Economy Improving for Promotion Ecommerce Firms, Expert Says

Ecommerce merchants run companies that might be bought and sold. There’s a market for these companies and Mike Handelsman is an authority in the buying and selling of them. He’s general manager for BizBuySell.com, a leading business-for-sale marketplace, and he talked with us about it.

Practical eCommerce: What are the current market conditions to sell an ecommerce business?

Mike Handelsman:“It’s still a very challenging business. Since about mid-2008, it’s been a very hard environment for small companies generally which impacted the market for buying and selling small businesses. 2009 was a very challenging year, but the business is improving. We’ve seen a turnaround in the number of companies available and the number of businesses that have offered in the last couple of quarters. The principal reason that is happening is because sellers are now decreasing prices to be sure their expectations for what their business is worth is fulfilling the expectations of possible buyers. So, today I would say it’s a buyers’ market and it’s a marketplace that has been slow but coming back.”

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PeC: who would likely be a buyer for a small- to midsize ecommerce venture?

Handelsman:“There are probably two potential buyers. The first would be someone who has been laid off or abandoned his or her corporate jobs. The other is probably women and men which are already owners of small ecommerce businesses since it’s generally very scalable. So, for people that have a small business owner who’s built a successful ecommerce business and understands the fundamentals of customer acquisition and search engine optimization and ecommerce , they often look to expand to another category or comparable business where they can leverage their accounts somewhere else.”

PeC: Which are the multiples of cash flow, or multiples of earnings, that you see with ecommerce providers, and is there a trend?

Handelsman: “Yes. When business agents close a sale, they will report that transaction to BizBuySell, then we collect that information and aggregate it to the purposes of helping small businesses owners understand the market.

“In the past 12 months, we had about 140 businesses that were sold on our website that fall in the web business category generally. The median multiple of gross earnings or earnings that those businesses sold for was 0.60 and the median cash flow multiplier those businesses sold for was 1.85. “Cash flow” can also be referred to as seller’s discretionary earnings, or the income that comes from the business that could cover the owner or is retained in the firm.”

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PeC: Are there any lenders interested in funding an ecommerce company?

Handelsman:“Funding is one of the bigger challenges in the business at this time. While there are a good deal of buyers out there, they don’t always have access to small business loans to have a business. Nowadays, it is almost required a small business owner who wishes to market will need to give seller financing as part of the transaction to aid the purchaser be able to finance the organization.”

PeC: On BizBuySell.com, there is a class for retail businesses and a course for Internet businesses. Can an internet retail store be in the retail course or would it be in the internet category?

Handelsman:“It’s up to the vendor to choose up to two classes to record the company available. For people selling an online ecommerce business, I recommend that they record it in both categories.”

PeC: Do grocery stores control higher prices than strictly online stores?

Handelsman:“it is difficult to say, because a lot of business evaluation is based on the specifics of this enterprise. But in general I would say that ecommerce companies that are clearly online frequently have greater margin arrangements since they have less funding requirements, they don’t pay rent, usually those kinds of things. So, I’d say generally, if these organizations are running with higher profits and less overhead, then they generally will command better prices and better multiples.”

PeC: What are some of the factors a buyer should be looking for?

Handelsman:“We generally inform buyers that they need to be searching for a business that suits their special skills, they have the foundation or skills to add value to, which satisfies their personal income goals. Start searching for companies that will excite you and interest you, because it’s a really long day and it’s a tricky job managing your own small business. So you desire to get excited and very interested in the course that you’re working in.

“Secondly, you need skills which will lend themselves to succeed. Another element is unquestionably private income objective. So, potential customers will want to [establish] income ambitions and search for businesses that throw off a cash flow that’s very likely to fulfill those private income objectives.

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“Additionally, assess at least a couple of businesses that meet your criteria to understand the differences between how firms operate, the owner that you’re buying from, and how well you have the ability to work through the transition with this person.”

PeC: Can you give us some examples of current ecommerce businesses which have sold?

Handelsman:“Since the start of 2010, some of the cases are a client services business-to-consumer company that has been a market ecommerce website with about $125,000 a year in cash flow. It had an asking price of $395,000 and sold for $325,000.

“In March, we had an internet content system with 10 million unique visitors a month that had an asking price of $900,000 and was apparently sold for $1 million. It was generating about $0.5 million of annual revenue and about $0.25 million in annual cash flow.

“We had an easy-to-operate, drop ship ecommerce firm that has been generating about $26,000 annually in revenue and $2,500 a year in cash flow that sold for $14,000. Thus, we run the gamut from tiny companies to much larger companies.”

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PeC: Imagine if merchants do right now if they are contemplating selling their businesses in the future?

Handelsman:“The most important element is to start preparing now, even if their sale is a couple years away. You can’t start too early. People ought to be managing their business, considering what they’d want to establish if they were going to consider buying it, and some of the real principles are strong, stable and growing cash flow and earnings. If you see a potential buyer, you will need to be able to demonstrate a history of growing income and growing profits and a very stable set of numbers.

“In addition, individuals which are contemplating selling should have well documented financials and historicals, especially things like website traffic or any other information that’s pertinent to the enterprise. Buyers are usually turned off whenever they look at a business where there’s not a solid history of listed amounts or financials that they can look at.

“The other thing that’s actually important is to be sure the business can function without them, especially in the ecommerce course. Many small business owners kind of behavior the business largely independently and thus the business needs to be in a position when someone new comes in, they can feel confident that they can take that business over and run it successfully as the existing owner.”

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PeC: Tell us more about BizBuySell.com.

Handelsman:“BizBuySell.com has been around for 16 years now and we are the biggest business-for-sale marketplace on earth. We have about 45,000 businesses available on the web site now and we have an audience of about three-quarters of a million unique visitors every month taking a look at companies available. We bring together buyers and sellers and then we let them seep in an offline world, away from us. We’re not a broker. We don’t take a percentage off the selling price. We are really only a marketplace that brings buyers and sellers together.

“Along with the current business-for-sale marketplace that we have on BizBuySell, we also have one of the Internet’s largest franchise directories where people can explore opening a new franchise business, and we have a valuation report that might allow buyers and sellers to purchase data to comprehend the status of the market — the valuation multiples in their private sector.”

PeC: Anything else on your mind for our readers?

Handelsman:“If you’ve been sitting on the sidelines for the last year or two since you’d love to sell during a larger market, times are changing and things are moving. Prices continue to be marginally lower on the prized multiple side, but you will find an excellent variety of possible buyers in the business.

“So, if you want to advertise, I think it’s a fantastic time to look at getting back in the marketplace. Prepare your company to be sure you’re putting your best foot forward, and give potential buyers the confidence they may be successful handling your organization in the future.”

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