The Importance of an Exit Strategy
You are an ecommerce business owner. Your revenue and profit are increasing. In “Ecommerce Trends Point to a Bright Future,” we confirmed the industry is solid and growing. Why in the world would you consider an exit strategy?
First, let’s define “exit strategy.” In most cases, it means the sale of your business. It may also simply mean taking yourself out of day-to-day operations and hiring or promoting an executive team to manage the company. Even in the case of a sale, you may stay involved in the business in some role. Exit strategies take many forms. But in most cases, they involve owners cashing out and moving on to a new phase of their lives.
Reasons for Having an Exit Strategy
Here are reasons why you should always contemplate your exit strategy — even if you have no immediate intention of selling your company.
- Unexpected offers may arise. As the ecommerce industry becomes more competitive and larger players look for growth through acquisitions, smaller companies may look for mergers to gain a larger market share and buying power.
- Health or family crisis. Sudden illnesses or family issues take time away from your focus on your business.
- Economic shift. A recession may negatively impact your business.
- Technology trends shift. If you are not making the transition to mobile devices, you may be left in the dust.
- You want options. Should you decide to sell, you will want to have options beyond selling to a competitor at a low value.
- Age. At some point, you may want to retire and you will want to capture the value of your company.
- Product trends change. Many small ecommerce businesses are highly dependent on a single product or product line. A shift in trends may lower your revenues.
- Wear and tear. In my case, I simply grew tired of the sameness of managing a mid-sized ecommerce company. I wanted to do something different and reap some of the benefits of my hard work. I addressed it all in “Ecommerce Owner Sells the Business; Explains the Process.”
What would you do if you got an unexpected call, with an offer to buy your company? If you have an exit strategy, you will be able to have a meaningful conversation, with an understanding of your company’s worth.
Why Plan Your Exit?
It takes more than placing a listing on BizBuySell, BuySelleBiz or hiring a business broker. Think about selling your house. The most common advice is to make major repairs, paint the house, spruce up the yard, and get rid of clutter. Likely, you will still want to hire a professional broker who understands valuations, regulations, and contract negotiations.
Determining a Value
There are many factors that affect the valuation and overall marketability of your company. A successful sale of your business will depend on how you are executing these key factors.
Net cash flow. For most small businesses, the single most important factor in its valuation is the net cash that is paid or available to the owners in the form of salary, distributions, or other compensation, such as company car, phone allowances, and business club memberships. Typically the overall value of your business is a multiple of your net cash flow.
For example, if your net cash flow is $100,000 and your company is the market leader, has consistent traffic and revenue, has a good infrastructure and organization that is self-sustaining without your skills or leadership, you may have a multiple of as much as seven times your cash flow — a valuation of $700,000.
Conversely, if your revenue is declining, most of the business knowledge is in the owner’s head, and you are running the business with a 10 year old online store, your multiple may only be 1.5 times cash flow, or $150,000.
Store traffic, sources, and trends. It is important to have consistent and growing visitors, page views, time on site, and all things related to traffic. Your traffic sources are equally important. You want to demonstrate diversity and not have a huge dependence on a single referral source.
Products and inventory. What is the depth and breadth of your product line? What are your gross margins? How solid is your supply chain? What is the valuation of your inventory and what is the turnover? How many obsolete, unsalable products are in stock? How do you get rid of them?
Customer base. Buyers want to understand your customer base. What is your conversion rate for new customers? What is your retention rate for existing ones? What is the lifetime value of a customer? How many times per year do they buy? What is the opportunity to get more revenue per customer?
Revenue. Beyond gross revenue, buyers want to understand your average order value for new and existing customers. They want to look closely at trends and understand seasonality, market trends, and product trends.
Search marketing metrics. Search engine optimization and pay-per-click campaigns are critical to the success of most ecommerce businesses. Search rankings are huge. The depth and scalability of your PPC campaigns are also very important.
Likes, followers, and subscribers. Social media presence is a big factor in ecommerce. The size of your following is not nearly as important as the influence from your various outbound marketing platforms. Buyers will want to see the number of Facebook Fans and understand the influence of your interactions on purchases. The same goes for Twitter and Pinterest. Email marketing in ecommerce still delivers the highest rate of conversions and will be evaluated closely.
Online store. A huge factor is whether your website is up to date. This includes the overall design and, more importantly, includes search and navigation, personalization, merchandising, and the overall customer experience. Support for tablets and smartphones is critical. If a buyer is looking at a major site redesign or platform change, your valuation and overall scalability will be adversely affected is your site is not mobile friendly.
Infrastructure. This is your computer network, ecommerce platform, financial system, order management, offices, warehouse, and phone systems. An integrated and well-supported infrastructure will add value to your company. One that is held together with duct tape, so to speak, will not.
Organization. This is a huge factor for mid-sized companies. If you have more than a few employees, buyers will want to know how much of the business can be run by the existing staff and whether they will be able to retain that staff.
The owner factor. I’ll finish up with the biggest variable. Buyers want to know if the business is self-sufficient without the owners or how much time and effort it will take to replace the owners’ contribution. If your buyer is in the business, this is less of a factor. If you have a buyer who is new to ecommerce, this is huge.
There are many moving parts that will impact your company’s valuation. Planning a strategy to sell your company starts with evaluating potential buyers and what will be important to them. Next, evaluate your strengths and weaknesses with each of the key factors discussed above. Collect all the facts and data for each factor and include it in a prospectus, likely with the help of a broker. At that point, you can estimate a valuation. If it’s too low, invest some effort into improving the key factors or in increasing your net cash flow.
The most successful exit strategies are the ones that were planned years in advance. Frequently, they leverage one or two key factors such as profits, customer experience, supply chain, or organization. Think about an exit strategy for your business and plan ahead. You can then decide when to act.