How to Sell a Business: The Open-Book Sale of My $600K Store (With Complete Financials)

How to Sell a Business: The Open-Book Sale of My $600K Store (With Complete Financials)

I’m selling one of my stores, TrollingMotors.net, and will be using a radically different approach.

Instead of keeping the details private, I’ll be sharing all the key data, including financials and traffic stats. And forget business brokers or Flippa; I’ll be selling the site exclusively via the blog.

Even the auction will be turned upside down. The price will start high – at $185,000 – and will drop every few days by $10,000 until someone buys it.

I’m also offering a 5% friendly bribe referral commission – possibly totaling more than $9,000 – to anyone who connects me to a buyer, even if it’s through a Tweet or Facebook share.

So definitely not your run-of-the-mill store sale.

I’m doing this for two reasons. First, I want to challenge the status quo notions regarding selling a store. Do you really need a third party involved, or is it possible to sell successfully on an independent platform? Second, I want to offer a look inside the process of selling an eCommerce store – the details of which are usually very hush hush.

I have no idea how this will pan out. It could be a huge flop or a massive success. Regardless, I’m excited to take the ride alongside you.

Store Overview

For those who aren’t familiar with it, TrollingMotors.net is a drop shipping eCommerce store I started three years ago. It specializes in (surprise!) trolling motors, which are electric fishing motors designed to provide more precise steering and navigation than large gas-powered motors.

Our customers are predominately male, aged 40 to 60, who love fishing and are looking for a quality trolling motor for their (often expensive) boat. While motors can be found for as little as $100, TrollingMotors.net  focuses primarily on high-end models ($700 to $2,000) targeted for customers with larger boats in the 12′ to 20′ range.

TMScreenshot

Financials

Let’s dive in to what everyone is most interested in: the financials. Listed below are the financials for TrollingMotors.net, both annually for the last four years and a quarterly breakdown of 2013:

Reading on Your Phone?  Having a hard time reading the charts? Here are the high points: 2013 revenues of $623,022. Gross profits of $72,784. Bottom-line profits of $65,042. Revenue growth of +50% in 2012 and 2013. Income growth of 40%+ in 2012 and 2013.

Four-Year-IS

 

2013-IS

Income Statement Footnotes

(1)(2)(3) TrollingMotors.net shared a lot of services with my other businesses, so these were expenses covered by the parent company. As such, I’ve listed estimated expenses for services like telephone, hosting and a help desk to replicate what those historical expenses would be.

(4) This is the cash back received from my credit card when paying for goods from suppliers, effectively reducing the cost of the products.

Thoughts on the Financials

As you can see, growth for TrollingMotors.net has been extremely healthy with revenue growing +50%  in the last two years and earnings growing 40% or more in each of the same periods. Most drop shipping businesses have smaller margins, and TrollingMotors.net is no exception: Its gross margins are around 12%. But with the significant revenue generated by the company, it will earn about $65,000 for 2013.

I invested a significant amount in SEO and web design the first year to get TrollingMotors.net off the ground, and total expenses for 2010 were nearly $25,000. But since then, operational expenses have been fairly low. As 100% of the products sold are drop shipped, there’s very little overhead to worry about.

The trolling motor niche is seasonal, with demand peaking in the spring and summer and dropping off in the fall and winter months.

New Supplier Discount

Recently one of our suppliers who didn’t realize we were selling approached us about a partnership that would offer better pricing. In October, we met with them in Vegas and secured a deal (transferable to the new buyer) that will lower our costs in 2014 by about $5,000. This one pricing change alone should add $5,000 directly to the bottom line for 2014, raising profits almost 8%.

Employee Wages/Automated Business

Currently, my operations manager, Pat, runs the day-to-day operations. He works part time and spends up to two hours per day running the operations of TrollingMotors.net. For more details on exactly what he does, please see the section on Operational Responsibilities farther down.

When calculating seller’s discretionary earnings (i.e., income) for small eCommerce businesses of this size, wages for one person (often the owner) are usually not deducted. Given that Pat and my combined operational workload for the business is less than 15 hours per week, I didn’t include any labor costs per this normal exclusion in calculating seller’s discretionary income.

However, I realize that most people (myself included if I were you!) would want to see the financials including payments to an employee. That’s why I’ve listed below how paying an employee would impact the bottom line. This is the anticipated cash flow assuming someone else was running the day-to-day operations of the business, effectively putting the operational aspects of the business on complete autopilot.

Salary-Estimate

Footnote:

(1) In sensitivity to Pat, I haven’t included his actual compensation numbers in this post. While these actual salary figures are available in the full due-diligence packet (see details below), the calculations assume a $50,000/year salaried employee working 2 hours per day (inclusive of tax costs to the employer).

 

Traffic and Conversion

Traffic has been consistent throughout 2013, apart from the few days where I accidentally disabled the the Google Analytics plug-in. Again, please note that the trolling motors niche is seasonal, with traffic peaking in the summer months and falling off in the fall and winter. Over the last year, the site has seen more than 185,000 total visits and nearly 140,000 unique visitors. The charts below represent data for the last year, from 11/1/12 to 10/31/2013.

 

Total-Traffic

Key-Stats

Top Organic Keywords

Top-Keywords

 

Traffic That Drives Revenue

Direct traffic (people typing TrollingMotors.net directly into the browser address bar) is the store’s leading source of business and generated 39.2% of the store’s revenue in the last year, totaling approximately $232,000 in sales.

Of this $232,000 in direct traffic sales, about half was made up from orders placed over the phone. The other half was revenue generated from people actively searching for the TrollingMotors.net brand online and ordering from our website.

Approximately 20% to 25% of TrollingMotors.net orders are placed over the phone.

Revenue-by-Source

 

Brand Reputation

Over the last few years, we’ve managed to build up some brand reputation with TrollingMotors.net. As mentioned earlier, a significant portion of our revenue comes from people actively searching for us. If you look at a list of the top 10 organic keywords that drive traffic, you’ll find “TrollingMotors.net” is #4 on the list.

And this brand reputation is growing. Over the last year, branded searches for the name “TrollingMotors.net” are up about 25%.

Conversion Rates

Because TrollingMotors.net focuses on high-end trolling motors, many costing $1,000 or more, the conversion rate is on the low end for eCommerce stores. Over the last year, the average conversion rate was 0.46%, which increases slightly in the busy season and drops off in the fall and winter.

Revenues listed in the graph below won’t match up with official financials, as the data below are for the last 12 months (Nov 2012 to Oct 2013) and because of the inevitable discrepancies between analytics revenue reports and actual bank revenue reports.

Conversion-Rate

 

 Google’s Penguin Update

As I’ve publicly written about before, the site was impacted by Google’s Penguin update and lost a significant amount of its organic traffic from Google. This penalty was primarily due to over-optimized anchor text that had been built by a SEO firm hired to help market the company. This SEO firm was employed for six months in the second half of 2010. Since then, they have not done any work on the site.

After the penalty, we did a backlink audit and reached out to linking sites that had questionable, spammy or over-optimized text links pointing to us and asked to have them removed. We were successful in removing a number of these links. We also made a number of changes to the site itself, such as removing highly optimized site-wide footer links, to help address the penalty.

Since the penalty, we’ve worked to build new quality links and have completely redesigned our website (see the case study here) to offer the most relevant and useful information regarding trolling motors online. While this doesn’t directly address the issues that caused the Penguin penalty, it is very much in line with Google’s desire to rank quality, highly educational websites.

Traffic Since Penguin

When comparing the first full two months immediately proceeding the Penguin penalty (May and June 2012) with the same period in 2013, organic traffic from Google had increased by more than 95%, as you can see in the chart below:

 

Improvements Since Penguin

Increase-Notes

Current organic traffic from Google isn’t as high as it was pre-Penguin. But the efforts taken to address the root problems of Penguin have helped significantly. Traffic year-over-year is up significantly and, more importantly, organic traffic over the last year has been consistent, despite additional updates to the Penguin algorithm by Google.

Most importantly, Penguin hasn’t slowed earnings growth. Earnings are on track to grow more than 44% in 2013 from 2012 levels.

 

Operational Responsibilities – Two Hours Per Day

It takes approximately two hours a day to run TrollingMotors.net. Pat, my sales manager, handles all the operations for TrollingMotors.net and my other store, Right Channel Radios, working just four hours each day. And of that four-hour chunk of time, TrollingMotors.net operations take up about half of the workload.

But it sure would be easy to underestimate work times when selling a website, wouldn’t it? I mean, how GOOD does a two-hour work day sound when trying to sell a store? I’d certainly be suspicious of a seller’s (er, my!) motives and estimation abilities.

That’s why I put together some hard data on how much work is involved to run day-to-day operations so you can make the judgment call. The metrics below are averages for the last year, ending 10/31/2013:

Operational Averages

Telephones

The largest operational responsibility is talking with customers on the phones. In 2013, our phone lines were open only from 8:30 a.m. to 12:30 p.m. MST Monday through Friday, with callers being sent to voicemail outside of these times. The average call duration was slightly over 8 minutes and we get an average of about 4 calls and/or voicemails per day. Over the last 12 months, approximately 20% of our orders have been placed by phone.

Email Ticket Volume

Answering emails is the second most time-consuming responsibility, next to the phones. We have historically used Zendesk to manage our customer email interactions. On average, we get about 3 new email tickets per business day from customers. Some are replies to automated order follow-ups that can be solved in 30 seconds. Others are return requests or complaints about a damaged shipment. But overall, average email volumes are extremely manageable.

Automated Inventory Syncing & Routing

One of the biggest pains of drop shipping is keeping inventory in sync with multiple suppliers and not selling out-of-stock items. If this isn’t handled well, it can be a HUGE hassle of running a drop shipping store.

This isn’t something we’ve had to worry about with TrollingMotors.net. The business is connected to both of our suppliers via a live data feed (facilitated by eCommHub) so that inventory status for items matches our suppliers real-time availability. Our eCommHub integration also routes many orders to suppliers, collects tracking information from supplier websites and automatically sends notifications to customers when items ship.  These systems eliminate a great deal of manual work.

Other Responsibilities

Other operational responsibilities include:

  • Updating the website. The bulk of this usually occurs in fall and winter, when new motors are released and old ones are discontinued. One of the benefits of the trolling motors niche is that model turnover is fairly low. But there are usually a few dozen products that change and need to be updated each year.
  • Troubleshooting order routing and tracking numbers. While eCommHub automates routing orders and sending tracking numbers in most cases, there are some instances when this needs to be done manually.

Business Advantages

So why would TrollingMotors.net be a good purchase? There are a number of advantages to the business:

Strong Historical Growth: The business has experienced strong, consistent growth over the last three years, both in top-line revenue and operating income.

The Premium Site in the Space: TrollingMotors.net is, as we’re often told by our customers, the BEST resource available online for learning about trolling motors. The site boasts an impressive library of educational articles, informative category pages and the most detailed motor product pages anywhere online.

100% Drop Shipped & Location Independent: Everything sold on the site is drop shipped. Most of our products are carried by multiple suppliers, which adds a layer of redundancy and increased availability to our sourcing and limits the number of orders we can’t fill. Due to the drop shipping model, it’s possible to run the business from anywhere on the planet. You don’t have to worry about purchasing inventory, dealing with fulfillment or managing warehouse employees.

Defensible MAP Pricing: Most of the high-end motors we sell (which make up the majority of our revenue) have strict minimum advertised pricing (MAP) enforced by the manufacturer. This helps keep the market viable and prevents the profit-destroying price wars that are common in other niches.

Highly Automated & Minimal Workload: Much of the tedious work involved with running a drop shipping business (inventory syncing, sending out tracking notifications, etc.) is fully automated. The other daily tasks, including answering the phones and replying to customer emails, take just a few hours a day.

Busy Season Right Around the Corner: The trolling motor niche is very seasonal, with demand beginning to grow in January and spiking in the spring. Assuming the sale closes in mid-January as scheduled, the new owner will taking over as peak earning season begins to ramp up.

Includes Training & Documented Systems: Most of the recurring tasks in the business (such as placing orders, editing orders, issuing refunds and handling returns) are documented and systemized. This makes it MUCH easier for a new owner to get up to speed and to train staff members. Plus, the sales price includes a two-month personal training period for the new owner. Full details of this are outlined in the full sales prospectus (see below).

Bidding Process

The sale will take the form of a Dutch auction. The price will start at $185,000 and will decrease by $10,000 at scheduled intervals until someone places a bid. The first party to bid will win the auction.

The timeline for the auction and its subsequent price drops are as follows:

Bid-timeline

The Bid Multiple

Included in the chart above is a multiple of seller’s discretionary earnings (SDE) that each bid represents. Small eCommerce businesses like this usually sell for between 2.0x and 3.0x SDE, so I’d be very surprised if the price falls to the lower levels or even to the reserve price of $105,000.

But I started it at a reasonable open and an aggressively low reserve price to make this process exciting for everyone involved. It should be nerve racking interesting to see how the bidding process pans out!

While the bid amount will take a dollar form, it will actually be a bid on the multiple to be paid on final 2013 seller’s discretionary earnings and adjusted in early January 2014.  If earnings for the fourth quarter end up lower than anticipated, the final sales price will be adjusted downward appropriately. This can sound a bit confusing, but it’s discussed in detail in the full prospectus available below.

Getting the Full Prospectus & Making a Bid

Given that the auction has ended, the prospectus is no longer available.  For details on what happened, please see the follow-up article referenced at the end of this post.

Why I’m Selling

If you’re anything like me, you’ve had one question in your mind throughout this post.

“If this business is so great, why’s he selling it?”

I ALWAYS wonder this when I see a drop ship business for sale, especially if it makes claims about being fairly easy to run and operate. For a long time I figured someone would have to be crazy to sell a site for 2x or 3x earnings, which is effectively a 50% or 33% annual return on your investment assuming things continue to go well. I couldn’t comprehend the logic, and fellow finance friends of mine agreed.

But what I finally realized is that all sales aren’t purely financial. Here are my reasons for selling:

Larger Opportunities & Focus: TrollingMotors.net has been a great business and an incredible learning experience, but it isn’t necessarily the business I’d start, run and invest in today given my current opportunities, experience and resources. The niche drop shipping model has been an amazing way to learn eCommerce and has provided the lifestyle flexibility for some incredible adventures, but I’m ready to step into a business that holds the potential for larger growth.

In the coming years, I’d like to explore developing my own products and trying to create a widely known brand. These types of businesses take a bit longer to scale up (and require more capital), but ultimately have a the potential to become much larger and more profitable. I’d also like my team to have more time (even if just a few hours a day) to focus on some aspects of our other businesses we’ve been neglecting.

Personal Experience: I’ve never sold a company and I’d really like to – both for the learning experience and (perhaps pridefully) to say I’ve done it.

Taking Money Off the Table: I like the idea of pocketing some money now and reducing my risk across my business investments. This also gives me more capital for larger, hairier projects (see above).

Produces Great Blog Content: Having a transparent, public sale of the site on my blog will hopefully create some of the best content I’ve ever been able to produce and gain exposure for eCommerceFuel. I’m definitely factoring in the value of that buzz in the sale decision. 🙂

Earn a 5% Referral Commission (up to $9,250)

I’m paying a 5% referral commission – which could be as high as $9,250 at the top price – for anyone who brings me a buyer for TrollingMotors.net. You could be eligible for the commission simply by tweeting or liking this page!

When I close a deal with the buyer, I’ll ask if there was a specific person or website that steered them toward the sale. And if they name you, I’ll cut you a check for 5% of the final purchase price as a commission – up to $9,250 and no less than $5,250 if sold at the reserve price.

There are a few caveats: The buyer can’t already be on my email list as of Nov. 13, 2013, and you’ll need to provide some record of proof that you promoted the site prior to my connecting with the buyer (a blog post, a dated share in your Twitter or Facebook stream, making the introduction directly, etc.). But assuming you were genuinely the person who connected us, I’ll be cutting you a nice fat check for very little work.

This is really just a friendly bribe to try to get maximum exposure for the sale of the site. When you’re not paying site auction fees or for a business broker, it allows you to get creative with how you market the business. What’s more valuable: paying 10% to a business broker or offering an internet-wide 5% bribe? It will be interesting to find out.

So how can you score the 5% commission?  You can:

  • Tweet this post by clicking here
  • Mention it on your blog
  • Share this case study to your email list
  • Like the post of Facebook or Google+ via the buttons below

Questions? I’m Happy to Answer Them!

I’d love to answer any questions you have about TrollingMotors.net and/or the sales process – just leave them in the comments below.

Thanks for reading and following the sales process! I have no idea what will happen, but I’m excited to find out with you.

Update – Auction Ended:  Interested in hearing what happened with the sale?  You can read my post-auction update post here.

Andrew Youderian
Post by Andrew Youderian
Andrew is the founder of eCommerceFuel and has been building eCommerce businesses ever since gleefully leaving the corporate world in 2008.  Join him and 1,000+ vetted 7- and 8-figure store owners inside the eCommerceFuel Community.

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176 Comments

SusanJanuary 2, 2015

Hello Andrew – As always very informative and educational. I have been following your posts and have gathered so much valuable information as to how to start a drop-shipping business. I need to be careful on the amount of time I am spending on researching this topic that I fear I may be ‘stuck’ in the research mode. I just need to do my due diligence before ‘pulling the trigger’. Thank you again for the invaluable information that you have shared.

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JayJune 23, 2015

This is good idea to sell your website directly. I presonally hate filippa or godaddy auction, because there are no good quality buyers. But, where is this ducth auction being placed?

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