The road to creating the best product listings with the highest conversion rates is long and windy. No matter where you are in your ecommerce entrepreneurial journey, it’s important to stop and ask yourself, “What is the end goal for my business?”
Many founders never seriously think about exiting their business (with the exception of it not working out) and I don’t blame them—your business is like your baby, and it can always grow or do better.
But what if I told you that it was possible to entertain a sale, without betraying your ‘baby’ or giving up your ecommerce dreams? What if it was possible to jump on this opportunity sooner rather than later, even while your time and capital are currently tied up in your business?
Well, I’ve got good news. Whether your plan is to earn more capital to reinvest into another business or to free up some time for your personal life, you’re fully capable of finding a buyer for your digital assets as long as you understand how ecommerce businesses are valued today. In this blog we’ll cover behind-the-scenes advice on how to prepare your business for a sale in the future.
Why Would I Sell My Ecommerce Business?
Let’s address the elephant in the room first—why sell a profitable business in the first place?
The truth is, many business owners never consider a sale as a valid option. There is, in fact, a common misconception that one should never sell their business unless it is failing; selling is treated as an exit strategy that can help founders salvage whatever equity is available.
But we’ve seen ecommerce founders exit their business due to personal or business reasons. Some entrepreneurs want to raise funds to buy a home mortgage-free or start a college fund for their kids. Others sell because their business partnerships dissolve or they want to raise capital to pursue side hustles that they are more interested in.
Whatever your reason is for putting your business up for sale, you should know that there are investors who are willing to pay a large amount of capital to have full ownership of your ecommerce brand!
Whether you dropship, sell via Amazon FBA or have a large-scale ecommerce business, there’s an opportunity to sell. On the Empire Flippers marketplace, for example, 97 FBA accounts were migrated from sellers to buyers in 2020, and over 110 ecommerce businesses were successfully sold.
The growth of ecommerce as an industry is accelerating each year and entrepreneurs with capital want a piece of this profitable pie. By negotiating the right deal, you could receive up to four years of net profit in cash up front.
That much capital unlocks many opportunities that weren’t available to you while all your cash was tied up in your business. If this resonates with you, let’s go over how to find out what your ecommerce business is worth.
Understanding the Value of Your Ecommerce Business
If you search for guidelines on how brokers or merger-and-acquisition (M&A) individuals value businesses, you’ll come across some variation of:
EBITDA x Multiple
EBITDA is short for Earnings Before Interest, Taxes, Depreciation and Amortization. This figure is a measure of a business’s annual profits and is increased by a two to four multiple.
The basic formula at Empire Flippers is a slight variation of the above:
Valuation = Average Monthly Net Profit x Multiple
The two formulas are pretty similar; the main difference lies in using a monthly net profit instead of an annual one.
We feel a monthly average net profit over 12 months provides a better understanding of an online business’s performance compared to a yearly average.
Figuring out the multiple is a trickier process since there are several factors that can affect this metric, such as how old an ecommerce business is, its traffic diversity and how many products it sells.
We’d strongly recommend that first time-sellers get a rough estimate of their business’s value before they commit to a sale.
Even if you go through a private deal, consider using a free valuation tool for a ballpark figure to use as a baseline for negotiations. You’ll be better prepared to negotiate and know if a buyer is trying to slip you a lowball offer.
Before we explore how these factors affect the multiple, it’s important to understand that there are different pricing windows a seller can use for a more favorable valuation.
When to Expand or Retract Pricing Windows
Most sellers will choose between a 12, six- and three-month pricing window to calculate the average monthly net profit.
Twelve months is the golden standard because it accounts for any differences in buyer demand throughout the year, otherwise known as seasonality, and builds trust with potential buyers by providing a better view of traffic and revenue earnings than shorter pricing windows.
It’s advisable for sellers to stick with a 12-month pricing period to get the highest possible valuation for their business. Buyers want to minimize their risk as much as possible, and a shorter-pricing period could narrow the buyer pool to only include investors with much more capital and a higher-risk appetite. Having more data normally always works in a seller’s favor by appealing to a larger number of buyers and increasing the chances of negotiating a favorable deal.
A common mistake new sellers make is trying to sell their business shortly after it has started simply because it’s experiencing rapid growth. A 12-month pricing period will probably reflect poorly for the business since it likely didn’t make any money until six to nine months after it started. Even if the seller chose a three- or six-month window to reflect the business’s profitability, buyers will be much more cautious buying a $500,000 ecommerce business with such a limited amount of data available compared to a $50,000 business with the same pricing period.
We recommend considering a sale at least 18–24 months after you start your company so there’s a long enough audit trail of financial data available.
Now that we’ve discussed why the pricing period is one of several important valuation factors to grasp, let’s see how the multiple is calculated.
Landing on a Multiple
How much you increase the average monthly net profit by a multiple isn’t a hard science. The best place to start is by thinking from a buyer’s perspective and asking yourself, “Would I buy this business?”
Adopting this mindset helps you understand what the business’s strengths and weaknesses are and gives you an idea of how you can increase the multiple. Generally speaking, there are several factors that you can influence to move the needle:
Your Business’s Age
Older businesses tend to receive higher valuations. With changes in trends and markets, an older business that’s profitable shows buyers it has weathered storms and has high survivability.
Some optimizations need time to bear fruit too. SEO is one such case where ecommerce stores want to rank for high-value keywords and can only benefit from organic search as a traffic driver after the business ranks for these types of keywords, which typically takes a lot of tinkering and time.
As long as sellers improve their business to keep pace with industry standards and stay on top of market trends, age works in their favor.
Diversifying how many sources your business generates sales from lowers risk for buyers dramatically and increases the multiple because the business isn’t dependent on one source of traffic for your site.
Even if an ecommerce business earns $500,000 in monthly net profit, a potential buyer might wince when they see that all the traffic directing customers to the online storefront is only generated through PPC advertising. As effective as paid advertising may be, you practically lose all value in your store if something happens to this channel.
A few ways you can increase your traffic sources include multichannel selling, building a social media following or starting a blog.
A recent Shopify study found that selling on at least one other platform increases your revenue by 38%, which can grow to 190% if you successfully establish your brand on three online storefronts. If you’re not already selling on Amazon, consider starting an FBA business. You can leverage the brand’s excellent reputation, which many customers already know and trust, as well as lean on their extensive fulfillment network.
Also, selling on different marketplaces provides greater brand exposure to a wider range of buyers. Different types of buyers visit each marketplace, and you can nurture different audiences that you wouldn’t normally have access to if you stayed with your initial storefront.
Another way to increase your brand’s reach is by building up a following on social media. Many sellers are social media-shy, but they could be losing out on potential sales by ignoring this channel. Avionos claims that 55% of customers have bought something from a social media platform, so it’s worth considering as another traffic driver for your business.
Once you branch out your traffic sources, your business becomes more resilient and sales can continue flowing from other channels, providing backup in the case that one of these sources is affected.
Number of Products
The number of products sold by an ecommerce business plays a large role in the multiple. A business that generates the lion’s share of its revenue from a single product is at risk of failing if the product is delisted or quickly goes out of trend. However, an online store that sells dozens of products is a time sink for buyers to manage.
Buyers want to buy an active investment, not a job. Launching a range of products where each one pulls its own weight in terms of sales and not having too many to manage is key if you want to increase your multiple.
There isn’t a fixed, definitive number of products you should sell for an optimal valuation. A few guidelines to follow is to make sure a single product doesn’t make up half of your business’s total revenue. Another is to make sure there’s enough market demand and interest in a new product before launching so you can be confident it will generate sales.
Watch out for “shiny object” syndrome that can lead to adding several active products to your storefront. If only 10 out of 50 SKUs actually contribute to the store’s earnings, delisting the other 40 could improve the store’s revenue-by-product metric.
After nearly 1,500 deals completed on our marketplace to date, three to eight products seems to be the ideal range for diversified revenue and required time management.
Again, there isn’t a hard-and-fast rule for a perfect number of SKUs, and if you have an ecommerce business that sells only one product, don’t worry: there are buyers who will be interested in your online store. Every buyer has their own due diligence criteria. Typically, one-product ecommerce businesses can be acquired by buyers with more financial resources as the risk isn’t as steep for them.
Keep in mind that increasing the buyer pool means making the business as attractive as possible. Growing your product range as discussed above is one way to increase the chances of your business being sold, as well as to increase the multiple.
Customer Reviews and Ratings
To sell more products, you need to create strong branding. For great branding, your business needs to generate more sales.
Branding is a soft valuation factor, but it gives buyers an idea of how reputable an ecommerce store is and how likely it is that customers will buy its products.
To understand a business’s branding and positioning in the market, you need to have a grasp of how much people love your products, if they do at all. Customer reviews and ratings are a couple of the most obvious ways to reflect how satisfied your customers were with their purchases. All ecommerce owners want to gather high ratings for their brand and their products since 95% of customers check reviews before buying something.
While it’s difficult to secure stellar customer reviews, you can increase the chances of someone leaving a glowing review by providing top customer service to make the buying experience seamless and enjoyable. Staying on top of potential issues if something goes wrong can turn a bad review into a great one, so remember to regularly check and respond to inquiries.
If you sell on Amazon, consider using the Amazon Buyer-Seller Messaging service to ask for feedback if you feel a customer had a positive experience.
It might seem like a minor factor impacting the valuation multiple, but having a well-established monetized email list with many subscribers is a highly valuable asset for a couple of reasons.
As we mentioned earlier, diversifying traffic channels increases your multiple. An email list is a cost-effective and powerful tool to leverage to this end because you’re not relying on a search engine algorithm to draw customers to your business. You have a direct line to share your content with subscribers any time you want—and it’s free.
An email list is also a great way to drive revenue. You can send regular newsletters that deliver value to your subscribers with exclusive offers or informative content. By creating automated email campaigns, you can retarget customers based on their actions to increase the likelihood of a conversion.
People rarely convert after opening the first email. Subsequent follow-up emails can help communicate the customer and product benefits, increasing the chance of a customer following through with a purchase.
All that said, if your business doesn’t have an email list but you’re considering putting your ecommerce store up for sale, we’d recommend against starting one for the sake of trying to get a multiple. An unused and underdeveloped email list can actually harm your valuation more than increase it, since you could have used the time and energy to improve the business in areas where it’s performing well.
When Should You Sell?
The next most common question we get is, “When is the best time to sell?”
The simple answer is when your business is at its best.
Think about it: Customers wouldn’t consider buying a faulty product, let alone paying a premium or even discounted price for it (except maybe in the case of food—hello, discounted aisle!). If you want buyers to pay a premium price for your business, it needs to be firing on all cylinders under your ownership.
On the other hand, getting the maximum sales price will probably be the least of your concerns if you want to sell your ecommerce business to raise capital quickly or if you’re looking for a fast exit.
To get the most out of a deal, you’ll need to prepare your business to perform at optimal levels and make your business an attractive investment for the right types of buyers.
Who Would Buy Your Site?
There are a wide range of buyers looking for a smart deal that suits their needs.
If your online store is valued around five figures or low-six figures, it could be a good deal for a buyer who’s new to ecommerce and is looking for a digital asset with a low barrier to entry. The business will be small enough to manage, while generating enough monthly profit to earn a sizable side income.
A business that’s valued at multiple six figures and above won’t be suitable for a newbie since they’ll likely have had insufficient capital and experience to make it work. At this point, experienced ecommerce entrepreneurs or institutional investors will be the most likely types of buyers to put an offer forward for your business.
While your ecommerce store’s profile might not appeal to all buyers, there is one thing that all investors have in common: wanting to buy a turnkey solution. The more hands-off the operations are, the bigger your buyer pool. No matter how large your business is, creating processes and automations to help you run the business makes your asset more attractive to buyers. Implementing as many solutions as possible so a buyer spends minimal time on the business increases the buyer pool.
Where You Can Sell Your Business
You could list your business up on DIY marketplaces, but it’s almost never recommended. These types of marketplaces charge high commissions while lacking the necessary processes for a smooth deal. In the end, you could either part with your business for much less than you hoped or not strike a deal at all.
The two best options to sell your business are through a...
- Brokerage - At the risk of sounding self-serving, we would strongly recommend selling through a brokerage, mainly because of the large buyer pool that watches these marketplaces. It’s the easiest way to land your business in front of suitable buyers who have serious buying intent. Many institutional buyers with deep pockets pay attention to new listings that appear from reputable brokers because they know and trust their vetting system. You could speak with a reputable broker for free to discuss how much your site might be worth today.
- Private deal - With this option, you’ll have to market your business and negotiate with savvy buyers who could wrestle negotiations out of your control or deal with tire-kickers—individuals who waste your time by making poor offers. While someone may offer you a great deal that’s comparable to what you’d get through a broker, the chance is very slim.
A Final Note
Even if you have no plans to sell in the near future, preparing to sell your business is a helpful mentality to have so you can streamline operations and improve sales performance. If and when the time comes to exit the business, you’ll be in a prime position to negotiate a high premium to reflect its value.
Schedule time with a Zentail expert to see how we can transform your Ecommerce business.