29
Nov

Control Risk: Sell Your Business Or Buy An Opportunity

You are an entrepreneur in one of the most disruptive, complex and competitive areas of e-commerce – Amazon. With changes in Amazon’s policies, product duplication and price wars among Amazon stores, you deal with constant risk to your market share and the financial performance of your business.

In an old-school, brick and mortar business, if something unexpected happens that requires a change in strategy, it can take significant time to recover even if the change is something good.

By contrast, Amazon businesses are routinely bought, sold, or merged within 30 to 90 days after the Letter of Intent is accepted. The average time on the market until a buyer presents an LOI is 90 days. While some web businesses take much longer to sell, it is still possible to move in and out of an online business relatively quickly – and that allows you to strategically acquire or divest business assets when needed.

Marketplace of opportunity

The relatively short turnaround time and the growing liquidity of the marketplace for web-based businesses present new ways to strategically manage risk, and an entirely new alternative investment category for the private capital crowd. Amazon has been the catalyst and platform for this change.

Amazon store owners are flippers, portfolio investors, mom and pop operations, enterprise builders, and beginners who just want to give e-commerce a try. So many different strategic business agendas enables a highly liquid market for Amazon businesses of all sizes, and a liquid market leads to better risk management for you. There are always store owners who want to sell and there are always people who want to buy those stores.

Every business involves risk

Things change fast, particularly in the busy world of Amazon. Your business has a performance bell curve that reflects how changes affect your business sustainability. The top of the curve is where you decide to either cash out or expand. Don’t make the mistake of loyally hanging on, waiting to do all those things you hope will rocket your business to the stratosphere while your business steadily loses value. A common problem that can sneak up on you is falling into a trend of diminishing returns even though your revenues and profits are constantly increasing. Price competition and cost-of-goods-sold can deteriorate your profits at a faster rate than your revenues are increasing. The solution is active risk management through strategic divestments and expansion into more lucrative or less competitive product areas.

Evaluate your risk – The Five stages in the life of a business

Strategically manage your business assets according to each stage and the opportunity or difficulty it presents:

  1. Launch Stage. If you want to raise capital, there is a good market for young companies that have been organized and managed well. They might sell only one or two well-chosen products, but they have value because they are inexpensive starter businesses that are bought by beginners, flippers, and portfolios.
  2. The Crisis Of Market Penetration. Companies in this stage might not have the financial resources to grow. These are also attractive to flippers and investors looking for turn-around candidates.
  3. The Decision Stage (the “Take The Money And Run” stage). Your company has grown to a point where additional resources are needed to continue growth. This is when you exit, take the proceeds and use them to fund another startup or purchase. If you have financial resources, it is also the stage where growth is created through the acquisition of other companies.
  4. Ownership Transfer Stage. This happens when you acquire, receive an investment, or sell to a Buyer.
  5. Stage five is the point where your growth plateaus or begins to decline. The company has matured and its primary crisis is to maintain relevance in its market.

Insider’s guide to selling or buying online businesses

This is a casual description of how the process of buying or selling an online business works at Latona’s. (contact Victoria Duff at victoria@latonas.com for assistance):

  • Latona’s markets each available company with a confidential listing on the Latonas.com website and to affiliated websites. Listings and price changes are announced in its weekly newsletter, to its VIP customer list, to private equity investors, and via cold-calling prospects.
  • Buyers work with assigned brokers who supply information, schedule meetings with Sellers, and assist with negotiations and the final sale transactions.
  • Latona’s attracts listings through marketing, referrals, broker outreach, and existing relationships with clients.
  • Seller executes a Seller’s Agreement, which spells out the duties of the Seller and the Broker.
  • Broker takes company information from Seller and creates a strategic pricing and marketing plan that includes a prospectus that is only available to Buyers with a signed NDA on file.
  • Prospective Buyers sign NDAs and receive information, talk with the Seller, and present letters-of-intent (LOI) to purchase, outlining terms.
  • Seller may either accept an offer or counter.
  • Once there is agreement on price and terms, the Buyer has an exclusive period to perform due diligence.
  • Money is deposited with an escrow agent.
  • The Purchase Agreement is signed and the transaction closes with the escrow agent disbursing the proceeds of sale minus expenses.

Due diligence

Buyers want deep and detailed information on their prospective purchases. If you are a Seller, start compiling a file containing Amazon and supplier contracts, trademarks, patents, incorporation documents, tax returns, supplier contact information, customer lists, and other things a Buyer will want to see during due diligence. Your broker can help you with this. If you are a Buyer, these files also come in handy when applying for bank loans.

Key elements of a due diligence file include:

  • Business activity. If you have a referring website or are active on other platforms such as Walmart or eBay, provide proof of the number of transactions, unique visitors, page views, traffic sources, and backlinks.
  • Proof of ownership of all assets. Information on trademarks, copyrights, and proofs of photo or graphics ownership or licenses. A Buyer will use this information to help evaluate the business.
  • Financial records. Statements of sales transactions, product invoices, ad-network payments, affiliate commissions, marketing expenses, and hosting and maintenance expenses, bank statements, merchant account statements, and such.

When to sell or buy

Try to identify in which stage you are operating. This will help you decide whether to sell your Amazon business, or expand by acquiring your competition and adding new product lines. Hanging on to a business after the third stage increases your risk exponentially. If you are considering acquisition of an Amazon business, the first three stages offer opportunity to apply your own strategies for growth before your target company has declined past redemption and is still priced low enough to achieve good return on your investment.

 

Latonas.com is one of the World’s leading and largest web-property brokers specializing in pre-reviewed properties with positive cash flow. Latona’s brokers only premium quality properties and charges no up-front fee. Commissions are based on the selling price. All transactions are closed through Escrow.com. Victoria Duff is a broker who brings years of investment banking and startup consulting experience to benefit her clients at Latona’s.

 

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