Top 5 Mistakes Ecommerce Owners Make When Selling their Businesses
Recently I stumbled upon an article on Entrepreneur.com titled “10 Mistakes to Avoid When Selling Your Business.” I found myself relating to five of them, from my own experiences brokering ecommerce business deals.
Mistake 1: Listing Your Business without Sufficient Preparation
Insufficient preparation is the top mistake many ecommerce business owners make. In addition to solid financial statements, business prospectuses should contain many key pieces of information. Preparing your business for sale typically takes at least a few weeks time with the help of an expert ecommerce broker. If you are doing this yourself, you should allow yourself 3 months time. A broker can provide you with many different samples that will give you an understanding of how a good prospectus should look like. Following is a list of items we included in a last prospectus we prepared:
- Hours of operation
- Product or service segmentation
- Margins by segment
- Market served
- Competitive environment
- Customer base
- Industry trends
- Industry outlook
- New developments
- Management style
- Sales and marketing plans
Case Study: I brokered a transaction that involved selling a thriving business that had three income streams: (a) brick and mortar store; (b) portfolio of websites; and (c) an Amazon store. In addition the storeowner spent all day in the store and her husband had a full time job and he would manage website aspects on nights and weekends. Unfortunately, due to extremely busy schedule, the storeowner never got a chance to institute software based bookkeeping (e.g. QuickBooks or similar software) and last but not least, when the storeowner approached me with a decision to sell, she said she wants to sell her business in next few months. Looking at the amount of work ahead of us trying to figure out Excel-based bookkeeping I immediately knew this was going to be a challenge. I gave an estimate to the owner that to effectively represent a business of this size for sale it will need last five years of books prepared including P&Ls, inventory reconciliation and due diligence reports before I will feel comfortable opening it up for the marketplace. With the current state of books, it would take a solid one-month of my time along with one full-time employee from the seller team working with me. They did not have anyone other than husband and a wife team who can work with me and both of them had no time to devote to this activity. I knew even if it took two month to get where we needed to be before we list the business, it would be worth the efforts. Sellers felt strongly that they wanted to offer business for sale immediately and wanted to start speaking with the buyers. In short, we listed the business with only last one year of books, and worked our way through preparing remaining books while speaking with buyers at the same time. Today the business is sold, it took 9 instead of 3 months that would have taken if we had listed it after 2 month of preparation time and, moreover, we would have gotten better price than what the seller ended up getting. It pays to bring your books in order and keep them in order long before you decide to sell your business.
Mistake 2: Unwillingness to Hire Business Intermediary
The Entrepreneur article makes following observation of a business owner: “You’re an expert at running your business — not selling it. Yet it’s always surprising how many sellers are averse to hiring a business broker to facilitate the sale of their business. Would it be nice to save the roughly 10 percent brokerage fee? Sure, but in most cases brokers are capable of adding at least 10-12 percent to the sales price.“ I can’t agree more with Mike that working with a business intermediary to facilitate business sale makes sense for most of the business owners. Reflecting upon past deals I was involved as intermediary, I see following three areas where a competent business intermediary would add value.
- Get higher business price by using a broker. Since most business owners go through a selling process only once in their lifetime, they have no knowledge of the “right” price at which to list the business and the “right” preparation that will get them that price. If an intermediary is handling the sale process, she will be able to share adjusted market range customized for your own business.
- If your business growth has slowed or worse trending down, you need a broker. For a business that is challenged by economy or any other factors, not having a business intermediary involved could mean the owner may not be able to sell. This is due to the fact that most first-time sellers have no idea how quickly the business value declines for a businesses that are trending down in profitability or revenue. If business price is not reduced to keep up with the falling revenue, the business may never sell.
- Most sellers underestimate the efforts required to sell their business. Most business owners who try to sell their business on their own have no idea on the efforts required just to get the non-disclosure agreement signed from the potential buyers, let alone qualifying each of them and finding the one who is not going to waste owners time. In two cases, one for a business A that had an offer in first month after listing, and a second for business B that did not have offer after being in the market for more than 20 months, the number of ad displays were 12,148 and 19,156 respectively and “clicked for details” were 657 and 780 respectively. Many of those who “clicked for details” will either send an email or call the broker to understand the business. They all need to be processed and their NDA signed before they can be provided with any confidential information.
Mistake 3: Try to Cover up Problems
As a seller, you want to portray your business in the best possible light. However, there is a big difference between representing your business in the best light and misrepresenting your business to prospective buyers. At some point during the selling process you will be tempted to exaggerate numbers, distort projections or even cover up problems.
Every seller wants to highlight the strengths of his or her business and that’s fair. It’s easy to emphasize and pitch these strengths to the prospective buyer. But it is also very important that no facts are twisted to cover up any issues as this will likely result in a lawsuit later. In fact there is a way to use your business weaknesses to your advantage. If you analyze these weaknesses, you will often find that they are not business weaknesses but your (i.e. owner’s) weaknesses. May be you are not good at search engine optimization or budgeting or you take too much on yourself and do not delegate enough. Due to these weaknesses, business suffers in one or other areas. The way to capitalize on these weaknesses is to find a buyer who is strong in the areas where you are weak. When you find such a buyer, he will be willing to pay for your business more than anyone else.
Mistake 4: Having Unrealistic Price Expectations
In “Nurturing an unrealistic value for your ecommerce business,” my post last month, I addressed one of the biggest mistakes sellers make that will decide the fate whether or not their ecommerce business will sell. Many sellers have a preset idea about minimum price they want to get from their business and oftentimes that is based on a gut feeling and not supported by any analysis. I often say to my seller clients “No offer is a bad offer until you have a better offer.” Having a reasonable expectation increases your chances of obtaining your asking price and if you have a high yet realistic value with documentation to back it up, it is much better. You will find that having a realistic value is half the negotiating battle.
Case Study: When I think of unrealistic seller expectations, I think of one deal where the business was trending down and seller did not understand the importance of price reduction. He would not listen to my advice to keep up with price reduction during the sale period that extended several months and the passing of each month brought the trailing 12-month profitability lower and lower. Ultimately we ended up taking the business off the market and it took more than a year before the seller could restore the profitability back to normal levels. We listed the business back in the market with a realistic price and were able to sell in a reasonably short period while business was trending upwards.
Mistake 5: Unwillingness to Offer Seller Financing
I recommend my ecommerce business clients to offer seller financing. I have a following question in my valuation questionnaire: “Are you willing to consider up to 35% owner financing for a qualified buyer?” Many sellers feel very uncomfortable carrying a note that will be paid back over several years and rightfully so. But here is a reality. You are increasing your chance to sell your business and sell it quickly by offering owner financing. It doesn’t have to be large and can be anywhere between 25 to 35% of your asking price. Typical term is no more than 3 to 5 years and the interest rate is prime plus 2%. Here are the benefits of seller, or owner, financing.
- Owner financing can boost buyer confidence and make or break the deal. Buyer interpret seller’s willingness to carry a note as a sign that seller believes in his business.
- Owner financing reduces tax burden by deferring income to future years. Profit you make on a business is sale price minus the tax basis for your business (i.e., what you spent when you started your business) is taxed as an ordinary income if you owned the business for less than a year (rarely a case for successful businesses) or at capital gains tax rate (15%) for businesses held more than a year. Many smart sellers time the sale of their business in the 2nd half of the year so by the time they sell their business, they are close to the end of the year and they can defer taxes for the amount financed for the next year.
Owner financing can be protected by using any one or more of the following mechanisms.
- File a lien on the ecommerce business property is filed with the secretary of state’s office.
- Require the buyer to put up his property as additional collateral.
- Owner can also require the buyer to personally guarantee the loan.
- Owner can require the buyer to take out a life insurance policy with owner as a beneficiary.
- Last but not least, buyer should not be allowed to sell the business until the loan is fully paid off.