Why You Need To Know Your Numbers – Case Study

Sarah (not her real name) approached us with $12 million in annual sales, $1.6 million in SDE, and an estimated $7 to $8 million valuation. It appeared to be a successful business. However, things started to fall apart after conducting a more in-depth analysis.

Things got off to a tricky start when Sarah explained that she wasn’t using accounting software (like Xero or QuickBooks) – it was all in spreadsheets. Then we discovered Sarah was using cash-based accounts. Cash accounts are appropriate for butchers, bakers, and candlestick makers. They are not suitable for ecommerce businesses, especially if you intend to exit. We had to convert her cash-based accounts to accrual-based accounts.

As we dug deeper and talked to Sarah, it became clear that she didn’t know her numbers. She believed that because she employed a bookkeeper (as opposed to an accountant), she was ‘on top’ of the financials. Nope.

If you’re serious about growing your business, you should work with an experienced ecommerce specialist accountant. (In the UK, we recommend Mint Accounting; please get in touch with us for European and US recommendations.)

Just when we thought we’d ironed everything out, we noticed a glaring hole in the numbers. Where was her Amazon PPC spend? There didn’t appear to be any, but we knew Sarah was running ads.

Turned out that just over a year ago, Sarah had switched the payment method for her PPC. Whereas previously the PPC fees were deducted from her Amazon payout, she had switched to a credit card. And then she forgot all about it. Oh dear.

Overall, we discovered a $750k gap between what Sarah thought was her SDE (based on the basic cash-based accounts from the bookkeeper) and the true SDE. In reality, her SDE was around $850k. The company was most likely worth $3.5 – 4 million. We all hoped for a lot more at the start of the process.

Fortunately, we were able to put Sarah on the right track, identify opportunities to increase her top and bottom lines, and add value to the business to get her to her target value.

Imagine if Sarah hadn’t come to us….

• She’d have gone it alone and tried to sell directly to an aggregator, who would have taken her to the cleaners and probably persuaded her to sell at a low multiple for around $2.5-3MM if it became clear Sarah didn’t know her numbers. To top it off, the deal structure would be abysmal.
• She would have used a low-quality generic listing/flipping service, which would not have correctly calculated her SDE and would not have put her on the path to success. They would have persuaded her to ‘flip’ her business and make a quick buck. And they’d have charged her a fortune!
• Or perhaps she would have stuck with the business, continuing to make the same mistakes and potentially pushing the company into a decline…

Take-aways:

• Hire an experienced ecommerce-focused accounting firm (it’s less expensive and more effective than hiring a bookkeeper as an employee!)
• Understand your numbers! Meet with your accountant on a regular (monthly) basis!
• Plan for an exit with a brokerage that will walk you through an actual process. No flippers, gimmicks, or marketplaces.

Whether you want to sell soon or in a year or more, planning ahead of time is essential. The sooner we examine the data, the sooner we can implement a strategy to maximise your SDE while balancing the potential for growth that will entice a buyer. The sooner we understand your company, the deeper we can go and the wider the net we can cast to bring you the best buyers, deal structures, and dream exit.

Most people only get one big exit opportunity. Get it right. We’re here to assist, so let’s get started – https://www.ecombrokers.co.uk/vyb

Ready to sell your business for the best possible price? Start by clicking the link below! No obligation, no hard sell. Just solid, professional advice.