Practical Ecommerce

Recap of selling an ecommerce business

Every time I sell an ecommerce business, I write an internal summary with highlights of that deal. This includes statistics like:

  • Asking price vs. selling price;
  • Terms offered vs. terms negotiated between buyer and seller;
  • Challenges faced selling the business;
  • Number of offers received;
  • Time between the listing date and selling date.

After the transaction is completed, when I discuss and reflect with the seller on the selling process, I hear interesting and many times repeated comments.

Many of the comments are versions of “If I had known before, I would not have done or I would have done it differently.” It occurred to me that other ecommerce owners might want to learn from the insights of these experiences. Thus, going forward I will periodically share a snapshot and key takeaways of an actual sale of an ecommerce business I have completed.

For this installment, I will focus on an ecommerce business that declined in revenue in the last two years. This business was manufacturing and selling art and related gift items. Here is the financial overview. Note that all identifying information has been changed, including the product line sold, to preserve seller confidentiality.

  • Asking Price: $693,875.
  • Gross Sales: $681,980.
  • Cash Flow (i.e., EBITDA): $284,177.
  • Inventory: $247,813 (not included in asking price).
Additional information about the business is as follows.
  • In business for 6 years.
  • Average annual growth 30 percent since inception
  • 50 percent sales B-to-B from online wholesalers and brand-name brick-and-mortar stores.
  • 50 percent sales B-to-C directly from the website.
  • Gross profit margin on the products: 80 percent.
  • Products manufactured in China but managed (production, factory communication, and shipping) by a third-party U.S. vendor.
  • Shipping from 1,445 sq. ft. basement.
  • Staff consists of one person, working 21 hour per week, who manages all aspects of shipping.
  • Excellent record keeping.
  • Tax returns show profit of roughly $281,000 per year for first 3 years.
  • Seller wants out as he has developed passion for a different, unrelated business that requires more time and money.
  • The revenue declined by 40 percent in last two years since seller started his new business, resulting in lack of attention and marketing.

SWOT Analysis

Strengths, Weaknesses, Opportunities, Threats — SWOT — are as follows.

Strengths

  • Product: The ability to further develop and manufacture current lines and ability to expand to other product categories.
  • Low overhead costs.
  • Excellent margins.
  • Good inventory turnover.
  • The business does not take a lot of hours to manage.
  • Recognizable brand in the home decor and gift industry.
  • Ecommerce site runs efficiently, with easy download to QuickBooks.
  • More than 175 established wholesale accounts.

Weaknesses

  • A gift and home-decor business needs product assortment to be addressed annually and product must be updated for the current and future market conditions.
  • Some products still assembled in-house.

Opportunities

  • Distribution strategy to differentiate wholesale vs. retail (goal setting, budget, margins, sales reps).
  • Improved marketing strategy for both retail and wholesale.
  • Move forward into the “digital technology” market with designs.
  • Streamline shipping process through a fulfillment center.
  • Streamline product by moving all production to overseas factory or assembled at fulfillment center.

Threats

  • Additional companies have emerged, creating similar products.

Sale Details

  • Selling price: $499,590 ($301,340 cash down and $198,250 seller note for at 6.25 percent for 3 years).
  • Inventory paid in cash at closing: $233,935 (this is in addition to selling price).
  • Seller note: Note was secured by buyer’s real estate.
  • Time taken to sell, from listing date: 3 months
  • Asking price EBITDA ratio without inventory: $693,875 / $284,177 = 2.44
  • Asking price EBITDA ratio with inventory: ($693,875 + $247,813) / $284,177 = 3.31
  • Selling price EBITDA Ratio without inventory: $499,590 / $284,177 = 1.76
  • Selling price EBITDA ratio with inventory: ($693,875 + $233,935) / $284,177 = 2.58

Key Takeaways

  • Declining businesses can be sold if there is an opportunity for turnaround.
  • Declining businesses can have a dramatic impact on selling price.
  • Buyer will only buy inventory that is in a good salable condition. In this case, buyer refused about $14,000 of slow-moving inventory.

 


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