Top 5 Mistakes Ecommerce Owners Make When Selling their Firms
Mistake 1: List Your Company without Sufficient Preparation
Insufficient preparation is the very best mistake many ecommerce business owners make. Besides strong financial statements, company prospectuses should comprise many important pieces of information. Preparing your company for sale typically requires at least a couple weeks time with the support of an expert ecommerce agent. If you’re doing this yourself, you need to allow yourself 3 weeks time. A broker can provide you with many distinct samples that will provide you an understanding of how a fantastic prospectus should look like. Following is a list of things we included in a Previous prospectus we prepared:
- Hours of operation
- Product or service segmentation
- Margins by section
- Market served
- Competitive environment
- Client base
- Industry trends
- Industry prognosis
- New developments
- Management style
- Sales and advertising plans
Case Study: I brokered a transaction that involved selling a flourishing business that had three revenue streams: (a) brick and mortar shop; (b) portfolio of sites; and (c) an Amazon shop. Additionally the storeowner spent all day in the shop and her husband had a full time job and he would manage website aspects on weekends and nights. Unfortunately, because of exceptionally busy schedule, the storeowner never got a opportunity to institute applications based accounting (e.g. QuickBooks or similar applications ) and last but not least, once the storeowner approached me decided to market, she said she would like to sell her company in next couple of months. Taking a look at the amount of work before us trying to work out Excel-based accounting I instantly knew this was going to be a challenge. I gave a quote to the proprietor that to effectively reflect a business of the size available it will require last five decades of books ready including P&Ls, stock reconciliation and due diligence reports before I will feel comfortable opening it up to the market. With the present condition of novels, it would have a solid one-month of my time together with one fulltime employee from the vendor group working with me. They did not have anybody aside from husband and a wife team who will work together and the two of them had no time to devote to the activity. I understood even if it required two month to get where we had to be before we record the company, it would be well worth the efforts. Sellers believed strongly that they wanted to provide business for sale immediately and wanted to begin talking with the buyers. In a nutshell, we recorded the company with only last one year of novels, and worked our way through preparing remaining books while talking with buyers at exactly the exact same time. Today the company is sold, it took 9 instead of 3 weeks which could have obtained if we had recorded it after two month of prep time and, moreover, we would have gotten better price than what the seller ended up becoming. It pays to bring your books in order and keep them so long before you opt to sell your company.
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Mistake 2: Unwillingness to Hire Business Intermediary
The Entrepreneur article makes subsequent monitoring of a business owner:”You are an expert in running your business — not promoting it. Yet it is always surprising how many sellers are hesitant to hiring a business broker to facilitate the sale of their company. Would it be wonderful to save the approximately 10 percent brokerage fee? Sure, but typically agents are capable of incorporating at least 10-12 percentage to the sales price. ” I can not agree more with Mike that operating with a company intermediary to facilitate business sale is reasonable for the majority of the company owners. Reflecting upon previous deals I had been involved as intermediary, I see after three areas where a capable business intermediary would add value.
- Get increased business price by employing a broker. Because most business owners go through a selling procedure just once in their lifetime, they don’t have any understanding of their”right” price at which to record the company and the”right” prep that will get them that price. If an intermediary is handling the sale procedure, she is going to have the ability to share adjusted market array customized to your own company.
- If your company growth has slowed or worse down, you want a broker. For a company that’s challenged by economy or some other aspects, not having a business intermediary involved could mean the owner might be unable to sell. This is a result of the fact that the majority of first-time sellers don’t have any idea how fast the company value declines for a companies which are trending down in earnings or revenue. If business price isn’t reduced to keep up with the decreasing revenue, the company may never sell.
- Most vendors underestimate the efforts necessary to sell their company. Most business owners who attempt to market their company on their own don’t have any idea on the efforts required only to have the non-disclosure agreement signed by the prospective buyers, let alone qualifying all them and finding the person who isn’t going to squander owners time. In two instances, one for a company A that had an offer in first month after record, and a second for company B which didn’t have provide after being in the market for at least 20 months, the amount of ad displays were 12,148 and 19,156 respectively and”clicked for details” were 657 and 780 respectively. A lot of those who”clicked for details” will either send an email or call the agent to comprehend the business. All of them must be processed and their NDA signed before they can be provided with any confidential information.
Mistake 3: Attempt to Cover up Issues
As a vendor, you want to portray your company in the best possible light. However, there’s a major difference between representing your company in the best light and misrepresenting your company to potential buyers. At some stage during the selling process you’ll be tempted to exaggerate numbers, distort projections or perhaps cover up issues.
Every vendor wants to emphasize the strengths of their company and that is fair. It’s simple to highlight and pitch these strengths to the potential buyer. But it’s also extremely significant that no facts are twisted to cover any problems as this will probably lead to a lawsuit later. In reality there’s a way to utilize your organization weaknesses to your advantage. If you analyze these flaws, you will often discover they’re not business weaknesses but your (i.e. proprietor ) weaknesses. May be you are bad at search engine optimization or marketing or you simply take too much on your own and don’t delegate enough. Due to these flaws, company suffers in one or different areas. The best way to capitalize on these flaws is to locate a buyer who’s strong in the areas in which you’re weak. When you find such a purchaser, he is going to be ready to cover your company more than anyone else.
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Mistake 4: Getting Unrealistic Price Expectations
In”Nurturing an unrealistic value for your ecommerce company ,” my post last month, I addressed one of the biggest mistakes sellers make that will determine the fate whether their ecommerce business will sell. Many vendors have a preset idea about minimal price they wish to get from their enterprise and oftentimes that’s based on a gut feeling and not supported by any analysis. I often say to my seller clients”No offer is a lousy offer till you’ve got a better deal.” With a reasonable expectation increases your odds of getting your asking price and in case you’ve got a high yet realistic value with documentation to back this up, it is far better. You will see that using a realistic value is half of the negotiating battle.
Case Study: once I think of unrealistic seller expectations, I think of one deal where the company was trending down and vendor did not understand the value of price reduction. He wouldn’t listen to my advice to keep up with price reduction during the selling period that extended a few months and the departure of every month attracted the trailing 12-month profitability lower and lower. Finally we ended up taking the company out there and it took over a year before the seller could restore the profitability back to normal levels. We recorded the company back in the market with a realistic price and could market in a fairly short period while industry was trending up.
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Mistake 5: Unwillingness to Offer Seller Financing
I recommend my ecommerce company clients to provide seller financing. I have a following question in my evaluation poll:”Are you ready to consider around 35% owner financing for a qualified buyer?” Many vendors feel really uncomfortable carrying a note which will be repaid over a long time and rightfully so. But here’s a reality. You’re increasing your chance to offer your company and sell it fast by offering owner financing. It doesn’t need to be large and may be anywhere between 25 to 35 percent of your asking price. Normal duration is no more than 3 to 5 years and the interest rate is prime plus 2%. Here are the benefits of seller, or owner, financing.
- Owner financing can boost buyer confidence and make or break the deal. Buyer translate seller’s willingness to take a note for a indication that vendor believes in his enterprise.
- Owner financing reduces tax burden by deferring income to future years. Gain you make on a company is selling price minus the tax foundation for your company (i.e., what you invested when you began your company ) is taxed as a normal income in case you owned the company for less than a year (seldom a case for successful companies ) or in capital gains tax rate (15 percent ) for businesses held over a year. Many clever sellers moment the sale of their company in the 2nd half of the year so by the time they market their company, they are near the end of the year and they are able to defer taxes for the amount financed for the following year.
Owner financing can be protected by using any one or more of these mechanisms.
- File a lien on the ecommerce business property is registered with the secretary of state’s office.
- Require the purchaser to put up his property as additional security.
- Proprietor can also require the purchaser to personally guarantee the loan.
- Operator can require the buyer to take out a life insurance policy with owner for a beneficiary.
- Last but not least, buyer shouldn’t be permitted to market the company until the loan is completely repaid.