There are deals and money to be made if you’re interesting in buying and selling an ecommerce business.
Ecommerce is booming and companies are seeing tremendous profits in many niches.
Other businesses are struggling to get off the ground, and might just need insight and assistance from someone with the right knowledge or funding.
That someone might be you.
Of course, business deals should be approached with careful deliberation and caution. You don’t want to rush into anything that might cause you to ultimately lose money. But what are the things you should be looking for as you consider a new ecommerce acquisition? We have some thinking points below.
Look past the flash and fancy pitches
Ecommerce is about sales, so it stands to reason that the person trying to get you to buy their business might be pretty good at selling it. Don’t get caught up in the aspirational pitches to try and sucker you in.
Consider everything the seller is saying with heavy scrutiny – they should be able to prove and back-up every claim. If it is supposed to be so easy to double or triple the income, why didn’t the seller do it before selling? Ignore the pitch. This is a deal that deals exclusively with numbers and figures.
Know how to read the numbers and figures.
If you’re planning to buy an ecommerce business, you should know how they run, how they report income, where the numbers come from and the past profits and expenses. That means you need to know how to read, understand and speculate based on the documents provided.
While a trusty accountant can be a huge asset as you pick through tax returns, profit and loss statements, ledgers and marketing accounts, you should need the financial guru as a back-up only. If you can’t read the financials of a business without assistance, should you be buying the business? Study and prepare ahead of time – never trust someone else to tell you about your own money.
Determine the likely future of the business.
Not every business is sustainable. There are trends that come and go and you don’t want to get caught up in the heat of the moment if the moment is just about over. Of course, there are trends where things come and go in popularity, but you don’t want to be the one who buys the business as sales are beginning to drop.
Consider the bigger picture when looking for an ecommerce purchase. Is the industry healthy? What factors are at work? Are the current sales sustainable or able to grow? If not, steer clear of that particular purchase. You can make a lot of money on a trend, but only if you know how to get your money out before the trend dies off.
Look for the seller’s rationale.
You want to know why a business is for sale. Why is the seller willing to let go of a money-making operation? This is another area to dig deeply and approach with skepticism. The seller knows that he has to make the operation sound good to potential buyers, so you might have to look beyond pat responses to find out if there is a hidden area the seller isn’t disclosing. If that is the case, you should proceed with extreme caution.
Of course, the rationale for selling might make perfect sense. The seller wants to retire or pursue other ventures. The seller has other interests and is bored with this one. Just be sure you do your due diligence.
Understand the Traffic
Ecommerce is heavily dependent on traffic sources and marketing. Where is the traffic currently coming from and can you sustain that? Traffic comes from multiple sources, and the more varied the source, the better. Not all traffic is considered equal, however. You need to understand the traffic patterns of the website and how sustainable those sources are.
This is especially true if the website is primarily using paid traffic sources. Paid sources require a tremendous amount of cash on hand and a steady head and marketing plan to keep from spending more than you anticipate or more than you can afford. Be sure that the source of the traffic is on the up and up and is sustainable. Otherwise you have no business buying that business.
Focus on profit
The gross merchandise valuation (GMV) will sound impressive. The amount of gross income from an online business can be startling. But what matters more than how much money comes into the business is how much money you get to actually keep from the business. Net profits can be substantially lower than the gross income – especially if there is paid traffic or heavy expenses in marketing to make those profits.
Your buying price should be based on the actual profits of the business, not the amount of money that actually changes hands. Turnover numbers will be published and accentuated, but look down at the actual bottom line. Who cares if $2 million comes in if almost $2 million is going right back out again? What does the business actually earn? That is the number you care about.
Focus heavily on profit and loss statements
The profit and loss statement is going to tell you more than just the actual profit the business turned last year. The P&L will also tell you about the true aspects of the business including revenue, costs and expenses from the business itself.
With the P&L statement in hand you can easily see almost every detail of the way the business works – how much comes in through sales, how much those good cost, the actual income, the company losses. It’s possible that there is negative profit from one year due to a heavy marketing investment or unusual circumstance. P&L statements over multiple years should help you determine how viable a company is.
Find where to leave your mark.
What are you going to do with this business once you own it? Where can it be improved? Assuming that the business you’re interested in is sustainable and a good investment, what are you going to do to improve that business and make it even more profitable for you?
This might be streamlining costs, merging the business with other acquisitions, improving the website or just tweaking the marketing channels to those that are most effective. There are countless things you can do to improve your ecommerce business, and you should have some of them already in mind before any money changes hands.
Buying an ecommerce business is exciting, but also risky. You are sinking money into an endeavor that can create tremendous losses, and you shouldn’t rush your decision or move into a sale without careful, in-depth research. Look carefully through the details and take your time to ensure you’re making the best move for you and your business.