This is the third post in a series called “Valuing Your E-Commerce Business”. Click here to see all posts in this series.
In recent weeks we’ve tackled the beginning stages of valuing your business, including inventory valuation. This week, we’re covering the different deal structures you may encounter when selling your e-commerce business and the different ways you could get paid out by an investor.
An Overview
As Tyler explains it, it’s easier to think of risk and payout as an inversely proportional relationship. The more cash you take up front for your business, the lowest risk you have of not getting paid by your investor (i.e. the check is written right at the table). However, by taking an all cash deal, you’re trusting that your investor will be able to pay you out immediately, possibly resulting in a smaller deal.
If you have the time for your investor to pay you out over several months or years, they may be able to pay you out a larger amount over time. But taking the risk of a longer payout period means you’ll be waiting on money longer – and there’s always a chance you might not receive the full amount due to the buyer’s poor money management.
Types of Deal Structures
There are five main types of deal structures you might encounter in trying to sell your business.
- All cash – The buyer pays the full amount up front, usually at time of sale.
- Cash plus seller note – The buyer pays a percentage in cash, plus a seller note over a period of years.
- Cash plus earnout – The buyer pays a percentage in cash, plus profitability of your business as a partnership. In this case, the seller receives payment from the buyer as the business continues to grow.
- All earnout – The buyer pays a larger percentage of partnership for several years with no cash payout. This type of structure is uncommon.
- Rollup equity – Instead of buying the business outright, the buyer enfolds the entity into their existing portfolio and the seller becomes a part owner of that entity. This type of deal is becoming less common because when aggregators own too many brands, things get can easily sloppy and complicated. There is no cash payout involved in this deal.
Just as an all cash deal is the safest bet for sellers, rollup equity is riskiest. Since there is absolutely no cash payout, you’re at the mercy of the aggregator’s performance for the profitability of your brand. In these cases, it might be worth the peace of mind to just get paid out in cash even though the equity deal may be valued higher.
Equity vs. Asset Sales
In the past, buyers looked at deals in terms of owning the entity itself – both the brand itself, the LLC/C-corp, and the stock. These are equity deals, and in recent years, they’ve become less common in the e-commerce market.
What we see more often these days are asset deals, sales in which the buyer purchases the products, trademark, and the inventory itself. This type of structure allows the buyer to take on the business without taking on liability for your past mistakes, be they issues with sales tax or bad relationships with suppliers.
Next week we’re sharing tips and tricks we’ve learned from years of valuing e-commerce businesses. Check back for more in this series!