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How To Develop An Exit Strategy For Ecommerce Sellers

By November 10, 2022 No Comments

We’re here to talk exit strategy for startups! Every entrepreneur should have an exit plan on their radar. However, many business owners don’t think about creating an exit plan until they’re preparing to leave.

This is not ideal because a good exit strategy helps you maximize the value of your company ahead of a sale. By starting your planning well in advance, you can help ensure your company is desirable, even without you, while also creating a clear path to attaining the financial freedom you’ll need post-exit.

But first, let’s dive into…

What is an exit strategy in business?

Let’s start out with the definition of exit strategy: it’s a plan to either end a business, or better yet, progress it to meeting long-term goals. Long-term goals of a business exit strategy might include reaching financial sustainability, introducing new leadership, or re-thinking the business’ direction.

Long story short – if you’re an entrepreneur, and you’re sitting here asking, “what is an exit strategy in business?” – it’s a necessary plan to protect your financial future. Why is that? In order to develop an exit strategy, you have to conduct a pretty in-depth financial analysis. That way, you know how high your business should be valued.

The funny thing about a business exit strategy, though, is it needs to be in place before you exit. Not during your exit. Not after your exit. Before you exit.

Your exit strategy plays a key role in determining the strategic direction for your company. Will you sell and move on, have an earn out period, or become an employee of the company after the sale? By not proactively planning an exit strategy, you and your heirs or successors may find that future options are limited.

That’s why at Acuity, our ecommerce practice helps our clients in two big ways.

The first is management accounting. This is essential for knowing where things stand on a daily, weekly, and/or monthly basis.

The second is setting them up to have a great business exit strategy by providing them with high level guidance, and introducing them to brokers, and providing them with financial reports to share with a broker/buyer.

Exit strategy for startups in ecommerce

Ecommerce businesses are valued based on either: a multiple of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) or Seller Discretionary Earnings (SDE), where businesses are valued on a multiple of the annual revenue.

It’s a given that as a business owner, you know that your money is too hard-earned to leave any of it behind. But in the ecommerce realm, it’s painfully common for business owners to try to sell their startup without an exit strategy.

And you already know what that means…you’re selling yourself short. Kind of ironic as a seller, huh?

So, it’s not a secret at this point that ecommerce sellers need to know what their plan is in an exit. We recommend creating a plan, not only for your exit, but for how you will spend and save funds. Take a vacation, invest in another business, invest in your retirement.

Another thing to consider is your mental health. Many ecommerce sellers talk with a therapist when selling their business. A lot of times, it either feels like your newborn baby or a piece of your identity, and talking with a professional helps to manage the transition.

For more insight into exit strategy for startups in ecommerce, check out the clip below from our recent ecommerce panel discussion. Tune in for:

3 exit strategies you need to be executing to get the most return and largest multiple on your ecommerce startup:

  1. You need to practice practice accrual-based accounting
  2. You need a unique product
  3. You need a solid marketing campaign and social following

Insights and tips into exit strategy for startups from ecommerce entrepreneurs who have experience with exiting a business:

  • More people are signing up for A2X for good data and good accounting practices to prepare for an exit.
  • You need a buyer who wants to purchase your business.
  • You need to be prepared for an interested purchaser to approach you, with quality data and accounting.

Video Transcript

Scott Scharf: You know, one of the things there…from Acuity and our e-commerce practice, is to really help our clients not only just do management accounting, so they know where things stand on a daily, weekly, monthly basis, but it’s helping them have a great exit.

So I’ve been talking to our team about a great book called The EXITpreneur’s Playbook by Joe Valley, one of the brokers that we work with. He does a great job saying, “Here are the 3 things you need to do to get the most return and the largest multiple on your business.”

And the first is accrual-based accounting. OK so you’ve got a whole bunch of sellers going, ‘Oh yeah, I should probably do that.’ And now they do because they’re going to sell in a year or two, or whatever time frame.

The second key thing that he recommends is that you have to have a unique product. You can’t just be a reseller of other people’s stuff, because you’re just doing it faster and somebody else can take over. You need to have some of your own unique products, whether it’s private-label or your own design.

And then the last thing is you have to have a solid marketing campaign and really a social following. You have to have that organic ability to pull people in. Um, Jamie, what are you seeing? Are sellers starting to catch on? Are more people signing up for A2X and going, oh yeah… I do need good data…I do need good accounting?

Jamie Shulman: Yeah, it’s interesting. I was just thinking as you were saying that. Am I right to say that everyone sitting here by coincidence has had an exit?

Jermaine Brown: I didn’t have an exit.

Jamie Shulman: Okay. Well, you’re exiting. I would say that these merchants/these sellers – absolutely – we’re seeing more direct discussion around that. They’re coming to us saying, “I understand that I should be getting my books in order because I should be thinking about an exit.”

I don’t know whether they’re reading Joe Valley’s book or whether they’re being more thoughtful about it. I share that view. I know people have asked me about selling Hubdoc and I often say to them, “We didn’t sell Hubdoc…Hubdoc was purchased,” meaning that you need a buyer who wants to buy you. You can’t just go out and think I’m just gonna sell my business. And so the idea of being prepared for when a purchaser emerges makes a ton of sense.

And so we are seeing a lot of that…merchants who are coming in specifically mentioning exits. Interestingly…I think I might have told someone recently this story… which is that we now find ourselves working a lot with aggregators who are rolling up a number of brands or sellers. They’re in the news a lot because they raise a lot of capital, and they buy up these companies.

We see businesses signing up for A2X and just adding, you know, dozens and dozens of subscriptions and we’re like, “who is this…it doesn’t seem like an accounting firm that’s magically got hundreds of clients.” And it turns out, it’s these aggregators.

And so we’ve spoken to a number of them and one of the themes we’ve heard is that when they go to do due diligence, and they’re doing the research on these companies before they make an offer to buy them, they learn that it’s not proper accrual-based accounting. And, oftentimes, it’s as simple as they’re just booking deposits from say, Shopify or Amazon from their bank account straight into their GLS sales.

And it turns out that it was net sales and their sales were actually quite a bit higher, but they weren’t realizing that sales tax and refunds and returns and fees and a whole bunch of things had come off of it. And so these aggregators, a number of them said to us that we have to inform the entrepreneur, that you actually are not a $2 million business, you’re a $3 million business because you’re not accounting for it correctly.

It’s something as simple as that. And to which the entrepreneur often then says, “well then I want you to buy me for more money because I’m a bigger business.” So we are seeing that, even in a simple example like that, people are recognizing this. And it might be in some ways from Joe’s book.

Scott Scharf: Yeah, that’s great. Well, Marketplace Pulse today – their newsletter today – showed the amount of VC funds in aggregators, specifically Amazon aggregators. And it went just like this and then it plummeted down.

So we are seeing that the money’s not only not being invested, it’s being pulled back. I know of one group that the VC has come in and taken over and they’re running the business because they’re not getting the returns they want. So there’s just a lot going on.

The other thing, talking with Joe Valley and a few other people, last year was just kind of the heyday and people were getting between 3X and 5X multipliers on their SDE (seller discretionary earnings) or better in some cases. And now, it’s two to four multiples come down across the board, whether it’s an aggregator or somebody else.

So there’s just a lot of interesting stuff going on.

Acuity CTO Scott Scharf moderated this ecommerce panel at AcuityCon 2022. The panel featured:

More Resources: Exit Strategy For Startups

Check out The EXITpreneur’s Playbook by Joe Valley for more exit strategies on how to successfully sell your ecommerce startup for the most return.

Interested in hearing more from this panel of ecommerce entrepreneurs? Watch the full panel discussion on our ecommerce YouTube channel.

Need help building your ecommerce startup exit strategies?

We’re always ready to help! Learn more about our ecommerce practice on our website.

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