Selling an e-commerce business is a big decision for any founder and business owner. How do you know when the right time to exit is? What is the business worth? Are there things I can do to increase the valuation of my e-commerce business? What does the exit process entail?
This article will answer all these questions as we discuss facts and trends related to e-commerce, the exit process and steps you can take to best prepare for a sale.
E-commerce and Online Store Trends: What You Need to Know
The e-commerce industry is thriving, with global e-commerce sales expected to total $5.5 trillion this year. By 2025, it’s estimated that this number will reach over $7.3 trillion, and e-commerce will comprise 23.6% of all retail sales. The demand for e-commerce businesses is high and will only continue to expand as the economy recovers.
During the first half of 2022, the total value of e-commerce closed deals was nearly triple that of the first half of 2021. For more insight into the current state of the market, unique FE data and trends in the M&A landscape, download our 2022 Mid-Year Report.
At FE, we’re seeing valuations holding firm and rising for high-quality e-commerce businesses; the second half of 2022 is a prime time for founders to exit at favorable multiples.
Most Profitable Types of E-commerce Stores
E-commerce stores built with Shopify are currently the top targets in e-commerce M&A. With the recent slow in Amazon aggregator funding, much existing Amazon-earmarked capital is being deployed into these spaces.
There are several reasons why Shopify and other e-commerce stores are in the M&A spotlight. While a business’ Amazon product page contains a myriad of links to competing products, a business’ native website has no competition on-site, resulting in more conversions and greater brand loyalty. Customers are more likely to return to a brand on Shopify than on Amazon, reducing customer acquisition cost.
Therefore, e-commerce stores built on Shopify are benefitting from higher repeat order rates due to strong brand equity. Since Shopify stores can access their customer data and better manage the customer journey, they can also use it to raise repeat order rates, making Shopify businesses more profitable long-term prospects, as they can yield a higher IRR for buyers over time.
Despite investors shifting toward Shopify, Amazon still dominates e-commerce: The giant retailer reported $469.8 billion in net sales in 2021, up 22% from 2020. Moreover, 56% of paid units were sold by third-party sellers in the fourth quarter of 2021.
Amazon businesses are still an asset many aggregators and other investors are eyeing. Smaller 7-figure and high-caliber 8-figure Amazon businesses have been the most often sold in our network in the first half of 2022.
How to Get the Best Price for Your E-commerce Site
Business valuation tends to depend on factors such as brand strength, historical growth, scalability, and whether there is a trend in demand for what your business offers. You can take several crucial steps as an e-commerce owner to increase your business’s value.
Prepare your Site for Sale
By preparing for an exit early on and making informed decisions during the exit planning process, you can significantly increase the value of your business.
Exit planning and selling your business involves identifying the right advisor, agreeing on a valuation, complying with expectations and regulations and understanding the acquisition landscape.
- Reducing owner involvement: High owner involvement can be a drawback for your business to a potential buyer, as most buyers are looking for businesses with streamlined operations that are easy to take over and scale. When planning for an exit, make it a priority to delegate or outsource your daily responsibilities as much as possible. Ensure that these processes are well documented so a potential new owner can see the level of your involvement in the e-commerce store.
- Run a technical SEO audit: Organic traffic is a big part of attracting customers to your store, and a solid content strategy is key. Consider running a technical SEO audit of your content to ensure you’re not missing out on any low-hanging fruit and adhering to SEO best practices.
Read our in-depth Guide to E-commerce SEO which can help you identify if you’re missing out on any low-hanging SEO fruit that you should be utilizing to increase organic, high-converting traffic to your e-commerce site.
- Get social media profiles up to date: Social media platforms like Instagram, TikTok and Twitter are doubling down on their e-commerce offerings and tools for sellers to utilize. Building brand awareness is vital for an e-commerce store, and ensuring your social platforms are up to date shows a potential buyer that you’re acquiring customers through all the relevant channels. This is also an avenue for customer support, another aspect a new owner will look into. Having a highly transferable and scalable customer support operation is ideal.
Clean Up Your Inventory
As an e-commerce owner, your products are the center of your operation and one of your most significant expenses. Cleaning up your inventory, keeping track of out-of-stock items and balancing supply with demand is a crucial task that any owner needs to stay on top of. You will want an organized system to manage inventory and clearly understand your peak seasons.
If your store frequently runs out of stock and doesn’t provide satisfactory customer service, it will see lower repurchase rates, which in turn lowers the value of your business.
Hiring someone to handle your inventory management can be a way to negate these issues, as this is a very time-consuming part of running an e-commerce business. You will also avoid potentially expensive mistakes like ordering too much inventory or running out of stock before you can reorder.
If your goal is to increase the value of your business, take stock of your inventory and business plans and ensure your product pages are up to date.
- Hide or limit the visibility of out-of-stock product pages: Consider limiting the visibility of products that are out-of-stock. This is because you’ll want to avoid driving traffic to pages with products that are out of stock. Consider using an inventory tracking and management software that lets you forecast product shortages and get ahead of the game. If you have the funds and infrastructure to do this, it’s a great way to get ahead of the game when a product looks like it will go out of stock. You can also limit the visibility of out-of-stock products in your storefront by placing the listing at the bottom of the page where it’s less visible.
- Update product images and descriptions: If you’re having issues with customers not adding products to their cart and you’re not sure why or how to fix it, there might be an issue with your product page. The purchasing decision should be as intuitive and straightforward as possible.
Make sure you have a clear call-to-action (CTA). Your number one goal is for people to “add to cart.” Therefore, your CTA needs to be front and center. Troubleshooting your product page should be your first course of action. Additionally, it’s crucial to optimize your product listings and update them whenever necessary. Product listings that are outdated, irrelevant, confusing or otherwise uninteresting will drive customers away and damage the business.
Get Your Financial Statements in Order
If you are thinking about selling your business, one of the most important things to make sure of is that your books are in order. Hire a good bookkeeper and accountant; this will save you money in the long run.
- Make sure you have solid and verifiable financial records: This is one of the most crucial steps owners can take not only to increase the value of your business but to operate it effectively. Thanks to accounting software such as QuickBooks, much of the traditional grind of bookkeeping has been eliminated. We strongly recommend to all our clients that they begin using QuickBooks or similar from the earliest stage of their e-commerce business.
- Understand the financials of your e-commerce business: Being clear on every aspect of your business, including all sources of revenue, cost(s) of sales and operating expenses is key when you’re preparing for an exit.
You should be looking to collect all the financial and supporting documentation to prove the financial performance of your e-commerce business. Not only will this verify the numbers you provide at the outset, but FE International will audit the financials, which will be the starting point for the buyer’s due diligence process. As part of the preparation for sale, pull these files together in one place. You will want to gather monthly bank statements, credit card statements, merchant processor statements and inventory and shipping invoices.
The factors mentioned above will be key when it comes to Due Diligence, which is the process of confirming all relevant information about the business.
The buyer will need access to all of the primary data sources used to build the P&L: the company’s accounting software, inventory software, seller accounts, and payment processing accounts, among other systems.
For more information on the specifics of due diligence and the process, please read our detailed guide: E-Commerce Business Due Diligence Checklist.
Organize Your Digital Assets and Customer Data
Part of the value to a buyer is built into your reach and audience. Here are some items to consider in terms of organizing digital assets and customer data.
- Email Marketing: Using emails to generate sales is a crucial part of a marketing strategy. Track the performance metrics of your marketing emails through the platforms like HubSpot or MailChimp. These tools provide insight on list performance, open rate, click-through rate and other key metrics. You will want to look at your emails’ performance and whether you’re successfully driving customer engagement. You should also carefully track and be able to present performance in terms of:
– Automation of your checkout process (Order placed, processing, shipped, request review)
– Email effectiveness in re-engaging prospects (repeat buy)
- Customer Data
– How many of your customers are one-time vs. repeat customers
– How large is your customer base
– Clear out inactive contacts
– Segment by purchasing habits and persona type
- Social Media Accounts
– Documenting engagement, followers
– Get accounts up to date with branding and post frequency
Consult with an M&A Advisor
Before diving into the depths of selling your business, getting help navigating the waters is essential. Finding the right advisor can help you sell for a higher value at the optimal time.
Any good advisor will work with you upfront to prepare your business for market while in the background identifying potential buyers.
At FE International, we have an in-house audit team. The audit process takes about a month on average. It will prevent any surprises in the buyer due diligence stage later on, which is the stage of the deal process that results in the most deal failures or renegotiations. We find and fix profit and loss (P&L) concerns before buyers do.
It is crucial to understand business valuation to ensure your e-commerce business sells for a reasonable price. Otherwise, buyers may be able to negotiate a deal favorable to them but not necessarily to you. Ultimately, the seller and buyer would ideally like to reach a valuation consensus.
Learn more about the e-commerce valuation process in this article which covers the topic in depth: How to Value and E-commerce Business.
Understanding Selling Options
If after examining all the personal and professional reasons for selling an e-commerce business, an owner decides the time is right to seek a successful exit, there are a number of options they can consider. Each selling option offers different upfront requirements, time commitments and success rates.
Using a Mergers and Acquisitions Advisor
- Pre-vetted and Qualified Buyer Network: One distinct advantage of using an experienced M&A advisor is gaining access to their extensive network of thoroughly vetted and qualified buyers, many of whom may be repeat customers. FE International, for example, has a proprietary database of over 80,000 qualified buyers actively looking for online businesses such as a successful e-commerce company to acquire.
- High Success Rate: M&A advisors generally have a high success rate due to their network of investors. For example, FE International has a 94.1% sales success rate for businesses it lists.
- Maximum Value: The goal of an M&A advisor is to extract the maximum possible value for the seller while ensuring that the asking price remains attractive to buyers. At FE International, we use our proprietary valuation model to achieve this goal.
- Full Service: Selling an e-commerce business is a complex process, especially for first-time sellers. A seasoned M&A advisor will direct the sales process from start to completion. Once the seller has provided all the requisite information requested by the advisor, the advisor takes the reins. Services typically offered by an M&A advisory include valuation, preparation of marketing materials such as a prospectus, finding a buyer, negotiation, due diligence, drafting contracts, helping resolve any other legal or regulatory matters, facilitating the transfer of assets, and finally, closing the deal.
The goal of a quality M&A advisor is to extract maximum value for the seller while requiring the least amount of effort from them to complete a successful exit.
- Security – As alluded to above, all buyers are vetted to ensure they have a serious interest in acquiring an online business and the means to do so. Advisors will ensure that intellectual property, trade secrets, and all other assets are safeguarded throughout the sale process even if the sale ends up not being finalized.
- Fees: Full service comes at a price. Any reputable M&A advisor will charge a fee of up to 15% of the final selling price, depending on the size of the transaction. This is only paid on completion of the transaction.
- Barrier to Entry: As a natural effect of M&A advisors stringently vetting and pre-qualifying buyers, the benchmarks an e-commerce company must hit to become listed are substantially higher than when selling through other means. Being selective with sellers and buyers is just one way an M&A advisory such as FE International can maintain its 94.1% sales success rate.
Selling Through a Marketplace
Online business marketplaces such as Flippa or WebsiteBroker can initially seem appealing to e-commerce business owners. Businesses can be listed for a small listing fee. The documentation and due diligence requirements are minimal. Marketplace sites tend to get plenty of traffic, but how many of these visitors are high-quality buyers is highly debatable. While a listing fee may seem reasonable, note that many of the most popular marketplaces also charge a “success fee” or commission of 10-15%.
In other words, if your business sells, you may end up paying a similar fee to what you would have paid an M&A advisor or broker with virtually none of the support.
While marketplace sites have their place, primarily for pre-revenue businesses or sites selling for less than $10,000, established, successful e-commerce site owners will likely receive a higher valuation and an overall better result by working with an M&A advisor.
Auction sites share many of the same advantages and drawbacks as marketplace sites. Flippa hosts both an auction and a marketplace model. Sellers can set a timeframe for the auction, a reserve price and let the market speak for itself. It’s essentially an eBay for online businesses and should be approached with extreme caution by owners of established and successful e-commerce sites.
While the desire to cut out the middleman is understandable, selling an e-commerce business directly to a buyer—which sounds like a simple prospect—can end up being a time-consuming, expensive, and overwhelming process.
For a seasoned entrepreneur with a long track record of selling businesses and a robust network of reputable buyer contacts, selling direct may be a viable option. For sellers without this experience, it can be anything but, and the chances are high that the business will be sold for well below its full value.
The chart below summarizes the basics of each selling option:
Understanding Financing Options
For the vast majority of sellers of an e-commerce business, the most desirable outcome of an exit would be a one-time all-cash payment.
For many buyers, this is not an option they are willing or able to consider. Buyers typically seek to secure the best possible deal according to their available funds and risk profile.
Often, in order to align the expectations of the buyer and seller, creative financing methods are employed. Here are the four most common financing methods used in the acquisition of an e-commerce business.
Cash typically forms the most substantial portion of the total consideration in acquisitions of e-commerce businesses. Buyers may limit their search to online businesses they can purchase with liquid assets, such as the money in their bank accounts. This can lead to buyers limiting their ability to make an offer on an otherwise desirable business. In this instance, many buyers turn to more creative and sometimes unconventional methods of raising cash. Some of these methods include:
- Cashing out retirement funds
- Borrowing against a 401k Account or taking regular IRA payouts
- Revoking a Roth Contribution
- Small Business Administration (SBA) Loans
- Asset or collateral-based lending
- Bringing aboard a partner with cash and/or experience
- Peer-to-peer lending platforms like Prosper and Lending Tree
Seller financing is one of the most commonly deployed methods of financing in online business acquisitions. Seller financing allows the buyer to bridge the gap between their available cash and the business’s purchase price by using the business’s cash flow to pay the outstanding balance over a fixed period post-closing. A seller’s willingness to agree to this type of financing has the additional benefit of showing the buyer that the seller has confidence that the business will not decline going forward.
Seller financing is popular in online business acquisitions because it eliminates the red tape involved with the buyer borrowing from a bank or other lender. However, it is critical to keep in mind that seller financing bears risks for both parties. Buyers must be realistic about future cash flow, as a missed payment may prove costly and, depending on the agreement, can even result in the seller repossessing the business without having to pay back any cash consideration thus far received. Sellers should retain some collateral in the business until the buyer pays off the financing in full.
In an earn-out agreement, the buyer agrees to pay the seller a percentage of either net profit or revenue over a fixed amount of time. Earn-out agreements are typically seen in acquisitions involving younger businesses, sites with inconsistent cash flows, or with companies facing an uncertain future. With an earn-out, the buyer attempts to leverage the seller’s knowledge and resources in an effort to grow the business immediately after the sale is complete.
In order to structure an earn-out, the buyer will need to forecast future cash flows based on historical data and micro and macro industry trends. For an earn-out arrangement to work for both parties, the buyer and seller must agree on what the site is expected to earn over the term of the agreement.
Given that earn-outs agreements are based solely on projected revenue or profits, they carry a high degree of risk, particularly for the seller. The seller must be confident that the buyer is capable of operating the business successfully and that they will not default on payments. Due to the additional risk, it is not uncommon for the seller to demand an extended earn-out period beyond the somewhat standard 12 months.
Because earn-outs carry a high degree of risk, sellers are advised only to consider such an agreement when the buyer has a track record of growing and operating businesses successfully. With inexperienced buyers, the risk that the business will not perform as forecasted is likely too great to make an earn-out satisfactory to the seller.
The buyer retains a portion of the total consideration payable under the APA in a holdback agreement until certain mutually agreed milestones or obligations are met. Examples of such milestones include:
- The seller meeting mutually agreed upon commitments subsequent to the sale.
- Employees continue to work for the firm for an agreed period of time.
- Long-term service agreements being honored and fulfilled
- Agreed upon targets being met, for example, maintaining monthly gross revenue averages.
- Verification of agreed-upon revenues and costs that are difficult to evaluate thoroughly prior to sale. Examples of this could include refund rates and chargebacks.
Holdbacks carry risk for both the buyer and seller as either party may under or overestimate the value of post-sale obligations.
For more information on e-commerce valuations, valuation drivers and advice to keep in mind when divesting of an e-commerce business, read How to Value and Sell an E-Commerce Business.
Conclusion & Final Thoughts
Selling your e-commerce business is a big and life-changing decision. Whatever your reason are for wanting to sell – whether you’re a first-time seller or an experienced one – you’ll want to maximize your business’ exit price and feel comfortable handing it off to someone else.
Our M&A team has led the successful acquisition of FoxyBae, a category-leading hair care brand acquired by Boosted Commerce. Another notable e-commerce deal led by FE was the acquisition of Verma Farms by Branded.
If you are interested in more tailored exit planning advice or you’d like to get a pulse on the market and see what your business could be worth, please fill out this short form for a free valuation.