Control eCommerce Risk: Grow or Cash Out

By all news reports, 2017 was a very busy Holiday Shopping Season for your business. Hopefully, you made strong profits. Don’t get too comfortable yet. You might miss the opportunity to do something brilliant – whatever that is.

If you are an Amazon Seller, for example, you are an entrepreneur in one of the most disruptive, complex and competitive areas of e-commerce. With changes in Amazon’s policies, product duplication and price wars among Amazon stores, you deal with constant risk to your market share and the financial performance of your business. This means you should be constantly looking to make strategic improvements in your business that might include selling it and starting a new enterprise or growing your business through acquisition.

In an old-school, brick and mortar business, if something unexpected happens that requires a change in strategy, it can take significant time for the business to recover, even if the change produces a good outcome.

By contrast, e-commerce businesses are routinely bought, sold, or merged within three to six months. While some web businesses take longer to sell, it is still possible to move in and out of an online business relatively quickly.

Take advantage of opportunity

The relatively short turnaround time and the growing liquidity of the marketplace for web-based businesses present new ways to strategically manage risk, and an entirely new alternative investment category for the private capital crowd. Amazon has been the catalyst and platform for this change.

Web-based-business owners are flippers, portfolio investors, mom and pop operations, enterprise builders, and beginners who just want to give e-commerce a try. These many different strategic business agendas mean a highly liquid market for online businesses of all sizes, and a liquid market leads to better risk management for you. There are always owners who want to sell and there are always people who want to buy those businesses.

Every business involves risk

Things change fast, particularly in the busy world of e-commerce – Amazon or other online marketplaces as well as independent sellers of everything from cosmetics to SaaS.

Your business has a performance bell curve that reflects how changes in the economy, taxes, marketplace rules, or customer buying habits affect your business sustainability. The top of the curve is where you decide to either cash out or expand. Are you at the top of your performance curve now?

Don’t make the mistake of loyally hanging on, waiting to do all those things you hope will rocket your business to the stratosphere while your business steadily loses value.

A common problem that can sneak up on you is falling into a trend of diminishing returns even though your revenues and profits are constantly increasing. Price competition and cost-of-goods-sold can deteriorate your profits at a faster rate than your revenues are increasing. The solution is active risk management through strategic divestments and expansion into more lucrative or less competitive product areas.

Evaluate your risk – The Five stages in the life of a business

Strategically manage your business assets according to each stage and the opportunity or difficulty it presents:

  1. Launch Stage. If you want to raise capital by selling your business, there is a good market for young companies that have been organized and managed well. They might sell only one or two well-chosen products, but they have value because they are inexpensive starter businesses that are bought by beginners, flippers, and portfolios. Amazon presents many such opportunities.
  2. The Crisis Of Market Penetration. Companies in this stage might not have the financial resources to grow. These are also attractive to flippers and investors looking for turn-around candidates.
  3. The Decision Stage (the “Take The Money And Run” stage). Your company has grown to a point where additional resources are needed to continue growth. This is when you exit, take the proceeds and use them to fund another startup or purchase. If you have financial resources, it is also the stage where growth is created through the acquisition of other companies.
  4. Ownership Transfer Stage. This happens when you acquire, receive an investment, or sell to a Buyer.
  5. Stage five is the point where your growth plateaus or begins to decline. The company has matured and its primary crisis is to maintain relevance in its market.

When to sell or buy

Try to identify in which stage you are operating. This will help you decide whether to sell your business or expand by acquiring your competition and adding new product lines. Hanging on to a business after the third stage increases your risk exponentially. If you are considering the acquisition of another online business, the first three stages offer an opportunity to apply your own strategies for growth before your target company has declined past redemption. In these early stages, your acquisition target probably is still priced low enough to achieve a good return on your investment.

Every online business eventually reaches a point of diminishing returns. It might need an injection of marketing capital, an overhaul of its product lines, or some new ideas. In any case, if it is your business, you are going to have to make an important decision: To sell the business and apply the proceeds to another enterprise, or to expand through the acquisition of other businesses. The third option is to do nothing and to hope your business picks up soon.