How to Sell Your eCommerce Business
Preparing to Sell Your eCommerce Business
Selling a business is similar to selling any other type of asset. You want it to be in the best shape possible to attract the most attention from buyers.
For eCommerce businesses, this means making sure that all of your operating procedures have been documented, so you can show potential buyers how the business operates. You should consider automating as many operations as possible to make the buyer’s workload minimal. There should be documentation to show current inventory, and your financial statements need to be clean and easy to understand.
If you have your eCommerce business set up as a legal entity, you must collect business tax returns, alongside the other financial documents. Not only will your potential business broker require this documentation before the sale, but it also helps the buyer see how much the business is truly making and can help them secure acquisition financing.
Listing Your eCommerce Business For Sale
Confidential Information Memorandum (CIM) Creation
At Raincatcher, we work together with our sellers as a partner. Our digital services team will work closely with you to gather all necessary documents, create a valuation, and put together a sales packet for your business. The sales packet often called a prospectus, or a "Confidential Information Memorandum (CIM)," contains the highlights of your business, ranging from financial recasts to personnel and logistics, and offers a highly detailed snapshot into its inner workings.
Your CIM is a key branding document at Raincatcher, and we create it with you in great detail in order to bring your company to market in the most honest and best possible light.
Legitimate buyers expect accurate and thorough levels of due diligence, so they can review your business and make an educated next step. Because eCommerce businesses, especially omnichannel retailers, have so many moving pieces it is important to paint a brief, but clear picture of how they are operated and why they are a worthwhile investment.
Presenting the Business
Once a CIM has been created and approved by both your broker and yourself, a listing teaser and marketing email is sent to our prospective buyer list. The teaser contains purchase considerations, high-level company highlights, and other features of your business that are attractive to a potential investor for sale.
They do not have access to your full listings at this stage, nor your company's name. Only after buyers sign an NDA can they access the full listing. We also ask that buyers tell us a bit about themselves, the types of businesses in which they are interested, and their financial capabilities. We will also post the listing on our website and other third-party listing sites.
Offers, Negotiation, and Close
Fielding Offers
At Raincatcher we will always be honest and transparent with our clients and aim to set reasonable expectations surrounding the value of your business and what you can expect to sell for. The market is an ever-shifting entity and it is ultimately the buyers on the market that will determine the value of the business based on what they are willing to pay.
eCommerce businesses that stock a large amount of inventory may be asked by the buyer to hold back a portion of the inventory cost. This means that the cost of inventory at the time of deal closing won’t be paid until that inventory actually sells through. Some buyers may even request that the inventory cost be paid after the first calendar year. This helps them with their cash flow and bankrolling future inventory and expansion efforts.
Deal structures including seller financing and royalties are also common with eCommerce business sales.
A seller-financed business is when the buyer pays the seller a portion of the purchase price over a set period of time. This means that the seller is assuming some risk for the buyer and can typically ask for a higher purchase price in exchange.
Royalties for eCommerce transactions businesses are typically structured as a fixed percentage of revenue paid to the seller on a quarterly basis for a set period of time.
Deal Negotiation
Once a buyer comes forward with an acceptable offer, we negotiate the exact terms of the deal with you and on your behalf based on the criteria determined prior. Many sellers are of the mindset that they want to receive cash at the time of close, and we would rarely advise on accepting a deal with less than 50% cash due at close.
The seller may request that you stay on for a period of time to train them or even sign a contract to consult for a salary or monthly fee moving forward. In most situations, this is so the buyer can rest assured they have help running the business for a period of time and are not biting off more than they can chew.
Close & Migration
Once final deal terms have been agreed upon, it is time to transfer the capital and business assets. Most business acquisitions are for assets and not equity. The corporate entity you used to run your business can typically stay with you, while the new buyer typically purchases all other business assets.
We will oversee the migration of the website(s), a third-party logistics (3PL) account, wholesale relationships, seller central account, trademarks, product patents, and any other purchased assets.
When Is the Right Time to Sell?
There is a quantitative answer to the question, “how much profit does my business need to make before I sell it?” And a more qualitative or quality of life question of “do I really want to part with my eCommerce business?”
We can help you answer both questions.
To answer the first question, eCommerce businesses should have:
A positive growth trajectory for the past 12 months
Should be at least three years old
Should have clean financial statements
Should be automated to the point that the seller can run it on less than 10 hours per week.
Should make at least $250K in annual profit (other eCommerce brokers and marketplaces will still take you if you’re smaller)
If your business does not check ALL of these boxes, don’t worry, you can still sell your business. It will likely just come at a penalty of your valuation. Generally speaking, buyers aren’t going to pay a premium to: buy themselves a 40 hr./wk job, a diminishing website, a brand new project/idea or a business where the financials and operations are not transparent.
To answer the second question. There are a few things to consider. First, if you still love working on your business, the answer is simple… Don’t sell. Secondly, we have a Pre -Score Valuation that can provide insights into where you stand regarding preparedness to leave and post eCommerce ownership.
Get Your Pre-Score Valuation
You have invested years of your life building your business, and it probably feels a bit like selling a firstborn. However, if you have made your way to this article, chances are that you have reached a point where you are ready to move on to the next project.
It’s an entrepreneurial right of passage to build a business, evolve, and set your sights on future endeavors by selling your current business. Many eCommerce entrepreneurs will go through this cycle several times.
Selling eCommerce Companies to Strategic or Financial Buyers
The buyer of your eCommerce business will most likely fall into one of two categories: strategic buyer or financial buyer.
Financial buyers look for businesses they understand how to run, believe they can grow, and buy at a reasonable multiple of what the company is currently making.
Strategic buyers make up the minority of buyers. Strategics are companies that have unique and significant benefits in acquiring your business, more than just your business’s profit. A strategic buyer could be your manufacturer, who would now be vertically integrated, or another competitor in the eCommerce space or a larger entity that wants access to your IP or customer list.
Selling to a Financial Buyer
Financial buyers are generally classified as investors interested in the return they can achieve by buying a business. They are interested in the cash flow generated by a business and the future exit opportunities from the business. They are typically individuals or companies with money to invest and are willing to look at many different types of businesses or industries.
Because the main focus of these buyers is to generate free cash flow for themselves or their investors, they can drive a hard bargain when looking to close an acquisition. They may ask you to hold back a portion of payment, stay on to operate the business for some time, take an earnout as partial payment or rollover some equity into the new entity they will be forming.
Our job as your advisor is to help you navigate what type of deals you should consider and how to negotiate a fair deal structure with buyers.
Selling to a Strategic Buyer
While they are a smaller proportion of the buyers out there, strategic buyers will typically be more lenient on the deal terms. They are likely willing to pay more for the business than someone new to the industry.
In addition to being able to pay more for the business, if the buyer is already in the industry, in all likelihood, you would not have to train them on operations. They will have a team in place and operating procedures that can readily be implemented into their new acquisition.
Whenever the opportunity presents itself, we target strategic buyers for our clients looking to sell their eCommerce business.
How Long Does it Take to Sell?
You can look up the average time a business of your size spends on the market, the same average for an eCommerce business, or the average for a business in your niche-- you’ll come up with three wildly different answers.
The truth is, only an expert who keeps a close eye on the market and the various driving factors can give you an accurate assessment of how desirable your specific business is and how long it will be on the market. Even then, an expert can only honestly give you a broad time range when it comes to the big question of, “when will my business sell?”
Many factors, including Lady Luck, come into play. We have our eye specifically on the eCommerce industry, talk with dozens of capable and motivated buyers each week, and we have our finger on the pulse of the market. We can give you an educated, fair estimate, but nobody in truth can ever give you an answer as to how long it takes any business to sell.
Do I Sell the Business Assets? Or the Equity?
Long story short… it depends.
The rule of thumb is that small businesses will typically be asset sales, NOT equity sales. This is because the buyer is not interested in buying the equity of your business since they will be assuming contingent liabilities. Meaning you could owe taxes, get sued by a former employee or have committed fraud, and there is a possibility the buyer who now owns the business would be on the hook for these problems.
With eCommerce companies, asset purchases are more frequent. Due in large part to the fact many transactions with eCommerce businesses happen across borders. Many legal complications come into play when you sell an American S Corporation to an Australian resident that lives in Thailand. The deal is just much cleaner if the buyer purchases the assets and forms a new entity to hold them in.
Benefits of Selling Equity vs. Assets
While it is still unlikely for the opportunity to present itself with businesses under $5M in the purchase price, we work with a number of eCommerce business owners that sell for eight figures. For these folks, there may be an opportunity to sell the equity in the business as opposed to the assets.
The reason that equity sales start to become more common with mid-market ($10MM – $100MM) mergers and acquisitions (M&A) transactions is that the buyers are typically US-based companies by this point. Moreover, these are likely investment firms that manage capital for investors who could potentially benefit from buying the equity in your business as opposed to the assets.
The buyer may make an offer to purchase the equity of the business at a discount of what it would cost them to purchase the assets. You may be thinking “why in the world would I take an offer for LESS money just to sell the equity vs. the assets?” the answer is simple: taxes.
If you are a US citizen, when you own your business for over one year and sell the equity in it, you get long-term capital gains tax treatment. This means that you will pay roughly half the income tax that you would if you were to sell the assets. All of a sudden, that stock deal for $18mm will net you more than an asset deal at $20mm.
The benefit to the buyer is that they buy the business for less money. They can then do a legal restructuring later on and form a new holding company should they elect to do so.
Any of this said, always seek counsel with professionals in this field, including specialized accountants and lawyers, if you are considering a sale of this nature.
What About Marketplaces for Websites and eCommerce Businesses?
There are several players in the “selling a website” industry. There are a handful of competent brokerage firms and some additional marketplaces to help you sell your website or eCommerce business.
These marketplaces may ask you, as the owner, to do the majority of the work in selling your business. They are charging you a fee to use their platform to help secure a buyer. Some of these marketplaces will help you create financial statements and give you a sales rep to provide pointers.
When selecting a broker or marketplace to work with, don’t be afraid to ask questions. See if the person you are talking with actually knows the industry and can provide beneficial services, or are they going to leave you to your own devices.
Marketplaces are in many ways a positive for the M&A industry and provide a much-needed place for entrepreneurs to flip domains and sell small websites. However, if you have a robust and profitable business doing over $250K in profit, you can hire a seasoned broker to help you every step of the way.
At Raincatcher our brokers and our digital services team are committed to you and securing you the best possible deal for your eCommerce business.
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