Is your online business ready to be sold?

For buyers' interest, it works exactly the other way around: The buyer wants to acquire the online store for the future results of that business. If the results increase up to the time of sale, it is credible that this trend will continue into the future. But if the results decline a bit, then a buyer will extend this trend into future results. Not surprisingly, the latter situation results in a lower average valuation.

So the sales moment of your online business is important. But what determines the ideal moment? To get a feel for this, look at external factors (the market) and internal factors (the company).

The (acquisition) market

External conditions are mainly determined by the economy (macro) and industry (meso). Here you have little or no influence, so this article will pay little further attention to this.

In a general sense, it can be said that the economy is currently doing well, cheap money is at hand and this is translating into a good number of acquisitions. Flip open the newspaper on an average day and you will see that acquisitions are the order of the day. The same is true for e-commerce: on acquisition platforms the supply is increasing, but the demand is greater. However, the economy is now showing the first signs of cooling down.

Conditions at the industry level are more difficult to predict: online retail is still growing impressively, but not as fast as in previous years. In addition, turnover is shifting between sales channels and the average online retailer seems to be becoming more dependent on sales platforms such as Bol.com and Amazon, over which they themselves have limited influence.

On average, the medium-short term outlook is still good, making this a good selling point in terms of external conditions.

The company to be sold

The internal conditions are mainly about the performance of your online business and here, of course, you do have influence. The rest of this article will focus on the circumstances that you can influence in order to maximize the revenue of the online business in case of a sale: getting your business ready for sale.

To this end, tax and legal tips will be shared and suggestions made for optimizing your online business value. Before going into the details, it is first important to realize that value is mainly determined by the (future) cash flow of an online business and by its risk profile. The value increasing tips in this article are therefore based on increasing the cash flow and decreasing the risk profile.

Because not everyone starts thinking about selling at the same time, the tips are divided into 3 time frames. If you start considering an exit early, it may be possible to implement all the tips and thus maximize the online business value prior to a sale. But what is more common is that a seller now has an urgent reason to offer the business. In that case, there are issues that can no longer be improved. Then start with the points that can still be implemented in the short term.

Long-term

(longer than 12 months)

1 - Many online businesses are started as sole proprietorships or partnerships. There are good reasons for this (such as start-up benefits), but at the time the online business is sold, these are not optimal tax structures. This is because (income) tax has to be paid on the profit when the business is sold.

If the seller has a Holding (B.V.) with an Operating Company (B.V.) under it in which the online business is housed, it can be transferred via a share transfer. In that case, the seller enjoys participation exemption: at that time, the profits end up in the seller's holding company without levies from the tax authorities.

Of course, the Tax Office does not accept that the legal form is changed for tax reasons shortly before the acquisition. You must take a period of 3 years into account here.

2 - To ensure the future cash flow of the online store, it is good to examine if there are any entry barriers that you can put up in your market. This will prevent new parties from easily entering this market and competing with your online business.

Having your own unique assortment is a good way to do this. For example, is it possible to acquire (regional) exclusive distribution rights for part of your assortment? Or perhaps you can develop your own brand or own product and add it to the assortment. Then also make sure that the intellectual property of this is well established, so that it can be sold along with it.

3 - The composition of traffic on your online business affects the risk profile: businesses that rely heavily on Google Ads have a higher dependency than online businesses that receive visitors mainly through organic, direct or newsletter sources. If the ratio between these channels can be improved, you lower the risk profile which contributes to the value of your online business.

Medium-term

(2 to 12 months)

1 - Overall, you can increase cash flow by increasing sales, cutting costs and/or optimizing your working capital (inventory, incoming and outgoing invoices).

Many entrepreneurs' main focus is on increasing sales. It is important to keep this focus even when the decision to sell has been made! Anything that can be added to (profitable) sales directly contributes to a higher value at the time of sale.

Cost is a second important element. Cost savings contribute almost 1-to-1 (adjusted for taxes) to cash flow. So take another look at expenses:

• Advertising (is optimization possible?)
• Product procurement (does changing suppliers yield anything?)
• Leases (when do they expire and are better terms possible?)
• Car expenses (are they really necessary?)
• Personnel (should you renew expiring contracts?)

And don't forget working capital. For many entrepreneurs, this is a trickier concept, but by optimizing inventory and keeping your cash in the business as long as possible, the net working capital can be optimized (so pay suppliers on time but not too early and conduct active accounts receivable management). The amount this releases contributes to the online business value.

2 - To lower the risk profile, look at the online business's dependencies, among other things: how dependent is the operation on you? Are you the only one who knows how everything works and deals with suppliers? To lower the risk profile, you can delegate this knowledge and tasks to staff or start documenting them well.

The same goes for staff, customers and suppliers: is the success of your online store too dependent on 1 person or 1 party? Then reduce it by looking for alternatives to spread risk.

3 - Are there any legal issues at play? Deal with those as soon as possible. This will cost one-time money, but buyers will likely assess the potential cost (even) higher and adjust their bids accordingly.

4 - Agreements with suppliers and customers are often not fixed. Make sure you record discount arrangements and make sure that they are transferable. Many suppliers have "change of control" clauses that prevent agreements from being transferred without question. Find this out and consider how you will deal with this in the sales process.

5 - Are existing employment contracts clear and in writing? A buyer has a duty to take over staff on at least the same terms. Even in the case of an asset transaction. Make sure buyer risks are limited.

6 - Get administration right. Online business administration is relatively simple, but lack of complete records limits a buyer's insight. This is a risk and will quickly lead to a lower sales price.

An important part of administration is accounting. If you can offer the online store with at least 1 year of clean figures, confirmed in an annual report by your accountant, you are ahead of the game. Some business owners do pay some private expenses from the business or take investments as expenses in 1 year when they can be written off. It sells easier when the numbers speak for themselves. Anything that needs to be explained is likely to be only partially assumed. And that lowers the expected acquisition price.

Short term

(up to 2 months)

1 - Make sure you have (created) complete and comprehensive documentation of the online business to be sold: think financial reports, a sales memorandum and a transfer document.

2 - With your accountant, prepare a pro forma income statement: these are expected sales and expenses for regular operations. For example, vendors can normalize here for one-time charges and capitalize certain costs to depreciate. Also look at the entrepreneurial salary here; you should adjust this to a customary entrepreneurial salary. If you pay yourself relatively much or too little, account for it in the pro forma income statement. For this, use at least the usual entrepreneur's salary scheme of the Tax Office.

3 - If you have multiple online businesses in a B.V. and only 1 of them is sold, prepare a pro forma income statement for just that activity and allocate actual sales and expenses.

4 - Finally, consider the legal form of the acquisition. As a sole proprietorship or partnership, you have no choice. This always involves an asset transaction. If you have a B.V., you can choose between an asset transaction and an equity transaction. There are tax differences depending on your situation.

Before the online business is put up for sale, you still have two final questions to answer: where to put your online business for sale and what is it worth? For this you can go to several parties, so familiarize yourself with the working methods and select the party you feel most comfortable with.

(This article by Businessforsale / WebshopOvername appeared in Twinkle Magazine edition March 2020: page 1, page 2 & page 3)