How to sell your ecommerce business for a high valuation

I just finished reading Built to Sell, a book by John Warrillow that describes a fictional business owner who is struggling to sell his company. The cover of the book describes a common problem many business owners face.

“If you are like most business owners, you started a company because you thought it would give you freedom – to do what you want, work on your own schedule, make the kind of money you deserve, and eventually retire on the fruits of your labor.

“Unfortunately, according to John Warrillow, many owners find that selling their business is difficult because they’ve built a business that relies too heavily on their personal involvement. Without them, their company — no matter how big or profitable — is essentially worthless. Luckily, there are steps you can take to create a valuable, sellable company that can grow and thrive without you.”

In the book, the business owner turns to his trusted friend and entrepreneur, who lays out an easy-to-follow plan to transform his business.

Warrillow describes an ideal business that is “built to sell” as follows.

  • “Teachable: A built-to-sell business offers products and services that you can teach employees to do, or program technology to deliver, while you sleep.”
  • “Valuable: A built-to-sell business avoids price wars by specializing in doing one thing better than anyone else.”
  • “Repeatable: A built-to-sell business creates a stream of recurring revenue where customers have to re-purchase often.”

Though the book is written for a service business (an advertising agency) all three of the above components are equally applicable to an ecommerce business.

Built to Sell and The E-Myth Revisited by Michael Gerber, which I mentioned in “Secrets of getting top valuation for your ecommerce business,” a previous column, both provide a good guidance on core business fundamentals to focus on to sell your ecommerce business for a good price, which is currently between 3 and 6 times EBITDA — i.e.. “earnings before interest, taxes, depreciation, amortization,” roughly the annual cash flow of your business. Both books have the same underlying theme of building an owner-independent and easily transferrable company with the aim of significantly increasing the valuation. In fact, if you have a few years before you would consider selling your company, I recommend both books.

In a post from 2011, I described the mechanics of how to value an ecommerce business and shared that valuation multiple between 2 and 3 times EBITDA is a market average derived from the sale of many small companies.

But today, a higher price of 3 to 6 times EBITDA is possible depending on how many items from the following checklist apply to your business. None of the following should come to you as a surprise. It is not comprehensive. But I it has 70 to 80 percent of everything that will make your business a desirable acquisition.

  • Age of the domain and business history of 6 years and higher.
  • Consistent or growing revenue throughout the history of your business.
  • Loyal customers who rave about the products you sell and provide positive reviews.
  • Ecommerce revenue unaffected by ongoing Google updates.
  • Your business should be in an industry that is growing.
  • Business with mature processes that can be run without the involvement of the owner.
  • Many unexplored growth opportunities or guaranteed recurring revenue.
  • Higher gross revenue; businesses with revenue of $3.5 million or higher generally obtain higher multiples.
  • Scalable software platform. If an acquirer is an ecommerce chain that also uses the same platform you are, the value created just by this factor alone is huge for the acquirer and he could be willing to extend a higher offer than most other buyers who will need to switch platforms.
  • Excellent relationship with suppliers and not having a dependency on a few.
  • Audited financials (for larger companies) or financials maintained by a CPA firm. This is better than financial statements prepared by the owner.
  • Niche or customized products.
  • High gross profit margin: 40 to 60 percent and above range.
  • Multiple sources of traffic — i.e., Amazon, pay-per-click, natural search, affiliates, social media.
  • Large opt-in email subscriber list.
  • Either a responsive (mobile ready) website or a strategy to move to a responsive design.

The above list shows factors that will drive your valuation multiple higher. If you own a company that matches the description above, you have likely received an unsolicited offer.

Manish Shah
Manish Shah
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