082: How To Sell Your Ecommerce Store For Maximum Value
Posted by July 15, 2015on
If you listened to last week’s episode about how to value an ecommerce business then you’re ready to find out what you need to do to sell your ecommerce store for maximum value.
Just like any other large sale, there is a right and a wrong way to sell, and you definitely don’t want to be leaving money on the table when it comes to selling your business.
We’ve had a few ecommerce companies come to us recently about selling their business. They’ve come to us with questions about determining the value and how to sell it for maximum value, but we didn’t’ know how to answer their questions.
Because of our lack of expertise we brought Jock Purtle of Digital Exits onto to the show. He’ll not only explain to us how to determine a store’s value but then he’ll explain to us how to sell it for maximum value.
This is episode is part one in a 3-part series about valuing and selling an ecommerce store. Part one is “How To Determine What Your Ecommerce Business Is Worth“, part two is “How To Sell Your Ecommerce Store For Maximum Value”, and part three is “The 8 Essential Components Needed To Sell Your Site At Maximum Price”
Key Takeaways from the Show
- The sales criteria you need to know to know to sell your ecommerce store for maximum value
- Learn what a prospectus is and how to create an accurate for your business
- How to negotiate the best deal for your store
- How to problem-proof the sales process
- The best way to find buyers when selling your ecommerce business
Links / Resources
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Chad: All right, so we’re back for part two of the three-part series on how to sell an ecommerce business, and this part two is gonna be with Jock Purtle of Digital Exits on how to sell your ecommerce store for maximum value. Jock’s already on the line with us now, so wanted to jump right back in and start off with a broad question on the topic. When is an ecommerce business owner ready to sell their business and how do they know?
Jock: When they want out. Nothing more, nothing less. It’s just a mental decision that they make and they are like, “All right, I’ve had enough” or “I want to sell it” or “I’ve got another opportunity” and then you know, they become from the opportunity, opportunistic seller. Like everything is on sale for a price. If I came and offered you ten million dollars for your business, I’m pretty sure that you are probably gonna take it; however, the chance that that happening is like slim to none. And so, when is someone ready to sell is when they make their mind up, and they must have made their mind up, then they start down the process.
Chad: What is that process? What does that process look like?
Jock: So step one is determining its value, you know, what’s your business worth, and you probably fill out a valuation request on our site, and we go through your business, we probably do like a top-down, core first and then if we need to, drill down into the financials, and so that’s step number one – you know, what’s the range that your business is worth in terms of what someone is going to cut you a check for. And then after that, it’s assumed that you are engaging us in our services, we’ve assigned some type of an agreement, once that’s done, we then start the data collection process, and we develop what’s called a prospectus, or information memorandum for your business.
And that’s basically a document that explains you know, what the business is, how it makes money, some financial snapshots, some traffic snapshots, some general FAQ about how the business is, how it runs, all that good stuff. That document then is used to pitch to our investor database, and we also you know, try and use some other marketing channels to generate some leads in terms of buyers, and then you know, initial parties will be interested and they’ll start emailing in some questions which you get to answer. And then the more interested parties will have a call, and then depending on the size of the business, there might be a site inspection or you know, meeting in person, and then once someone is comfortable, you know, interested in the business, they’ll sigh what’s called a Letter of Intent. That’s a document that outlines, okay, I’m gonna buy your business for X.
Let’s say it’s a million dollars and the terms are 600 in cash, and 400 in self-financing over three years. And so, you accept that, or decline that as the seller; if you accept, you sign that and then the buyer gets access, or exclusive due diligence access. And so that’s generally up to a month depending on the size and the transaction. If you are doing maybe a five to ten million dollar deal, it might be like two or three months and in that process, the buyer will verify that you know, all the claims that you made is true, you know, let’s say that it’s a million bucks and you are doing two million bucks a year in gross revenue, he’s gonna try and verify with the bank accounts and the merchant statements, and the merchant processor and you know, shopping cart receipts, and supply receipts and all that good stuff, you know that that business is making that money.
You know, talk to staff, understand the process, etcetera. If that gets the tick of approval, then they’ll make a final offer, make any adjustments if there are any adjustments based on the due diligence. We generally start to get the lawyers involved at that stage, we do contract for sale, get that fleshed out, and then after fleshing that out, we generally get – we get the lawyers to review that. We get it signed, and then we use a third party escrow service to hold the money while the asset is transferred. Once that process happens, the seller has the money, the buyer has their assets, there’s generally like a one to three-month training period after that time period where the seller educates the buyer on how the business works. And then that’s kind of in rough broad detail, the process from start to finish.
Austin: How long typically does that process take?
Jock: Anywhere between four weeks and five months, depending on the size of the business. The average timeframe is sort of four to ten weeks.
Austin: And then I want to go back a little bit and kinda put a scenario together. So, you mentioned – the question was when are they ready to sell a business, you said, when they are ready to get out. So, if someone is listening, and they are running a business, and they know that eventually, they wanna sell; they are not ready to get out yet, what can they do or what should they do to start getting the process – or what would be an ideal timeline if they say, okay, I want to get out of this thing in a year, or two years, what would that look like? What would be the best things they can possibly do with their business besides obviously grow, to make sure they get the best return on investment – or return when they sell the business?
Jock: Monthly bookkeeper.
Clean financials; biggest pain in my butt is sellers that just can’t get their numbers together.
Make sure you’ve got a growth strategy in place for those one to two years.
Take out discretionary expenses in the business, prime the pumps, you know, pump off the puff, you know, whatever you want to call the terminology –
Austin: Pump the profits.
Jock: Profits, profits, profits, get them up. Get them up as high as you can ‘cause at the end of the day, it’s all about return on equity or return on cash, so the more profit the business is doing, the higher the valuation you get. Diversification, you know, if you have a reliance on one supplier that could go away tomorrow and then there’s no backup, big problem. Also on the revenue side, if you are reliant on one customer that generates like 60% of your revenue, big red flag. So yeah, diversifying by product and earnings, and then from a traffic standpoint, you know, diversification there if you are just reliant on SEO traffic, make sure it’s stable, maybe have a look at some other traffic channels. You know, just think about it from the point of view of a buyer, like I want you to mitigate my risk ‘cause I wanna get my money back. So, if you take that standpoint over the one or two-year period, then you know – most people are smart, they’ll do the right things in that regards.
Chad: Now, I was gonna go back to the negotiation process ‘cause you know, you sign that Letter of Intent and then you go through all of this time, so to speak, of the other things that you need to do, and then of course, you have another negotiation process after the potential buyer has time to look at that. So, how does one operate within the negotiation phase? Like what is the best way to negotiate for your win and I know that you had mentioned that there is a difference between negotiating for terms and price; so which one’s more important and why?
Jock: Terms is more important. I think for both parties, the better terms you get as a buyer, the bigger win you have, the worst terms you get as a seller – you know, it all comes down to terms. I don’t care right, let’s say you have an ecommerce business and you sell tables. It’s doing two million bucks a year in gross revenue, it’s doing 500,000 dollars a year in profit; that might be worth a million-four. So, I make you an offer for 1.4 million dollars and the offer is 100,000 dollars upfront and then the remaining amount earn-out over the next three years, based on the performance of the business. Is that a good offer? Would you take it? That’s a question, by the way.
Chad: Oh, no.
Austin: Yeah, probably not. Say that again, repeat it.
Jock: Two million dollar business gross revenue, 500,000 dollars a year in profit, my offer to you is 1.4 million dollars –
Chad: Oh, 1.4 million dollars?
Jock: And here’s the terms; 100,000 dollars in cash, and the rest of the money in an earn-out of the next three years based on the performance of the business.
Chad: And you are offering that to me?
Jock: Yeah, are you gonna take that offer?
Jock: Exactly. So it all comes down to terms. That same business, all right, I’m gonna offer you 1.2 million dollars, except it’s going to be 800,000 dollars cash, and 400,000 dollars in seller financing at a four percent interest rate over the next three years, guaranteed personally. Would you take that offer?
Austin: Oh boy, yeah, that’s a much better offer; much, much better even it’s the same price.
Chad: It’s actually at a less price.
Austin: Less, yeah.
Jock: So it’s a 12000-dollar valuation less except, you’re getting 800 grand in cash up front and then a guaranteed 400 grand over the next three years in a personal – covered personally by the seller; and also that domain name, or the business that he’s holding in escrow while those payments are being paid – so technically if they default, you get the business back. Which offer is better? So terms are the most important thing. It’s never about the total valuation; like I could offer you – I could offer you five million dollars for that business, but it’s gonna be 10,000 dollars upfront, and then you know, it doesn’t really matter what the value is. It’s all about the cash component; it’s like what do you actually pocket from the deal.
Austin: Why don’t you go into those terms a little bit more? What do you see – you might not be able to comment on this ‘cause all the deals are different, but if you were to talk about standard terms, is there such a thing as standard terms in an ecommerce sale? And if there is, what do those look like and if there is not, is there a reason why there are no standard terms?
Jock: Most transactions have some element of cash and some element of seller note and seller note is seller financing. And what that means is, essentially I am taking a loan from you and pay it back over a certain time period to buy the business. So instead of me going to the bank and borrowing the money from the bank – let’s just use that that 1.2 million dollar example.
I want to offer you 1.2 million dollars for the business, I’m gonna pay you 800,000 dollars in cash and then 400,000 dollars in financing. Now my option for that financing is to go to the bank, to borrow it from someone else, or to get it from you. And generally the banks don’t lend to internet businesses because there are no tangible assets, so that option is out. Then the second option is getting it from a friend, family, investor etcetera. Now, fund-raising is pretty difficult so that’s options – you know, there’s probably like a 20% chance or, you loan the money from the seller and if the seller is confident enough in the business that they happen to take a loan on it, then you as a buyer have more confidence that you know, you’re buying a decent business.
Austin: Sure, makes sense.
Chad: So, going back to this negotiation process, things we have been talking about in the last couple of seconds, a couple of minutes, you know, I used to sell real estate; sounds like you were very involved in real estate growing up with your dad, and the one thing that always happens between the initial contract and the actual close is the opportunity for the buyer to get cold feet. So, in the process with an ecommerce business, people come in with a Letter of Intent, then they have this time period of say 30 days to analyze the business on their own, and then they come back with their final offer.
How often does it happen that a buyer comes in with this Letter of Intent and it’s completely different, or the final negotiation phase is completely different than what that Letter of Intent was, and like how can we prevent buyers from getting cold feet in that process or what does it really look like? I guess that’s my concern is, from Letter of Intent to final negotiation process, like what do you need to do there to handle that?
Jock: Honestly, I can count the transactions on one hand that that’s happened. The current market for internet businesses is massive lack of supply, massive demand, and so generally before the Letter of Intent, like you’ve – you know, 90% of the time, that buyer is gonna close. So that’s something that you don’t have to worry about.
Austin: Interesting. Well, let’s just say, let’s put it in a scenario of the ones that have gone wrong; like what could go wrong and how do you really problem-proof that process? Obviously, it hasn’t happened a lot, but that also means that there’s an opportunity for it. So the ones that have gone wrong, like what happened and how would you have prevented that for future deals?
Jock: Two main reasons: Buyer doesn’t come up with the cash. Business doesn’t pass due diligence.
If the business doesn’t pass due diligence then there’s nothing that I can do about that; like if you got a shitty business, you have no control over that. That’s just your prerogative as a seller for running – you know, something crappy, right?
Chad: That’s why you come back to the idea of like the first thing you do is get your books in order because that’s one major component and then of course, like you said, the systems and the management and all that.
Jock: I will make a comment; a lot of times, the seller takes his foot off the gas while the selling process happens, and the sales drop. So, the buyer freaks out and retracts his offer.
Jock: So that’s probably something in terms of actionable buyers and then the other thing is, the buyer and the cash, like, get their credit statements and their checking account statements, make sure they’ve got the money in there. I know it might feel a little bit intrusive but if someone is gonna you know, purchase something for a million bucks off you, ain’t gonna waste your time for two months, suck the board, or suck it up and just ask the question and say, listen –
Chad: It reminds me of the mortgage institute, right? They ask for everything from you for that exact reason.
Austin: What about – I mean, we are talking here about – you’ve described the process here from working through a broker, what are the options, benefits of working with a broker or drawbacks, and can you explain the process from your side and then what are the other options out there if they weren’t to go through a broker?
Jock: If it’s a really, really small site like under 50 grand, I’d use a classified site like Flipper, you know, not many people own a lease to their homes, right? So, you know, not many people don’t use a broker, and if they wouldn’t use a broker, they would get a private offer meaning, you know, I wanted – Austin I wanted to buy your business, I knew you, I’ve known you for two years, I offered a million-one for your business, you know, if you think about plus the broker’s commission on top of that, it’s probably a pretty fair deal, let’s do the deal. Good deal, let’s make it happen. It’s a fair deal for that business that I was talking about before. So that’s probably the main scenario in terms of like where you would sell it.
Austin: So Flipper and your 50,000, you’re talking earnings or sales?
Jock: No, valuation.
Chad: Okay and then the other option is the private deals –
Jock: Private deals or broker.
Chad: Cool. So then let’s – we’ll start wrapping this up here, unless Austin you have other questions, but –
Chad: I guess my final question on the way out is like what resources do you recommend to an ecommerce store owner to help them sell their ecommerce store for maximum value at this point?
Jock: Digital Exits podcast, there’s a couple of episodes on that where we are talking about improving valuation. I’ve written three massive guides, one’s called the ‘Ultimate Website Selling Guide’, one’s called the ‘Ultimate Website Valuation Guide’ and one’s called the ‘Ultimate Website Buying Guide’, read all of those.
Jock: I’ve published a whole bunch of material on valuations, on both my site and other sites; I wrote a really good article on Shopify.
Chad: I saw that one.
Jock: Yeah, I think that’s one of my better ecommerce articles. In terms of other resources, there’s a forum called experienced-people.net which is all about buying and selling online businesses.
Austin: We’ll have links to all this too in the notes.
Chad: I think that’s a pretty good start there. We’ll put links to the stuff here so our listeners can find the access to it, especially those considering or trying to value their site and then potentially sell it. So really, other than digitalexits.com, is there any other place where listeners can connect with you like Twitter or something like that?
Jock: I’m not a big tweeter, I’m not a big LinkedIn user, just generally through my blog. Yeah pop me a contact form and we’ll chat about whatever you want to discuss.
Chad: Awesome, we put together two episodes so, out of all these things, how to value your ecommerce business, and then how to sell it for maximum value, what would you say the one – if there’s one piece of advice you can provide for people, what would that one piece of advice, or that one action item for them to do?
Jock: Sorry, the one action item on?
Chad: On either, on anything; if they are thinking about selling, what is the one thing they need to do right away?
Jock: Oh, that’s a good question. Can I say, talk to me?
Austin: You already said it, so maybe we can distill it down to like if someone is running a business, I look at these businesses that have people as the face of the business, or maybe I don’t know what it is, what can they – what should they be thinking about to make sure that their business is sellable? If there is something we could talk about on that.
Jock: Gotcha. Okay. Well, probably having a business in a kosher market will make it a little bit more sellable. Having a business that’s growing is going to make it a little bit more sellable. Actually, this is something that I haven’t talked about, the age of the business matters. So, like if you just started a site six months ago, don’t sell it. Please don’t sell it. You know, if you want to maximize your value, you know, you need to be at least two or three years into the project.
Chad: I think we can pull something out of here. I think that works out really well.
Jock: Yeah, anyway, there’s one thing turned into a couple but –
Austin: Yeah, makes sense.
Chad: Yeah, it usually does. So those worked out pretty well but I mean, you know, Jock, appreciate you coming on on this episode here, and helping us help our listeners understand how they can sell this ecommerce site for maximum value. So we’re looking forward to sending this out to the listeners and having them let us know what they think, man. So, appreciate you coming on.
Jock: Awesome guys, thank you very much for having me.
Chad: All right, so we’re back for part two of the three-part series on how to sell an ecommerce business, and this part two is gonna be with Jock Purtle of Digital Exits on how to sell your ecommerce store for maximum value. Jock’s already on the line with us now, so wanted to jump right back in and start off with a broad quest...
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