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 sale is common. The first step is often reaching out to existing ecommerce businesses to gauge if there is any interest. 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 the 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.
Going the broker and marketplace route does save time because these are ecommerce businesses that are clearly up for sale.
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 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.
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 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.
Due diligence is crucial since all the vetting is the buyer’s responsibility when dealing with purchases on Flippa.
Still, there is some potential for finding a good ecommerce business deal here.
FE International has been a major marketplace for buying and selling successful businesses for many years.
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.
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.
- 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
- 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.
A good ecommerce business might already have a loyal customer base. They already have products and a production process in place. If the website has good authority and organic traffic, that could be another big plus.
- Existing infrastructure is in place
- There’s a real-world track record for the business
- Real-world sales numbers can make for more accurate projections
- Not starting from scratch
- Revenue stream from day one
- High cash price upfront
- Can take a lot of time to find the right deal
Due Diligence When Buying an Ecommerce Business
Buying an ecommerce business for the sake of just owning a business doesn’t make sense. The idea is to get a good deal on an ecommerce business that is selling undervalued or has a largely 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: Sales, Traffic & Conversions
The sales numbers matter. No one wants an ecommerce money that is losing money or making products that virtually no one wants.
Ask for sales numbers, traffic numbers, and take a look at conversions. If anything looks odd or suspicious, ask follow-up questions. This is a crucial part of the due diligence process.
Customer Acquisition Channels
How are customers acquired? Is it all paid traffic? All organic traffic? A paid sales superstar on staff for the company?
How the customers are acquired and where they come from paint a more detailed picture of the value that can let a buyer see where potential strengths and weaknesses of this ecommerce setup might be.
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?
Understanding the supply chain setup being inherited is crucial when dealing with ecommerce acquisition.
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? If the business is done internationally, how do EU, Canadian, or even state regulations in the U.S. create potential issues?
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.
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, but there’s no way of knowing that until doing an in-depth look at what competition is actually there.
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 what little steps long-time professionals take that give them that extra bit of information 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.
A seller trying to get a huge price that has no relation to what their ecommerce business has actually sold should just be avoided.
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? That it’s profitable but only half as much as years ago? 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 to getting a good bid out there for an ecommerce business that caught the investor’s eye.
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 Stability
Some buyers value stability over all else while others want to see growth and more growth potential still there. Looking at all three of these factors paints a picture of what the ecommerce business has to offer and can affect how each buyer sees valuation.
Measuring if the site has one, two, or all three of these can shift how much an investor is willing to pay to acquire that business.
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 revenues 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.
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.