{{deal.priceTagText}} {{deal.multipleTagText}} {{deal.ageTagText}} {{deal.newTagText}}An ecommerce business allows for much higher revenues than an affiliate site since your site is doing the direct selling of products instead of just taking a cut.
Ecommerce businesses come in many forms and offer possibilities for major revenue that can be grown year after year.
In this write-up, we cover where to look for ecommerce businesses for sale, due diligence, valuations, risks, pros and cons, and much more.
Where To Buy An Ecommerce Business?
There are two main options when it comes to buying an ecommerce business. One is going private while the other is going through a broker/marketplace.
There are pros and cons to both methods, but which is ideal?
Private Sale vs Broker
Private sales are typically not that common but they represent the best way to get a good deal on an ecommerce business for sale. The first step in this approach is reaching out to existing eCommerce businesses to gauge if they are interested in selling. Most are likely to decline or not respond. Out of those that respond, not all will be good fits after due diligence.
Private sale does open up potential options and allows a buyer to get a crack at an existing business that hasn’t been heavily scouted because it’s not on the open marketplaces.
However, going the broker and marketplace route saves a large amount of time because these are ecommerce businesses where the owner has already decided to sell.
Best Marketplaces For Buying an Ecommerce Business
When it comes to buying an ecommerce business, three online business brokers consistently come up in conversation: Empire Flippers, Flippa, and FE International
Empire Flippers
Empire Flippers has a reputation for being one of the best marketplaces for looking at websites and online businesses. The search function of the marketplace makes it easy to separate the ecommerce businesses from SaaS, niche websites, or other online businesses.
Empire Flippers does some basic due diligence and offers information on each business for sale including monthly net profit, price, multiple, etc. On higher priced listings, they often include an interview with the seller which contains valuable information on the business and its operations.
Some sellers are even open to email communication during the selling process, which is a definite plus for the due diligence section of the process.
Flippa
Flippa is well-known as the largest open marketplace for online sites and businesses in the world, and there are good deals to be found here.
In contrast to Empire Flippers, Flippa performs no due diligence on the listings there. That means an extensive due diligence process is crucial to avoid being scammed and to ensure the business is high quality.
As an open marketplace, Flippa has the largest number of listings of nearly any Internet business broker. However, it can take quite some work to sift through the listings and find the diamonds in the rough.
FE International
FE International has been a major marketplace for buying and selling successful businesses for many years. Their team brings years of investment banking experience to the nascent online business acquisition space.
They tend to focus on larger businesses that have six-figure valuations or higher, so buyers on a budget will need to keep that in mind.
Quiet Light
Quiet Light is another major marketplace for buying or selling ecommerce businesses. One of their differentiators is that each of the advisors either owns or sold their own Internet business. This gives them hands-on experience when dealing with ecommerce businesses for sale.
Quiet Light mostly lists businesses in the $250,000 – $1,000,000+ list price range so keep that in mind if you’re on a budget.
Buying vs Building an Ecommerce Business
There are pros and cons to building a business from scratch just as there are both pros and cons to purchasing an existing ecommerce business.
Benefits of Building From Zero
Building an ecommerce business from scratch has its challenges. It takes time to create content, ramp up the production of a product, and go through the labor-intensive steps of creating a new business.
This can be intimidating, but there are many advantages to building from scratch. One is full control. The ecommerce business can be set up in a niche or industry where you have strong knowledge or passion.
Controlling the early factors of what industry to enter, what products to sell, and to scout the competition are definitely positives of going the starting from scratch route.
Pros
- Can handpick the niche or industry the ecommerce business will be in
- Important for ecommerce beginners to learn the ropes
- Full control over the business from start to finish
- Full control over the scaling process
- Less investment bootstrapping vs. buying
Cons
- Takes a much larger time investment
- No guarantee of a successful market or product
- More possible points of failure for beginners to mess up
Benefits of Purchasing an Existing Business
If starting from scratch sounds like too much of a time investment, there are benefits to going with buying an existing ecommerce business and scaling it up from there.
An existing ecommerce business has products, a way to sell them, and an existing customer base. If the website has good authority and organic traffic, that could be another big plus. They have already put in the hard work of setting up manufacturing, the supply chain, and shipping products to customers. They’ve also figured out how to sell their products to their customers.
For prospective buyers, this eliminates a lot of risk. Starting an ecommerce business you have to figure out supply chain, marketing, operations, and more. By buying a business, you can takeover the existing infrastructure and then grow it from there.
Pros
- Existing infrastructure is in place
- There’s a real-world track record for the business
- Historical sales numbers can make for more accurate future projections
- Not starting from scratch
- Revenue stream from day one
Cons
- High cash price upfront
- Extensive due diligence required
- Can take a lot of time to find the right deal
Due Diligence When Buying an Ecommerce Business
Nearly all prospective buyers buy with a growth thesis: that is, they believe that they will buy an ecommerce business, grow revenue and profit, and then decide whether to flip or keep it. The idea is to get a good deal on an ecommerce business that is undervalued or has unrealized potential that the buyer believes they can tap into.
Make sure to check on the following numbers during due diligence to get a realistic picture of what the business is worth and what its potential could be.
Business Performance: The Financials
At the core of every business is the profit and loss statement. When analyzing an ecommerce business for sale, the first thing you want to do is look at overall revenue, gross profit, and net profit over the last 12 months.
You want to look at two primary things: the raw numbers and the trends. What size is the business? Is it selling 10-100 products every month or selling 1000s? In most cases, the larger the business the more established and secure it is.
You want to also look at the trends. Is revenue trending up/stable/down over the last 12 months? What about gross profit and net profit? Use the trends to paint a picture of the business and forecast where it could be under your ownership.
Note: Margins matter in an ecommerce business! Most ecommerce businesses run at a 20-25% net margin. Having a higher margin is almost always better as it gives you more flexibility with costs before breakeven/losing money territory.
If anything looks odd or suspicious in the P&L, ask follow-up questions. This is a crucial part of the due diligence process and one of the most important.s.
Customer Acquisition Channels
After reviewing the financials, next evaluate the source of the sales.
How are customers acquired? Is it all paid traffic? All organic traffic? A mixture? Do they use an ads agency or do it all in-house?
Looking at an ecommerce business, you want to know exactly what channel drives the majority of revenue for the business. For many ecommerce businesses, this will be a mixture of Facebook/Instagram ads and Google Ads.
For each channel, ask about the customer acquisition cost (CAC). How much does it cost you to acquire each sale? That will give you an idea of profitability on a per-order basis.
Evaluating the customer acquisition channels allows prospective buyers to easily see the strength and weaknesses of the business. It also presents opportunities.
As an example, if a buyer is looking at a business with good Facebook ads but no SEO presence, he can implement a SEO strategy to grow sales.
Ecommerce Metrics that Matter: CAC, LTV, and CVR
Most ecommerce businesses can be summarized by a few metrics.
As discussed above, customer acquisition cost (CAC) is how much it costs you to acquire a customer. This is easiest to see when using paid traffic as a traffic source.
LTV stands for lifetime value and is how much a customer is worth to you. This varies based on the product you’re selling. For example, a customer of a monthly subscription box business may place 12 orders over the span of a year – making them worth $300+.
CVR stands for conversion rate. If you get 100 people to your website, how many of them will place an order? A standard ecommerce conversion rate is ~1.5-2%.
You can use these metrics to simplify the financials of the business.
How much is their CAC vs their LTV? Can they spend more to acquire a customer? Or are they losing money on the 1st purchase hoping to make it back with future orders? Is their conversion rate below or better than average?
Looking at the relationship between these metrics allows you to evaluate a ecommerce business for sale.
Supply Chain: 1st Party vs Dropshipping
If the past couple of years have proved anything, it’s that no supply chain is immune to potential interruptions.
Do they produce their own products? Rely on dropshipping? If they rely on dropshipping, where is the manufacturer located? What is the average shipping time?
Understanding the supply chain setup being inherited is crucial when dealing with ecommerce acquisition.
Legals
What are the specific legal challenges of the industry? Are there terms of service on the site not allowing an email list to be sold? Is there a privacy policy on the site? Do they have a cookie consent form? If the business is done internationally, how do EU, Canadian, or even state regulations in the U.S. create potential issues?
Note: One problem that many larger ecommerce businesses encounter is being ADA-compliant. ADA stands for the Americans with Disabilities Act and is a set of regulations ensuring websites can function for people with disabilities. Many times, lawyers will scan for websites that are not ADA compliant and threaten to sue them unless they settle (often for $10,000+).
Understand all the legal aspects and don’t assume it’s all being done properly. Verify.
Design, Branding & Platform
Does the site look professional, or does it look like someone using a 10-year old site builder put something together and then forgot about it?
Has any branding or marketing work been done? Does the business stick out in any form (good or bad)?
Understanding how progress can be made in these areas, or seeing them well taken care of, can tell a potential buyer a lot.
Make sure whatever platforms being used are functional, secure, and fully updated.
Competition
What does the competition look like? Is this a very competitive niche where this business carved out a very loyal group of customers? What’s the actual quality of the competition? What’s the growth potential?
Light competition or heavy competition can both be good or bad depending on the full picture. However, evaluating the competitive landscape is an essential part of the due diligence process.
Out-of-the-Box Advice People Won’t Tell You
There’s plenty of advice out there for acquiring an ecommerce business. Honing the due diligence skills requires experience, and understanding there’s a number of nuances involved to find the truly great deals while avoiding hidden landmines.
Speak to Suppliers Before You Buy a Business
The ecommerce business is going to be in a specific niche or industry. Talk to common suppliers. Are there supply chain issues on the horizon? Any problems with raw materials or supplies known in the industry but not outside of it?
Talking to suppliers can reveal a lot of intra-industry knowledge that changes a buyer’s perspective on the pros/cons of a potential deal.
Avoid Aspirational Sellers
You might consider buying because you see the potential for huge growth, but that potential shouldn’t be priced in. Remember – you are buying the business as it exists today not what it could be a year from now.
It’s often unproductive to talk with sellers who have an unrealistic list price in mind.
If the selling price has no relation to traffic, sales, or market-accepted multiples it’s time to walk away to a better deal rooted in reality.
Find Out Why They Are Selling
There are many good reasons for selling a successful business. However, if the business is doing well, asking why they are selling can reveal a lot of information.
Is it because of a lack of interest? Is it because the business is declining? Health reasons?
If a person is dodgy or evasive with this question that’s usually a red flag. Selling generally doesn’t happen on a whim and the reason for selling might come with a story that brings a lot of additional information with it.
How To Value An Ecommerce Business
There are a few main things to look at when trying to come up with what is my business worth. These steps are critical for placing an attractive bid for an ecommerce business.
Formula for Valuations
The general formula used is as follows:
To calculate the profit, take all of the revenues from the business minus operational costs and cost of goods. Do not factor in any growth capital (e.g., website design, content) since such costs are one-time.
The valuation multiplier is a monthly value based on the industry trends.
Figure out a Valuation Multiple
The going rate for monthly valuation multiples are in the 35X to 40X on average. However, for a very stable business, it can get up to 50X multiple.
Growth, Potential, and Trends
Some buyers value stability and a long history of selling over all else while others want to see positive growth over recent months and the potential for future growth.
Is revenue and profit increasing over the last 12 months? The valuation multiple will likely be higher then.
Have revenue and profit stayed the same over the last 1,2, or 3 years? This indicates the business is extremely steady and likely to continue to do well in the future.
After going through the due diligence process, you should have an extensive idea of the strengths and weaknesses of the business. Using that information, you can gauge exactly how much the business is worth to you.
End Goal – Flip or Passive Income?
What’s the end goal of the buyer? Is this an acquisition for long-term passive income that keeps generating more cash month after month, or is it to scale up revenue and sell for a higher one-time cash payment to a new investor?
Both are viable strategies, but they also change how much a buyer might be willing to offer during the valuation process. A buyer looking for a flip may offer less money in order to maximize his return on investment. A buyer looking to hold long-term may offer more because he intends to run the business for multiple years.
Main Takeaways
There are several important takeaways from this article when considering diving into investing in an ecommerce business.
- Avoid aspirational sellers
- Go heavy into the due diligence process
- Don’t be afraid to approach ecommerce businesses to gauge interest in a private deal
- Have short and long-term goals for how to improve the business upon purchase
- Negotiate the valuation if the seller’s suggestion isn’t satisfactory
Acquiring and improving an ecommerce business can be a challenge, but purchasing the right one can lead to massive profits and provide great returns.
