First of all, let’s delve deeper into how vast e-commerce became throughout the years and how much it will change in the next 3 years. In 2017, mobile e-commerce hit $700B in revenue which was more than 300% growth since 2013. Frankly, mobile e-commerce is growing faster than e-commerce in general. According to the statistics, it doesn’t even seem to decline for following years. “…being mobile-friendly, having content that is quick, usable, graceful and compelling on smartphones is not optional.” – Tom Grinsted, product manager at Google. So, retail being online become a necessity, not a fancy trend anymore.
With higher demand, there’s also a higher supply, which means more e-commerce stores in the global market. As every entrepreneur should think about their business liquidity, the same stands for e-commerce business owners. At some point of business existence, the majority of holders decide to transfer the helm into someone others hands. That is why we want to provide an in-depth guide about the e-commerce business selling process and what are the key points to note.
Preparation
Preparing a business to sell takes approximately 12-24 months depending on the business scale. So, if you decide to be patient and still run your business for the next 1 or 2 years while taking some specific steps to increase your business value, apparently you will experience the ultimate success of selling your e-commerce. There is a list of things you should do to get the most out of the sale of your business:
- Focus on profitability. Business valuation is usually based on business profitability, so it would be the best time to boost sales or increase the product/service price if you see the potential. Also, try to run your business as leanly as possible. Do not make long-term investments, cut everything you think isn’t absolutely necessary at the moment. It goes without saying, that you mustn’t do anything that could hurt the future prospects of the business. Just leave all long-term, strategic decisions to the new owner.
- Get your books in order. Prepare 2-3 years’ worth of financial information. The clearer your financials the easier for you will be to create an organized and trustworthy image of yourself, consequently, buyers will be more willing to co-operate with you. With clear financials there is also some assurance that the buyer won’t find anything nasty about your business, so the selling process will be shorter and more pleasant for both parties.
- Name the reasons why do you want to sell. Understanding why you should sell your business is important for potential buyers and for yourself. Try to identify wherefore you don’t want to be a part of your current business anymore. Some of the entrepreneurs struggle to let go their leadership when it comes to selling their business, so identifying the reasons might help.
Business Valuation
After a year of preparation, you can be sure you could sell your business for the maximum profit. And now it is time to evaluate how much your business is worth. There are a lot of free business valuations on the Internet, so it is your freedom to choose which one applies best for your enterprise. The most common method for evaluation is using SDE multiple. To assess the multiple there are some variables that have the most influence: age of the business, growth, and stability, owner reliability, churn rate, customer acquisition costs. If you want to read more about e-commerce business valuation or evaluate your business for free, click here.
Writing the Sales Prospectus
Composing a good sales prospectus can add up to 30% to your business sale price. So, spending a bit more time writing a good business proposal might bring you thousands of dollars. This document should answer questions like: what your business is doing, how it generates money, what products do you offer (shouldn’t disclose names), what is the business history, what are the operating costs and etc. Your business sales prospectus should engage potential buyers to find out more about the business, so it must be easy to read, simple and straight to the point. But before giving access to your sales prospectus don’t forget to give potential buyers to sign a Non-disclosure agreement to secure your business confidential information. More comprehensive post about sales proposal is here.
NDA
As we just mentioned, NDA will be needed to keep your business confidential information secured. Once somebody sings non-disclosure agreement, they commit to
Letter of Intent
Earnest money and LOI usually comes together before signing the final Asset Purchase Agreement. Signing LOI shows that both sides are serious about the purchase and earnest money proves that. According to rocketlawyer.com, there is basic information needed in LOI:
- Your contact information, title and business name
- Prospective transaction and purchase price details
- Liabilities or obligations
- Negotiation rights
- How long until the letter terminates
Letter of Intent typically is non-binding, so it doesn’t obligate buyer to buy, or seller to sell the business. Nevertheless, after signing LOI and then breaking down the contract might cost some money, depending on which party screwed up.
Down Payment
“For example, let’s assume John wants to buy a home that is listed for $500,000. To show that he is serious and ready to close the deal quickly, he provides $10,000 in earnest money. When the deal closes, the $10,000 is applied toward the sale price (meaning that John does not pay the earnest money on top of the price of the house; he simply fronts the money).”
Down payment is often used in real estate transactions, but it is becoming more popular in business takeovers. It assures seller that buyer is serious about the business acquisition, while the buyer gets some kind of a warrant what seller won’t sell the business to anybody else.
The Asset Purchase Agreement
The APA is the official legal document you sigh to close the deal and transfer ownership to the buyer. While LOI was only a short non-binding agreement with basic terms, APA is a formal, legally binding agreement with very detailed aspects of the transaction. APA usually has effective and closing dates and during that period the seller makes its final financing arrangements for the purchase. Involving an attorney in writing an Asset Purchase Agreement would be strongly recommended if you haven’t done that earlier in the business transferring process.
Escrow service
When it comes to transactions worth thousands or millions of dollars it’s better to think about online escrow services. Escrow is an arrangement where the “third party” holds the money until both parties meet their obligations. Using escrow service can help minimize your risk and continue the deal run smoothly. In fact, whether to use it or not is an agreement between buyer and seller, so it’s not necessary if you both trust each other and feel comfortable enough.
According to your experience, it takes approximately 3-6 months to sell your e-commerce business. So, with all the preparation to sell and selling process, prepare to spend at least a year and a half if you want to sell your business for the maximum value. Consider hiring online brokerage services if you don’t want to walk through the business selling process on your own. A competitive team of Dotexitwould help you to evaluate, find potential buyers and provide M&A advisory while transferring business ownership.