Whether you have been building your eCommerce store with the end goal of selling your eCommerce business, or just looking at the opportunities that lie in eCommerce. The concept of selling an eCommerce business is an interesting way to look at the entire approach. Thinking of the end goal can always provide you with a means of getting to the end. While I have often not been a fan of an exit strategy from the beginning, it is important to think about the exit, and in this case we cover selling your eCommerce business as an overall exit strategy for the eCommerce entrepreneur.
As I have prepared the notes from this show and compiled the following post, I have really started to think about the opportunities in a sector I hold dear to my heart, eCommerce. I have learned that there is quite an appetite out there right now for entrepreneurs selling an eCommerce business. With a continued growth in the average multiple for eCommerce businesses, and even a thirst for Amazon based businesses. Quite frankly, the approach that we discussed today with Chris Shipferling an expert in the field of eCommerce acquisitions sheds some awesome insights and out of the box approach to an otherwise P&L based business sales methodology. I am far from an expert in the realm of selling your eCommerce business, but am certainly an expert on most things eCommerce, and the things we cover today are definitly items that any eCommerce business should be putting into place regardless of exit strategies. They will simply make your business that much more of an eCommerce machine.
You’ve worked hard, or are going to have to work very hard in order to build an eCommerce business that is ready to sell, your blood sweat and tears will go into it. If your lucky in the end you may have the opportunity to sell it, but even that will be difficult because you will be emotionally attached to the business. In short, follow the steps in the guide below, more or less an edited dictation of the key principles of selling your eCommerce business discussed in the podcast with Chris Shipferling Managing Partner at Global Wired Advisors.
Is your business in order?
Just because you’re, you’re not selling your home doesn’t mean you don’t want to clean it up and make it look really nice and very livable, right? This is the same type of analogy for your own business. Just because you may not want to sell your business right now, it’s always good to have it cleaned up.
You may never want to sell your business, because it’s a great annuity or, whatever, but the truth is you really never know when the right opportunity may just come knocking to sell your eCommerce business, and if your paperwork is a mess your valuation just dropped considerably. Not to mention if you keep the numbers at the ready you are better able to make the right business decisions in rapid succession.
So, it’s always good to have it cleaned up and ready to go because you really never know, and the activity and the processes that you put into your business to help it get prepped for sale is a great organizational practice for your business. It creates good structure and starts to make you think about some things that you may have never thought about before, which we will get into shortly.
What value does your business bring to the marketplace
First, you’ve got to start first with understanding what is the value that your business brings to the marketplace? You want to take a look at what else is out there, companies like yours or even similar companies that might even be for sale. Understand first, what is the value that you’re bringing to the marketplace and what is the value that I bring just for my business.
Cashflow really does matter
We talk about this a lot, cashflow really does matter and so cashflow is number 2. Not a simple formula by any means, but to break it down in the most simplest form, cashflow is your net profits – capital expenditures. Again this is extremely rudimentary in the base formula, because an extrapolated simplistic formula mentioned on the show is:
Net profits + Any owner operated related benefits, your salary, your health insurance, your car payment, whatever you run through the business, that’s owner owner benefit. You’re going to add that back and we’re going to create a cashflow number. Now to get a heavier cashflow number. Let’s not focus on the calculations because that’s something a good bookkeeper should be able to get for you.
Focus on Gross Margins
There are things that you look at like your gross margin.
Sometimes it’s an exercise of going, okay, I want to get my gross margin a bit healthier before I sell. It’s going to create more cashflow for my business and in turn it’s going to probably get me more money. So if I’m working on a multiple of three and a half or a multiple of four, maybe more, then I’m able to improve my gross margin by two, three, four points. You could be talking about a substantial number when you eventually close and sell your ecommerce business. So I would say, taking a look at gross margin is critical.
While our cashflow playing center stage, taking a look at gross margin, number one, you may want to take a look at some other things in your business that might be driving down costs or driving up your expenses. That’s just an exercise of really good bookkeeping.
If you haven’t done it yet, please do it. Just stop what you’re doing. pick up the phone, call a great bookkeeper so that you can get the best dashboard and more wholistic picture of your business. Data is not just a growing trend that is discussed on the podcast time and time again, it’s critical to your business particularly eCommerce businesses. The eCommerce space allows for some of the best analytics of any business.
eCommerce Through the lens of Data
Consider if you will, Airplane Pilots, when they learn how to fly, they learn with VFR and IFR. It’s visual and instrument. And if you want to be a really good pilot, you had better know IFR really, really well, think of these instruments for a pilot as the dashboard of data you have at your disposal as an eCommerce entrepreneur.
It’s the same thing with your business, running your business through data to understand where to go next has become an absolute for success in eCommerce. You would never run a successful business without lots and lots of data points and lots and lots of instruments to help you understand those data points and what to do next. Same thing with finance and bookkeeping.
Get P and L’s together. Understand where your true profitability is. Understand where your revenue concentration is, where your revenue diversity, what your revenue diversity looks like, what your profitability diversity looks like. Start to really hone in on what items or what products your offering that’s driving really good profitability and the ones that aren’t, and maybe it’s time to do a little bit of skew rationalization. So cashflow matters, but getting yourself organized to really understand your cashflow is what really matters most then go back to identify what you believe about the value piece. Start really identifying what your unique selling proposition is again.
Write down a list of what are we offering that brings tons and tons of value. As far as the types of product that your selling, if you’re selling a commodity and you’re doing it because it’s based on price and you happen to get a good price. That business going to market even with good cash flow is probably not going to be nearly as attractive as someone who has built something that truly solves a problem or has built out a brand that is starting to get recognized or may even be recognized.
So to wrap all that up in a nice bow, get yourself organized, it’s wildly helpful because you’re able to really start reading your business from, from a lens of data.
Profits vs Revenues
When you talk about your personal value proposition, your profit margins and cashflow, on thing that stands out to me is profit. The profit is so much more important to me than the revenues, it improves your overall cashflow and most importantly, you could be generating 5 million in sales and barely breaking even or be generating 1 million in sales and have far superior profits. This goes back to what we were saying earlier about knowing the details about what products are generating the most profits and expenses that may be driving down your profitability. You need to know what those are, so you can hone in on where to focus efforts, and honestly simply having a profit based focus over a revenue based one your cashflow will inadvertently improve.
Once you start identifying some of the general ledger items that might be driving your profitability up or down, you know start to formulate a little bit of an offense and defense for both. Example: My advertising was 30% of my sales for the first two years because I was driving as many customers as I could possibly drive because my LTV (Life Time Value) is insane. Once I grabbed a customer, I grabbed them effectively for life. So of course I’m going out there and I’m spending an insane amount of marketing money in the first one to three years. You see where I’m going with this. It’s, the ability to really play offense and defense with your numbers.
The last thing you want to do is sit there and say, well, I believe, or I think, getting organized is going to help you speak from a level of confidence.
Have a product roadmap in mind.
A lot of folks will just say
“Okay well, I’m selling my business and I think it can grow.”
Why do you think that?
“Well, look, I’ve been growing like crazy and take a look at these numbers!”
A clear product roadmap is going to help articulate the opportunity and the story of your business, it’s also going to make you wildly attractive when it comes to selling your company. The key here is that you actually have to execute on it. As long as you’ve got a really good, believable narrative about where your ecommerce business it’s going to bring tremendous value, when it comes to getting a transaction done.
Traditional business brokerages
This is where career experience kicks in, and hiring the expertise of an organization like Global Wired Advisors. They can help you get paid on the growth, not just on trailing 12 months of cash flow, which is a typical business broker approach.
When, brokers are doing large capital market deals in the billions, obviously with very large teams, it’s a giant tug of war. The acquirer wants to look and make you look in the rear view (12 months trailing), but the seller, if they’re represented correctly, will want you to take a look at what’s going to happen in the windshield (Future Growth, YOUR STORY).
As long as what’s happening in the windshield is extremely compelling, then you can actually get people to pay a little bit more attention there then on the trailing 12 months. Business brokers typically want you to only focus on trailing 12 months. They tend to be minimalist in nature and act more as a listing agent then in the capacity of helping you put together compelling marketing materials and prepping your business in the best way you could.
Take a wildly different approach that will in the end garner you the best returns as you sell your eCommerce business and articulate a story of growth as opposed to the trailing 12 month story.
Know and tell your growth story, Sometimes it’s a matter of going, okay, let’s just look at a, product line extension, what does that look like? Yeah, I’ve got a bike that I’m selling and it’s just gangbusters. Well, let’s start looking at other accessories that could follow with this bike because you know, you’ve driven lots of loyal followers and Oh, by the way, you have their data, so what can I do to potentially market now this new widget that fits perfectly as a product line extension.
It’s important to do your research and to be intentional, that’s one small example of something that can be built out very robust with time and effort, and in the end tells a compelling story. Afterall a good story is at the heart of every successful sale.
Once again I want to thank Chris Shipferling for his thoughts and time on this interview. Check them out at GlobalWired Advisors if your considering selling your eCommerce business. If you want to build your eCommerce business to sell it, reach out to us we can help get your house in order from a digital perspective.
