The time will eventually come when you need to exit your eCommerce business. It could be that you’ve taken your business as far as you can and it needs a big-money buyer to invest in its growth, you may want to venture into other businesses or even real estate, or it could be that you’re bored with the niche and you want to explore something new.
Whatever your reason, you want to get the maximum amount of money possible, right?
At the core of valuing your eCommerce business is its monthly net profit. This is the first factor we consider when valuing your business for sale.
To arrive at your final valuation figure, we multiply your 12-month average net profit with the business multiple.
Your business multiple is determined by several factors, including the age of your business, the time required to maintain the business, its brand presence within the niche, and the number and quality of the products. Because we’re currently in a selling season, the base multiples for eCommerce businesses have risen from 31x to 33x. That means if you sold your eCommerce business, you could receive at least 33 times your monthly net profits.
Although net profit is relevant, multiple factors can impact the valuation of your business. That’s why we always advise against comparing with other businesses making the same net profit since the valuation figure can be drastically different.
A buyer looking at your business as an investment sees only an investable asset. Just because your business is earning a lot of money right now doesn’t mean it will stay that way—as much as you would like it to.
This is why it’s best to treat your business as an asset. Ask yourself: Is this a desirable business? A business that if I was an investor, I would be happy to take on and be confident that it will consistently make me money? Are there opportunities to grow this asset?
To answer these questions, you need to get your business ready for sale. The added benefit of this is that by doing so, you will actually make your business more profitable and make it a better business overall.
Today, we’re going to look at the top five tips for preparing your eCommerce business for that dream five, six, seven, or even eight-figure exit.
It starts with your business numbers.
Tip 1: Get Your Finances in Order
A lot of non-entrepreneurs would be surprised to know that online business owners who are making tens or hundreds of thousands of dollars a month in revenue aren’t clear about their business finances.
As an entrepreneur, you know that finances are not that simple to track. Finances, along with other figures such as website traffic, is the lifeblood of business. If your business isn’t making profits, you don’t really have a business yet.
One of the first things an online business buyer will look at when assessing your business for purchase is the financial figures. These figures tell the history of your business to the buyer. If you don’t have clear financial data and you have them splayed over multiple dashboards and documents, it’s a turn off for a buyer.
The best way to solve this issue is to create a profit and loss statement (P&L). This is a breakdown of all your business income and expenses in one or two easy-to-read documents.
By doing this, you might notice areas where you’re overspending or losing money. For example, you could find that you’re overspending on inventory storage because of poor inventory forecasting.
Don’t be afraid to show these figures to a buyer, however. Any areas where your business can be improved are growth opportunities for the buyer.
Tip 2: Create SOPs
SOPs, or standard operating procedures, are a fantastic tool for organizing your business operations. They are documents that outline each of your business procedures step-by-step. You should create SOPs for all of your important business tasks. However, you should avoid getting too granular since having SOPs for every little task can actually slow down production.
Easy to follow SOPs should include:
- Clear step-by-step instructions
- Video tutorials
SOPs are important to have because while you know how to run your business on a day-to-day basis, a buyer looking to take over your business doesn’t.
Through the process of creating SOPs, you’ll likely identify areas where you can make your business operations more efficient. For example, you might realize how long a mundane task is taking you and think of a way to shorten the task, remove it if it doesn’t bring worthwhile results, or outsource or automate the task.
Tip 3: Outsource and Automate What You Can
If you want to scale your business, then you need to let go of the steering wheel. Many entrepreneurs struggle to grasp this concept because they’re afraid to release control of their business.
However, buyers love turnkey solutions which require only a few hours to maintain on their part. Letting others handle time-consuming tasks means you can work on your business instead of in your business.
Some tasks you can delegate so you can focus on expanding your eCommerce business include customer service, inventory management, planning logistics, and repricing product listings.
Consider these automation and outsourcing solutions to free up a few hours each week:
- Hiring a virtual assistant (VA)
- Hiring and third-party logistics provider (3PL)
- Subscribing to SaaS tools (e.g. Jungle Scout, Helium 10)
Your first thought might be “these are extra expenses!”
But think about this: if you’ve got someone who can efficiently manage different areas of your business without you, you can dedicate your time and resources to optimizing your business in other ways.
A popular way to make a business more hands-off is by hiring VAs. They can help with a variety of tasks from product research and optimizing a storefront for SEO to responding to customer inquiries. To empower a VA to do the job, consider putting together SOPs so they can handle their responsibilities with confidence.
Streamlining logistics can be a big headache for founders, but it’s a vital part of making sure your supply chain runs smoothly and crucial to your ability to fulfill customer orders. Using a third-party logistics provider (3PL) to help manage your inventory means you can leave logistics to the experts while you focus on leveraging your strengths to grow the business.
You also get access to their supplier network, and it’s cheaper to share a warehouse and employ the 3PL team to handle your inventory than to hire a warehouse team and run a facility outright.
The less you work on your business, the more desirable it is to a buyer, and the more you can get by selling it.
Tip 4: Organize Your Inventory
While DropShipping customer orders are fulfilled on a per-order basis, for eCommerce, you have to order in bulk to prepare for demand. This is where inventory forecasting comes into play.
Inventory forecasting is a process where you bulk order inventory based on your sales projections and other factors. If you’re not forecasting your inventory orders effectively, you put yourself at risk of losing sales and perishable inventory, negatively impacting your profits.
Buyers will notice any dips in profits while examining your business financial history and would want to know why they occurred. While not being proficient in inventory management isn’t the end of the world, sorting out inventory management is a growth opportunity for buyers to analyze the business potential.
Having said that, expect to sell for a lower price. A business with consistent profits is considered to be more valuable. This is why we calculate a business’ value over 12 months to account for any spikes or dips in performance.
If your business is Amazon FBA, going out of stock will affect your Amazon listing.
You can lose the rankings you’ve gained through pay per click (PPC) advertising. If you’re the only seller of that product in the marketplace, then the product listing could completely disappear.
A simple way to increase your business profits and valuation is by asking your suppliers for cheaper rates. If you have a good relationship with your suppliers, it’s worth asking since you can source products at a cheaper rate and reinvest the profit into the growth of your business.
Many e-commerce owners don’t know they can negotiate their rates or are too afraid to ask. The worst that can happen is they say no!
Tip 5: Diversify Your Traffic, Revenue, and Products
At Empire Flippers, we always emphasize the power of diversifying your business. When you diversify your traffic sources, revenue sources, and products, you mitigate the risk of being exposed to single points of failure.
For example, if your site drives over 90% of traffic from SEO, you leave your business at risk of being hit by a Google update. When you lose that traffic, you have no one visiting your store, and thus you make no sales.
To diversify your traffic, consider running paid ad campaigns or create a blog on your site and do guest post outreach.
Here are some options to diversify revenue:
- Expand to international Amazon marketplaces (if you’re an FBA Seller)
- Build a storefront on other marketplaces (e.g. Walmart, eBay, Shopify)
- Increase your product range.
If you’re not already on Amazon, consider setting up an Amazon Seller Central account to sell your products on the Amazon marketplace. You can leverage their fulfillment network while building another revenue stream.
You could also add a DropShipping element to your business. Offering drop shipped products as upsell with your current products can increase your average cart value.
An easy way to diversify your product selection is to source new products related to your current offerings. For example, if you sell garden chairs, you could introduce garden tables or garden chair covers to your store. This is a quick way to increase your business valuation, too, as the range of products and sales performances play a large role in an eCommerce business’s valuation.
Prepare for Sales, Build a Better Business, Sell for More
By preparing your business for sale, you make your business more profitable, efficient, and effective to run.
Well-built, diversified, profitable, and mostly hands-off eCommerce businesses with efficient processes, good inventory management history, and clear financial data tend to sell for more compared to a business unprepared for sale.
By working on the areas discussed in this article, you improve your business across the valuation factors considered for determining your business sale price.
If you’d like to sell your eCommerce business for 30–50x its average monthly net profit on the world’s largest curated online business marketplace with collective funds of over $1 billion among its buyer pool, then submit your eCommerce business for sale today.
Craig Schoolkate is a Content Specialist for Empire Flippers; the leading M&A brokerage with the world’s largest curated online business marketplace. He produces content on eCommerce topics, including DropShipping and Amazon FBA, and he interviews eCommerce sellers for the Real Money Real Business podcast. Outside of Empire Flippers, Craig likes to travel and socialize with friends.