Online businesses are booming. In January 2019, ecommerce was responsible for 9% of Australia’s total retail sales. By the end of 2019, it’s expected that online businesses will experience revenue growth of over 15% (Statista).
It makes sense, then, that we are also seeing an increase in the number of online businesses for sale, some well established and some start-ups. A relatively new area, how does the sales process differ from a bricks-and-mortar business? Denise Hall of Xcllusive Business Sales says the sales process is quite similar.
“The fundamentals still apply; it’s only the business model that is different,” she says.
“There are two types of buyers: the first are the ‘financial buyers’, who make up about 95% of the market; the rest are ‘strategic buyers’.”
Establishing value
If you’re selling a start-up online business, it’s very hard for financial buyers to establish value if it has not yet been commercialised.
“That said, strategic buyers see value in terms of ‘buying time’ and maybe expertise,” said Denise. “So, the price they are prepared to pay is completely driven by how quickly they think they can commercialise it in their context.” When it comes to valuing an online business, Denise says the process is quite similar to valuing any business.
“It’s based on the profitability and where the quality/risk (multiple) resides, influenced by what’s happening in the marketplace.”
Quality/Risk Determination
And as with any business, the amount of stock being held is a key factor. Many online businesses use drop shopping – a supply chain management method which avoids having to hold stock.
“This is part of the quality/risk determination,” says Denise. “Firstly, is all the profit tied up in stock? This is a key consideration regardless of where the stock is being held. Then it’s a question of whether where it’s being held is the best option, in terms of cost, convenience and quality/timeliness of delivery.”
Selling an online business can be complicated and that’s where a good business broker can help.
“As with all businesses, you must first determine saleability and indicative price range via an appraisal initially. This is followed closely by the management of the sale process including, most importantly, the facilitation of the negotiation and deal structuring,” said Denise.
Having the right systems in place
“Once the appraisal is done, and if the pricing meets expectation, it’s time to explore the best way to go to market. If the pricing does not meet expectation, then this process will highlight what to do from a saleability perspective.”
Denise stressed the importance of getting the financials in order and keeping them as clean as possible (i.e. with no personal expenses). It is also crucial to have systems like Google analytics in place.
“This is very important. Google being Google means it is the one source of universal data to substantiate traffic claims that is perceived to be mostly trusted. SEO and backlinks are important only to the point where they drive the right traffic to the website and purchases are subsequently made. Having an aged domain may also help,” said Denise. It’s a similar story with Intellectual Property.
“And you should always include a Restraint of Trade in all Contracts of Sale for business.”
If you’re looking at selling or buying an online business, why not give Denise a call on (03) 8560 0524 or email her at [email protected]
Denise Hall is a Business Value Analyst with Xcllusive Business Sales. She has many years’ experience in helping people appraise and successfully sell their businesses so they can move on to their next venture or retirement. She is also a speaker and mentor.