product Portfolio
- Attractive category: Growing market with passionate following
- Diversified product portfolio: A compact portfolio of products under the brand that make sense for the business with limited underperforming SKUs. How are the products split in terms of share of revenue?
- Intellectual property and owned patents or trademarks: Do your products have design / other IP protection? How easy is it for competitors to copy your products
Operations & Supply Chain Health
- Manufacturer security: Where do you source your products from, how many manufacturers do you work with, and how strong are those relationships (e.g. any exclusive contracts)
- Status of logistics and fulfillment networks: How do you transport your products from the manufacturer to Amazon / the end customer, How many logistics partners do you work with
- Existing inventory and inventory management: Explain how your business manages inventory and determine what is the inventory amount the buyer receives upon the completion of the transaction
Compliance & Legal Risk
- Amazon account health: Any previous product / account suspensions, suspicious activity – even if resolved!
- Compliance: Aligning with all necessary regulations relevant to the product category
- Previous legal disputes: Transparency around any pending disputes as this will present an additional risk for the buyer and can have financial repercussions
After taking all the above into account, your business should now be prepped and in the best position to consider a sale. However, it’s very important to remember that just because you are entering the sales process, it doesn’t mean it’s time to sit back and coast on the day-to-day running of your business! Keeping business as usual shows your buyers you are serious about success and ensures your performance stays at advertised levels.
The Valuation Process
The valuation process is another important element of getting your business ready for sale – an accurate and realistic valuation will smooth the entire sales journey for you and your buyer.
Hopefully, you’ll already have an idea of how much your business could be worth, or at the least, what you’d be prepared to accept as an offer. It’s important to be realistic about your expectations, as too high a price will put off prospective buyers. Conversely, undervaluing could lead to you accepting too low an offer, and leave you shortchanged.
A good tried and tested way to go about getting an accurate valuation is to work with a consultant or broker in the FBA space. They will assess all your assets, your position and your business as a whole and will be able to provide you with a solid ballpark estimate of what price you should expect to command. Bear in mind that this will not be the final sale price, but it will arm you with the knowledge and confidence you need to go to market and sell your e-commerce business.
There are a few different valuation methods a valuer might employ:
Multiple Seller Discretionary Earnings (“SDE”): This valuation type looks at your historical earnings over the last 12 months (“LTM”, as a typical timeline). Your total net profit over this time is then multiplied by a number (average multiple around 3x) to arrive at a valuation. The multiple used depends on the valuer’s own methods.
The calculation is Multiple x Seller Discretionary Earnings = Value of Business.
The Precedent Sales Method: This valuation type looks at other similar businesses sale values to assess what your business could be worth. This isn’t always the most accurate way to assess value, as you may not feel that the valuation criteria matches your existing business, and so you will want to clarify the metrics used in this method to determine if it will be an accurate comparison.
Discounted Cash-Flow Analysis: The discounted cash flow model is one of the most versatile techniques in the world of valuation. While it’s not always employed in valuing e-commerce businesses, it’s useful for projecting a business’ future value. Best used for e-commerce businesses with a stable history, this method provides an idea of future value, adjusted for inflation and time, and gives your buyer an idea of their potential return on investment.
The most common & straightforward valuation method in the market is the multiple on the SDE. But regardless of the valuation method, it’s vital to ensure your final number is as accurate as possible – set an unrealistically high price and buyers will walk away, go too low and you risk giving away your business for peanuts.
How do I Find a Buyer?
There are a few options open to you when you’re looking to sell an e-commerce business. One of the most important decisions to make at this point is whether you’re looking to sell privately or through a broker – and there are pros and cons to both options.
Selling privately involves facilitating all elements of the sale yourself. You will need to locate your buyers, through online forums or sales marketplaces, and advertise your business to them. There will be a lot of work involved in vetting, contacting and communicating with your potential buyers, and once a sale is agreed, you will be responsible for all the migration processes. Doing everything yourself is hard work, but you will avoid any commission fees and marketing fees charged by a broker.
When selling an e-commerce business, many owners choose to sell through a broker. Brokers that specialize in e-commerce businesses are widely available and give you a better chance of connecting with buyers particularly interested in e-commerce businesses. Brokers also do most of the heavy lifting for you when it comes to organizing your sale, taking care of providing all relevant information to interested parties and negotiating on your behalf. Do be aware though, by making your sale through a broker, you may have to part with between 5-10% of your sale price as a commission fee.
How to Pick the Right Buyer or Partner?
In deciding who you want to sell your business to, you should consider what is the optimal outcome for you and your company. Are you interested in staying involved with the business or do you just want to “cash out”? While there are many potential buyers out there, not all of them are the best potential buyers for YOUR company.
Some buyers only look to buy your company and others want to partner with you and grow your business together. As a result, these buyers will offer you different valuations and come up with different payment structures. Having present what sort of deal value and deal structure you are after will help you find the right buyer. For more info on how to evaluate potential buyers for your business see our blog post here.
At BRANDED we’re flexible and are keen to find a deal structure that works for both parties. We are always beyond excited to partner with talented & passionate entrepreneurs and grow their brands together on our platform. We want to give the founders the opportunity to keep working on their project and dedicate time to what they love most – building brands, while we scale them further with our experienced operations teams.
Once you sign the LOI, the next part of selling your e-commerce business will largely depend on your buyer or investor and the deal you have made. Even after a sale has been made, there is still a lot of work to be done when transferring ownership. If you’re a small business, your migration process is going to be different to that of a larger business, but in either case, you want to complete the hand-over in a quick and effective way to ensure the success of your sale.
As standard, there will be a period of due diligence – up to 4 weeks on average – to give buyers the chance to verify everything is in order with your business, and that you’re happy with everything they are offering as a buyer. This transition period can require a significant time commitment from you as the seller, and can distract you from the day-to-day business activities.
BRANDED offers all our businesses extensive post-sale support. We understand that bringing an investor onboard or selling your e-commerce business is an incredibly important milestone, and that it’s important to get all of the details right. We’re empathetic with our sellers and proactively check in with them throughout the migration process to make sure both parties feel comfortable and happy with the outcome.
Our team of global experts are highly experienced at scaling brands into global success stories, and we prioritize fairness in every deal we make. BRANDED’s unique approach to acquisitions emphasizes a partnership mentality with 3 out of 4 founders staying on with BRANDED in a long-term commitment. We work in parallel with them to ensure continuing success and growth of the business, resulting in a win/win deal for everyone.