Congrats, you’ve made it! You’ve finally reached the pivotal stage of getting ready to sell the ecommerce brand you have painstakingly built from the ground up online or on Shopify.
You wouldn’t show your house to prospective buyers without cleaning up; your business is in need of the same, if not more, TLC to get it in shape before presenting it to buyers.
Any potential buyer will want to look through every nook and cranny to uncover skeletons and opportunities. Essentially, they’ll be looking to answer 2 questions:
- Should we buy this business?
- If we buy it, how much are we willing to pay?
Many of our customers have successfully gone through this intensive review process, so using our experience of advising them with their ecommerce bookkeeping and ecommerce accounting, here are our top tips to get your business ready for its close-up.
Step 1: How to find the right buyer for your DTC business
Finding the right buyer is crucial. Are you looking for a brand aggregator or an individual? Do you want to stay on in a key role or hand over the reins completely?
You’ll want to find someone who shares your vision about the brand and about your future role. Finding the ‘one’ can be more difficult than finding the right spouse….or therapist.
Once you have an idea of your ideal buyer, think like the enemy…uh, we mean buyer. Put yourself in the head of your perfect buyer. What would you want to know in their shoes? Anticipate their every move and have the answers readily available.
If you know another brand that has been successfully acquired by a similar buyer, speak to them first. The DTC world is very community-driven. Speaking to the right people can make your process much smoother and easier.
Step 2: How to present your ecommerce brand to the right buyers
1) Share your story and the opportunities
A huge arrow in your marketing quiver is your brand’s story, so don’t skimp on the details! Share your passion for your brand and make the buyer understand why you started it and your journey of how you got to where you are today. Include why your brand is valuable and any customer testimonials.
Remember—as an ecommerce operator—you are the brand.
Here the buyer will be assessing the key main risk—how reliant is the business on you and your proprietary knowledge? If the answer is very reliant, the risk is higher for the buyers which may impact their assessment. Creating processes in your business that can run successfully even if you’re not there, can increase the value of your brand.
2) Share why you’re selling
Be upfront as to exactly why you’re selling.
Maybe you want to exit ecommerce and start selling bubble tea on Santa Monica Pier or join an Ashram in India, or maybe you are looking for a partner and some more financial backing to get your brand to where you want it to be. Whatever it is, it’s part of your story.
3) Outline and understand your role moving forward
Your role is critical, not only in the success of the sale itself but also after. Outline exactly how you want to be involved. While you might have dreams of taking a long vacation, the buyer might expect you to stay on as an advisor so the brand doesn’t lose momentum during the transition period.
4) SWOT Analysis
Make life easier for the buyer by taking an objective look at your brand and carrying out your own SWOT analysis.
Step 3: How to get your ecommerce financials ready for exit
Financial documentation is KEY to getting your ecommerce brand ready for sale. Pulling sales reports from Shopify won’t be enough and neither will completely outdated financials on Quickbooks. This is where using AI accounting and AI bookkeeping will really help you.
Buyers want to see your actual numbers but they also want to see that you’ve had a process that actually works. This will instill a lot of confidence when assessing the stability and potential of your brand.
At a minimum, here is what any buyer will want to see in any due diligence process:
- Ecommerce-tailored profit & loss statement (P&L) for at least the last 3 years
- Ecommerce-tailored balance sheet for at least the last 3 years
- 12-week rolling cash flow statement
Read more about what the buyer will assess when reviewing your financials in the second blog of our series How to prepare your ecommerce business for sale: The financials
Step 4: How to prep your taxes for a sale
Have you ever thought about setting your brand up as a C Corp? It can have major benefits for you as you prepare to sell:
1) Investors are much more likely to invest
As a C Corp is a separate business entity from its owners, investors will be attracted by the personal legal liability protection it offers.
2) Sets you up to have the best tax impact for the future.
If you have held shares for a minimum of five years before the sale, you can get a 100% tax exemption on capital gains! It's known as a qualified small business stock (QBSB) exemption and it's been used by some of our larger brands. If this is something that is relevant, the sooner you get this set up the better because the five-year period doesn't start until the company officially becomes a C corp for tax purposes.
Read more in our blog Selling your business: The tax secret that can save you millions.
A C corp has a double layer of tax—one is corporate income tax to be paid by the company (currently 21% at the federal level) and the second is individual tax due when cash is distributed by the company to the shareholders generally taxed at up to 20%.
However, this may be the right choice for your growing brand if you plan to sell.
IMPORTANT: Converting to a C corp can cause a change to the tax entity and, thus, the EIN (your federal tax ID). This can cause a lot of friction for ecommerce since all of your payment processors and selling platforms are set up with your EIN.
A really useful way around this issue that we have seen used by our larger customers would be to structure the conversion as a tax-free reorganization. The result would be that your company would remain the same tax entity with the same EIN. It's worth speaking to a tax advisor to see if you can qualify.
Step 5: Get your traffic and channels up to speed
For DTC brands, another key factor that any buyer will assess is your site traffic (if you aren’t DTC and sell only on Amazon, your traffic shouldn’t be an issue).
The buyer will look at:
- Where are your customers coming from? Organic, paid marketing, or direct searches? For ecommerce brands, the average organic search conversion rate is 1.5-2.5%, the average conversion rate for Google Ads is 3-4%, and the average direct traffic conversion rate is 1-2%. The higher the organic rates, the more selling power you have.
- Google Analytics for useful info on customer acquisitions, new users and behavior.
- Your backlinks profile - The more quality backlinks you have, the more potential new customers are being driven to your site and the higher your conversion rate.
Make sure you are doing everything you can to make your business as attractive as possible to make not only the buyer’s experience easier, but also yours. Finaloop can help you ensure that your financials are up-to-date and 100% accurate. We’ve seen what it takes to close successful ecommerce sales with aggregators and with funds. If this is your long-term plan, get your financials set up today.
We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.