Buying an E-Commerce Business: A Step-by-Step Guide
The e-commerce business model is continuing to grow in popularity.
In a world where more and more transactions are taking place over the internet, it makes sense to want to own an e-commerce store—but where do you begin?
You could create your own e-commerce store from scratch, but it won’t guarantee you will ever earn anything. This is why many investors and entrepreneurs are choosing to purchase businesses that are already successful and generating cash flow, leaping ahead of the business-building stage.
While it can be a smart move to acquire a business, you want the buying process to be as smooth as possible. That’s why we’re using our experience to tell you exactly what to look for when buying an e-commerce business.
Private Sale vs. Broker
Where you buy a business from must be one of your first considerations.
Your primary options as a buyer fall into two main categories: private sale or brokerage.
A private sale is negotiated entirely between you and the current owner. If a marketplace doesn’t vet the businesses for sale, this leaves the door open to businesses of lower quality. On a marketplace like Flippa, you’ll spend more time sifting through listings of unsuccessful businesses.
As a brokerage, we don’t mind admitting our biased stance on this topic. However, buyers on our online marketplace get to use all the services of the broker without paying for it. A broker’s commission is always taken from the seller’s side, not the buyer’s.
A business broker acts as an impartial third party, helping both sides find the right deal. Each brokerage’s offering will be slightly different, but at Empire Flippers, we provide full service, from vetting to escrow and migration. This means we vet every business that applies to be listed on our marketplace to ensure their high quality.
A brokerage will also help to keep a business valuation closer to market value. While undervaluations do represent good prospects, an impartial party is helpful when a seller inflates the asking price and overvalues their business.
Due Diligence Checklist for an E-commerce Business
This due diligence checklist will provide a framework for finding a business that is right for you.
Systematizing the process allows you to work through your list of potential acquisitions as effectively as possible. This ensures you don’t waste your time on unsuitable opportunities and focus instead on successful businesses.
1. Vetting the Accounts
Once you’re interested in a business, you first need to delve into its accounts. While this might not be the most exciting part of buying an online business, it’s one of the most important.
Analyzing a business’s profit and loss statement will show you all its incomings and outgoings. To give you an understanding of the business’s true earnings, the statement should be broken down into the following parts:
Total units sold: This will show how many units of each SKU sell on a month-by-month basis. Data like this is a great way to see exactly what products are generating revenue.
Maybe a business has 50 SKUs for sale, but only one SKU is actually selling any units. While this isn’t necessarily a deal-ending factor, you should be aware of it. This also shows you when each SKU was released, so you can see how it has performed over time.
Gross income: The total of all the incomings will be the gross revenue: this encompasses everything the business makes across all its income streams minus costs such as returns or discounts, to make the figure more accurate.
The gross income will be the largest and most impressive figure, but it doesn’t truly represent how the business is doing. It’s imperative that the accounts differentiate between this and the other types of profit.
Gross profit: The gross income minus the cost of sales. This includes some common costs associated with running an e-commerce business, such as payment-processing fees, third-party fulfillment (3PL), and delivery. Removing these costs from the gross income provides a truer figure of how much it costs to get the products to the customers.
Expenses: The operating costs: this should include everything it costs to run the business. Operating expenses vary greatly between e-commerce stores, but some common expenses include web and domain name hosting, contractors and employees, and software.
Net income: The gross profit minus expenses: this provides a true figure of how much the business is making per month. This is the amount you as the business owner could take home each month. The net income shows what trajectory the business is on: is it growing, holding steady, or in decline?
Understanding the accounts will allow you to see precisely how the business makes money and whether there are any red flags or great opportunities. The business should also provide access to platforms that back up the claims about their income, such as Shopify’s analytics.
2. Understanding the Supply Chain
Before you buy an e-commerce store, you’ll want to understand how it gets the products to the customer. This is a critical point of any business and will help ensure orders continue to be fulfilled after you are handed the keys to the business.
Confirm with the seller of the e-commerce site that any supplier relationships and contracts they have negotiated will transfer over to you. You don’t want to find out that a seller negotiated a great rate with a supplier only for them to raise the rates after the point of sale.
Fortunately, most manufacturers and suppliers are more than happy to work with a new owner of the business.
You should seek information on how the products are acquired, such as where they are manufactured. Many e-commerce stores source products from China, where they can be made at a lower cost. This shouldn’t be an issue, but lead times will be longer, meaning you’ll need to keep an eye on inventory levels to avoid running out of stock. Also ask about the opportunity to create new products, as this can be a great way to take the business to another level.
The fulfillment process is part of the supply chain that is paramount to a business’s success. The use of a 3PL or similar service makes owning an online store accessible to almost anyone. Ideally, you’ll want to arrange a call with the seller to ask how this side of the business is operated. It is usually a bad sign if a seller is unwilling to talk.
At Empire Flippers, we try to include seller interviews in our listings, in which you’ll hear the seller talk about their business in their own words, including how the supply chain operates.
3. The Channels of Acquisition
How does the business get its customers?
An e-commerce website can drive traffic to its store in a variety of ways, including:
- Search engine optimization (SEO)
- Paid traffic
- Social traffic
Each of these traffic sources is valuable in its own right, and one of the best parts of buying an established business is the marketing data you receive. This marketing data corresponds directly to the business’s customer base.
Using all these marketing strategies isn’t necessary to make a successful e-commerce business. If a business is lacking in one area of marketing, adding another traffic source could take the business to the next level. If you don’t have the know-how in a particular area, you could hire someone who does.
The bottom line is that you need to see a breakdown of the business’s traffic sources. Whether this comes from Google Analytics or another reputable analytics provider, what’s important is for you to see what’s working and what could be improved.
You should also find out where this traffic comes from. The country that generates the most traffic should always be the store’s main market for sales.
SEO: An e-commerce website can easily include a blog to make the most of Google search traffic. Of all the online marketing strategies, SEO is one of the most cost-effective when done right. Once implemented, it requires little in terms of upkeep or additional spending, meaning the customer acquisition cost is low. Its downside is that it can take some time to see results, especially when starting SEO from scratch.
If a business already relies heavily on SEO to drive traffic, then it is helpful to analyze which pages generate that traffic and the backlink profile. This ensures that the traffic is legitimate and not acquired through spammy tactics that could lead to getting penalized.
Paid advertising: Google and Facebook ads are the most widely used forms of paid advertising. They have the potential to be highly lucrative when optimized, but they can also eat away at your profit margins if done incorrectly. Buying a business that already does paid advertising successfully can save your time and money. However, if a business isn’t using paid ads, then implementing them can bring almost instantaneous results.
Viewing data on things like ad spend, cost-per-click, and conversion rates will help you understand how well-optimized the ads currently are. This will show you how much room for improvement there might be.
Social media: We’ve seen e-commerce brands with huge online followings sell on our marketplace. Social media is a great way to diversify traffic sources, making the business more stable. Again, this can be added to an e-commerce business after purchase to improve it.
4. Social Media and Email List
Social media can be a great way for customers to hear about products and news from your e-commerce business. It also acts as social proof, allowing customers to post about your products and potential customers to see your products in use.
Products that make it to trending status can achieve many more sales. If an e-commerce brand isn’t using social media, you should consider adding it to maximize the potential reach of the business.
Another valuable and often-overlooked marketing tool is an email list. Building and monetizing an email list means you own a traffic channel you can use to market your products as you choose. Tricks like remarketing are particularly useful for an e-commerce website.
Fortunately, setting up an email form to capture people’s email addresses is pretty simple. You should consider adding this improvement early on if the business doesn’t have one already.
5. Storefront Design and Branding
You’ll want to find out how the store was created. How it’s built, whether through an e-commerce platform like Shopify or a custom-built design, will greatly impact how you run it. To manage the technical aspect of owning an online store, you will need to have the relevant skills or to hire someone who does.
Ask the previous owner how they run things and whether they used any employees or freelancers. Getting a virtual assistant on board that can help with simple tasks like customer support and fulfilling orders, which frees you up to improve the business. If the seller is moving on from e-commerce, they might be happy to pass on the details of people who helped them run the store.
Take a look at the website design as though you were a customer. Is there any room for improvement? Just because you’re buying an already established business idea doesn’t mean you can’t take it in a new direction. Assess what’s working and what can be improved.
6. Know Your Competition
Our focus so far has been on analyzing the e-commerce company you’re interested in buying. However, you also want to dedicate time to analyzing competing companies.
Whether it’s a small business or a market leader, every company has competitors. Customers are becoming more and more astute at shopping around for the best products and prices. This means that online retailers are competing against each other more than ever before.
Tally up the positives and negatives of your competitors and compare them to the brand you’re interested in buying. Ask yourself which one you would purchase from if you were a customer.
Buying an E-commerce Business
This checklist should help you not only to distinguish successful businesses from the not-so-successful but, more importantly, to find the right business for your needs.
This checklist was about understanding the difference between must-haves and improvement opportunities. Once you know what type of business you want, it becomes easier to use this system to find it.
Whatever the size of the business you’re buying, it is beneficial to improve it. By increasing the net profit, you speed up your return on investment and create an even more valuable asset. This means you could sell it for a profit later on.
Take a look at our e-commerce business marketplace to see what’s for sale right now. If you want to learn more about buying an online business, you can arrange a call with our sales team. They would be happy to talk you through the buying process, find listings for you, and help you to structure competitive offers.
Using our marketplace and our buying checklist will help you find the right e-commerce business in no time at all.