Business Exit Strategy
E-commerce business owners start their business with the objective of building a successful business and selling within a defined period of time. For such a business owner the exit strategy starts right at the beginning of the life of the business.
Every business needs a plan. A business plan isn’t just about the numbers (although they are, of course, vitally important). It should also include a clear picture of what the business will do, Many and how it will market its products or services and the competitive landscape. A business plan is also often required when raising finance. You should use the plan to monitor your progress against your objectives.
Types of Business Exit Strategy
There are multiple ways in which you could exit your business. You could sell to your management team, or a private buyer, be acquired by an existing business, or float the company on a stock exchange (an Initial Public Offering or “IPO”). There are also many “aggregators” that acquire and consolidate smaller 3rd party brands selling on Amazon and Shopify. Note the reference to brands.
Many dropshipping businesses do not have a brand as such as will sell other brands’ products. These businesses will have a much lower value than other that build their own brand. A further option is liquidation. Liquidation isn’t something that is reserved for businesses that are in trouble. If you have built up significant funds within your business, extracting those funds with a liquidation can be tax efficient. Another option is to pass the business on to a family member.
A key component in your plan are the financials – forecast profit and loss, balance sheet and, most importantly, cash flow. E-commerce businesses cash flows are different to most other businesses. They won’t have significant debtors (people who owe them money) because customers will pay for their purchase at checkout. But unlike traditional retailers there can still be a lag in receiving cash from sales as marketplaces will often hold funds and pay out on a two weekly cycle, or even monthly. Marketplaces and card processors will often also hold onto funds if there are concerns over the levels of refunds and chargebacks.
Inventory can also be a significant investment. Dropshippers don’t have any stock, but if you are not dropshipping and also selling internationally you may need to hold stock in multiple territories.
What Does A Saleable Business Look Like?
Think about the type of business you would like to buy. That is how you want your business to look when it comes to the time to exit. It should be profitable, have efficient processes, clean accounts and clearly presented management information which can be made available to interested parties. Perhaps most importantly, it should be capable of running without you.
What Are “Clean” Accounts
Clean accounts means that every balance sheet account should be regularly reconciled. Every profit and loss account should only contain those transactions that are appropriate to each category. For instance, the most basic and essential balance sheet reconciliation is the bank reconciliation. The bank balance in your balance sheet should reconcile to the actual bank balance.
It won’t necessarily agree to the bank statement, as there could be legitimate timing differences, but these should be identifiable and documented. Many business owners who attempt to maintain their own books will process transactions, but will not undertake any reconciliations. The reconciliation process ensures accounts are accurate.
Due diligence is the process that a buyer will go through in order to evaluate your business. It is an investigative research and assessment of a business. It is an intense and stressful processes, but it can go much more smoothly if you are prepared – if you have efficient processes that are well documented, and clean accounts. It will also include a review by a legal team who will review all agreements you have in place with third parties. It will also look at what Intellectual property the business has, and how it is protected.
Do I Need An Exit Plan If I Don’t Intend To Sell?
Your business is growing. It’s profitable. Your personal income and wealth is increasing. You don’t intend to sell. However what would happen if you, or someone close to you, developed health issues? Or you may receive an expected offer that is too good to refuse. It does happen. Aggregators are constantly on the look out for new acquisitions. With no exit plan you won’t be ready for these eventualities. In this respect it is a contingency plan.
Final Thoughts on Exit Planning
Exiting a business requires planning. Financials are a vital component in that plan and at Elver E-commerce Accountants we have the expertise to ensure your financials are in tip top condition and to guide you through the creation and execution of your plan. If you would like to know more please call us on 01942 725419.
If you’d like to discuss further how our eCommerce bookkeeping services could help your eCommerce business, please give us a call on 01942 725419 or enquire online.
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