How Online Interim Invoicing Can Turn Things around for Your Small Business
Running a small business in the age of rapid globalization is a challenge. As a business owner, you have to wear multiple hats. You are the store manager, customer care executive, marketer, and the accountant, all at the same time. However, one of the frustrating and mundane responsibilities you have to carry out is dealing with invoices…
Only timely invoice payments will ensure you are bringing in more money than you are sending out. Unfortunately, late invoice payments plague many SMBs. A quarter of SMEs in Northern Ireland and over two fifths in the UK suffer from late payments with over half them being forced to write off up to 10% of their turnover.
In other words, if you don’t want to lose your hard-earned money, you need a strategic small business invoicing strategy. That’s where online interim invoice can help you.
Let’s start with the basics.
1. What Is an Interim Invoice?
Instead of asking for the payment in one lump sum, an interim invoice allows you to collect the total amount in small installments. You can either design these installments as fixed monthly payments or when a particular stage of work is complete. You will need to send the final invoice after the project ends with the details of interim bills and respective payments. Almost every online invoice generator allows you to send an interim invoice.
Let’s say you are offering SEO services to ABC for six months starting from 1st August, 2019. You can charge the client with $300 each month. For the first five months, you will be able to collect a total of $1500 from the client. In the final month, you can foot the final bill for $300.
However, you will need to make the adjustments in the final bill for extra work hours (if any) plus the profit you intend to make. For example, if you did extra work worth $500, and intend to make a profit of $600, your final invoice will be $1400.
Outstanding Monthly Charges
Extra Man Hours
Profit to be Footed
Total Final Bill
The total amount you will collect from the client in this case will be $2900 ($1500 + $1400).
2. Why Use Interim Invoices?
Most small businesses use interim invoicing for the following three reasons –
Maintain a Liquid Cash Flow – As you keep getting monthly payments, interim bills allow you to maintain the cash flow. A highly liquid cash flow, in turn, helps you run your business smoothly without incurring unnecessary debt.
Avoid Costly Write-Offs – It can also help you avoid costly write-offs as you get a bigger chunk of your payment before the project is over. You can afford to follow-up for the final outstanding amount via email. If the client stops paying in the middle of the project, you can also stop working until the dues are cleared.
Offer Flexibility – This is an advantage for your clients. Instead of arranging for a lump sum payment, they can pay you in small installments. You can also add or remove services during the project tenure and charge the client accordingly.
3. When to Use Interim Invoices?
As you can see, you can use interim invoice only for large projects or services stretching over a long period. Usually, you can use it for projects that will run longer than three months at least. You can’t use this method for small projects and short-term contracts. You will also need to consult the client to see if they are open to this idea. Although it is rare, some clients may refuse to use this invoice format.
4. Understanding the Structure of an Interim Bill
The structure of your interim bill change depending on the type of service or project you are undertaking. For example, a contractor will need to provide measurement details along with measurement books, a statement of recoveries, deductions, advances, and extra payments if any, and cumulative information of work completed till the date of billing.
On the other hand, a digital marketing agency will need to include only the details of completed work, work in progress, and the amount billed as decided in the contract. However, usually, an interim invoice has the following details.
Name and contact details your organization and your client
An itemized description of services and products you are charging for
The total amount you are charging including the breakdown of relevant taxes, discounts, and any other charge
Terms of payments, including late payment charges, if applicable
Special instructions or notes for the client, if any
In addition to this information, you will need to mention the total due amount in the final invoice when the project is complete along with the details of all previous interim invoices.
Once you have sent an interim invoice, you should expect the client to make the payment within the stipulated time. If not, you will need to follow up. Today, invoicing software has made online invoicing easier, to create different types of invoices, including interim bills. You can also integrate almost any invoicing tool with other business applications to create more accurate invoices and an automated follow-up via email reminders.
As you can see, an online interim invoice is a powerful tool for small and medium businesses. It will not only help you maintain cash flow, but also offer clients the flexibility of paying in small installments. Are you still using an Excel sheet for your small business invoicing needs? Maybe, it is time to switch to an online invoicing tool. The question is when are you going to do it? Let us know in the comments section.
Online Invoicing for Small Businesses: Brief History & 5 Essential Invoices You Need
Findings reveal that 27% of small and midsized businesses (SMBs) admit that they have a hard time creating and sending invoices, let alone tracking them.
As per a HubSpot survey of 400 SMBs, 49% have a hard time following up on late payments, and 46% find it difficult to receive their payments on time.
It’s no secret that small business owners wear several hats, but sometimes this can be overwhelming. While they’re supposed to focus on the strategic and money-making aspects of the business, they often find themselves taking care of manual tasks that can easily be automated. One such time-consuming task is invoicing.
One may say that invoicing is crucial to getting paid for the products/services provided, business owners need to realize that time is money. There is no money to be made for the time spent on creating, sending, and organizing invoices.
It is best to automate invoicing jobs to not only save precious hours, but also streamline the process, make it error-free, and ensure quick payments. You can put different types of invoices to use for your various business payment needs. Meanwhile, you can take care of business activities that help you rake in additional revenue or attend to your customer needs.
Invoicing should never feel like a hassle or slow down small business operations. If you think it’s hampering your productivity, using online invoicing software can help. It will improve your experiences with your clients in these ways:
Provide Accurate Estimates before Invoicing
You can proactively prevent the chances of answering verification questions and addressing disagreements with your clients at a later stage by creating professional-style invoices with the help of small business invoicing software. Using its templates will ensure that both, you and your clients are clear about the entailments of the project and associated costs even before starting work on the project.
These type of invoices can also help you detail your payment terms and establish a healthy work environment right from the project’s inception. This, in turn, will ensure that you don’t have to spend hours going through agreement terms and conditions over and over again to answer clients’ queries.
Add Specifics and Branding Standards
Your invoices should help you get easily identified by your clients, so establishing strong brand standards is necessary. They should also emphasize your brand’s values consistently in all your communications.
Certain important specifications should be mentioned in every invoice that is created for better organizing. It helps to have a numbering system in place so you can assign a unique number/code to each invoice for easy tracking. Your invoices should also specify your contact details such as your office address, email ID, and phone numbers.
Moreover, make sure the specifications mentioned cover the terms and conditions of the completion of the work and the payment. Even though these figures and stipulations are included in the written agreement/contract, your invoices should reinforce them to the client as and when they are issued.
Purpose of Invoicing
Businesses send sales invoices to their clients after providing them with goods or services. The invoices serve as either written or electronic documentation of the transaction between the business and the client. It is crucial that businesses maintain a record of all the sales they make to protect their interests in case a dispute arises in the future.
The purposes of invoicing include:
One of the primary purposes of invoicing is to chronicle your sales figures accurately. It is an efficient way to track specific details such the date on which the product was sold, the price that was paid for it, as well as any outstanding debt. Further, an invoice it also aids the process of accounting while monitoring the performance of employees that makes sales and the items they sell.
More often than not, governments do not formulate a set system or template for the type of invoice businesses should use. However, all business are required to pay certain taxes, which is why invoicing tools become useful in recording cash inflow. It is always a good idea to maintain an ongoing summary of all business transactions with the help of invoices. This comes in handy at the time of filing taxes and ensuring that the precise amount is paid to avoid audits.
Online invoicing systems help shield small businesses from fraudulent and petty civil lawsuits. The details mentioned in the invoice make it clear that a particular item/service was provided at a certain time. An invoice with the client’s signature is extremely valuable as it serves as evidence of an agreement between the business and the customer. In the absence of an invoice, there will be no record of a sale, which makes businesses susceptible to facing price-related conflicts.
Gain Marketing Insights
Business owners need to closely monitor all sales invoices to use the information for targeting its customer base and marketing to them. This includes data such as dates of sales, frequency of sales, products sold, and the selling price of the products. CRM software or marketing professionals can use this information to gain insights on customer demography, peak purchasing times, preferred products, and more. This proves valuable when creating marketing strategies.
Using well-designed invoices for small business can be beneficial to buyers as well as sellers as they help with managing inventory. Whether you employ an automated inventory system that adds and removes items as you receive and sell them respectively or use the traditional paper-and-pen method to manage information about your available stock, an invoice is a valuable document. Sellers can track details about the products that are sold and shipped, while buyers can track the products that are received and stocked.
Invoices for small businesses present all the product and sales-related information in a systematic manner wherein the total price is broken down systematically and explained. It also reflects charges levied for services as well as labor. Other details include the date and time of the purchase, taxes applicable, total product price, date sent, the due date for payment, and seller and buyer information.
From Traditional to Modern: The Invoicing Journey
As far as modern businesses are concerned, invoicing tools have been gaining momentum as they streamline and simplify receiving payments. However, the practice of recording the rendering of products and services as well as the consequent transactions is being followed since the last 5000 years.
Before the modern invoicing and billing software for small businesses came along, other methods were used. It began thousands of years ago in ancient Mesopotamia in a region that corresponds to modern Iraq. In the earliest recorded forms of invoices, sellers created IOUs (abbreviated from the phrase “I owe you”) on cards made from clay.
Given the technological advancements in the times we live in, sending invoices on paper, email, and PDF have also come to be considered as primitive methods.
3300 BC: This image depicts one of the world’s earliest invoices, which came in the form of clay tablets. Inscriptions on it were made with the help of a writing system called cuneiform.
Source: Wikimedia Commons
1504: This image shows an account of a £36 down payment made by Philip I of Castile when he bought a painting of the Last Judgment (Paradise and Hell).
1780: The above image shows an eighteenth-century invoice for products purchased for a funeral. Items include coffin, furniture, and more.
1870: This image shows a document created by the director of the Sistine Chapel choir. They charged 67 francs and 50 centimes for six lessons plus the sheet music.
Source: British Library
1891: This is a seventeenth-century invoice for Dutch sea charts which were bought by the British Library.
Source: The Coopered Tot
1904: This is an early twentieth-century invoice from the renowned Graham Distillery Company.
Source: Wikimedia Commons
1935: This is what the price list for bow and arrows in Belgium looked like.
Source: Wikimedia Commons
1942: This is an invoice for American painter, Ed Hopper’s Nighthawks from the Chicago Art Institute.
Source: Wikimedia Commons
1976: This image shows the oversized IBM printing machine model 3800. It was first used for large-scale document printing such as invoices and mailing labels.
1981: Seen above is an invoice for a disk drive meant for the Atari 800, which was among the first personal computers to go on the market.
Source: DiCentral Corp.
2003: The above image is a screenshot of a Walmart invoice. This is how the typical ERP-powered invoicing solutions looked like (and maybe still do), although offices did need to carry out a certain amount of supporting paperwork.
2013: E-invoicing software became a total game changer and simplified the invoicing process.
Many businesses create invoices on programs such as Microsoft Word and Excel. Templates for creating such invoices are easily available online. All you need to do is download one, fill out the required data fields, and email it. You can also print the invoice and send it to the client via snail mail. However, this can be extremely tedious and time-consuming for a growing business, especially if you’re required to repeat the same process frequently.
Further, it is also an error-prone process. From entering the wrong numbers to accidentally deleting certain details and messing up the alignment, the scope for going wrong is immense.
For these reasons, online invoicing tools are gaining increasing popularity among small businesses. Not only are they easy to use, they also allow users to create different types of invoices in a matter of seconds.
Invoicing software for small businesses is more efficient and convenient to work with for the following reasons:
Automation: Online invoice software automates necessary processes that make invoicing easy and efficient. This includes sending automatic payment reminders for unpaid bills to the concerned parties.
Quicker Payments: The invoice format used by invoice software results in a professional design. It includes all the necessary information which is conveyed clearly to customers to enable faster payment.
Innovative Built-in Tools: Crucial data related to products, customers, prices, and taxes is securely stored by invoice software. This enables businesses to prepare an invoice with only a few clicks.
Mobility: Because all data is stored on the cloud, it doesn’t matter where you access it from. Whether you want to work with it at your desk or when on the go, online invoicing empowers you to easily view and manage your invoices. Further, you’re equipped to perform transactions through your mobile devices.
The Cost Conundrum
An increasing number of businesses are switching from paper-based invoicing methods to online electronic methods. However, several emerging businesses continue to employ paper-based invoices and billing systems along with outdated payment processing procedures. This can prove to be expensive, inaccurate, monotonous, as well as extremely time-consuming.
The same study also found that “manually-processed invoices cost, on average, $30 per invoice to process, while fully-automated invoices average only $3.50 per invoice to process.”
In modern times, an online invoicing system is more suitable as it is cloud-based and makes it possible for businesses to create and send multiple invoices simultaneously over the internet. Such a system, therefore, helps cut costs and speed up the billing process.
If you’re still using a paper-based invoicing system, the following few factors could be burning a hole in your business’s pocket:
Cost of preparing and printing paper invoices
Cost related to storing paper invoices
Fees for postage and shipping
Fees for offering payment options such as debit and credit
Costs associated with undelivered bills or lost invoice and time
Costs related to handling customer calls and answering questions about the invoices
“Below is an infographic that will tell you everything about online invoicing and its global impact. Also, why small businesses should start going paperless and how it will help them with faster and timely payments while saving money.”
The Emergence of Online Invoices
If you haven’t already ditched the paper-based invoicing system and adopted online invoicing, here are a few undeniable reasons to do so right away.
Bid Adieu to the Challenges of Paper Invoices
As established above, paper-based invoicing process takes time, effort, and money. With an online invoicing system, you can reduce expending valuable resources on all these fronts and optimize your accounts payable functions. When it comes to storing invoices, sending automated reminders through electronic invoices will leave a trail that is easy for you and your customers to refer when needed. This means lesser clutter and smaller mess at the workplace with no need for filing paperwork.
Enhance Process Automation
Thanks to technological innovations, businesses have become capable of transforming their processes to collaborate, communicate, administer, and operate better, regardless of the time and location. Online invoicing can not only make process convenient and accessible, but also allow you to leverage your mobile devices to run your business by sending you timely alerts, updates, reports, notifications, and more.
Improve Cash Management
When the economic conditions are tough, which is the case among most small businesses, you need to focus on cutting costs. The importance of optimal cash management cannot be overlooked. Whether it is receiving timely or late payments or recording details about your invoicing expenses, an online invoicing system can help you keep everything sorted.
Facilitate Quality Assurance
Sending low-quality and erroneous invoices to clients will ruin your image and they will probably stop taking your business seriously. This may result in late or no payments, which is the last thing you want. Having an online invoicing system in place will prevent this by:
Verifying and organizing supplier data
Confirming the number work on the invoice
Ensuring the invoice is in accordance with the order, receipt, and contract
Assigning to cost centers
Generating correct tax statements
Embrace a Green Initiative
We live in times when clients want to be associated with socially responsible companies. Moreover, going green is great for our planet and future generations. Creating less paper invoices and storing files electronically will enable you to do your bit to try and make a much-needed difference to the ecology.
Setting up the Online Invoicing Process to Make the Most of It
Mentioned ahead are a few things to keep in mind to fully reap the benefits of an online invoicing system.
Ensure Proper System Setup: Every client you transact with should be assigned a unique numeric code and all invoices sent to clients should include their own respective number.
Be Regular with Sending Invoices: Regular billing is key to receiving timely payments without attracting disputes.
Mention Penalty for Late Payment: Doing so will keep the clients alert to not miss payments and send them on time.
Generate Important Reports Frequently: Whether you need instant or customized reports for a quick glimpse into your business affairs, you can generate all necessary reports whenever needed to stay on top of your business’s financials.
Advantages of Electronic Invoices
Because the online invoicing process is automated, buyers, sellers, and administrators stand to gain a number of strategic and operational benefits. The ability of the invoice software to integrate with other business applications allows businesses to improve efficiencies and revenue-creation capacity.
Apart from benefits such as cost reduction, time saving, and dispute avoidance, e-invoices offer several other advantages.
Advantages for sellers:
Quicker and more accurate payments
Reduced likelihood of invoice rejection
Better accounts reconciliation
Enriched cash management
Improved customer relationships
Creation of professional-looking invoices
Advantages for buyers:
Accelerated payment cycles and processing
Improved accounts reconciliation
Enhanced cash management
Decreased likelihood of fraud, disputes, and other payment-related issues
Better supplier relationship management
Advantages for business administrators:
Enhanced business branding and awareness
Optimal use of business capital
Ensured compliance with industry and legal norms
Improved relationships with customers and suppliers
Optimized IT system
Different Types of Invoices: 5 Essentials for Small Businesses
Here are the five essential types of invoices that every small business needs.
1. Pro Forma Invoice
A pro forma invoice is different from a regular price quotation in that it is a binding agreement. However, the terms and conditions of the sale are subject to change. They’re helpful in streamlining the sales process by minimizing back-and-forth post a sale going through, as all mentioned terms are agreed upon by all parties involved.
It, therefore, is a document of good faith estimate to prevent the buyer from incurring unforeseen and substantial charges upon the finalization of a transaction.
The purpose of the pro forma invoice is to provide the buyer with an exact sale price. This invoice includes estimates of fees or commissions, applicable taxes, and shipping costs if any. Businesses from almost every industry use pro forma invoices to complete their internal purchase-approval process.
A business may send a pro forma invoice either prior to shipping the products or at the time of shipping them. While the invoice does contain the exact cost and the details of the sale, it is not considered an official demand for payment. There are no guidelines in place that dictate a precise format of a pro forma invoice. It may or may not be similar to other commercial invoices in its presentation.
You may have visited a designer boutique and agreed to the price of a garment on a pro forma invoice. The designer will deliver the garment once it is ready. You will pay the designer once the invoice is received. The final amount on the invoice will be the same as or around the same amount as mentioned in the pro forma invoice.
2. Interim Invoice
An interim invoice allows breaking down payments for a huge project into multiple small payments. The time of making the payment corresponds to the completion of a predetermined portion of the project. This type of invoice covers that amount of money and helps with regulating cash flow for large-scale projects.
Big projects make higher expenses in terms of material, labor, and additional operating costs. Interim invoices help small businesses manage their expenditures when undertaking high-volume jobs. You need not wait until the completion of the project to receive payments. You can use the money received from interim invoices to pay off some of the costs you incur.
This kind of invoice is commonly used when you want to post multiple invoices for a client job.
You may perform some accounting work for Johnson HVAC technicians. You might start the work in January 2018 and estimate that the job will be completed by December 2018. You decide to invoice the client $100 per month.
If you use interim invoice, you will have to post interim invoices for $100 for every month between January 2018 and November 2018, bringing the invoice total to 11, and the amount total to $1100.
Your time ledger shows $1500 of staff time. The interim invoices will show 11 different postings of $1100, thereby reflecting a net WIP balance of 400. The interim invoices will show as “credits on account” and will not be coordinated with any amount of time.
By using an interim invoice, you have the advantage of being able to see all staff posting that has not been billed and all the invoices sent to the client so far when November ends. You will also be able to view the current WIP balance owed to you, which may help you make a more informed billing decision.
Once December arrives, you complete the job and are ready to bill the client. You see that you’ve spent $1500 on staff and have invoiced the client $1100. Consequently, you may decide to invoice the client $1800, thereby making a profit of $300. You can also reduce the client’s WIP and clear all posted interim invoices.
For this, you will need to post a final bill of $700 ($1800 less $1100 is $700). You can post a write out to the value of $1500 as that would be the current balance, and your aim is to get the value down to $0 ($1500 less 0 is $1500). The final bill is used to finalize (or clear) all interim invoices posted to the client’s account so far.
3. Past Due Invoice
A past due invoice serves as a reminder to the client that they haven’t paid up yet and should act to settle the due payments. Sometimes, the client fails to pay you in accordance with the due date on the final invoice. When this happens, you may send them a past due invoice immediately after payment becomes late.
The main purpose of a past due invoice is to remind clients that their payment due date has passed. When preparing this invoice, make it a point to mention all the information from the final invoice, including penalties that late payments will attract.
You want to overlay your driveway, so you buy large quantities of gravel and a couple of pallets from a hardware store. The purchase agreement mentions a payment term of two weeks from the delivery date.
The hardware store delivers the supplies the next day, thereby completing its contractual obligation. It now has the right to collect the purchase price from you. In this way, a debt relationship is established, with you as the debtor and the hardware store as the creditor.
If the debtor does not provide the contractually agreed upon payment before or by the due date as mentioned in the agreement, then the creditor can demand it upfront.
4. Recurring Invoice
Issuing a recurring invoice makes sense when invoicing for ongoing services. It is most suitable for payments of the same amount, like a subscription.
When you set up recurring invoices, your invoices get sent to your customers automatically. You need not bother with setting reminders or copying data from an old invoice to a new one every time you need to send them out. This arrangement allows you to focus your time and attention towards other strategic business activities while your invoicing takes care of itself.
If the product or service you provide requires you to send out invoices with the same details to clients on a regular basis, you need to use recurring invoices. A few types of businesses that use recurring invoices are:
Service providers, like plumbers and electricians, who bill for a fixed number of working hours every month.
Providers of monthly service packages. For example, a digital marketing agency that provides a set number of content and implements SEO services for its clients.
Providers of maintenance plans for products. For example, technology companies that digitize company processes with the help of their trademark tools and technologies. Integration with legacy systems and constant updating of business-critical applications will need their monthly support. Another example is that of a gardening service provider that attends to the client’s garden on a weekly basis.
Providers of educational material and online training resources such as long-term online learning and refresher courses offered by educational and training institutes.
Providers of services that require membership or subscription. This could be a one-year subscription to a magazine or fees for a 10-year club membership.
Software providers who charge a license fee every month to allow the use of their products.
Typically, when a recurring invoice is used, customers avail services at regular intervals without performing any additional action. When the agreed-upon term ends, the customer can either extend or terminate the alliance.
5. Credit Memo
A credit memo or a credit memorandum is a document that is issued by the seller of products or services to the buyer to decrease the amount the buyer owes to the seller under the terms of an earlier invoice. Typically, the credit memo clearly mentions the reason for the amount stated on the memo that has been issued. This comes in handy at the time of gathering information about credit memos and figuring out the reason for their issuing by the seller.
This document is commonly issued when the buyer wants to return purchased goods to the seller, or when there is a pricing issue, a marketing allowance, or any other reason where the buyer should not pay the seller the amount as mentioned in the invoice. The seller makes of a note of the credit memo as a reduction of the accounts receivable balance. The buyer, on the other hand, notes it down as a reduction in the accounts payable balance.
When using a credit memo, the seller will do well to review the open credit memos at the end of each reporting period to check the suitability for linking to open accounts receivable. When this is done, it lowers the average amount of outstanding invoices, and can also decrease payments to suppliers.
In case the payment from the buyer and seller is pending, the buyer can use the credit memo as a partial offset to the invoice-based payment to the seller. But if the buyer has made the full payment as mentioned on the invoice, he/she has can use the credit memo to either uses the credit memo to offset a future payment or demand cash payment in exchange for the memo.
An internal credit memo is created when the buyer is not sent a copy of the invoice. This is done when a business is writing off an outstanding receivable balance.
You purchased some clothes from a fashion clothing store. The store’s return policy stipulates that returns will be accepted within 15 business days from the date of purchase. Their policy also mentions that reimbursements will be made through store credit only, and not by cash.
One day after the purchase, you realize that one of the garments you bought has a hole in it. So you decide to return the product. The store manager informs you that they will accept the returned product. The manager then proceeds to create a credit memo because the clothing store will need to reduce a previously issued invoice to compensate for the sold damaged garment.
Once the memo is issued, your account at the fashion clothing store will be credited with the amount you paid for the item you want to return. You can then use this positive credit to either exchange the damaged garment with a proper one of the same model or buy a different garment altogether.
The modern marketplace is extremely competitive and small businesses need to be prepared with the best systems and software to stay competent. Business needs to not only attract new clients but also retain them if they want to grow and compete in the market for the long term. Efficiency is the name of the game, which is why it is crucial that small businesses find ways to maximize their results while saving their resources. Factors such as improving productivity and making dealings convenient for clients matter. An online invoicing system for small businesses is the key to achieving this. An improved invoicing process will ultimately help scale your business by bringing about enhanced cash flow. Gone are the days when creating invoices on paper and excel sheets were enough for efficient invoicing. Modern business processes demand the efficiency and the multiple benefits that only cloud-based software can bring to the table.
Is your small business equipped with a state-of-the-art invoicing system that caters to all its unique needs? Do let us know how it has helped your business in the comments box below.
The In-Depth Guide To Selling Your eCommerce Business
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.