“I’d like to sell one brand out of my portfolio but all of my business is commingled in one account. What do I do?”
Seller Accountant recently helped a seller prepare to sell part of his business. To be exact he wanted to sell one brand out of his portfolio. The problem was that he sold multiple brands under the same Amazon Seller Central account and had another side venture that also flowed into the same Quickbooks account. Needless to say, we had some work to do in order to present a valid profit and loss statement to potentials buyers but we did it and learned a ton in the process!
This Scenario is More Common Than You Think!
You wake up one day and decide that it is time to sell one brand out of your business and when you open your accounting system you realize that it is impossible to distinguish this brand from your others. In other words, your current financials are worthless to a prospective buyer. You know that rational investors won’t make you a good offer on your brand when you can’t clearly demonstrate its performance over time. What do you do? You’re tempted to panic but don’t! The obvious solution to this problem is to create separate financials but this is easier said than done! Let’s walk through how to separate things but first let’s think about why it matters.
Buyer Psychology 101
What drives buyers to make purchases and pay top dollar? Tons of factors drive the value of a business up or down but almost all of them boil down to 3 things: Cash Flow, Market Conditions & Risk Profile.
Given the history and current health of the business, what does the investor expect your business to generate in profitable cash flow for the foreseeable future? While Sales volume certainly plays a big part in this an investor is much more concerned with EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization) sometimes called Operating Profit. Basically, a buyer will pay you some multiple of your EBITDA normally expressed in years (i.e. 3x = 3 times annual EBITDA). The multiple is determined by the market conditions and by the risk profile.
Simply put, is it a buyer’s market or a seller’s market? The last few years have favored sellers meaning that values have been driven up.
The 3rd key driver of value is risk. How likely is it that the cash flow will decrease in the future? There are lots of things that can make e-commerce stores more or less risky. A few risk factors are SKU-diversity, IP protection, competitors, TOS violations, tenure, seasonality, channel diversity, sourcing security and documented systems but there are many more. Selling a single brand doesn’t necessarily increase the risk profile but it makes the detailed financials even more important. Everyone wants to get the highest multiple possible and we can’t control market conditions so our only jobs are to increase cash flow and decrease risk. Focus your energy on improving these 2 factors and you WILL get paid more for your company. Bigger, broader, safer, longer standing brands are more valuable. Increasing visibility especially if you want to sell one brand can dramatically lower the risk profile putting the buyer’s mind at ease.
Your Books Matter
If you don’t have clean, believable financials for the brand that you are looking to sell prospective buyers can’t properly determine cash flow or riskiness and they will assume the worst to protect themselves. E-Commerce accounting presents some unique challenges. Another thing to consider is that a buyer has more financing options if the books are clean meaning they can afford to pay more. Here is a simplified example of a Profit & Loss Statement for an Amazon FBA business. If your record keeping doesn’t allow you to provide monthly financials specifically for your brand accompanied by source documents like bank and Seller Central statements you will likely get offers that are closer to 2x EBITDA which in this example would equal $250k. However, if you are able to provide the needed detailed financials and supporting documents proving that your products are stable and growing, you are more likely to get offers that are closer to 4x EBITDA and we are seeing some companies going for 5x EBITDA! This is a simplified example but understand that the quality and integrity of your financials WILL have a major impact on your sale price. Your books really matter and it is worth investing the time and money into getting them right.
Which Numbers Need To Be Separate?
You want to sell one brand and are convinced that having separate income and expense numbers will help you get more when you sell but exactly which numbers should you focus on? Focus on separating as many income and expense categories as can be directly tied to the brand. I listed the most important ones in the example P&L above but here they are again:
- Gross Sales, Shipping, Promotional Rebates, Returns
- Landed COGS, Amazon Selling Fees, FBA (and other fulfillment) fees, Storage Fees
- Advertising spend and associated salaries or any other expense that is directly tied to this brand.
Don’t worry as much about trying to divvy exactly what percentage of your accounting or internet expenses should be associated with this brand unless they are unusually large. What’s most important is giving a clear picture of how each of the above categories looks for as many months as you can. The more data the better and ultimately it must be split into months.
Note On Advertising Reports!
Because Amazon only stores detailed advertising data for 60 days reconstructing exactly which ad spend dollars should be associated with this brand can be a nightmare. We have found a few tricks that help like signing up for Ignite by Seller Labs because it will store the data for you. Regardless, know that getting to Ad data is a problem even if you have a good accounting system and can make it hard to tease things out when you sell one brand out of many. Regardless of what tools you use you should stop everything and do the following: Go to Seller Central, Reports, Advertising Reports and download as many monthly detail reports as you can. If you are lucky and have requested some over the past few months you can download those as well as the current 60 days. The key is to start storing this data each month so that you or your accounting professional can reconstruct your true ACOS and ROAS numbers for as many months as possible. Ad spend has a major impact on your profitability and therefore your value.
So How Do I Create Clear, Believable Financials?
It is very possible to separate your the right numbers so that you can sell one brand but your strategy depends on your timeline.
I want to sell one brand but I have a year before I’m ready
If you have at least a year you have lots of options and you can take action now to increase the value of your business a year from now.
- Separate this brand from everything else. Literally, open a separate bank account, set up a separate Quickbooks Online account and consider opening another Seller Central account to sell through. You may even go ahead and set up a separate LLC to house this brand.
- Sign up for Feedback Genius and Ignite by Seller Labs. Several of the competitors don’t store the proper data like Seller Labs does and I promise you will thank me when you need granular access to this mountain of data next year.
- Start measuring key performance indicators (KPIs) like Return on Ad Spend, Fulfillment costs, Gross margin, etc… closely and set goals to improve these key metrics over the next year.
- Write out any explanatory stories that help your cause. For example, if you stocked out of a few key SKUs which resulted in a couple of really cruddy months then write out the story including what you learned and how you worked to improve inventory performance for the next year. Another example is if you changed suppliers which hurt short-term profits but will yield better profits in the future. Buyers will listen to rational arguments.
Doing these 4 things will take a lot of work and it might make sense to hire someone to help you but it is worth it if you want to sell one brand for top dollar!
I have 6 months before I want to sell
If you want to sell one brand soon but have just a few months it doesn’t make sense to create a completely different seller account or accounting system. However, there are some things you can do within your existing system to separate this brand from your others.
- Create separate income and expense accounts within your accounting software for each brand. This will take some work but literally split out sales into Brand A and Brand B and likewise split out COGS, Fees, Rebates, Returns and Advertising. Go back as far as you can so that you can ultimately provide a P&L for just this brand.
- Start hoarding Advertising Data ASAP. As mentioned above Amazon does not store your detailed advertising data for you and it will be your responsibility to provide the supporting documents that validate your advertising numbers.
- Create a detailed analysis using a spreadsheet and supporting documents for months that are too far back to reconstruct within QBO.
You won’t have as much time to measure and improve KPIs in this scenario but you can clean up the financial picture and therefore get more for your brand.
I want to sell ASAP!
If you want to sell one brand now meaning the market is perfect or you have a potential buyer lined up it won’t make sense to correct your accounting system. In this scenario, you need to carefully create a P&L using a spreadsheet for as many months as you can. Here are some thoughts on how:
- Create a spreadsheet with the categories I listed above with each column being a month
- Download Seller Central monthly reports and filter or pivot those reports to isolate your target brand. Save each clearly marked report in a folder (i.e Sales Supporting Docs, Storage Supporting Docs, Advertising Supporting Docs, etc…)
- Recreate each line of the P&L for the one brand.
- The key is to make it as easy as possible for a potential buyer to look at your supporting documents and see exactly how you came to each number on your spreadsheet. It is critical that the accounting methods be correct and that the numbers are accurate. You will get a lot more when you sell one brand by telling the truth as clearly as you can especially for the bad months.
Whether you have a year or a week this project will take a bunch of hours of either your time or your accountant’s time. It could cost you $2000-5000 dollars to have this project done for you but if it allows you to sell for 3x EBITDA instead of 2x it is well worth every penny and having it done correctly is critical!
I hope this article about how to sell one brand out of your portfolio is helpful! The shameless plug is that this is what Seller Accountant is best at! The process of understanding buyer psychology and using whatever time is available to create and maintain clear accurate financials for your brand so that you can get top dollar when you sell IS our business. We’d love to help if you are stuck! Please reach out to us if you have any questions related to your books or how to get the most out of your business. We look forward to talking to you! -Written by Seller Accountant CEO Tyler Jefcoat