[Case Study] How to Flip an E-commerce Business for $345,000
It sounds too good to be true.
An entrepreneur buys an online asset and later decides to sell it for almost double what they bought it for two years later.
You might think you’d have to be an expert marketer or superstar computer genius to grow a business this much in such a short time. But that’s not what we see for most businesses that are bought and sold on our marketplace. The person who bought and sold this business spent about ten hours a week managing it, with a small investment in search engine optimization (SEO) and some Google Adwords he had the know-how to setup.
He is living proof that you don’t need to spend long hours or work late into the night to double your profits from an acquired online business. Sometimes all it takes is confidence in knowing what you’re good at, hiring people to fill in the gaps, and following tried and true practices to grow a profitable business.
Let’s look at how this buyer-turned-seller grew the business he bought from us, and in just 24 months ended up selling it with us to another investor for a much larger exit.
When the Glove Just Fits
When most people think of a hands-off business, e-commerce is usually far from the first thing that comes to mind. When you take into account product research, dealing with multiple suppliers, shipping, and customer service, many owners struggle in the beginning stages to automate or build a team for the daily routines of the business. However, in spite of these challenges, e-commerce is still an attractive model. E-commerce gives you far more control than almost any other business model does, from how you approach marketing to the actual sourcing and design of the products you’re selling.
Having more control over the business was exactly why the seller, Felipe in this case, had decided to go with this business model. The lucrative Shopify e-commerce business was created in January 2013 and focused on a hybrid e-commerce and drop shipping model which utilized their own in-house production in tandem with outsourced suppliers for larger corporate accounts. This, coupled with the Shopify platform, offered him more control over his business.
On the up side, businesses that sell direct to their customers rather than through a platform like FBA will also enjoy keeping more of the profits. The increase in margins led to a business that generated an average of $11,882 in net profit stemming from a total revenue of $17,571 per month.
The majority of the business expenses were spent on Google Ads and one part-time employee who works on design and fulfillment of product goods, and who was eager to stay with the company after the sale.
Another huge advantage of selling through the Shopify platform is that you can also build an email list and social media following. The owner was able to build an addressable audience via email who would become repeat customers, as opposed to shoppers who just happened to stumble upon the site, bought just once, and never came back. The business had over 27,000 social media followers and an email subscriber base of over 2,000. Promotional emails were seldom sent out, and this offered a great opportunity for the new owner to optimize the business with conversion rate optimization (CRO).
This number of subscribers might not seem like many, but when you consider the high-profile contacts it included, from corporate accounts including MTV, Nike, Adidas, Sephora, and Zara, among hundreds of others, this email list was a game changer for any prospective buyer wanting to cash in on this opportunity.
When Preparation Meets Opportunity
Felipe had originally purchased this business back in early 2016 when the business was originally listed on our marketplace for $175,000. He could see that the business had huge potential for growth with minimal effort required on his part, based on business margins hovering right around 67%.
This, in conjunction with low manufacturing costs, meant that he could focus his investments in the business on building the SEO for his products. He also knew that focusing on advertising campaigns would exponentially grow revenue in a short period of time with a fruitful exit in a few years.
He purchased this business just two years after the initial launch of the website. The original seller had a rapidly-growing business and had stumbled upon a profitable, yet overlooked, niche with excellent margins. Felipe saw other opportunities to reach impressive growth. He was running two other businesses, yet due to this perfect opportunity, with its unbelievable margins, he knew that this was something he couldn’t let pass by.
He had a unique skill set that allowed him to implement other strategies that the original owner hadn’t. He used his social media skills to build business pages that generated traffic and profits for the business and mastered the skill of running successful paid ad campaigns which brought even more traffic to the business. All of this led to lucrative deals with dozens of large corporations, non-profits, and universities.
He did a phenomenal job of growing the business, working on the fundamentals and making sure it was well-suited for an acquisition before listing it back on our marketplace.
Before listing the business, Felipe invested in the following:
- He hired a full-time employee who was willing to stay on after the acquisition.
- He switched to Shopify for ease of use.
- He ran paid advertisements to build a list of leads and encourage repeat business.
- He explored alternative product sources and switched vendors to reduce expenses.
- He purchased printing machinery that was transferable in the sale.
- He ensured that ample inventory was on hand upon acquisition.
Revenue had grown 25% in 2018, with the repeat customer rate rising by over 18%, which is something that many businesses are able to accomplish after establishing an addressable audience and utilizing their email lists. With all of these changes in effect, the buyer would have an easier-to-run, profitable business.
Not long after Felipe’s business went live on our marketplace, we received multiple deposits from potential buyers all wanting in. Felipe’s optimized business was on our marketplace for only 43 days, and within 8 days’ time it had 9 depositors eager to get the full details on the niche.
One of the many benefits of selling a business that has already been on our marketplace is that he was already familiar with how the transaction would work throughout the different stages of the process. He was prepared to speak with interested buyers, answer all of their questions, and provide ongoing support as needed, having been in the buyer’s shoes for this exact business once before.
When Felipe decided to switch from a private platform to the Shopify layout, he did so with good reason. Buyers are keen to acquire e-commerce stores on Shopify because it is one of the most popular platforms and is much easier to migrate to a new owner as it offers consistency across the board. It’s also easy to use, and it has detailed analytics which can help guide new business owners in their decision making and optimization processes.
The Shopify platform also has built-in tools and third-party integrations that make customizing the site and scaling when needed inexpensive. Not only do you have the ability to manage inventory, host a blog, and offer up-sells, but you can also offer cross-sells with just a few simple clicks on the backend. A buyer familiar with Shopify has an incredible advantage when acquiring a business that’s already profitable, as the legwork of finding a profitable niche and sourcing inventory has already been done for them.
A buyer can take over this type of business almost immediately and even allow the seller to maintain a staff account so they can check in and offer support, if that’s part of the agreement. All of these great features make this particular business model an attractive one for most buyers, and we often see these types of businesses sell on the marketplace quick.
The Offer on the Table
A serious offer came into play not long after Felipe listed his business for sale. The offer on the table was placed just before we re-evaluated the profit and losses (P&L) numbers, right as the sale price for the business had actually increased because of the re-evaluation. The reason this happens is that at the end of the month we always take into account what a business generates in revenue and update the listing price accordingly. In this case, Felipe’s business had continued to grow its average net profit, due to the change in suppliers and producing the product in-house with a business equipment purchase.
The business was growing at an exceptional rate. The list price increase was in direct correlation with an increase in average net profit seen through a 12-month window. While this was great for Felipe, it can also have a negative effect on the buyer, who was familiar with the old listing price. Buyers will often have a fixed number for how much they are willing to spend on purchasing a business, as was the case with this particular buyer.
Felipe had a difficult decision to make. Would he take the $345,000 being offered? Or would he go back into the negotiation process and try to gain those extra few thousand dollars that were part of the new valuation? If he took the offer, he would double his initial investment in just two years time.
In the end, Felipe decided to take the offer.
He was happy with the deal, since the buyer had made a good impression on Felipe. Being pleasant to work with is a subtle advantage a buyer can give themselves when making an offer. After all, Felipe knew he’d be working with the buyer for a couple months during the knowledge transfer process. It’s not uncommon that if a seller relates to and believes in a buyer, they’re often willing to accept a lower ultimate sales price to help that buyer succeed with the new asset. Felipe offered a generous seller support period including three months of Skype calls and six months of email feedback. He also went the extra mile by offering to fly out to the buyer’s location to turn-over the entire business process in person after delivering the equipment needed to produce the product.
The Buyer’s Opportunity
The buyer was thrilled with the opportunity the business model provided. Some of the opportunities that Felipe was unable to capitalize on included hiring a sales team to do outbound marketing and to secure other large corporate accounts. The product line was another area that could be expanded. These optimization and expansion strategies were things Felipe had been planning to do after collecting two years worth of data while running the business.
When all was said and done, both Felipe and the buyer were happy with the final sale price, knowing that they had the business chemistry to work together. Felipe almost doubled his investment, and the buyer obtained a growing business that looked to be a winner.
The buyer acquired a profitable line of inventory, valuable dropship relationships, equipment related to the manufacturing, and an employee who could run the day-to-day business operations.
The buyer also reaped the benefits of the SEO efforts that Felipe had put in, including all the advertising assets and analytics, an email database, and active social media accounts.
Of the many decisions facing the buyer, one of the most important was whether he wanted to take upon himself the daily tasks that Felipe had been carrying out or outsource them. For example, Felipe was solely responsible for managing customer service and ordering supplies. The buyer could either do such tasks himself or look into bringing on another part-time employee. This was something Felipe was willing to advise the buyer on during the knowledge transfer period.
Commanding the Highest Sales Multiples
Not every business warrants multiples of nearly 30x, and for some business models this might seem like a dream. But for a high quality business like Felipe’s? In our experience, a 30x becomes more the norm rather than the exception. Our buyers know that if they see a multiple this high, they’re looking at a business that offers a serious income stream. A moneymaker boasting many systems already in place makes it a desirable asset for potential investors. This particular investor was excited to start working with Felipe on the next chapter in this venture.
And of course, we were there for that next chapter.
We helped Felipe transfer the business over with our migration team and helped make sure the buyer had a smooth transition into becoming the new owner of the lucrative e-commerce store.
We familiarize ourselves with the goals of both the person selling their business and the buyer interested in making a purchase. Because we had the pleasure of working with Felipe in the past, we knew he had a quality business, so it was easy to command a strong multiple. Helping the buyer with their criteria discovery, we were able to match the two, allowing us to sell Felipe’s company quicker and to find the perfect business for the buyer at the same time. Both buyers and sellers win in these transactions because everything is transparent. By keeping negotiations an open dialogue, no question goes unanswered.
We get that selling can be stressful, though. That’s why if you have any questions at all, just schedule an exit planning call with us and we’ll walk you through the process while giving you industry-leading strategies to improve your valuation.
Or maybe you’re looking to buy as Felipe originally did? We’re happy to help you create criteria that make sense for your current skill sets and business goals. Set up a free call here with us if you’d like to start your buying journey.
If you’re intrigued by this case study and are eager to start your empire, give us a call or put down a refundable deposit in our marketplace. Whether you decide to buy a business and hold it or sell it down the road for a substantial profit, we’re here to help you on your journey to success.