Timing Critical Business Sale - Avoid Losses Before Things Worsen
In the competitive world of ecommerce, maintaining a thriving business is no easy feat. For Joe, owner of Joe's Bikes, a successful seller of electronic bikes, the journey from nothing to $20MM in revenues between 2018 and 2022 was a meteoric rise. However, the tide began to turn in 2024.
Joe's Bikes started experiencing increased competition and a decline in the effectiveness of Google advertising. The cost per click on Google for Joe's Bikes doubled, and traffic from Google halved due to changes in AI engines and Google's redesign. This resulted in a potential decline in revenues from $20MM to $10MM over the next year.
Facing these challenges, Joe set metrics for himself to predict the future health of his business, using clicks and cost per click from his Google campaign as leading indicators. However, as the situation worsened, Joe realised he needed to find leading indicators that would enable him to quickly pull his "ripcord" with enough time to get a "soft landing".
Recognising the need to act, Joe decided that selling the business was the best path forward. A buyer of Joe's business will be studying historical financials, which still look good for the business. Joe can sell his business for $5MM, which is $5MM more than the projected losses for the next year.
To help other ecommerce business owners in similar situations, it's essential to understand the signs that indicate it's time to sell. Here are five key strategies:
- Monitoring Financial Metrics Closely: Keep a close eye on profitability indicators such as Seller’s Discretionary Earnings (SDE), EBITDA, and revenue multiples. If these metrics decline and fall below industry multiples, the business may be losing investor value.
- Evaluating Key Ecommerce Performance KPIs: Declining sales conversion rates, reduced revenue per visitor, and a falling Customer Lifetime Value (CLTV) relative to Customer Acquisition Cost (CAC) may mean the business can no longer attract or retain customers profitably.
- Assessing Attempts to Improve Margins and Growth: After implementing strategies to reduce operating costs, improve trust signals, and minimise cart abandonment, if performance does not improve sustainably, it may be prudent to exit rather than incur further losses.
- Valuation Awareness: Understand how valuation multiples work and get a professional business valuation periodically. Selling while the business still commands a reasonable multiple helps preserve value.
- Signs to Act Quickly: Prolonged loss of market share or shrinking customer base, ongoing high churn rates despite retention efforts, marketing spend not generating acceptable returns, and owner burnout are signs that it may be time to sell.
In conclusion, a business owner should integrate financial valuation, ecommerce KPIs, and the effectiveness of turnaround efforts to identify when continuing operations leads to diminishing value and increased losses. Selling at a point where demand still exists and before major decline accelerates is essential to preserve business worth. For Joe, selling his business now was the best decision to protect his interests and those of his shareholders, ensuring a reasonable return on their investment.
[1] Business Valuation Resources. (n.d.). Selling a struggling ecommerce business. [2] Forbes. (2021, August 27). 10 signs it's time to sell your business. [3] Shopify. (n.d.). Ecommerce KPIs: The complete list and how to measure them. [4] Neil Patel. (n.d.). The complete guide to customer lifetime value (CLTV). [5] HubSpot. (n.d.). Ecommerce metrics: The ultimate guide.
- The competitive ecommerce landscape requires constant vigilance for business owners like Joe, who faced increased competition and a drop in Google advertising effectiveness, posing a threat to the long-term success of Joe's Bikes.
- To navigate these challenges, Joe knew he needed strong leading indicators to forecast his business's future health, eventually recognizing the need to find indicators that would allow him to act swiftly and mitigate potential losses.
- In response to these issues, Joe decided to evaluate the possibility of selling his business, understanding that a potential buyer would be scrutinizing historical financials but finding value in the current $5MM selling price, superior to the projected losses for the following year.
- For entrepreneurs experiencing similar predicaments, it's crucial to keep an eye on financial metrics, ecommerce performance KPIs, and the outcomes of efforts to enhance margins and stimulate growth, as signs of declining performance may warrant an exit strategy to protect both the business and its investors.
- Strategies to identify the right moment to sell include close monitoring of financial indicators, evaluating ecommerce KPIs, assessing attempts to improve margins and growth, understanding valuation multiples, and watching out for signs such as a shrinking customer base, high churn rates, and marketing expenditures not generating adequate returns.
- By selling his business proactively, Joe safeguarded his interests and those of his shareholders, ensuring a reasonable return on their investment, demonstrating that understanding when to sell is critical to preserving business worth.
