Guest Post by Jock Purtle
Your ecommerce business is your baby – you’ve invested your blood, sweat, tears, time, energy, and money. However, the time has come to sell. Your goal is to get as much as you possibly can from the sale, and you’re evaluating what you have to do in order to prepare. There are numerous conditions to take into account, and in this post, we will cover them all in order to help you get the highest possible price when the time comes to hand over the reins.
Let’s get down to business.
What is your ecommerce business worth?
There are a variety of factors that must be considered when calculating the value of an ecommerce business. Some factors are affected by external components, such as the type of business you have, the state of the market, and what buyers are willing to pay. However, there are also some common variables to consider, including:
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The business’ sales
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The business’ profit
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Growth trends
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Drivers of new sales and their sustainability
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Customer channels and channel breakdowns
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Market position
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Existing systems and processes that make the business’ operations run smoothly
Looking at the sales of other ecommerce businesses in the past is a vital component of the valuation process. The image below represents the results of our analysis of the 245 ecommerce business sales between 2010 and 2014. Those 245 sales resulted in a total transaction value of over $117 million.
There is a lot of useful information in this data; however, the most important number is the 2.51 average multiple. The average business sold for 2.51 times their annual profit. For example; if a business had $50,000 in profit in 2012, then on average, that business sold for roughly $125,500 [$50,000 x 2.51]
As you can see in the distribution graph above, the multiples from these sales ranged from 0.5X – 6.6X. So, if you are valuing a business that earns a net profit of $120,000 per year, the valuation can range from $60,000 – $792,000. The distribution pattern on the graph makes it clear that most businesses are sold for between 1.5 and 3 times their annual net profit, which is fairly close to the general assumption that most small or medium-sized businesses are typically valued at 2-3 times the annual net profit.
What makes an ecommerce business worth more?
For a buyer, what it really comes down to is one coin with two sides: return-on-investment (ROI) versus relative risk. The higher the price, the more risk the potential buyer is taking, and vice versa. The thing that will tempt investors to pay a higher price is diminishing the risk of future failure by ensuring that your online store can answer “Yes” to the following questions:
Does the business…
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Have a clean legal history?
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Have good branding with no legal, copyright, or trademark concerns?
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Have documented systems and processes that allow operations to run smoothly?
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Have good relationships established with suppliers, and backup suppliers in place?
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Possess the ability to demonstrate key drivers of new sales?
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Have a high percentage of repeat customers?
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Have a high percentage of repeat visitors to the site?
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Have stable (if not growing) traffic from a variety of sources?
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Have a long history of traffic stats from Google Adsense or another reputable source?
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Show potential for growth?
What does the average ecommerce business sell for?
The graph below shows data we analyzed, which shows that typically ecommerce businesses sell somewhere in the $100,000-5m revenue range. However, don’t be concerned if your business is smaller than this. We discuss tactics and places to sell a smaller business later in this post.
As the graph indicates, ecommerce businesses can sell for as little as a few thousand dollars to hundreds of millions if not billions of dollars.
Are bigger ecommerce businesses worth more?
In general, the larger the ecommerce business, the more that it is worth. Here is a brief explanation of the graph below. A business that sold for $2 million or more (learn what makes a million dollar ecommerce business in this article), would have an approximate yearly profit of $770,000 ($2 million divided by 2.6). Let’s say that a business sold for $75,000. On average that would mean that its yearly profit was $37,500 ($75,000 divided by 2). A final example would be a business that sold for $500,000. On average that would mean that its yearly profit was $208,000 ($500,000 divided by 2.4).
When is the best time to sell your business?
Like many major life decisions, there is never any ‘perfect time’ to sell your business. For the scope of this article, the prime time to sell your ecommerce business is when there has been sustainable growth, as tracked in annual increments. Let’s use the following example:
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Year 1 – $150,000
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Year 2 – $305,000
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Year 3 – $620,000
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Year 4 – $546,000
In this example, the best time to sell would have been late in year three. You don’t want to make the mistake of selling your business once it’s no longer lighting a fire in you, and the business is starting to decline. This can significantly impact the magnitude of the offers you receive. Other factors can also impact your decision. For example, you may be forced to sell because of external circumstances; or perhaps a potential buyer came along with an offer you couldn’t refuse.
How does the selling process work?
The selling process is fairly straightforward. However, depending on the size and scope of the business, it can be more complex and take additional time. Generally speaking, most sales will happen in the following progression:
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Decision to sell.
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Valuation (a summary of how much the business is worth).
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Prospectus development (legal document in which is contained all the facts and figures concerning the business.
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Locate potential buyers (on your own or with assistance from a broker).
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Negotiations with buyer (total price and also terms of the deal).
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Transfer of cash and assets.
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Train new owner.
How long will it take to sell your business?
All businesses are different, and the length of time needed to sell a business depends on many factors that relate to the type of business and the terms of the sale, but in general terms, smaller businesses take less time to sell, and vice versa.
The graph below represents the summary of all the deals that we have completed and the time it took to complete them on average. As you can see, between 50-60% of deals close within 90 days and close to 80% close within four months.
Why do buyers say “No”?
Sometimes a sale falls through or a buyer says, “No.” Some common reasons include:
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They don’t like the business
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They don’t like the target demographic
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Something wrong with the statistics or data
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A buyer finds something that makes them reconsider their offer
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Selling price is too high
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Trends with particular business or market
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Problems with transferability
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Financial, branding or product condition of the business
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The funding just falls through for the buyer
Final Thoughts
Selling an ecommerce business can be a difficult decision for many entrepreneurs. No matter the reason, there are a variety of options for you to find a buyer and sell your business. Following the tips in this post will ensure that you receive the maximum value for your business.
About The Author: 
Jock Purtle is the CEO of Digital Exits. If you are looking to sell your ecommerce business they offer a free valuation service here. Alternatively if you are interested in the buying and selling process you can read their blog, listen to their podcast or access the buying, selling and valuation guides.
