After building a successful eCommerce business, you can look back and see the massive amount of time and money it has taken you to get to this point — the point where you are generating profits and enjoying more free time.
However, after building a successful business, many entrepreneurs feel like there’s always something more, encounter a situation in their personal lives that requires a quick cash influx, or have gotten burned out from the incredible amount of work they’ve gone through.
When that happens, it may be time to sell the business you’ve built.
Whether you’re looking to focus on a new, bigger project, you want to put out fires in your personal life, or you need the time (and money) to step back and figure out what your next move is, selling an established eCommerce business can be incredibly profitable for you.
To make a profitable exit, and get the most value from the sale, you’re going to need to step out of your entrepreneur shoes and step into an investor’s shoes, since they’re the people who are going to dictate how much money you’re going to get out of the deal.
Figuring out a baseline value for your store is the first step, and can be one of the hardest things you’ll do — outside of mentally preparing yourself for letting go of your business.
At the end of the day, no two businesses are exactly alike and there is a wide range of variables that go into figuring out how much your specific business is worth.
That means figuring out what investors may be willing to pay for your business can be difficult to do.
At Digital Exits, we’ve made it our sole mission to understand what investors are looking for when they’re ready to buy and how business owners can implement those factors into their business.
To help you wrap your head around the entire process, you need to understand one critical point. The reason investors are willing to buy your business is because that business will generate an income for them. Nothing more, nothing less.
Those investors want to turn a profit, and the first question they’re going to ask themselves when they’re thinking about buying the business is “how long is it going to take me to earn my investment back?”
In order to get the highest sale price possible, you’re going to need to look at the business like an investor will look at the business, and then address the areas of concern that investors are going to be digging into in order to knock your sale price down.
You can start by answering the following questions:
What do your annual sales numbers look like?
This is going to be the biggest factor that determines how much your store is worth. Some investors will look at your average yearly sales over the past 3 years, while others are going to look at the last 12 months.
The key here is to show stability and have sales numbers that are easy for your investor to verify. If the numbers can’t be easily verified, your investor will assume that you’re hiding something and then think that you’re hiding other things, causing the deal to fall flat.
How much profit is generated from those sales, annually?
Your annual net profits is the meat and potatoes of your store. While having a high sales volume is attractive for most investors, if your profit margins are slim or near non-existent, it’s going to be hard to get an investor to move forward with the deal.
Before you start listing the business for sale, you’re going to want to make sure you’ve increased your profit margins as much as possible, either by negotiating better terms with your suppliers or by cutting expenses. Then, give those new changes time to stabilize.
Is your store currently growing?
Some entrepreneurs make the mistake of trying to sell their business when the traffic and sales have begun to decline. This usually happens because they are burned out and can no longer give the business the attention it deserves.
While some investors still may be interested in buying the business based on past performance, you’ll need to go into the process expecting to validate why the business is declining, and accept a lower valuation as a result.
Investors want to see growth, or problems that can easily be fixed that will result in growth down the line.
How are you driving new sales?
Are you currently running different promotions to drive new sales to your store? Have you tapped into influencers in the past that are still sending sales to your store? Or are you running paid advertising campaigns?
The methods you’re using to generate sales will affect what the store is worth to an investor. The more work they have to do to maintain the sales volume you’ve established, the less they’re going to be willing to offer to buy the business.
This is even more true if your sales have begun to decline and you don’t have plans in place for recovering the lost sales volume.
Can you sustain the new growth?
If you are driving new sales to the store, do you have the capacity to handle those sales? Do you have the inventory and shipping solutions needed to handle a new influx of customers? Do you have the support channels in place to handle problems as they come up?
With the new sales that you’re driving, can the increase be sustained on its own? Or will your investor need to put in more time and money to maintain the growth?
Answering this question and having plans in place to not only handle the new growth, but to sustain that growth into the future, your business is going to be more attractive, and worth more money to an investor.
How are you acquiring customers?
Which channels are you using to acquire new customers? Can your investor take over those sales channels after they buy the business from you? Do you have systems in place to maintain a relationship with those customers that your investor can take over?
Bringing in new customers is only a single part of the bigger equation. How you’re fulfilling those customer orders, providing service to those customers, and making sure you can bring them back to your store again and again are other areas investors will look at.
How much are you spending to acquire customers?
Paid advertising is a huge marketing channel for eCommerce stores, but one that cuts into your monthly net profits — which investors use to determine your store’s true value.
You’re going to want to have detailed statistics about the traffic you’re buying, how much you’re spending, where that traffic is coming from, where it is going, and, most importantly, how it converts into a new customer when it lands on your store.
Be prepared to turn this information over, and make it easy for your investor to verify.
How are you positioned in the market?
Your competition and how you’re able to stand up against them is another area that your investors are going to be looking into. That means you need to examine how you’re positioned in your market and be able to back up your claims during the negotiation process.
Identify who your competition is, what they’re doing well, and where they are weak. Then look at your own business and figure out your own strengths and weaknesses.
Play on your strengths during the negotiation process, but be honest about your weaknesses. Go a step further and develop strategies to overcome your weaknesses, if you want to ensure you’re prepared for the questions your investor will ask.
Is your business relatively automated?
It’s already been mentioned, but this question is important enough to mention again — how automated is your business, and how much work is your investor going to have to put in to sustain the business that you’ve built once they take it over?
Investors aren’t looking to create a new job for themselves, especially if that job is going to cost them high 6-figures or into the 7-figure range.
If there are certain parts of the business that you have to be actively involved in, you’re going to want to look into outsourcing those parts of the business. Likewise, if there’s something you’re doing that can be handled by an automated service, it’s worth investing in that service.
Your investors will appreciate a relatively hands-off business.
Do you have systems and processes in place?
This is similar to automating parts of the business that you’re able to automate. Rather than completely automating certain aspects, though, it may be worth your time to document the process and put systems in place that make it easy for your investor to outsource.
Remember, the ultimate goal for your investor is going to be to take over a business that they do not have to be actively involved in, or are able outsource the tasks that they don’t want to do to other people.
Part of being able to outsource certain tasks means understanding how to do, and how to train, the people coming in to handle those tasks. That’s where documentation and processes make their life easy, and make it easy to outsource what they need to.
Once you have unlocked the answers to each of those questions, you can begin placing a value on your business.
To get a general idea, you’re going to want to look at how much other businesses have sold for, and compare your own model to their model, finding strengths and weaknesses.
For the most part, an eCommerce store that doesn’t have significant issues with their model is going to sell for around 2.51 times the yearly net profits.
This means that if your eCommerce store is generating $89,000 in profits per year, you could apply the 2.51 multiple to the profits to find a final value of $223,390. This is a starting point in the negotiation process between you and your investor.
To help you navigate the negotiation process, there are a few things you’re going to need to do.
● Ensure that you have all the necessary paperwork. Your numbers need to be honest and accurate, because these are the numbers your investors will use to validate your asking price.
● Make sure you have systems and processes in place. Ensuring that the business is running efficiently after you leave is a huge selling point that you can use during negotiations.
● Make your products and services different. Setting yourself apart from the competition and ensuring that the business isn’t a commodity that can be easily replaced is critical if you’re asking for a higher valuation.
● Work with a professional broker. If you have never bought or sold a business before, you could easily get worked over during the negotiation process. Brokers help you keep your own interests protected and can get your offer in front of more investors than you can on your own.
● Clean up the business. If there are problems that you’re aware of, take the time to fix those problems and then let enough time pass for those problems to stabilize. If you notice problems, your investors will, too, and will use those issues to lower your asking price.
You can see from what I’ve laid out here that selling a profitable eCommerce business isn’t necessarily a black and white affair. There is a lot of intricacies that goes into finding the real-world value of a business.
However, if you answer the questions given here, and address any areas of concern in your business, getting the maximum asking price from selling your eCommerce store becomes a reality instead of a distant dream.