In 2015, the average multiple value of selling an e-commerce business was 2.39 (DigitalExits Ecommerce Study). If you are looking to sell your business, there are many variables to consider in order to maximize the value at close. In this post, we cover the top 5 things you need to know as a business owner in order to maximize the price you receive when exiting.
Clean FinancialsTo ensure that your business sells quickly and efficiently, take the time to make sure that your financial records are correct and in good standing order. This will prove to any prospective buyers that your business is reliable and trustworthy. Buyers love to see records and statistics items such as the number of new and returning customers, a long history of a consistent and clear growth, upward sales trends in revenue, records of reliable suppliers and backup suppliers, and a clean legal history to project a positive future trajectory.
Detailed financial record keeping is essential for any business. By having disorganized, merged with another business or non-existent financial records, you run the risk of losing the sale. A buyer will be more likely to walk away from the sale of your business if you are not able to accurately account for the revenue and expenses. If you’re unsure, or need help, many third party companies offer audits, which are a great way of finding possible indiscretions. Having solid financials usually leads to a higher sales multiple and a higher value for your business.
Staff ContractsBuyers will want to have an in depth record of the staff contracts they are committing to take on. Ensuring that you can provide detailed and up-to-date versions of staff contracts will help the success of the sale of your business. This is particularly important if you’re dealing with international buyers and business models. American law has no rigorous regulations on the transferal of staff and their contracts, however, the UK and other European countries have strict rules in order to protect the rights of the workers. The TUPE (Transfer of Undertakings Protection of Employment) law not only applies to employees, it also covers work that has been outsourced or sub-contracted. Before attempting to sell your business, familiarize yourself with TUPE, in the event that the sale of your business will be affected by this law.
Supplier ContractsAlongside staff contracts, it’s also important to have a detailed record of suppliers and the ongoing arrangements. The sale of a business affects its legal standing and identity, so any obligations and contracts need to be edited accordingly.
While it’s easy to transfer the rights and benefits of the company, the obligations often remain with the existing company. To clear any obligations from the previous contracts, the following can be done:
- Subcontracting performance to the new company This option requires clear, detailed and reviewed copies of the initial contracts in order to make this decision.
- Novation agreements Are signed by all three parties, in order to ensure to smooth transfer of supplier contracts.
- Notification letter These letters are sent to all contractors, informing them of the business sale and giving them the option to end the contract if they’re not happy with the situation. By doing this you can negate responsibility for any future problems that may arise.
SystemsCreate a detailed how to guide (standard operating procedure) for your buyer to make sure that they are ready to take on the responsibility of running your business. This should go smoothly if you already have clear systems in place that are easily explained to the buyer. In order to prepare for this step, try to have a clear manual for the buyer to refer to; make sure that the communication is open and fair during this time of learning.
Business ValuationAnnual profits of your business and the sales multiple assigned to your business by the buyer is crucial when looking to sell your business. Just as it is in more traditional models of business, the profit of your business is determined by how much money you’ve made after you’ve accounted for your operating costs.
The sales multiple is set by the buyer. It is a ratio that describes how much of your profit the buyer is willing to spend in order to buy the entirety of your e-commerce business. The buyer chooses the sales multiple based on the perceived risk of investing in your business: the lower the risk, the higher the sales multiple. And being able to present an accurate and complete business valuation is essential to ensure a successful sale and will improve your credibility and encourage faith from prospective new owners.
ConclusionBeing able to keep financial and relevant records accounted for, as well as your contracts, systems and business valuation will drive down the perceived risk of the buyer’s investment and will put your business on its way to a successful sale.
About the author
Jock Purtle is the founder of ecommerce M&A consulting firm Digital Exits, which helps ecommerce business owners find a buyer when they want to sell their company.
**Jock Purtle is the CEO of digitalexits.com a full service website brokerage. They help online business owners find a buyer when they want to exit their company.