More and more of my acquaintances are buying and selling ecommerce businesses.
Buying an ecommerce business, or any business, is never easy (or cheap). While things might look great on the surface, there are always a few “minor issues” hidden inside every business, particularly small ones. In this post I want to go over the guidance I offer to my friends and acquaintances when they tell me about their big plans.
This isn’t intended to be an exhaustive list of due diligence steps – far from it in fact. While due diligence in a business acquisition situation involves seeking advice from legal/financial experts, there are a few checks you can do before things even get that far.
Ignore aspirational pitches, stick to facts
It’s easy to get caught up in aspirational sales pitches from business owners. You know the kind:
“I haven’t put much effort into ______, if you did ______, you could easily triple income”
Oh, really? If that’s the case, why hasn’t the seller tripled the income already? By doing so they’d be able to line their pockets and sell the website for dramatically more. If tripling turnover was as easy as they’d like you to believe, they would have done it themselves. Make no mistake about it.
When you find an ecommerce business for sale, skip straight to the facts and figures – don’t get caught up in all the fluff of a sales pitch. It means absolutely nothing and shouldn’t be a determining factor in your decision.
Don’t buy a business based on someone else saying there’s potential. Buying an ecommerce business on its potential should only be done after your own calculations and assessment of the industry has been exhaustively performed.
Determine if sales are sustainable
Every few years here in the UK, there’s a big yoyo craze. Kids go absolutely mad for yoyos for a month or two – and whoever sells yoyos must make a fortune (quite literally). But then interest dies off and yoyos become the epitome of “uncool”. This is just one example of a niche where sales really aren’t sustainable or stable. Would I buy a yoyo business? I don’t think I would.
When buying an ecommerce business it’s important to establish that there’s consistent demand for the products you’re going to be selling. If you bought a yoyo business after a month of high demand, you’d pay top dollar. When demand dies off, you’d be left with a business that turns over very little.
Sure, some seasons like Christmas can be more profitable than others for most ecommerce businesses. The point is, however, that you want to buy an ecommerce business whose sales are fairly consistent year round – not a business whose sales come in phases spaced over years or even decades.
Find out why it’s for sale
You don’t just sell a profitable business without thinking it through properly.
For many people, it’s a case of wanting to retire early and live the easy life. For others, it’s selling off one venture so they can focus entirely on another. Dig deep and find out exactly why the business you’re interested in is being sold. There are lots of snake oil salesmen out there, selling worthless online businesses for jaw-dropping sums of money.
If a person doesn’t have a genuine reason for selling a business (as far as you can tell), alarm bells should be ringing and you should carry out further due diligence before parting with a dime.
Speak to suppliers & ensure they’ll stock you
A lot of suppliers out there have select distribution agreements in place.
Many of them STILL aren’t comfortable distributing to online retailers, or in their mind, parts unknown. Just because a business sells X, Y or Z products at the moment doesn’t mean that their supplier will continue to supply you once you buy the business.
With that in mind, you need to get written confirmation from suppliers that they’ll continue to support you if you buy the website or the business from the seller. If not, it might be time to bail out – or look seriously at alternative suppliers if you’re determined that the business is still viable without them.
Understand traffic sources and costs
Not all web traffic is equal. Some comes via referrals from other websites, some emanates from search engines, and some traffic comes from paid search networks.
Before you buy an ecommerce business it’s important to find out where conversions come from, and how much they cost!
A website might be generating $5,000 in sales every day, which is a great figure on the surface. But if that website relies on paid traffic, and they’re spending $5,000 a day to drive it, the sales figures start to look a bit less glamorous.
Take time to look over the business’ analytics in order to determine where traffic comes from and how much it costs.
Be careful to ensure it’s sustainable, too. If traffic comes from a search engine, for example, it could be advantageous to speak with an SEO consultant and ask them to analyze the site’s backlink portfolio. A bad backlink portfolio could mean a Google penalty is imminent – which would also mean a collapse in sales is just around the corner.
The past performance of a business should really mean nothing to you; it’s up to you to determine if the business is sustainable and profitable for the long-term.
Look past GMV and focus on PROFIT
It’s really easy to get caught up in seven or eight digit figures when you buy a website – it turns over $5,000,000 a year – or even $50,000,000 a year. While those figures are like candy for those new to business, they’re generally irrelevant to seasoned business buyers. Let’s say a website turns over $50,000,000 a year but makes less than $10,000 profit, you should be paying based on the site’s profit to acquire it – not based on the GMV figure (Gross Merchandise Volume).
Vendors and brokers often like to push the turnover figure because it looks impressive – but turnover means unless little there are serious operating issues that can be fixed to increase profit, or in the rare case, some strategic value of all that turnover. You need to get down the nitty gritty – you need to know exactly how much profit is made after all fixed and variable costs have been factored into the equation. I can say with almost certainty, the figure will be nowhere near the $50,000,000 mark…
Buying an ecommerce business can be a great move. It’s certainly an exciting opportunity to consider, as the industry is moving faster than ever.
Remember to exercise caution throughout the process. Ask the right questions, and look at the details, to ensure that your potential acquisition is a smart investment.
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