In the late 1990s, ecommerce vendors looked to brick and mortar retailers for marketing tips and best practices. Now, as more people shop online and abandon brick and mortar stores, retail chains are turning to online merchants for advice.
That’s because web-only sellers have shown themselves to be more adept at sales and marketing using mobile, subscriptions, celebrity curation, and social media techniques. As a result, established retail chains and holding companies are acquiring, merging or partnering with Internet-only ecommerce firms.
Just last week, PPR SA, a large European retail conglomerate announced a joint venture with online apparel merchant and ecommerce services provider Yoox Group, targeting global luxury apparel customers. In April, Nordstrom invested $16.4 in online men’s apparel etailer Bonobos and started selling the brand in its retail stores.
While many large ecommerce sites have thrived during the recession, some smaller ones have had a rough time.
If you think you would benefit from a partnership or want to sell your ecommerce business, here are a few things to consider.
These relationships can be negotiated with fewer legal ramifications than mergers and acquisitions. Revenues are shared, though not necessarily equally. To be successful, the partners should have the same objectives and goals. Some partnerships are quite informal, while others are quite complex. Partnerships usually work best when companies are of comparable size.
Another form of partnership is a joint venture. This is typically a short-term arrangement between two or more companies. Businesses enter into joint ventures to access new markets or to share costs. Once established, a joint venture can be structured as a general partnership, a limited partnership, or a corporation.
Mergers and Acquisitions
The rationale behind mergers and acquisitions is that combining the strengths of two companies while minimizing the weaknesses makes them both more valuable. This is particularly true in a recession. In the ecommerce arena small merchants may have cash flow constraints that curtail the purchase of inventory. Another problem is that small ecommerce merchants don’t buy enough inventory to qualify for volume discounts, putting them at a competitive pricing disadvantage. They may not have enough money for a robust marketing budget or they may not be able to pay for the latest ecommerce technology. Merging or being acquired can solve these problems and achieve economies of scale, creating one more efficient entity.
Merger or Acquisition?
A merger occurs when two firms — typically of equal size — agree to become a single new company. The names of both companies may remain in some form. An acquisition happens when one company — usually a larger one — takes over another business and becomes the new owner. From a legal perspective, the acquired company no longer exists.
Where Is the Value of Your Company?
The value of your company depends on what the potential acquirer or partner needs — where they have a weakness. In some cases this is specialized knowledge you or your employees may have. Other contributing factors include:
- Number of customers;
- Demographics and psychographics of your customers;
- Technology you have implemented, especially any proprietary software;
- Margins, profitability, liquidity, debt;
- Any competitive advantage you have over your competitors.
Due Diligence for an Ecommerce Business
If you are going to put your ecommerce company up for sale or are looking to merge, be prepared to undergo a thorough due diligence examination by potential buyers. They will look at the following.
- Your terms and policies
- Privacy and security
- How you use customer data
- Social media involvement
- Do you comply with the laws in the jurisdictions where you operate?
- Are you compliant with legal and industry standards?
- Supplier and outsourcing contracts — do they put you at risk in any way?
- Intellectual property issues, including (a) your domain name and trademarks trademark and domain name can contribute to the value of your company, (b) patents, and (c) any proprietary software you have developed.
- Your website hosting agreement, including (a) adequacy of service level agreements, and (b) transition assistance obligations if agreement is terminated.
Do Your Own Due Diligence
If you are trying to sell your house, you want to make sure potential buyers can afford the sales price and that they will complete the transaction in a timely manner. You need to do the same for any potential buyer of your business. Here are things to consider.
- Ask about the source of their funds — are they taking out a loan to purchase your company?
- Will you get the full price up-front in cash or will you be paid over an extended period of time? Make sure to look at the tax consequences of each approach.
- Do they understand your business? Are they ecommerce experts?
- Do you want to remain with the business for a period of time? Some buyers feel more comfortable with the owner staying on to assist with the transition period while others want a clean break.
As recommended by business broker Manny Shah, in his blog post “Overcoming Challenges for Qualifying Potential Buyers of eCommerce Business,” it’s best to use an experienced professional intermediary to help sell your ecommerce business. Most likely, he or she will be able to find a larger pool of interested and qualified buyers and can maximize the sales price.