The following is a contributed piece from Chris Shipferling, managing partner, Global Wired Advisors. Opinions expressed are author's own.
The pandemic has created a surge in online shopping and a burst in new e-commerce businesses.
Americans spent $88 billion more online during the first six months of 2020 than in 2019, fueled in part by people shopping online for the first time. Brick and mortar retailers are wondering whether some customers will ever shop in-store again.
Start-ups are following suit, with 1.3 million, and counting, e-commerce businesses in the U.S. today.
If you're part of a team launching an e-commerce business, think about your exit now. Waiting until you're showing year-on-year growth, or have reached some other benchmark, is too late. Although you must remain flexible to accommodate changing market conditions, you want to start working towards your exit right from the start.
M&A, IPO and legacy
There are three exit strategies most suitable for e-commerce business owners.
Mergers and acquisitions. The one founders strive for the most is having another company buy yours, either to increase their product portfolio or to unleash strengths in your business you don't have the resources to tap yourself.
In the acquirer's view, you've created the seeds of a great business; with a cash injection and a new management team, they can scale what you started into a bigger operation.
The recent acquisition of a popular children's products company is a case in point. It was founded by a former high-level industry executive and a partner to provide a retirement project for the senior founder.
Once the business exceeded the capacity of the two-man team, they decided that, rather than scale the business themselves, they sought out a buyer who could guide the company through its next expansion phase.
The deal gave each founder a satisfactory exit, and the senior founder continued on as a consultant.
Initial public offering. Depending on how much your business grows, you might set your sights on an IPO. This typically makes sense for larger businesses; it's a harder path for smaller companies.
Chris Shipferling
Courtesy of Global Wired Advisors
Going this route, founders can expect a big payday, but growing a company to the appropriate size and getting it listed requires a lot of work. More than any other strategy you pursue, if your team wants to go this route, you need to start planning as early into the company's launch as possible.
Task management software Asana completed its IPO as a direct listing just a few weeks ago. Its shares opened at $27, valuing the business at more than $4 billion, an increase of more than $2.5 billion over the company's previous private valuation of $1.5 billion.
The IPO's success highlights the importance of advanced planning because, as with all exits, this strategy hinges on timing and preparation. Had Asana launched its IPO when it was losing money rather than while achieving rapid, sustainable growth, the launch wouldn't have yielded such positive results.
Legacy. If yours is a family business and you want to keep it that way, you want to be working toward a legacy exit — when you hand over the business to someone in the family to run. You're unlikely to get a lump sum of cash, but you've provided a business for your family to continue.
It's not unusual for a legacy brand to be handed down from generation to generation. Furnitureland South, the largest furniture store in North Carolina, has been owned by the same family since its founding in 1969. Darrel Harris and his wife Stella ran the business for decades before exiting the company and transferring ownership to their sons.
Have a plan but be fluid
When you have a rough idea of when you want to move on, you have a blueprint for your success.
The world is constantly changing, so it's never wise to stick rigidly to an exit strategy you made six years ago that no longer makes sense. But thinking with an exit strategy mindset helps you inform your strategic decision making, benchmark what success for your business looks like, set goals and chart a timetable for your growth.
It's often only when a company is thinking about selling that many founders truly understand what makes it attractive to investors. Think of it like buying a property: are you buying it for your family or to flip for a profit? If it's the latter, what are the features you want to add that would create a bidding war?
Identifying value drivers
The most important factor for you to nail down, from an investors perspective, is what adds value to your business. Investors who find value in your business will offer you a multiple of your annual profit after expenses. If you make $1 million profit a year, for example, they might offer you a multiple of between 2 to 20, or $2 million to $20 million. The size of that multiple will depend on how much you leverage your value drivers. That's why you want to identify and maximize those right from the start.
What are those value drivers? In many e-commerce businesses, they're these:
High profit margins. Not every business is solely focused on making huge profits, but these are also the ones less likely to want to be bought out by investors. But if you have low operating costs and high profit margins and are growing year on year, this makes investors sit up.
Strong brand. In today's digital era, not every business needs to be churning in profit to get investors' attention. Companies like Facebook were valued at billions of dollars before earning a profit. That's because millions of users were signing up every day and investors saw the potential of a network where nearly half the population on the planet had an account. If you create a popular brand with rapid user adoption and growth but aren't making much revenue, you can still find a buyer.
Management team. As any successful entrepreneur will attest, successful businesses are all about the team. Investors often want the players who were instrumental in the company's success to continue on after it has been acquired, but they'll also bring in others who can guide the business through its next growth stage.
Strong position in a fast-growth segment. Who would have thought owning a toilet paper business or making face masks would turn into liquid gold? The market's constantly changing. Investors are constantly trying to predict which businesses will thrive in the future. If you have a face mask manufacturing business that allows customers to buy directly from your website but you haven't created a strong brand or management team, investors will know that, if they bring in a new team along with a cash injection, they can scale your business to tap today's demand surge.
Drafting your blueprint
Having an end goal, identifying our value drivers, and knowing the right time to sell are what often separate successful from struggling entrepreneurs. Without a blueprint, your business can stall. Many repeat entrepreneurs intentionally set out to spend only a few years building their business before selling it so they can cash out and move onto something else.
For e-commerce, there's never been a better time to start a business, but you need to have your exit in mind right from the start.
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