I recently spoke at the Yahoo Summit in Chicago. It was a quick 7 minute tip on selling your Ecommerce business. Below are my notes that I wanted to share with you.
Preparing to Sell Your Business
Planning to sell? Getting your ducks in a row requires a three-pronged approach. Get your head in the game first; then make sure your affairs are in order (on paper and otherwise).
Part one: Mental Preparation
- It takes an average of 2 to 4 years to sell a business, so it’s crucial to plan early. Lack of planning or poor planning often leads to missed opportunities. The trick is balancing the mindset of growing your business while you’re planning and preparing to sell it.
- Take the time to do an old-fashioned pros and cons list. Why do you want to sell? Are you tired, bored, looking for a new opportunity, or distracted by a shiny new penny? Are there other factors, like illness/disability, divorce, partner disputes, or retirement? Is your business not-profitable?
- If you’re just starting a business, begin with the end in mind. Understand the real reasons you’re starting a business. The most common reasons are that you want to make more money, control your time and destiny, and be your own boss. As you work on that business plan, be sure to include your exit strategy. Plan for success!
Part two: Preparing your Operations
- It’s time to clean house! Get your books in order. Make sure your bank and credit card statements are reconciled and up-to-date, and all your accounts receivable and accounts payable are collected and paid. Get your dead inventory off the books – sell it or get rid of it. (Any smart buyer will not pay you for dead inventory, so you might as well get rid of it on your terms.)
- Scale back on big investments. Don’t buy expensive technology or a new building. . If you’re selling to a new owner operator and they take over the business as a “turn key” business, then its okay to continue to make the investment as you would as if you were going to continue to operate it. If you’re selling to a larger business and/or competitor, they might not assume your current back-end/processes therefore if you make expensive investments you may never see the ROI.
- If your business is movable, ask if you can renew your lease for a shorter time frame or negotiate for a month-to-month lease.
- Document every task required to run your business, for every job and every little nitty gritty task no matter how mundane or boring it is. This includes your job description as the business owner and that of every single employee.
- While you’re ensuring your operations is going smoothly, focus on growing your top-line revenue, growing market share and maximizing net profit. Eliminate personal expenses as well as any activity that doesn’t make money.
Part three: Negotiations
- At the end of the day, it comes down to negotiating the selling price of your business. Your age, financial goals, and whether the business is your retirement nest egg all contribute to what it will take for you to walk away. If your business isn’t profitable, be sure to at least get enough to cover your debt.
- Work with accountant or even business broker to better understand what your business is worth. Typically an e-commerce business can expect to get between 3-5 times net earnings. So the more profitable your business is the more you can expect to get for it.
- Don’t throw out an outrageous number. Your potential buyers will not be amused, and it can be a non-starter and kill the deal.
- Lastly, keep it professional. Work with experts – like your accountant, attorney, and even a business broker – to ensure that you have all your documentations in order.
With more than 20 years retail/wholesale & e-commerce experience, Shirley Tan educates eCommerce business owners to be profitable while maintaining their sanity!
Great post! Interesting that the price of an e-commerce store would be in the range of 3 to 5 times earnings. In comparison – an apartment building would seem to go for a much higher price, based on rent earnings.
I suppose it could be that real estate is still just over priced… or maybe somehow real estate somehow feels more ‘permanent’. But in comparison, an e-commerce store which is a strong player in their niche, would seem to be in a much better position to grow their revenues year over year.
Sage advice from a business owner. You have definitely done your homework. Too many sellers come to the table unprepared and then wonder why their business does not sell.
Another thing that I forgot to mention is when business owners invest in expensive equipment where it be production equipment/machinery, software, computers… with the hopes that it will generate future income. Although this is important to continue to re-invest in your business you want to exercise caution that you don’t over do it.. because the buyer will not pay for your “future business potential”
They will and can only quantify what your company’s earnings today. Therefore its important to really think through your large investments.
Interesting, I am curious what the statistics are on your first point there…
hi Dentist Woodlands:
I’m pretty conservative. Based on my own experience with selling my prior business and discussion with several business brokers, their advise is that it can take between 2-4 years. This is based on the time that you may start listing the business for sale, business broker marketing the business and the final monies exchanging hands. Of course it can happen sooner and a lot quicker and that is why my advise is to make sure that your business is prepared for such opportunity.
Thanks for an idea, you sparked at thought from a concept I hadn’t considerd yet. Now lets see if I can do something productive with it.
Hi Commercial roofing:
Which idea?
Hi Shirley,
Great information. Have you ever noted instances where the 3 to 5 times net (I’m assuming annual) earnings didn’t hold true? Does it always come down to earnings, or earnings plus assets, etc?
All the best,
Mark
Hi Mark:
Net Earning and Top line revenue are 2 key metrics.
If you’re selling to a competitor or to a company looking for growth through acquisition, then what they look for is how much of your top line will add to their top line revenue. Obviously the higher the better, but I think the sweet spot is definitely somewhere above 20%+ Why? Because its a number they help them increase their top line that would probably be harder for them to get on their own (it will take too much time and its easier to just buy some a company to get their faster)
Net earning is crucial because this is the base in which they calculate the multiple on how much they will pay you for the business. Ecommerce sites or even Brick and Mortar stores typically ranges somewhere around 3x to 6x, I’m sure there are some that get less or some get more, and of course you try to get as much as the buyer is willing to pay you.
Assets are usually calculated separately and most wont’ take on the debts of the company, but everything is negotiable, so keep your books clean and up-to-date so that you yourself know what numbers you’re working with.