Today We learn more about how to sell your eCommerce business with Coran.
In Part 1 we spoke with Coran Woodmass from theFBAbroker.com about how to make your FBA business worth buying in the first place. In this episode, we look at who the buyers are. Who are these people? Why are they buying Amazon businesses instead of investing in stocks and shares and bonds and other investments?
The bulk of the market right now is $100,000 – 500,000 businesses. That’s also where the bulk of the buyers are looking. Did you know that 70% of the buyers are 100% new to Amazon? And most are new to eCommerce as a whole. The attraction to FBA businesses is the same thing that got us all into it in the first place: they’re very easy to run and the return on capital for inventory is really good.
As a secondary investment getting access to that capital return on inventory itself is very appealing. Most buyers are high 6-figure executives, who have a lot of savings. They’re looking to either quit their job and start something with less time involved, or they’re looking at it as just an investment. The latter is the biggest buyer pool. The information from Part 1 about making your business saleable and attractive to a buyer is to attract this type of buyer. They’re more of an investor, they have less time to manage the investment but they’re looking for a better return than on stocks or bonds.
A small percentage of that market are strategic buyers, but they’re few and far between which is why you want to position your business for the wider investor audience.
Those high paid executive investors are going to have a very corporate mindset. If they’ve only just started looking at FBA businesses they’ll be most appealed to the history and clean books. For the most part the more research they’ve done into the industry, the looser they’ll be with their criteria and more understanding and less nervous.
They typically don’t buy very fast if they’re a very new buyer, there’s a lot of education that needs to come into play for them to feel comfortable to move forward, to understand what is a good business and what isn’t a good business.
A much smaller area than $100-500K are businesses that are selling the $1 – 5 million. As you would expect there are fewer buyers that have over a million to spend. In that range, you’ll see very sophisticated, strategic buyers. You won’t get past them if you’re dodgy. You’ve got to be very up-front and honest about the good and the bad if you want to sell your eCommerce business.
At this level, the buyer is commonly an operator that has raised capital or a couple of investors getting together. Also, it might be someone looking to consolidate some brands and sell them on to an equity fund down the track. At the top end of the 5 million range, and over $5-10 million, it is definitely the playground of private equity funds. The multiples can get quite interesting at that point!
Every broker does it a little bit differently but there is a general overview.
Firstly, a buyer will start looking for a business and it will take them a while to figure out exactly what type of business they want. Typically there’s a very high funnel at the top, with lots of inquiries.
Most brokers don’t reveal your brand or links to anything personal at the top of that funnel.
In the second step, the buyer will say yes. They want info about the business. That’s when you can start engaging with the potential buyer. There will be some sort of call process, they’ll want to meet you. At this stage, it’s important to be very responsive and very upfront, because remember the buyer is also buying YOU as part of the deal. They need to trust not only that your business is doing what it says, but also to trust you enough to know that after the sale you’re not just going to disappear.
Step three is the offer stage, the fun part! This is where you can start negotiating.
Step four involves the deposit or LOIs. The buyer will sign something to put a deposit down to vet the business and do due diligence. Coran put a lot of time into vetting the businesses up front so that as soon as the deposit clears we can send the buyer a folder with all that information.
Step five is the purchase agreement that sets out the terms of the deal and also the handover. This is like a checklist for the handover process when you sell your eCommerce business.
Typically, in the $1-500,000 range, (the bulk of the market and probably the bulk of the audience) it could be a month before even listing and starting the sale process.You have got to get all your numbers and supporting documentation ready to go and checked before even listing the business.
The sale process is next: the client signs a non-disclosure agreement, and then the buyer sees the redacted LOI. And then there’s a short list call process. And then there are the offers. A recent sale we did this process went for 7 weeks.
Then the purchase agreement stage and entering into escrow could take another 6 weeks on top.
The best case scenario: 3 months to get to the point of a deal and then another month or so to finalise it.
The answer is up to you but there are some guidelines. You must have at least 12 months in business as an absolute bare minimum that any serious investor will look at.
You also want more than 12 months at your desired net profit level. The cash flow number builds up and that’s the multiple that you list the business for. If the business is growing, if the trend is a going up that’s a great time to sell. If things are leveling out, not stagnant but not growing, it’s also a good time to sell. Multiple months of decline (other than seasonality) is the worst time to sell or buy.
The up-trend side of things is a great time to sell to get the best price for your business. But if you’ve got such a successful business, why are you selling it? You do want to position your business so it’s progressing well. It’s interesting to a buyer and you still get a number that you’re happy with. Sometimes the best option is to wait 6 months.
You also must be happy with the figure. Take out all the closing costs, commissions and 20% just to give yourself a cushion to make sure you’re completely comfortable. If you go in with that mindset, anything else is a bonus, and that’s the time to sell.
A way to differentiate your business from others is to have some newer products that have some upside potential. Or have the next couple of products ready to go that are already sampled and on the way to being setting up and help in the setting up process for them. That means a lot to a buyer, especially if they’re brand new to the industry. It’s thinking 2 steps ahead and it really differentiates you.
In most cases, you’ll be tied into the success of this business for 6 or 12 months anyway. So you really want to set them up for success. It also builds trust and differentiates you from the others who just take the buck and run.
There are many similarities between selling a business and selling any other kind of product or service. The basics of marketing still apply.
Coran works with businesses 6 to 12 months out from wanting to sell. He’ll start at valuation, set up a call if it’s in the ballpark, but also to talk about steps to do specific to your business to plan for your exit. Coran is passionate about helping people position their business for success. It’s easier to sell, it’s more valuable for you in the exit, the buyers are happier with a better business. He can help with setting things up, systems, the timing of sale etc. and suggest other service providers who can help too.
Get in touch with Coran. To put your hand up for the monthly report email [email protected]
Put ‘monthly report’ in the subject line. When you email, if you do want to talk more about how to sell your eCommerce business, add that to the email and start the conversation.