How to Build & Sell an Ecommerce Business
Recently, Web Choice Co-Director Sam Dunning spoke to eComm entrepreneur Ben Leonard about how one goes about scaling-up an Ecommerce Business, with an eye to eventually selling it on for a respectable profit. As a UK web development company, Web Choice has created many ecommerce websites, and a number of these will have been established by our clients’ with the end-goal of moving the business on at a specific point, in return for a healthy profit.
There’s currently huge growth in the buying and selling of eComm businesses, but it pays to do your homework to make sure you eventually receive the true value of what your business is worth.
Create a Sellable Business
Your ecommerce business needs to be both sellable and valuable if it stands any chance of being sold with some form of return on investment. Ideally you’ll have already worked closely with graphic designers, web designers and SEO experts to build your business to the point where you have an established branding and IP, and your business is solving a unique problem that isn’t easily replicated. If you don’t have these ingredients, then what’s to say a prospective buyer, after looking at your books, doesn’t just turn around and say - ‘great idea, but now I can just copy and paste what you’re doing without paying you a penny for your business’!
Establishing an ‘Asset’ is the keyword here, so now’s the time to get help from an expert web marketing, and web development company to build up your brand, and carve out a true niche for yourself. If you’re not there yet… don’t panic, this can be worked on over time.
Own Your Enthusiasm & Passion
Remember that you’re looking to establish a business that’s transferable, not create a ‘job’ that consists purely of ‘busy work’. Ask yourself the following:
- Can your ecommerce business survive if new regulations are introduced, or a stream is suddenly closed-off to you?
- Do you exist on multiple channels?
- Do you operate in different markets?
- How much automation have you integrated into your business?
The answers to these questions will inform you of how valuable your ecommerce business is. If you’re reliant on one source for your customers, you are vulnerable, and therefore you are a more risky proposition.
The final question to ask yourself is; if you stepped down tomorrow, could someone else take over from you and be just as effective, or is your business solely dependent on your unique skills, knowledge or abilities? If the answer is no, then it’s not yet a transferable business.
At what point should You be Ready To Sell & Bring Your E-commerce Business to the Market?
You are aiming to sell your business whilst it’s still in the growing phase, and is yet to max-out. A prospective buyer will be looking for further growth and expansion themselves. What they don’t want is a shrivelled husk that you’ve hollowed-out all the nutrients from!
As early as possible you need to establish a figure of what you want for your business, then you need to work out how to reach that figure. This should be tangible, not pie in the sky.
Valuing an Ecommerce Business
To establish the worth of your ecommerce business, multiply the previous 12 month performance by the SDE (seller's discretionary earnings) - this is basically your Net profit, plus the business owner’s yearly salary, benefits and expenses (this includes non-cash, depreciation, amortisation, and any litigation etc). This newly inflated figure is then multiplied by anywhere between 2.5-7 times your SDE. These multiples vary significantly, so which side does your business land on?
How many times you multiply this number will depend on how attractive your business is. So then, how attractive is your business!?
Value is based upon a number of factors, including (but not limited to):
- Strength of your IP
- Historical presence in the market
- How diverse your business is
- Your growth rate
- How much infrastructure you have in place.
This is the most typical means of establishing the worth of an ecommerce business. It basically represents the financial reward that your business offers a single full-time owner of it.
You can visit www.ecombrokers.co.uk for a free ebook of how to accurately value your ecommerce business and prepare it for sale.
I know what My Business is worth, so how should I now Sell It?
Once you’ve established the true value of your business, who should you approach? - Your options are:
- Private equity or family office
There’s plenty of prospectors out there searching to buy your business, and some will coldly reach out to you. Don’t be tempted by such people! This is a surefire way to receive less than what your business is actually worth, on terms that are dictated to you.
There are many websites out there that you’ll encounter, that are basically advertising to ‘flip’ your business. If you go down this route then the valuation of your businesses will be lower, because these websites aren’t operated by industry experts, but by people wanting to make a quick buck. They’ll have high fees associated with them and automated services. In short, it’s like taking your gold watch for valuation at a car boot sale, rather than a specialist gold dealer.
Consultants may also reach out and offer to sell your business in return for a low percentage-rate fee (perhaps 5%). Whilst this might sound enticing, these consultants are essentially ‘double-dipping’, meaning they’ll happily take your 5% selling fee, and then get a referral price on top from the eventual buyer (which can be tens of thousands, or even hundreds of thousands of pounds). These are thousands of pounds that should be yours, as the buyer has effectively paid the price you sold it for, plus the referral price, meaning you’ve undersold your business.
So, now you know what (and who) to avoid when it comes to selling your business, who should you actually approach? The best option is to approach a qualified broker. These guys are industry experts who know e-commerce and understand the market, and with that, your true value.
Checklist of Establishing if a Broker is qualified to Sell Your Business
The individual, or team, best qualified to sell your ecommerce business will have the following:
- Experience in e-commerce
- Be a qualified accountants
- Experience with mergers & acquisitions so they can market your business to the right buyers
How to Make the Deal
If you’re lucky enough to have buyers fighting for your ecommerce business, then you might be able to haggle with how much cash you receive upfront. You can expect for an arrangement to be formed whereby you receive a ‘stability’ payment after the first year of trading. This will be dependent upon the business performing at the same level it did in the 12 months prior to sale. You may then receive another payment on an ‘earn-out’ after 1 or 2 years, depending on performance.
Your broker and / or solicitor will be able to effectively manage this for you, as the risk is, if the new owners don’t run the business well, they could cost you that final earn-out payment. These are the kind of traps you might miss if you jut go with the first ‘flipper’ who approaches you.
When it comes to selling, reach for an expert who knows how to get the best results for you, and they’ll more than pay for themselves in the long-run.