How to Get Your Finances in Order Before You Sell an eCommerce Business
After years of building a successful eCommerce business, you’ve reached a pivotal point in your growth that few manage to hit. You’ve decided to sell your business, either by yourself or through a business broker, such as Empire Flippers.
Regardless of which avenue you choose, one thing is for certain: the time has come to get your finances in order.
Your finances can make or break a deal with a prospective buyer. The intricacies of your financial statements allow buyers to visualize how the unique selling points of your business translate into cold, hard profit. Plus, financial reports clearly outline the potential risk and reward of buying your business.
If you want to sell your eCommerce business but don’t know where to start, the helpful tips below will help you get your finances in order.
Switch to accrual accounting instead of cash-based accounting
Before taking the leap to sell your online business, you’ll first need to ensure your financial records are in prime shape. As part of your financial good standing, solid accounting practices are crucial for overall business success and buyer interest. There are two types of accounting practices to consider for your eCommerce business: cash-based accounting or accrual-based accounting.
Cash-based accounting is when sales and expenses are recorded as they are received or spent, respectively.
Accrual-based accounting is when sales and expenses are recorded as they are incurred.
Generally speaking, accrual accounting makes it much easier to handle the complexities of an eCommerce business, particularly if your brand experiences seasonal sales spikes.
Consider it this way: With cash-based accounting, you only record sales and expenses once they’ve already hit your business bank account. While this allows your finances to mirror your recent transaction information, it doesn’t recognize future account receivables or accounts payables. On the other hand, accrual-based accounting records sales and expenses the moment the transaction occurs.
Throughout operations and when selling your business, accrual-based accounting provides a long-term picture of your business’s profitability as well as insights into sales trends month-over-month or year-over-year.
Update key financial reports
Now that you have a better understanding of the types of accounting, it’s time to update and gather your key financial reports. Financial reports are where you collect, organize, and analyze any and all financial data related to your previous and current business transactions and assets. These documents paint a picture of your business validity, as well as the potential return on investment (ROI) for a prospective buyer.
There are three main financial reports you should focus on prior to selling your eCommerce business:
- P&L Statement
- Balance Sheet
- Cash Flow Statement
Let’s take a deeper look at what each of these reports means and what you should be seeing when you look at them.
1. P&L Statement
A P&L statement goes by many names, including an income statement, statement of revenue and expense, and (most commonly) a profit and loss statement. As suggested by its name, a P&L statement summarizes a business’s revenue, expenses, and costs throughout a specified period of time. The purpose of a P&L statement is to provide a general idea about a company’s ability or inability to generate profit in a given time.
A quick glance at a P&L statement will reveal a few categories, including:
- Net Sales: Sales revenue from products sold through your eCommerce business.
- Operating Expenses: Fixed expenses necessary to maintain your eCommerce business month to month, such as hosting costs.
- Costs of Goods Sold: The costs it took to acquire or manufacture the products sold.
- Variable Costs: Expenses that are sensitive to sales activity, such as the volume of sales.
- Net Margin: The total revenue made by your eCommerce business once all expenses and costs have been deducted.
- Gross Margin: Sales revenue from the products minus the costs to acquire or manufacture the products.
Before selling, you’ll want to ensure that your net sales are more than the costs of goods sold and that your net margin can compensate for any expenses while still generating a tangible profit.
2. Balance Sheet
While a P&L statement tracks sales and expenses, a balance sheet tracks total assets over time. It’s kind of like the Instagram account – or highlight reel – for your business’s finances.
When prospective buyers look into your business, this sheet will help them estimate the liquidity of your business, or your ability to pay your liabilities in a timely manner.
The exact line items included in your balance sheet may vary depending on the types of business transactions your eCommerce company is involved with. However, typical items include:
- Assets: These are resources owned or controlled by your company to produce value. Assets typically include cash, accounts receivable, inventory, fixed assets, prepaid expenses, and marketable securities.
- Liabilities: These are items your company owes to another company or lender. Liabilities typically include accounts payable, loans, taxes payable, accrued expenses, and short- and long-term debt.
- Equity: This is how much you have invested in the business over time, either through investing money or retaining earnings. Equity is typically broken down into common shares, preferred shares, retained earnings, and additional paid-in capital.
A balance sheet takes these figures and organizes them into two columns, with assets on the left side and liabilities and shareholders’ equity on the right side. The total amount of assets listed on the left should always equal the sum of all liabilities and equity accounts listed on the right.
3. Cash Flow Statement
A cash flow statement hones in on the cash listed in the assets column of your balance sheet. It summarizes the cash (or other types of funding) being paid to and by your business.
The purpose of a cash flow statement is to take stock of the amount of cash your eCommerce business can generate to finance its operating activities and cover its debts, as well as to inform you of how your financial activities are managed.
There are three types of cash flow you should educate yourself with before selling your business:
- Operating Cash Flow: Cash generated from sales or paid out to support business operations, such as sourcing products.
- Investing Cash Flow: Cash utilized to buy or sell assets, such as inventory.
- Financing Cash Flow: Cash produced via loans or from raising funds, such as an angel investor.
An easy way to remember cash flow is that all cash is reported on your balance sheet. Therefore, as long as you’re looking at the same time period, the ending cash displayed on your cash flow statement should always equal the cash line on your balance sheet.
You’ve worked hard to build your eCommerce business to the point it’s at now.
Shouldn’t your financial records reflect that hard work?
Once you get your financial reports in order, you’ll want to educate yourself on some of the most common questions a buyer interested in your business might have.
After all, purchasing your eCommerce business will be a big decision for everyone involved.
These questions may range from profitability and free cash flow to inventory management, ad spend, and competitor analysis.