Selling an E-commerce Business for Maximum Profit
Many e-commerce store owners don’t even realize they have a sellable asset.
The truth is that a profitable e-commerce store is not just a sellable asset but also a highly desirable asset. The number of e-commerce businesses being sold and the average multiple at which they’re being sold have increased year on year since 2017.
All of this means that investors and buyers have sat up and recognized e-commerce as a profitable online business model, and now they’re willing to part with cash to own one.
We know this because we’ve analyzed the data from every business we’ve sold on our marketplace. We’ll begin by establishing market trends and what that means for you as a seller.
The Facts Behind Selling an E-commerce Business
When you look into the data for selling an e-commerce businesses, you’ll realize that the emerging trends will be of interest to e-commerce store owners.
In the past three years, we’ve sold 247 e-commerce stores on our marketplace. When you break that down year by year, there’s a 119% increase in businesses sold from 2017 to 2019.
This figure does include Amazon FBA and dropshipping stores, as it’s common to see mixed monetization methods. If you have a business with mixed monetization methods, then it shouldn’t put you off from selling; in fact, some buyers will prefer this.
We predict that the volume of e-commerce businesses being sold will continue to trend upwards, although there’s likely to be at least some leveling off when compared with the explosive growth over the past few years.
Another positive to note is that the desire from buyers also appears to be growing. Over the same three-year period, the average sales multiple has increased by 9%, reaching 25 in 2019. At Empire Flippers, we use a monthly multiple rather than the annual multiple that other business brokers use. We feel it allows for more nuanced valuations.
Both of these factors make it an exciting time to sell. We’re seeing buyers compete against each other, which is helping drive these multiples up. Investors and private equity firms have also entered the e-commerce space looking to acquire high-performing assets. One of the benefits of using a broker is access to these high-net-worth individuals.
The average sale price has also been rising quite considerably year by year; it increased by 77% from 2018 to 2019. The average sales price for an e-commerce business in 2019 stood at $312,820, which doesn’t even tell the full story.
We’re the market leader in terms of quantity sold. Even though we’re seeing more seven-figure businesses sold on our marketplace, the high number of sub $300K e-commerce stores sold on our marketplace has brought the average sales price down somewhat.
That said, as far as the market is concerned, selling now is better than ever.
?When’s the Right Time to Sell
This is a question that gets asked a lot, particularly by first-time sellers, and there are a few variables to consider.
Why do you want to sell?
It’s an obvious question, but asking yourself this will help determine the approach you need to take. For some people, they need to sell now to fund something in their personal life. Whether they’re paying off debts or buying a house, what’s appealing about selling is receiving a lump sum that can be anywhere from 20 to over 60 times your average monthly net profit.
How to Maximize Your Profit
If you’re not looking for an immediate sale, exit planning will not only help you determine the right time to sell, but also how you can get maximum value from your exit.
To begin this process, you first need to determine the value of your e-commerce business. We’ll talk about how this is calculated later on, but this is likely the largest factor in whether you’re ready to let go of your business.
If you want to find out how much your e-commerce store is worth, then check out our valuation tool. It will give you a free, impartial valuation in five minutes using the latest industry sales data.
Once you’ve got this, it becomes easier to decide if you’re ready to sell. Maybe you have a figure in your head that you want to reach before you sell. There are actually a few things you can do to improve your exit, if you’re not doing them already. You can also establish processes to ensure the sale goes smoothly.
To find out what these processes are, it can be helpful to speak to an industry professional—someone that oversees deals for a living. You can set up a call with one of our business analysts who will give you exit-planning advice tailored specifically to your business.
This doesn’t mean you have to commit to selling, but it will help you determine if your business is ready to sell, logistically speaking. This advice will allow you to take the most profitable exit from your business.
We’ll also go over some tips for planning your exit in the Preparing Your Business for Sale section below.
Opting for a Private Sale
Deciding where you want to sell your business will be a big decision, not just in terms of which company you decide to use, if any, but also whether you opt for a private sale or a brokerage.
A private sale is a sale that you facilitate yourself. This involves locating prospective buyers yourself or using a website such as Flippa to host the advert for your business.
The downside of this method is that you’re going to have to do the vast majority of the heavy lifting when it comes to vetting, communicating, and negotiating with potential buyers. In addition, you’ll also have to migrate the business to the new owner, which is often forgotten when considering a sale.
If you do go down this route, then privacy is not always an option with a private sale. You might not have control over who gets to view your actual store.
Withholding the URL of your e-commerce website is the best way to almost completely minimize the risk of tire kickers and copycats. Only verified buyers should be able to view this sensitive information.
The upside to this is that you will not have a higher level of commission associated with using a broker. If you’re willing to deal with the extra amount of work, then this might be something for you to consider.
Working with a Broker
People who don’t have a buyer contact list or the resources to facilitate a sale themselves can use brokerage services.
As a broker, we’re not afraid to admit we have a biased stance in this debate. To be as transparent as possible, we’ll tell you everything we offer as a full-service M&A broker. We feel that it stands up very well when you compare us to a private sale and should be the minimum any other broker should offer.
The most well-known reason for working with a broker is the use of their extensive list of buyers and investors.
When selling your successful e-commerce business, you’ll want to work with the broker that has the most experience in working within e-commerce. This will give you more opportunities to connect with relevant buyers. At Empire Flippers, we have the highest deal flow of e-commerce stores in the industry.
What’s not as well known is all the other tasks an e-commerce business broker should perform for you. We vet both buyers and sellers who want to use our marketplace. This ensures that there’s a high standard for both.
Listings will give as much information about your business as possible without revealing specific details. If a buyer wants to see your domain name and storefront, then they have to become verified, which involves submitting identification.
We have a dedicated team for each step of the process, from vetting and sales right through to migration.
Vetting will work with you to compile your profit and loss statement (P&L) and get your valuation. You’ll also get to work with a business analyst who’ll guide you through the whole process of dealing with buyers. This involves answering repetitive questions on your behalf, only contacting you when necessary. You’ll also receive advice before you go into any negotiations, and they’ll act as an intermediary between the buyer and the seller.
Once a deal has been worked out, your business will be handed over to our dedicated migrations team to transfer the asset to the owner at no extra charge. We are one of the only brokers to offer this service as part of the commission and not as an additional cost.
At Empire Flippers, the commission structures run from 2% to 15%, depending on the list price of your business, some of the best in the industry. We’re also so confident that we can sell your business that we have one of the lowest exclusivity periods of any broker: two months.
We’re telling you this so you have something to compare us to when doing your own research. Don’t be afraid to ask a broker what they’re doing for you, as well as what kind of deal flow they have for e-commerce specifically.
Preparing Your Business for Sale
Getting your business ready for a sale will help you save time in the long run. You may already have all the steps below in place, in which case we’ll try to provide you some insight into what buyers are going to ask.
Accurate Data with Analytics
Buyers will want to see how your e-commerce store is driving traffic and they won’t just take your word for it.
If you built your store with an e-commerce platform like Shopify, then your sales data will be viewable in Shopify’s built-in analytics platform. It’s also a good idea to install Google Analytics or Clicky, the two widely accepted analytics platforms.
The kind of data that these platforms provide is important to potential buyers. It’s standard procedure to provide read-only access to these platforms for qualified buyers to analyze the stats.
They’ll be looking at where traffic is coming from to better understand your customer base and how your business drives sales, ensuring it’s from a legitimate source. This will allow them to see the conversion rate and help them assess the history of your business.
If you have a blog this will allow Buyers to take a look at your organic search data. Search engine optimization (SEO) is a good marketing asset for your business to have. Thanks to being inexpensive to run it’s a good way to lower the customer acquisition cost for your store.
They’ll use all of this data to see opportunities for acquiring new customers, should they decide to take over the business.
Organizing Your Finances
Getting your finances right is imperative to securing a deal. If a buyer spots that your calculations are off, it might spook them out of committing to a deal.
Buyers will want to be able to easily view the finances of your e-commerce store. Creating a P&L is the best way to do this. A P&L will cover all the incomings and outgoings of the business, including monthly gross sales, monthly net profit, and cost of goods sold.
If you’re not adept at creating a spreadsheet or calculating these figures, it’s advisable to hire an accountant. At Empire Flippers, our vetting advisors will work with you to create the P&L.
Establishing SOPs
Standard operating procedures (SOPs) are basically instruction manuals detailing how you perform certain tasks for your e-commerce business.
An SOP is an incredibly useful resource for any task that requires some kind of methodology. It might be simple for you because you do it every day, but what about for someone outside of your business?
Finding new products, writing product descriptions, and restocking inventory are tasks that would need an SOP. Even if you have employees doing this for you, writing out a template for the process will help the buyer hire new people, should the current employees decide not to continue.
Having SOPs in place makes your business a more attractive prospect. Buyers don’t want to spend too much time working out how to run your business; they’re much more interested in dedicating their time to growing it or having people run it for them.
Employee and Supplier Contracts
The supply chain is paramount to the success of an online store, both in functionality and cost.
If you’ve got a good relationship with your supplier, then this is a major asset to your business. Inform your supplier that you’re working toward a sale and get it in writing that your current arrangement will remain in place.
Buyers don’t want to be caught short and find that the supplier ups the rates and affects the profit margin once they’ve taken over.
A similar process needs to be done for any employees your business might have. Speak with your employees and find out if they’ll be willing to continue on with a new buyer. If they’re not, then the SOPs you created should make training new staff easy enough.
If your business has used freelancers, then including their contact details will be appealing to buyers.
Inventory and Business Management
With all the procedures and contracts in place, your business is now in a prime position to be listed for sale.
While it’s in this state, you’ll want to avoid making any wholesale changes. Continue to run things as if you were going to hold on to it. Updating products is fine, but you don’t want to play with anything that is already working.
Inventory management is also something that you will need to keep on top of. Just because your business is being listed doesn’t mean it will sell straight away. It might take a few months for a buyer to come in for it, so don’t let the stock dip any lower than you normally would.
The Sales Process
Your business should now be prepped for sale. One of the most important things you need to remember is that the sales process isn’t a time to take your foot off the pedal.
Continuing to run your business as if you were going to keep it will ensure there’s no drop off in performance. This not only keeps everything as advertised but also shows buyers that you care about the success of the business.
To give you an idea of what to expect, we’ll go over the typical components of the sales process, beginning with valuation.
Valuation
Business valuation is the starting point of the sales process for everyone. Even if you aren’t looking to list your business anytime soon, you’re at least considering the idea of selling.
We recommend that all e-commerce store owners find out the value of your business when you’ve built up a year of profitability and at regular points thereafter. It helps you get an impartial valuation of where your business is now as relating to the market.
Also, understanding how a valuation is calculated may help you to improve your business.
Our valuations follow a pretty simple formula:
[6-12 Months’ Average Net Profit] x Multiple (Typically 20–60+)
The wholesale value of the current inventory will be taken and added to the valuation.
Net profit is determined by taking the revenue from a period of 6 to 12 months and subtracting any costs (cost of goods sold, marketing, hosting, employees, etc.).
If a business is showing signs of seasonality, we’ll try to take a 12-month average to account for it. Similarly, if a business is showing signs of recent growth or decline, then we’re more likely to use a shorter pricing period.
What makes up the multiple?
The multiple is dependent on a number of factors, including business age, social media followers, email list subscribers, and traffic diversity.
Using our valuation tool will give you three selling price points.
The typical valuation is where we price your business based on current sales data to get you the best price and make it an attractive acquisition to buyers.
We also give an absolute figure if you’re willing to hold out for a big offer, but this does mean you are getting toward the range where you’re overpricing yourself. On the other hand, lower figures are for business owners that want a quick sale.
The valuation tool does provide an accurate estimate, but speaking to one of our business analysts will help to get a more accurate valuation that’s specific to your e-commerce business.
Finding a Buyer
Now that you’ve got a valuation you’re happy with, it’s time to list your business.
Our vetting and marketing teams will work together to get your business listed. All new listings go live on Monday at 10 am EST and immediately get sent to our extensive list of buyers and sellers.
Our business analysts will also be using their contact lists to reach out to specific parties that might be interested in your business.
We conduct a seller interview with listings over $45K, if this is something you’re comfortable doing. It gives you a chance to talk about your business in your own words and is a feature that buyers have given great feedback on.
With your listing live, you can expect to be in regular contact with our business analysts who will be passing on any questions interested buyers may have about your business.
Negotiating a Deal
If your business is below $100K in price, the process of negotiating a deal will be largely automated thanks to our platform.
Buyers will be able to make offers for your business, allowing you to counter or accept. If you accept an offer below list price, your business will go into a 24-hour circulation. This alerts all interested buyers that an offer has been made, giving them a chance to beat it.
The circulation period is an important part of the sales process; it helps us get the best possible price for your business.
Listings over $100K tend to have more moving parts to them, so it’s common for interested buyers to set up a call with you. Before you go into any buyer-seller call, a business analyst will do a pre-call with you to prep you and answer any questions you may have.
For the larger priced listings, deal structuring will become part of the negotiations. This may involve an earn-out, where a buyer will offer an upfront payment that’s below the asking price and further payments over subsequent months. Not all buyers will have the immediate cash flow or be willing to stump up close to the full amount. Considering offers like this will improve your chances of making a deal.
This is an exciting time for sellers, when you’ve received an offer you’re happy with, it’s time to move forward with transferring the e-commerce site to the new owner.
Transferring Ownership
Even though a sale has been made in principle, there’s still a lot of work to be done.
Transferring a business can be a challenging task if you’re not experienced in online business. Handing your business over in a quick but effective way is vital to the success of a deal.
If your store uses Shopify, it’s fairly simple to transfer. All the major e-commerce platforms (Bigcommerce, Woocommerce) and WordPress are transferable. The migration for a small business is likely to be considerably different to that of a large one, but every business is likely to have a unique structure so it makes your life easier if you use a professional.
At Empire Flippers, we have a migrations team that will take care of this for you at no extra cost.
Due Diligence
A 14-day period of due diligence is pretty standard across the industry and gives buyers time to verify that everything was as sold.
During this time, buyers can’t make any major changes to the business. To get started on making changes to their new business, some buyers will end this early after determining that everything is running smoothly.
Any kind of deal is going to include some sort of post-sale support. This is something that you can negotiate with the buyer, but it’s common for this to be at least 30 days of email support and potentially a few Skype calls, should the buyer need them.
Being available for a buyer is going to go a long way to help the deal go through. Once it does, you’ll have your money sent through and you’ll be able to celebrate the sale of your e-commerce store!
How Long Will it Take to Sell My Business?
The average sale time for an e-commerce business on our marketplace is 92 days.
However, this does not give the full picture when it comes to selling your e-commerce store.
The time it takes to sell your business is largely dependent on the size of the business. The figure of 92 days includes larger businesses, one being over $4 million. The time it takes to work through a deal of a business that size will be longer than sub $200K deals.
Selling Your E-commerce Business
Now that we’ve given you everything you need to know about the selling process, it’s time to get a valuation for your business.
Take a few minutes to fill out our valuation tool.
Once you’ve done that, schedule a call with our business analysts to discuss an exit plan. This will be the best way to sell your e-commerce business for maximum profit.
MAX LAPIT
CONTENT SPECIALIST
Max joined Empire Flippers as a content specialist in March 2020. Before joining the marketing team he was involved in creating content sites and copywriting. Outside of work he can be usually found watching sport or travelling the world to watch it. He’s hoping to take in more new places after memorable trips to Budapest and Croatia.
Retrived from empireflipper, Updated on November 5, 2020