Selling Your Internet Retailing Company: Is it the Perfect Time to Sell?
Industry multiples in the e-tailing industry are high, but they could be slowing soon. If your online shopping business is mature, this could be the time to get top-dollar.
In general, I strongly advise against trying to “time” the market. It’s best to focus on building a successful company. The value of your company is the result of sound business strategy, not the primary consideration in designing that strategy. But sometimes, valuations are so high due to a confluence of economic, social, and technological factors that they merit special consideration. That’s what’s happening in Internet retailing right now.
Internet retailing is one of very few industries that can show positive growth from 2007 and through the recession to today. The ease and security of online shopping is driving 18-20% annual growth rates (compared to less than 3% for all retail). Investors like companies with consistent, positive financial performance, particularly in the face of adverse economic environments. Rapid growth, more than any other factor, leads to high valuations. Growth rates in excess of 25% render margins immaterial as long as the company is profitable or breakeven.
However, the growth of online shopping is slowing. A majority of consumers’ behavior changes relative to online shopping have already happened. In addition, technology and online merchandising are beginning to mature; this means it will be easier for traditional and multi-line retailers to succeed online, reducing their interest in acquiring an Internet retailer. Slowing growth and declining bidders all point to declining valuations.
When an entrepreneur finds himself in a market such as this, he really should ask himself, “How can I use these high valuations (i.e. cheap money) to make my company better?” If he cannot find any good answers, it is a sign that his business is mature and he should sell some or all of his company at these valuations. This is as close to timing the market as any entrepreneur ought to try.