Valuing an e-commerce business in this market (and advice on Vendor Finance)

[MrsV]

Hi. I don't post often, but I'm on here a lot, reading the nuggets of wisdom shared by the collective minds here and hoping I can get some outside perspectives on my situation. Sorry for a long post ...

I had a business for 20+ years that I lost with Covid - it was centred around two industries that were entirely closed for the best part of two years (I swing back to this point soon). Through that time, I worked really hard to turn what was a side gig - a passion, really - into a monetised business. It went from doing sales pre-pandemic of around $100,000 a year to $400,000 a year, and I managed to carve out a decent income for 2020, 21 and most of 2022.

This business sells products I created and manufactured in-house. It took years of study and trials to get the products right. Let's use supplements as an example - it would be like I had studied nutrition for a year (I know that would be a longer course, the course I did for my industry was one year), and instead of going to a contract manufacturer, I managed to develop my own formulas in house. These formulas have since gone on and been recognised with awards in the industry.

Here is my quandary. The packaging I need to sell my widgets comes from China (bottles, boxes etc.). Some of the other elements come from various areas overseas (we managed to cut out the middleman for many of our key components). On top of that, anybody selling online might know that Apple basically cut Meta off at the knees with their privacy laws. So marketing has been much more expensive and less effective than those good two+ years I was selling $400,000 plus direct to consumer.

For the past six months, I turned everything down - it got too complicated with China's constant shutdowns, and prices were in flux almost daily. The economy and people cutting back on spending on unnecessary things (my e-commerce product could be considered a luxury) obviously has a huge effect too.

I put my energy back into rebuilding my old business - a completely different model, more around a content model. At the time, I figured I could control costs better there, and a big part of me stubbornly didn't want to let 20+ years slip away, and I could let my e-commerce business tick along until China opened, the economy stabilised etc . My thought process was to work on getting this up and running while things stabilise economically etc., and swing back to my e-commerce business with a greater focus (I'm working about 15-20 hours on this to keep it all running along) as things got better. One of the two would surely work (I can't keep working on both, it's burning me out). I have to be honest though, I bit off more than I can chew and am on the verge of burn out again if I keep running the two businesses. But I can't yet ascertain if this old business has legs and will survive the post-Covid world.

I've now been approached by two possible purchasers - a VC group and somebody I've worked with previously who I respect. Both want me to sell 80% of my brand (e-commerce, direct to consumer). Both have yet to give a firm price as it is early days. Here is my quandary:

1) I had planned to work on building the figures back up before trying to sell it. Sales dropped from $400+ plus for two years running to 250K with everything going on. This year it could drop more - the bad economic news continues, so consumers aren't coming back in droves yet. How do you value a business in this situation?

2) How do you value a business that has five products with trademarks and IP - the things I created (they aren't as simple as designing a T-shirt and having it printed in China and then reselling it)? Surely it isn't as straightforward as just reselling items and looking at revenue and profit only?

3) One of the purchasers wants me to look at Vendor Finance and retain 20% ownership. Does anybody have experience here and advice?

I'm so conflicted - on the one hand, the person looking for vendor finance has the skills to take the brand to the next level, and I get to keep 20% of the business. They could just as easily run it to the ground too ...  On the other hand, there is no guarantee sales couldn't get worse with the economy the way it is. My business is worth probably half what it was a year ago. It could be worth less in 12 months if I wait.

Does anybody have any advice here with valuing the business and vendor financing? Or some thoughts overall? What would you do?

[SeattleCPA]

I don't know enough about your situation to give situation-specific comments. But a couple-three things to consider...

First, there are people who either as a hobby or a job or their "thing" talk to tons of small businesses every day almost, looking for firms they can buy or invest in. So the odds are pretty low this will turn into something.

Second, the valuation formulas for small businesses are really low. If your online venture's profits are $100K, for example, the standard formula says biz worth $200k to $500K and probably at the lower end of that.

Three, I always think if you can stay in the game for longer and grow the business, that's where you get your big bang for the buck.

[MrsV]

Thanks … helpful advice. I’d planned to stay in longer but think I’m just so burned out and watching similar businesses go broke, so I wonder if a bird in the hand (there’s been three or four similar businesses I respect close shop in the past six months. Another part of me says to take a month holiday and then get a plan to rebuild the business before selling. I have enough inventory to do a good six months this way. I know I’m not in a great state of mind and regret taking on so much, but am still aware enough to know this. People are looking for bargains in this current economic environment. Thanks again!

[MgoSam]

Hi,

I'm wondering how to get started? I am sales director for a B2B company and have gotten permission to setup a ecommerce site to sell products direct to consumer so long as it doesn't interfere with work hours and I price things such that our wholesale accounts won't get too upset (basically don't price them cheaply). I was going to use Shopify as one of our vendors will dropship for it and they have a ton of products that are popular in our industry.

[Michael in ABQ]

I've got some experience in this - having bought an ecommerce business about 18 months ago and grown it since then. https://forum.mrmoneymustache.com/entrepreneurship/buying-an-ecommerce-business-our-journey/

I've now been approached by two possible purchasers - a VC group and somebody I've worked with previously who I respect. Both want me to sell 80% of my brand (e-commerce, direct to consumer). Both have yet to give a firm price as it is early days. Here is my quandary:

1) I had planned to work on building the figures back up before trying to sell it. Sales dropped from $400+ plus for two years running to 250K with everything going on. This year it could drop more - the bad economic news continues, so consumers aren't coming back in droves yet. How do you value a business in this situation?

Ecommerce business are valued on a multiple of profit + the value of good saleable inventory. At your size, probably 2-2.5x. As you get larger (i.e. $1 million+ in profit/EBITDA) the multiples can get up to 4-5x. So if you generate $50k in profit (seller's discretionary earnings or EBITDA) you could expect a value of $100-125k + the value of your inventory. If you have $300k of inventory though, no reasonable buyer will pay full price for that. They'll be willing to buy 3-6 months of inventory at your landed cost but nothing that's expired, isn't selling well, damaged, etc.

2) How do you value a business that has five products with trademarks and IP - the things I created (they aren't as simple as designing a T-shirt and having it printed in China and then reselling it)? Surely it isn't as straightforward as just reselling items and looking at revenue and profit only?

IP is only worth what it can generate in profit. Trademarks and other IP is great, but in many cases it's basically table stakes for having a business. Unless you can show that trademark/IP/brand has significant value - i.e. you have hundreds of thousands of followers on social media because people love your brand so much - or your brand is getting thousands of searches a month on Google or Amazon. Those are tangible signs that a brand has value. And that really is the value of your business. Any proprietary formula for a supplement or consumable product (food, cosmetics, personal care, etc.) can be analyzed and copied. Unless you have some unique supply chain such as getting a rare and expensive ingredient - it can probably be copied closely enough that your customers wouldn't know the difference. 

3) One of the purchasers wants me to look at Vendor Finance and retain 20% ownership. Does anybody have experience here and advice?

I assume they meant seller financing. I.e. they value the business for $250k and buy 80% meaning you loan them that $200k and they pay it back over a few years (generally with interest). Vendor financing is when your supplier gives you 30 days or 60 days to pay for an order after it's been shipped or delivered.

I got 5% seller financing when I bought my business. It was mostly a show of good faith for the bank that lent us most of the money to buy the business. The seller has an incentive to not hand the buyer a falling knife because seller financing is generally unsecured. If the business fails, the seller isn't going to get paid. I would be very wary of accepting 80% seller financing. The norm is 10-20%, anything higher reflects it's a very risky deal and a normal lender won't touch it. It's great for the buyer as they would need to provide a personal guarantee for the whole loan value if they went to a bank and got an SBA loan. If they get you to finance everything and the business falls apart in a year they can basically walk away and you're left with nothing. 

I'm so conflicted - on the one hand, the person looking for vendor finance has the skills to take the brand to the next level, and I get to keep 20% of the business. They could just as easily run it to the ground too ...  On the other hand, there is no guarantee sales couldn't get worse with the economy the way it is. My business is worth probably half what it was a year ago. It could be worth less in 12 months if I wait.

Does anybody have any advice here with valuing the business and vendor financing? Or some thoughts overall? What would you do?

If your revenue is $250k and if you have great net margins of 25% that means your business is generating $50k of profit. Given that it's in decline and fairly small you would be lucky to get more than about 2x or $100k on the open market. If your margins are more average around 10-15% then you might only be able to sell this for $50k or so.


I'd recommend holding it and growing/stabilizing it. If you sell now, the buyer is going to have all the leverage because you're desperate.

[InterfaceLeader]

Re burnout, if your business is running a profit, and takes 20-30 hours a week, could you not hire someone part-time to manage it as an alternative to selling?

Obviously that would reduce your margins, at least in the short term, but could help you get through a down year and then focus on bringing the business back up to those higher turnovers? Assuming you can see it has a good chance of recovering.

[MrsV]

Thanks for all the advice guys. I really appreciate it. I’ve been considering the many great points …

I’m leaning toward my original plan (which most of you seemed to touch on in one way or another too)  ~ before being approached about selling out of the blue.

That is to ride this downturn out, cut costs, keep my brand solid throughout, and only look at escalating my advertising spend and hours working in this business to bring things back when the economy gets better. Or, I get a renewed energy for it all after stepping back a bit.

In the meantime, I’ll  continue working on my old businesses I lost to Covid to see if I can build something small there, or if I even want to actually do this business at all  (it could lead to a location neutral part time job when we fire if I can make it work the way I want to, but what I want and whether it will be successful are two different things and only doing the work will tell).

I’ll take a few more calls with these potential purchasers just to learn a bit about selling a business so that, when the time is right to sell (before I FIRE, in about three to four years) I’m not a total novice. But right now, I sense that they are looking for strong brands they can get at a bargain/distressed rate. I’ve worked too hard to go down that road yet.

Thanks again!

[webguy]

I have some experience in this area having sold half of my business a few years ago and the other half recently. I would start by saying that selling in your current situation is definitely not optimal. I would advise being intentional about the process in order to get the best return for all the hard work you put into it. I would advise checking out the following two books:
https://www.amazon.com/Before-Exit-Thought-Experiments-Entrepreneurs-ebook/dp/B07BN2KD1J
https://www.amazon.com/Built-Sell-Creating-Business-Without-ebook/dp/B004IYISQW (there's also a podcast of the same name which I'd highly recommend)

I would also advise running a process with a broker rather than only considering the two people who contacted you. If selling only 80% and keeping 20% then I'd be sure you're clear on the new owners expectations regarding your role. Often times they expect you to continue running the business for X number of years in exchange for keeping 20%, which it sounds like you may not want to do.

I would also strongly consider hiring someone in your business to help you. Not only does this make the business more valuable as it shows less dependence on you, but will allow you to put processes in place to free up more of your time to maximize it's value prior to selling. I was hesitant at first to do this, but after doing so was very glad I did.

[MrsV]

Thanks @webguy - some great advice.

I’m a bit overwhelmed still as I work on my two businesses and see what mud sticks. Perhaps I shouldn’t have tried to redeem my digital media one after Covid closed it down, but it made sense at the time, as inflation and currency pressures (our currency dropped and I purchase key ingredients and packaging in USD) were affecting my margins with my ecommerce business.

This eCommerce business, though … I’m really starting to value what I built from scratch - the loyal customers, the award-winning products I put my heart and soul into developing. Part of the downturn with the business is my lack of time, the rest is the current economy. It’s too much to sell for a steal in a downturn …

But downturns don’t last forever, so a longer term strategy (building it back up with a plan for a decent exit ~ outsourcing what I can so I’m not selling a job when the time to sell comes).

Thanks again to all that answered. I really needed completely objective feedback, and that’s what I got from you!