Here’s what eCommerce startup founders need to know before they sell their business

When the founder of an e-commerce company is looking to sell their business in the mid to long run, there are a few things they need to do first to make sure that they get the valuation they want and ensure a smooth process.

Understanding your business’ finances , knowing your customer base inside out and being able to demonstrate a clear trajectory for the future are all key to making the right sale to the right buyer, at the right time, at the desired valuation.

Knowing what you are worth

Buyers will want to see steady profitability over recent periods to get a sense of your business’ true valuation. They will look at your net profits over the last year and then apply a multiple in the range of 2x to 5x to determine a valuation. This means that if your startup made a net profit of £200,000 between April 2021 and April 2022, your business could be worth anywhere between £400,000 and £1mn! 

The other approach is to look at Seller Discretionary Earnings (SDE). It may sound less sexy but offers a more refined means of valuation, taking net profit (or loss) on the company tax return, plus interest expense, plus depreciation expense, plus amortisation expense (loan repayments), plus owner salary and perks. Factoring in all these variables gives a more accurate picture of how your business runs and the forces underlying its finances. Again, the final valuation is taken by applying a 2X to 5X multiple  – as with net profits.

A common mistake is looking at turnover as shorthand for valuation. This may be interesting to potential buyers but does not give enough information about expenses to account for risk into the future. When deciding when to sell, focus on your net profits, your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) and SDE.

Knowing your potential

The multiple your business commands has the potential to shoot up your valuation or to deflate it. There are several critical factors relevant to eCommerce businesses that attract high multiples that you should watch for:

Your customer base is key and being able to demonstrate the loyalty of your buyers will make your business a more attractive potential acquisition. This is easier to do as a digital business with the infrastructure already in place to monitor and analyse the habits of repeat customers. Your email and SMS subscriber lists tell a buyer how much work has already been put in  to establish foundations, and any data you can pull from social media or email automation campaigns will tell a story about the positioning of your business in the years to come.

Acquirers will also see value in a clear path for research and development. A steady trajectory of R&D is best evidenced with a clear product roadmap for the next 12-18 months, as well as any historical data to highlight how far you have already come. E-commerce businesses, again, have the tools available to show how different iterations of their site, service or product has developed over time.

Finally, against the pressures of the modern world, an eCommerce business that can demonstrate its commitment to ESG will be looked upon favourably by more sophisticated buyers that tend to pay higher multiples. Sustainability pledges actioned and evidenced will attract higher multiples, especially for strategic acquisitions. This will cover not only packaging but the materials used in production, your supply chain and logistics, and the last-mile delivery.

Knowing how to sell

When looking to sell or to get a valuation, it is possible to hire a broker but there are some downsides to this route. It might seem much easier for an eCommerce business to go through a broker to find the best deal, but occasionally enlisting a broker can come with high commission rates, fees and even a pre-sell retainer fee (which is sold as a project fee to get your business in shape to be sold if it isn’t already). 

These tools and considerations form the building blocks of knowing how and when to sell your eCommerce business in an increasingly complex and competitive market. A solid understanding of the fundamentals will ensure you get back all the value you have put in.