Practical Ecommerce

Market Improving for Selling Ecommerce Businesses, Expert Says

Ecommerce merchants run businesses that can be bought and sold. There’s a market for these businesses and Mike Handelsman is an expert in the buying and selling of them. He’s general manager for BizBuySell.com, a leading business-for-sale marketplace, and he recently talked with us about it.

Practical eCommerce: What are the current market conditions to sell an ecommerce business?

Mike Handelsman

Mike Handelsman

Mike Handelsman: “It’s still a very challenging market. Since about mid-2008, it’s been a very tough environment for small businesses in general and that impacted the market for selling and buying small businesses. 2009 was a very challenging year, but the market is improving. We’ve seen a turnaround in the number of businesses for sale and the number of businesses that have sold in the last few quarters. The main reason that is happening is because sellers are actually lowering prices to make sure that their expectations for what their business is worth is meeting the expectations of potential buyers. So, today I would say it’s a buyers’ market and it’s a market that’s been slow but coming back.”

PeC: Who would likely be a buyer for a small- to medium-sized ecommerce business?

Handelsman: “There are probably two potential buyers. The first would be someone who has recently been laid off or left his or her corporate jobs. The other is most likely people who are already owners of small ecommerce businesses because it’s generally very scalable. So, if you have a small business owner who’s built a successful ecommerce business and understands the fundamentals of customer acquisition and search engine optimization and ecommerce infrastructure, they often look to expand to another category or similar business where they can leverage their accounts somewhere else.”

PeC: What are the multiples of cash flow, or multiples of revenue, that you see with ecommerce businesses, and is there a trend?

Handelsman: “Yes. When business brokers close a sale, they will report that transaction to BizBuySell, and then we collect that data and aggregate it for the purposes of helping small businesses owners understand the market.

“In the past 12 months, we had about 140 businesses that were sold on our website that fall into the Internet business category in general. The median multiple of gross income or revenue that those businesses sold for was 0.60 and the median cash flow multiplier that those businesses sold for was 1.85. “Cash flow” is also known as seller’s discretionary earnings, or the income that comes out of the business that can pay the owner or is retained in the business.”

PeC: Are there lenders interested in financing an ecommerce business?

Handelsman: “Financing is definitely one of the bigger challenges in the market right now. While there are a lot of buyers out there, they don’t necessarily have access to small business loans to buy a business. Today, it’s almost required that a small business owner who wants to sell is going to have to offer seller financing as part of the transaction to help the buyer be able to finance the business.”

PeC: On BizBuySell.com, there is a category for retail businesses and a category for Internet businesses. Would an online retail store be in the retail category or would it be in the Internet category?

Handelsman: “It’s up to the seller to choose up to two categories to list the business for sale. For people selling an online ecommerce business, I would recommend that they list it in both categories.”

ListenListen to the complete audio interview with Mike Handelsman.

PeC: Do bricks-and-mortar stores command higher prices than strictly online stores?

Handelsman: “It is hard to say categorically, because so much of a business evaluation is based on the specifics of that business. But in general I would say that ecommerce businesses that are obviously online tend to have higher margin structures because they have less capital requirements, they don’t pay rent, usually those kinds of things. So, I would say in general, if those businesses are running with greater profits and less overhead, then they generally are going to command better prices and better multiples.”

PeC: What are some of the variables a buyer should be looking for?

Handelsman: “We generally tell buyers they should be looking for a business that suits their individual skills, that they have the background or talents to add value to, and that meets their personal income goals. Look for businesses that are going to excite you and interest you, because it’s a long day and it’s a tough job managing your own business. So you want to be excited and very interested in the category that you’re working in.

“Secondly, you need to have skills that are going to lend themselves to being successful. Another element is definitely personal income goal. So, potential buyers need to [establish] income aspirations and look for businesses that throw off a cash flow that’s going to meet those personal income goals.

“Also, evaluate at least a few businesses that meet your criteria to understand the differences between how businesses operate, the owner that you’re buying from, and how well you can work through the transition with that person.”

PeC: Can you give us some examples of recent ecommerce businesses that have sold?

Handelsman: “Since the beginning of 2010, some of the examples are a consumer services business-to-consumer company that was a niche ecommerce website with about $125,000 a year in cash flow. It had an asking price of $395,000 and sold for $325,000.

“In March, we had an Internet content network with 10 million unique visitors per month that had an asking price of $900,000 and was apparently sold for $1 million. It was generating about $0.5 million of annual revenue and about $0.25 million in annual cash flow.

“We also had an easy-to-operate, drop ship ecommerce business that was generating about $26,000 a year in revenue and $2,500 a year in cash flow that sold for $14,000. So, we really run the gamut from very small businesses to much larger businesses.”

PeC: What should merchants be doing right now if they are contemplating selling their businesses in the future?

Handelsman: “The most important factor is to start preparing now, even if their sale is a few years away. You can’t start too early. People should be managing their business, thinking about what they’d want to see if they were going to consider buying it, and some of the real fundamentals are strong, stable and growing cash flow and revenue. If you go to a potential buyer, you want to be able to show a history of growing income and growing profits and a very stable set of numbers.

“In addition, people who are thinking about selling should have well documented financials and historicals, especially things like website traffic or any other information that’s pertinent to the business. Buyers are generally very turned off when they look at a business where there isn’t a strong history of documented numbers or financials that they can look at.

“The other thing that’s really important is to make sure that the business can function without them, especially in the ecommerce category. Many small business owners kind of run the business largely on their own and so the business needs to be in a position that when someone new comes in, they can feel confident that they can take that business over and run it at least as successfully as the current owner.”

PeC: Tell us more about BizBuySell.com.

Handelsman: “BizBuySell.com has been around for 16 years now and we are the largest business-for-sale marketplace in the world. We have about 45,000 businesses for sale on our website today and we have an audience of about three-quarters of a million unique visitors every month looking at businesses for sale. We bring together sellers and buyers and then we let them transact in an offline world, away from us. We’re not a broker. We don’t take a percentage off the sale price. We’re actually just a marketplace that brings buyers and sellers together.

“In addition to the existing business-for-sale marketplace that we have on BizBuySell, we also have one of the Internet’s largest franchise directories where people can explore opening a new franchise business, and we have a valuation report that can allow buyers and sellers to purchase data to understand the state of the market — the valuation multiples in their individual sector.”

PeC: Anything else on your mind for our readers?

Handelsman: “If you’ve been sitting on the sidelines for the last year or two because you want to sell during a better market, times are changing and things are moving. Prices are still a little bit lower on the valuable multiple side, but there are a great number of potential buyers in the market.

“So, if you want to sell, I think it’s a good time to think about getting back into the market. Prepare your business to make sure you’re putting your best foot forward, and give potential buyers the confidence that they can be successful managing your business in the future.”

Practical Ecommerce

Practical Ecommerce

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Comment ( 1 )

  1. Ecommerce Exit Strategies May 20, 2010 Reply

    Great Article. As a business brokerage focused on internet business sales we are seeing a lot of the things Mike addressed. We have seen an increase in activity from motivated capable buyers, Sellers are having to finance more of a transaction than in years past, and cash flow multiples are down from the 3-3.5 x earnings we were seeing in 2008 to 2.5-3 x earnings in 2010.

    Businesses that were able to maintain or grow sales through 2009 are positioned well to sell and are receiving significant buyer traffic as these opportunities stand out from businesses that had declining sales in 2009.

    For sellers looking to approach the market it is important to take an objective evaluation of the state of the business, buyers pay for past performance an not potential so if sales declined recently owners need to determine if it is prudent to sell now or focus on growing the business and selling during a growth phase.

    If you are thinking about selling, like Mike said, give yourself some time to position your business for sale, any value you add to your business will potential be returned by a 2.5 to 3 multiple. There is no better time to invest in your business than the 12 months before you are ready to sell. In the current economy we have seen clients that went forward with new marketing initiatives and were able to pick up significant market share because the much of their competition had reduced marketing or gone out of business. Not only were they able to collect the profits from their increased sales but when it came time to value the business the business looked better to buyers because it was on a growth trend and had acquired a greater market share in their space, and they were able to collect a 3 times return on the profits.