There are many reasons why people decide to sell their Shopify or other e-commerce store — personal or professional. What they all have in common, though, are the worries that come with that decision:
• What if I can’t get a fair price?
• What if I can’t find a buyer?
These tips will help steer you through the valuation and marketing process of transitioning your business to a new owner.
There’s no point in starting negotiations unless you have a definite number that shows how much your business is worth — one that will pass muster with bankers, accountants and financial consultants, not just something you pulled out of the air.
There are three valuation methods used for e-commerce websites:
• Discounted cash flow analysis – make a projection based on future cash flows
• Asset value – subtract your liabilities (such as debts) from your assets (such as inventory)
• Multiple of revenue – multiply net profit times a specific number of years
The third way is the most common, so we’ll discuss that in a bit more detail.
First, you must figure out your net profit for the year. If your accountant provides you with a profit and loss statement, just look at that. If not, you’ll have to fill one out; free P&L templates are available on the internet.
Next, figure out the multiple — number of years the business can expect the same or similar net profit. This multiple is generally considered the amount of time it will take the new owner to make back their initial investment.
The multiple is dependent on a variety of factors which assign more or less risk to a business. So, the less risky your business, the higher your multiple. These factors include:
• Growth in net profits year-over-year shows less risk, therefore gives you a higher multiple
• Growth opportunities, though not guaranteed, should be considered part of the value of your business
• Type of business model — some are more risky than others
Doing the math, you can see that a higher multiple will result in a higher price for your business.
$100,000 net profit x2 multiple = $200,000 value of business
$100,000 net profit x3 multiple = $300,000 value of business
Your Shopify business should also be evaluated for its strength, sustainability and growth potential. It’s a good idea to get concrete numbers to support the following factors:
• Overview – age of business, business model, performance over the last 12 months
• Financials – current and projected growth rate, whether growth is trending up or down
• Customers – major traffic sources (such as Shopify), lifetime value of customers, customer engagement
• Operations – number of employees, value of inventory, list of suppliers
• Vertical – how the business performance compares to competitors, and how saturated is its niche
• Market — what price similar e-commerce businesses have sold for in the past and what’s currently on the market (check flippa.com for these sales records)
Here are some steps you can take to present the most favorable picture of your business.
• Because buyers are most interested in recent sales, wait — if you can — until sales are at their yearly peak. Or make extra efforts to increase sales for a few months.
• Organize and update your financial accounts, including receipts, categorized expenses, Shopify refunds or other adjustments, bank reconciliations and taxes. Buyers want to see accurate, summarized statements, not a big mess.
Here are some of your options.
• Exchange Marketplace is especially for selling Shopify businesses. You do have to meet some eligibility requirements, such as your account is in good standing and you don’t have active financing from Shopify Capital. Transferring the business and receiving payment are super simple.
• Flippa is widely regarded as the best platform for buying and selling online businesses. This is an auction format, so you’ll have to set a reserve price, auction time and so on. Verify that the buyer has placed their payment in the escrow account or sent it via Paypal before you transfer ownership.
• Website broker: If you’re not sure you’ve evaluated your business correctly, consult with a professional website broker. Brokers do charge a fee, but they can be a big help in maximizing your price and avoiding mistakes.
Whether you’ve got a bookkeeping backlog to clean up fast or need reliable P&L statements every month, Xendoo’s got you covered. Our e-commerce experts use Xero, the world-leading professional accounting software, to help get your business ready for a successful sale.
Xendoo’s flat rate packages are easily affordable by small businesses. Find out for yourself with a one month free trial.