eCommerce Business article by Jock Purtle of Digital Exists
If you’re like any other entrepreneur that wants to sell their business, you want to get the highest price possible.
To get the maximum value for the sale of your eCommerce store, you need to pay close attention to the timing of the sale. Perfect timing can mean the difference of tens of thousands of extra dollars in your pocket.
For some entrepreneurs, they may get the best result by selling during the peak season for their business. For others, though, getting maximum value could mean introducing a new product to your catalog to provide a quick growth trend.
Regardless of this information, the multiples you can get when you sell your business can be substantially higher if you time the sale and hold off until that time is right.
Let’s take a look at some of the biggest factors that affect how much you can ask for your business.
content provided by Jock Purtle.
#1 – The Lifecycle Of A Business
Every business in existence has a life cycle, regardless where the business is located or what products and services they sell.
There are 4 different stages businesses go through: idea, growth, maturing, and declining. The declining phase can be slowed or even halted by diversifying.
By understanding exactly where your business is at in the declining phase, you can figure out whether or not now is the right time to sell, or if you’re going to need to put in more work to increase your asking price.
Let’s take a look at 2 different businesses to give you a better idea of the possibilities.
One of the businesses is 5 years old, and the other is 3 years old. They’re both in the eCommerce sector, and both turnover $500,000 per year. This delivers a net profit of $150,000 for each business, both of which have 1 employee.
The first business has 5 years of established revenue history and shows linear growth, with annual compound growth of 50% over the course of its life.
The second business has a 3-year history and shows linear growth with an annual compound growth of 400%.
Which business is worth more, in your opinion?
Looking at the information we’ve given you, you would assume that the first business has reached the mature stage, while the second one is still likely to be in the startup or growth phases.
Given that their turnover and net profits are equal, the second business should easily outperform the first business over the course of those same 5 years, assuming everything else remains the same.
This means that even if your business has reached the maturity phase, it isn’t necessarily worth less.
If your business is considered mature, like the first one in our example, you don’t necessarily want to start panicking. There are far more risks associated with buying a younger business that hasn’t already reached the mature phase.
If you have placed a fair value on the business, you don’t want to rush and drop the price because it doesn’t look as good on paper as the second business in the example.
The fact that your business has proven to be stable over a longer period of time and has the history of growth to back it up will make it far more likely that you’ll get a higher price when you find an investor.
Knowing which phase your business is in will make it a lot easier to figure out whether now is the right time for you to sell, or not. If you are peaking in your growth phase, or have already reached the mature phase, the time is perfect for you to sell.
However, if your business is starting to decline, it may be worth it for you to hold off and attempt to stimulate growth by launching a new product or renewing a big contract.
#2 – Launching New Products
Adding a new product to your eCommerce business catalog can be a great way to make sure you’re extending the life of your business. As older products become saturated in your market, introducing new products can provide a quick influx of sales.
Investors are always going to look at your business in a favorable light if they see that there is still potential, even if the business has reached the maturity phase.
You can display clear ROI information after you’ve launched new products to justify the potential that is still left in the business.
Knowing this, however, doesn’t necessarily mean you should be launching products right before the sale just to bump up your asking price. Sometimes, it may be even more profitable for you to save the new product launch for your investor, and work that launch into the asking price.
Let’s look at one example so you get a better understanding.
Let’s assume that a business is generating mid six-figures and they want to sell. The business is focused on selling digital products inside of the health industry.
They have a large amount of data to back up their asking price, their traffic sources are sustainable, and growth is headed upwards.
The owner went back and forth on their decision to launch a new product while their business was listed for sale. They considered saving the launch for their investor after the deal had gone through.
Launching a new product during the sale of the business would have increased their profits and diversified their revenue, while also extending the lifecycle of their business — all factors that increase the value and asking price of the business.
Based on their own estimations, launching the new product would have added an additional $50,000 to $100,000 in revenue, along with another $5,000 per month in recurring income.
The owner viewed the launch as a way to say “farewell” to their business and create increased revenues for their new investor after they took over control of the business.
In this example, it makes sense to launch the product, right? You are right by saying yes, but launching a new product isn’t always so simple and straightforward.
Although, in this example, it seemed like a no-brainer to launch the new product, most times it’s actually better to hold off, for a couple different reasons.
First, the income generated by the launch isn’t going to affect the sale price. It’s only going to help the seller and not give any benefits to the investor. Even though it may seem like you would benefit from the launch, you put your investor in a bad spot.
Not only are they taking ownership of your business, but they’re also going to be forced to simultaneously manage a new product launch.
Also, your knowledge and expertise are going away. Launching the product before selling it could leave your investor wondering whether you attempted to pump and dump it.
The odds are high that the launch will actually do more damage than solve problems.
It’s always advisable to hold off on the product launch because you can show the history of other launches and use that information to help justify a higher asking price. And, your investor will know that they have a new product ready to go whenever they’re prepared.
If you want to profit from the launch, negotiate an earnout with the investor to get a piece of the pie after they have successfully transitioned into the business and decide to launch the product. This is the ultimate win-win situation for you and your investor.
#3 – The Time Of Year
Quite a few businesses go through ebbs and flows, based on the time of year
As an eCommerce business owner, you have probably already noticed this with a massive spike in your sales between October through January. Consider that most investors are not going to want to purchase your business when it’s coming off the back of a busy season.
If you do have to sell, you’re going to want to delay the sale until you’re around halfway through the season to help your investor sustain the momentum after they take over the business.
You’ll also want to think about your tax implications and how to minimize the liabilities from the sale. You’ll need to plan ahead and talk to an accountant about what you’re responsible for when you finalize the sale.
#4 – Trends In Your Industry
Once you’ve figured out the best time to sell based on your product’s lifecycles and the potential seasonality of your business, you should look at any industry data that is available to ensure you are choosing a time to sell that is favorable for you.
Like any other asset, there are forces in play, like supply and demand. Understanding how you can take advantage of those forces could help you get higher offers from investors.
Selling while the market is considered to be “hot” means that investors will have a large number of businesses from which to choose and it could be hard for you to get the highest value out of the sale of your own business.
To figure out whether the market is favorable, speak with a business broker who has a bird’s eye view and can help you learn about the different trends and investor activity.
To Sum It Up…
When it comes to selling your eCommerce business, there are many factors to consider. “It’s critical that you sell at the right time, and for the right reasons.” – Jock Purtle
If you think that selling your business quickly, or selling because you’re burnt out are good decisions, you’re almost always going to end up getting reduced offers because you didn’t properly prepare for the sale.
In general, the more time you give yourself to implement your exit strategy and focus on hitting the right timing, the higher your chances of selling for the maximum value.
This guest post was written by Jock Purtle of Digital Exits. To learn more about Jock Purtle and his company, visit Digital Exists.