Build Your eCommerce Business for Maximum Resale Value
by Dave Bryant, on February 14, 2019
In this guest post, Dave Bryant of eComCrew
When I was in university, I started a company selling boating supplies. In 2016, my company was making over $200,000 a year in profit, but I decided to sell the company to allow our young family the opportunity to go live in another country for a year.
In late 2016, I sold my company for $600,000 (or $867,000 if inventory is included). While this amount was not particularly large compared to many other eCommerce exits, for me it was a lot of money. More importantly, it was a lot of money when just two years earlier, my company was losing money and essentially worthless.
In this article, I'll talk about how to build and groom an eCommerce business for maximum resale value.
How eCommerce Businesses Are Valued
With very few exceptions, eCommerce businesses are valued based on a multiple of their seller's discretionary income (SDI). SDI basically include your net profit, the seller's salary, interest and other discretionary expenses not critical to running the business like travel, car expenses and so on. So, for example, if your business makes $100,000 in net profit, pays $10,000 in interest and you have discretionary expenses of $10,000, then your SDI is $120,000.
Most businesses are valued at somewhere between 2-3x their SDI. So in the above example, that business would be valued at somewhere between $240,000 and $360,000. Normally, buyers are going to look at the previous 12 months of profit.
It's important to be aware that eCommerce businesses are based on net profit, not revenue. Some fast-growing tech businesses, especially SaaS businesses, are based on a multiple of revenue. You will almost never see revenue used to value a business in eCommerce.
Increasing Your Profit Increases Your Business Value
The absolute most important way to increase the value of your business is by increasing its profit. Many eCommerce entrepreneurs are obsessed with chasing increasing revenue and this will do nothing to help you exit your business for maximum.
There are some easy things you can do to increase your profit right this second:
- Increase your prices
- Decrease all costs
- Pay annually for SaaS products to get discounts
- Optimize your advertising and marketing campaigns
- Trim unnecessary expenses
- Optimize your inbound shipping costs
Increase Your Prices
Consider the following scenario. You sell a widget at $20 with a 25% margin, meaning you make $5. By increasing your price to just $25 you can all of a sudden DOUBLE your profit per sale. Selling 100 widgets at $25 is the same as selling 200 at $20.
Negotiate Every Expense You Have
When was the last time you negotiated your product costs or other bills like your internet rate?
Negotiating product costs are often the quickest wins. If your sales have grown significantly since you last negotiated with your vendors, then you have perfect leverage to negotiate costs down.
Internet bills, 3PL costs, freight forwarder costs, etc. are other easy costs to negotiate. Most SaaS products have annual discounts, sometimes giving 50% or greater discounts. Now's the perfect time to take advantage of those discounts (just make sure you depreciate the expenses monthly). Remember, when you sell your business every $1 you save will be magnified by that 2-3x multiple.
Eliminate Unnecessary Expenses
Do you really need that keyword discovery tool?
Paying a VA to blog for your website since 2003 yet your blog has never seen a single organic visitor in years?
Some truly discretionary expenses, like that trip to Maui, your buyer is unlikely to scrutinize. For less discretionary ones, it's better to eliminate them altogether if they have no impact on the business.
Optimize Advertising and Marketing Costs
There was a saying popularized during the dot-com crash of the early 2000s: We lose $10 on every sale but we make up for it with volume.
Everyone has a few advertising campaigns that have some absurdly unprofitable ROI. Maybe you thought Facebook's algorithm would change eventually and they would miraculously become profitable or that the LTV (lifetime value) of your customers was higher than it really was. Either way now is the time to examine killing off unprofitable advertising campaigns.
Optimize Shipping Costs
Most companies could better optimize both their inbound and outbound shipping costs. Easy wins are:
- Optimizing packaging and avoiding excessively large boxes
- Avoiding shipping air from overseas vendors
- Consolidating shipments
For most eCommerce businesses, shipping is one of their top expenses, so carefully examining these costs can relatively easily boost your profits significantly.
Red Herrings for Increasing Valuations
There are a few things I see entrepreneurs chasing that they falsely think will increase the value of their company:
- Larger revenues with stagnant profits
- Social media followers
- The large email list that doesn't convert
The buyer of your business is not going to give some set amount of money per email address or Facebook follower. They are almost always only going to pay you a multiple of your profit.
Larger revenue, more social media followers and big email lists are great BUT ONLY if they filter down to the bottom line. If you have 100,000 social media followers but they never buy anything from you, it's going to mean very little to the buyer of your business. On the contrary, if you have a social media that converts very well, this will show through on your P&L and you'll be compensated indirectly for it that way.
Most of us will spend years building our eCommerce businesses before we decide to sell them. There's a saying I always live by: revenue is vanity, profits are sanity. Live by this in the final 12 months before selling your business and you, and your bank account will be happier for it.