When it comes time to sell your ecommerce business, you may find you are not fully prepared for prospective buyers or your business isn’t the smooth running machine you thought.
The individuals considering your company may be looking for a new source of income or an addition to a portfolio of related businesses. These prospective buyers need assurances and info to evaluate the potential.
What follows are six things to do before selling your ecommerce business.
1. Earn a Profit
“You need to understand what buyers look to acquire. It is not as simple as operating a business and pointing out the opportunities,” said Blake Hutchison, CEO of Flippa, a peer-to-peer marketplace of online businesses.
“The buyer is most interested in historical performance because that’s a record of the business’s ability to trade through seasons…Buyers look for opportunity, but they pay for performance,” Hutchison said.
While it is possible to sell an unprofitable business, you will likely get more if it has a record of profitability and, better still, is growing.
“You are going to receive a higher offer from a buyer if the growth trend of your business and profitability is improving,” said Jock Purtle, CEO of Connection Brands, which operates Digital Exits, a business brokerage, in a video.
Overall, expect buyers to evaluate your ecommerce business on trailing 12-month revenue and profit.
2. Keep Clean Books
Your company should have clean, understandable, and standardized financial statements — balance sheets and income statements at a minimum. This may mean retaining an accountant or at the very least tracking sales and expenses in QuickBooks, Xero, or similar software.
Prospective buyers want to know exactly where the company stands.
“Once a buyer has comfort around the way an asset is trading — let’s say it’s a Shopify store in the toy sector — and [the buyer] has comfort around the average order value, the refund rate, the cost of goods, all the things that go into operating an ecommerce business, once they’ve got comfort around that they start to assess the opportunity. That’s where you can see valuations increase above standard because it’s a well-performing asset on the Shopify platform, and now there are opportunities to expand it to the Walmart or Amazon marketplaces,” said Flippa’s Hutchison.
Providing good financial information allows prospective buyers to feel comfortable with your company and imagine the greater opportunity.
3. Calculate CAC, CLV
You’ll need to know more than how much your products cost, how much they sell for, and how much your business has spent on ads. You’ll also want to calculate customer acquisition cost and customer lifetime value and apply that information to a cohort model.
Alex Taussig, a partner at Lightspeed Venture Partners, has argued that cohorts should be the standard financial model for evaluating ecommerce businesses. “Cohorts” in Lightspeed’s model are the set of new customers that return for subsequent purchases.
Having this information builds on your company’s potential profitability, making the opportunity more vivid and perhaps driving up the selling price.
4. Document Operations
Your ecommerce company should also have written practices and standard operating procedures.
“Buyers get spooked when there is not enough information around how the business actually operates,” Hutchison said.
Prospective buyers want to come in, take over, and operate the company without interruption, thereby generating a return on their investment. If there is no clear understanding of, say, how to manage inventory or customer service, a buyer might be less interested or less willing to pay what your business might otherwise be worth.
5. Build a List
A customer list is among an online store’s most valuable assets. Buyers know this.
Your ecommerce business needs an email list and, perhaps, a text list proportional to revenue. “Proportional” is relative to your company’s industry. But know that you’ll want a strong list of customers and prospects to pass on to the new owners.
6. Stay Current
Some brokers recommend rebranding your company before you sell it. They suggest updating your logo, site design, and, if applicable, packaging. The concept is similar to a homeowner repainting or remodeling before selling. The site (house) needs to look good, after all.
But a better strategy is simply staying up to date. If it helps earn more revenue, why didn’t you update the logo, redesign the website, and redo the packaging before selling?