If you’re daunted by the prospect of starting your own business from scratch — coming up with a killer business idea, sourcing reliable suppliers for new products and building a customer base out of nothing — yet still have a strong hankering to become an entrepreneur, all is not lost.
Many investors and entrepreneurs are opting to purchase full-fledged ecommerce businesses that are already generating profit rather than starting from zero.
A whopping 20%%20industries.-,Percentage%20of%20businesses%20that%20fail%20in%20the%20U.S.,year%20earlier%20in%20March%202020.)) of businesses fail in the first year, according to a LendingTree analysis of data from the U.S. Bureau of Labor Services. With odds like those, it’s not surprising that some entrepreneurs prefer to sink their time and money into a business with a market-tested product and built-in audience.
Your best bet is to acquire an ecommerce company in a familiar niche with an acceptably-sized total addressable market (TAM) and low competition. Don’t compete in a saturated market unless the business has a unique value proposition.
Like starting your own business, you should have some expertise in running a business or at least understand the niche in which you will compete.
Why Buy a Business Instead of Starting One?
Buying an existing business is usually more expensive in the short term than starting one from scratch, in which the costs are spread out over several months or years, but the risks tend to be lower.
Most of the groundwork of starting a new business has been done for you — hiring employees, establishing cash flow and building a customer base. Businesses with a proven product and established reputation are more likely to generate repeat purchases and require less marketing spend.
Most sellers want to see their business succeed even after they renounce ownership, so they may be willing to lend support and guidance after the sale to help take it to the next level.
Business owners routinely sell profitable businesses for various reasons: to focus on other business ventures or to cash out to reinvest elsewhere. Lenders are also generally more willing to finance the acquisition of a business with proven potential than to fund the operating costs of a startup that has yet to break even.
How to Find Ecommerce Businesses for Sale
Before browsing businesses for sale, decide what industry and niche you want to focus on. This means asking yourself existential questions about your interests, how much time you can devote to running the business and the budget you can sink into acquiring the business and investing in its future success.
If you can afford it, go for a mature company (three-plus years) with established traction.
There are several ways to acquire an ecommerce store, from negotiating directly with the seller to going through a brokerage.
Marketplaces don’t always vet businesses for sale, so you’ll have to sift through the listings. Each listing should contain key information on the size of the business, monthly revenue, average profit, profit margin, average sale and operating expenses — however, these stats may not be verified, so be sure to cross-reference the business’ income statements.
Current owners must disclose on their profile why they’re selling the business and suggest ways to grow the venture. Marketplaces also provide safe store transfer, encrypted payment capture and a secure messaging platform for buyers and sellers to communicate.
Some business owners hire brokers to market the company to qualified buyers and facilitate the sale on their behalf. Brokers execute deal closing, negotiate contracts and manage the relationship between buyer and seller.
In exchange, brokers receive a percentage of the sale. The seller pays a broker’s commission, so you, as a buyer, can use the broker’s services for free.
Brokers assume the role of an impartial third party to help buyers and sellers find the best deal. They provide buyers with financial statements, obtain relevant disclosures from the seller, negotiate the sale price and handle the paperwork necessary to legalize the acquisition.
Brokerages keep business valuation closer to market value, so you’re less vulnerable to sellers overvaluing their business to inflate the asking price. Brokers may also assist sellers with finding financing options or help the seller set up owner financing.
Advantages to Buying an Ecommerce Business
Buying an established ecommerce brand comes with several perks, including saving time on the administrative minutiae that comes with starting a business from scratch. Acquiring a profitable business may also be less risky.
The average startup takes two to three years to become profitable. An established business has a customer base, a steady revenue stream and brand recognition, which reduces startup time significantly.
You won’t need to invest huge amounts of money in a go-to-market strategy or spend time hiring and training employees. Acquiring a business with an existing market presence lets you focus on using your strengths to grow the business rather than doing the work of purchasing inventory, finding suppliers, the cost of goods and filling out paperwork.
Proven track record.
An existing business can provide positive cash flow from the outset. Typically, a sale is structured so you can cover the debt service, receive a reasonable salary and have some cash left over to reinvest in the business.
Most established businesses already generate enough revenue to cover their costs, which makes lenders more likely to offer financing with favorable terms. Established businesses may also use assets or inventory as collateral.
Given the less-than-rosy statistics on new business failure (1 in 12 of all small businesses close each year), buyers can rest assured that a business that has been around for five years or more was probably doing something right.
Skip the learning curve.
Starting a new business involves copious trial-and-error, from switching out suppliers every few months, to experimenting with various business models and suffering the consequences of poor hiring decisions. By purchasing a successful ecommerce business you can adopt the best practices its founder used to get the business where it is today.
Sellers will tell you what marketing channels they used, how much they spent on each one, and which suppliers to avoid at all costs.
You can review the business’s branding materials and marketing collateral and decide whether to keep it or rebrand the business. You can also keep the business’s existing technology stack and avoid having to shop around for CRM solutions or accounting software.
Disadvantages to Purchasing an Ecommerce Business
Even if you do your due diligence, some businesses will have underlying problems that aren’t reflected in its financial statements. Here are some disadvantages to look out for.
Legacy systems and policies already in place.
Not every online store is a turnkey establishment. Even if you’ve diligently scoured the business’ financial statements and peppered the seller with thoughtful questions about past business performance, unforeseen problems may emerge in your day-to-day operations.
Observe how the business was run, including the workplace culture and root out inefficient processes. If the technology appears outdated and needs replacing, factor this into the overall cost of the acquisition.
It can be more expensive.
Profitable businesses with a large market presence will go for a higher asking price because the owners want to generate a return on their investment. In this case, it pays to compare the costs of starting your own business versus buying an existing one.
On the other hand, be wary of the hidden costs of buying a cheap business that’s struggling. A business may be priced low because of insufficient demand or poor cash flow. If you spot any red flags — fluctuating revenue, high employee turnover or negative customer reviews — beware of how past mismanagement may impact the business's future potential.
Past performance is not a guarantee of the future.
External factors such as competition and changing consumer tastes can impact the business’s future performance. Also, consider whether the seller’s personality, know-how and established relationships may have influenced the business’s success. Perhaps they were charismatic, well-connected and skilled at convincing investors to support an ultimately doomed product.
Learn as much as you can about the business’s reputation. Talk to vendors and customers and find out the nitty-gritty details you won’t find on an income statement. Look up consumer ratings and reviews on social media and websites like Better Business Bureau, LinkedIn, Yelp or Google.
If the business’s reputation is less-than-ideal, consider how much time and money it will take to repair any negative aspects.
Types of Financing
There are many ways to finance a business purchase, such as a loan from a traditional bank, online lender or Small Business Administration. Some sellers even offer owner financing or equity financing. Choosing the right type of financing depends on the asking price, your cash reserves and your risk profile.
Debt financing means the buyer takes on the business’s existing debt and liabilities, which are then subtracted from the business’s sale price. Of course, you must generate enough cash flow to cover the debt service.
For this reason, debt financing is a high-risk, high-reward strategy. Pay careful attention to the company’s projected cash flow and net profit margins before taking this on.
Debt financing can remove the pressure of purchasing a business in cash or taking out a massive loan. It can also simplify price negotiations and deter complex valuation discussions.
Equity financing entails allowing the owners to retain a certain business ownership percentage. The benefit is you pay less cash for the acquisition and retain some of the seller’s expertise and insight, in exchange for giving up some autonomy.
Some business owners want to wash their hands of their business so they can move on to the next venture, while others want to maintain limited control. The equity share offered to them will be based on the new company's valuation by an objective third party.
Mezzanine capital is a combination of debt and equity financing that gives the seller the right to convert the debt to an equity interest in the company in case of default. However, unlike equity financing, mezzanine capital isn’t secured by specific company assets.
Instead, it’s based on historical and expected future cash flows. The interest on a mezzanine loan is high, but it is tax-deductible. The way mezzanine financing works is very similar to how most people purchase a house: they pay a downpayment and the remaining amount is taken as a loan.
Off-balance sheet financing.
This is an accounting method where companies record certain assets or liabilities in a way that prevents them from appearing on their balance sheet. Companies usually do this when they need a large amount of capital and are about to reach their borrowing limit. Leaving certain items off the balance sheet keeps the business’s debt-to-equity and leverage ratios low, letting them raise more capital while paying a lower interest rate.
Given the high risks of off-balance sheet financing, you should only use this strategy if traditional loans aren’t possible or if you need to borrow a large sum of money.
Making good investment decisions is a numbers game. Before buying your first ecommerce business, you must sift through numerous deals and select the best option based on your budget, area of expertise and risk profile.
Dealflow refers to the quality and quantity of investment opportunities coming your way as an investor. Finding deal flow is important because you want to keep an objective lens and avoid getting hung up on a single business opportunity.
For example, you might evaluate 100 deals, pursue 10 in more detail and ultimately decide on one investment.
Dealflow comes from building meaningful connections with brokers, investors and business owners who are looking to sell. This way, you can learn about new opportunities to acquire ecommerce business through your professional network.
Get Reps Going Over Multiple Deals
Shortlist the ventures that show the most promise and reach out to the broker or seller to obtain income statements, tax returns, credit reports and any relevant disclosures. Similar to buying a home, you should have multiple options if one doesn’t pan out or you discover an unexpected red flag.
Evaluating multiple deals is important because you may have to decide between trade-offs.
For example, one business might generate more revenue per month than another business, but it has a lot of liabilities. Or, you’re deciding whether to go with a business that sells a limited product line to a niche market at high-profit margins or one that relies on volume to generate profit.
Perform Your Due Diligence
Always ask why the owner is selling the business. Ask them their thoughts on the business's future outlook. Are there factors that could terminate the business, such as changing consumer tastes or technology becoming obsolete? Find out what sales channels the business uses and the volume and projected sales for each.
Make sure all financial statements are audited by a certified public accountant. If the seller has not done, so consider hiring your own accountant to ensure you are making a safe investment.
Ask the owner to let you work in the business before making a final decision. This provides you with an inside look at what it’s like to run the business day-to-day and detect any problems not reflected in the financials.
Have a credit check done on the seller and the business.
Request federal, state, and local income tax returns for at least the last three years.
Vet the accounting.
Review profit and loss statements for every year of business operation. Have margins increased or decreased? Are there any sudden spikes in costs? Are revenues increasing? If not, what is needed to improve revenue?
Ask for tax returns and audited year-end financial statements (balance sheets, income statements and cash flow statements) for the last three years. Have an accountant review key financial ratios including gross profit to net sales, net income to net worth and net income to total assets.
Bottom line: does the company have adequate working capital and a healthy cash flow or is it borrowing money to fund its everyday operations?
Understand the end-to-end supply chain.
For many small businesses, managing a supply chain is a struggle. Does the business centralize purchasing (purchasing for the entire company is made by one department?). Does the business have good relationships with suppliers? Investigate who the suppliers are. Make sure the suppliers are willing to transfer the existing contracts when you take over the business, otherwise you may have to find new ones.
Did the previous owner negotiate agreements regularly, or did they keep renewing the same agreement — thereby missing out on cost savings from loyalty and/or volume? If the supplier is unaccustomed to negotiating with the business, they may be unwilling to do so with you.
Also, determine what inventory levels the company typically maintains. Too much can be a sign the company is struggling to move products or is overspending on inventory.
Here are some other supply chain factors to consider:
Does the company own or lease its production facilities and equipment, or does it outsource manufacturing? Does the business use dropshipping or print-on-demand?
How does the business get the products into the hands of its customers?
What logistics providers does the company work with?
How does the business acquire customers?
Make sure you understand the business’s target market and how to reach them. Is the market growing, stable or shrinking? Does the business rely too heavily on a few key customers? The 80:20 rule (80% of your revenue comes from 20% of your customers) is an accepted standard in most businesses; however, consider what would happen if those customers left.
What is the marketing strategy?
Review the company’s brand style guide and the ecommerce website, social media accounts and email lists. Does the business use marketing automation software to follow up with leads, send emails and retarget cart abandoners? Is there an existing SEO (search engine optimization) strategy?
Ask the seller where and how they generate most of their leads. Look at social media engagement metrics, website traffic, email open rate and lead generation from paid advertising. A high-quality business should generate a healthy number of new leads per month.
Additionally, ask the seller to provide samples of marketing plans and budgets from prior years. When you purchase the business, you will own the rights to marketing assets like email lists, domain names and branding collateral. Make sure these are itemized in the purchase agreement.
What is the competitive landscape?
Who are the company’s competitors and what is their market share? Identify both direct competitors (businesses that offer the same product) and indirect (businesses that offer a different product but target the same customer base).
Analyze each competitor’s online presence by checking online reviews, ecommerce site functionality and social media metrics. Identify each competitor’s strengths and weaknesses, then compare these with the strengths and weaknesses of the business you’re considering purchasing.
Does the business have strengths or a unique value proposition relative to its competitors? If not, you may want to reconsider.
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The Final Word
Acquiring an ecommerce business is a major decision that requires lots of research — not to mention soul-searching!
While the upfront costs are high, buying an existing business offers numerous benefits over starting one from scratch — particularly if you have experience running a business and are familiar with the industry.