There are plenty of ways to get started as an eCommerce entrepreneur thanks to several types of business models that exist today.
While the barrier to entry is at its lowest, many entrepreneurs prefer to buy an eCommerce business instead of building their own from scratch.
It takes a lot of time to not only find in-demand products in an evergreen niche, but also to grow a reputable brand. Yet eCommerce businesses are all the rage, with many entrepreneurs electing to start their own business to create side income or quit their full-time job and learn new skills.
As seen in our latest State of the Industry report, between 2018 and 2020, the sales price of eCommerce businesses increased by 110%. If we look at last year alone, the average eCommerce business was bought for $538,960.08 at a multiple of 28.4X.
All these numbers sound impressive and maybe a little overwhelming. Does it mean you have to spend over $500,000 to buy a profitable eCommerce business? What are multiples?
Buying an eCommerce business is quite nuanced, and there’s a lot to consider before you commit to a purchase. If you do find a great deal, it’s important to determine whether it’s the best choice for you. When you do find the right business, it can accelerate your journey toward building wealth while learning life-long skills you can carry over to other projects.
We’ll explore why buying an eCommerce business is right for you and what you should consider before committing to a purchase.
Buy or build: why does buying a business skip the queue?
If you dreamed of running your own business, your first instinct might be to start a business bootstrapped.
It might seem like a good idea at first when you look at the costs saved, but the trade-off is the amount of time it takes for you to grow a brand. Our latest State of the Industry report shows that businesses that sold in our marketplace for six figures or more took at least three years to build.
There’s a lot to get right during that time, such as finding product-market fit, lowering your expenses as you figure out how to grow the business by reinvesting the profits, and figuring out which traffic channels result in the highest conversion rates. After all, the entrepreneurial road is filled with failures.
As you’re optimizing your business, it can feel like you’re throwing different tactics at a wall and seeing what sticks.
You’ll probably find yourself throwing a LOT of proverbial tactics before you find what works. Sadly, there isn’t a handbook that tells you exactly how to grow a business without these growing pains.
Instead of starting from square one, you can jump the queue and skip all the sleepless nights and hair-pulling inducing problems by acquiring a business. If you have the capital, buying a sustainable business in a profitable niche means you’ll be earning from day one.
With the right infrastructure and support, you could be running your own business that generates a healthy side income or even outright replaces your day job.
What you do with your new asset depends on your goals. You could just keep it in maintenance mode and reap the monthly profits, or you could scale the business further by expanding the business.
If you don’t have the time, you could hire incubator services like A Better Lemonade Stand to accelerate growth or outsource some tasks to freelance experts.
There are plenty of options once you’ve finalized the deal. Let’s explore how an eCommerce business is valued so you can start preparing a budget if you’re considering an acquisition of your own.
Key factors that influence eCommerce business valuations
There’s a fantastic guide on how to sell an eCommerce business that goes into much more detail about how valuations work. For now, we’ll provide you with the basics.
The three most common ways to value a business involve using seller discretionary earnings (SDE), Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), or using the average monthly net profit.
These approaches are more or less the same. At Empire Flippers, we use an average monthly net profit because we feel it gives a more granular view of a business’s operating performance.
The formula we use is:
Listing Price = 12-Month Average Monthly Net Profit x Multiple
It’s simple to calculate the first part of the formula: take the net profit over a set period (e.g., 12 months) and divide by that many months.
The multiple is trickier to calculate because there are a lot of factors to account for, such as pricing windows, the business’s age, traffic diversity, number of products sold, customer reviews and ratings, and if there’s an email list attached to the business.
We’ll explore each of these factors to understand how they affect the multiple.
Pricing windows (and why 12 months is the gold standard)
As a buyer, you’re looking for as much information as possible about a business before you make a decision to purchase.
Ideally, a business will be valued on its financial performance over the past 12 months. This period gives you a better view of the traffic and revenue earnings in different seasons so you can see where the business enjoys increased sales or where the downtimes might be.
Some businesses choose a shorter period of time (six months or even three months) to reflect a recent growth in revenue or because that’s the earliest the business began to make a profit. While you could explore acquiring a business that’s valued over a shorter period of time, keep in mind that you have fewer data to work with.
Age of the ecommerce business
All good things come to those who wait.
Ecommerce brand building is no exception. The older the business, the more likely the multiple will increase.
An older business indicates how resilient it is selling in-demand products in an evergreen niche. As time passes, the owner can gain more market share through concerted marketing efforts.
Increasing your brand reach through multichannel selling can have a positive influence on the multiple. A recent Shopify study claimed that businesses selling on three different platforms increased their revenue by as much as 190%!
Each marketplace attracts a different type of audience. If a business has a good distribution of sales across each marketplace, this is a great sign of an in-demand product. It also means the business is less likely to suffer if sales struggle in one of these marketplaces.
Another way to minimize risk is to have a healthy mix of organic and paid traffic.
Many eCommerce businesses have paid advertising campaigns but little organic reach. Having several traffic channels also lowers the risk of decreased sales if a search engine algorithm changes or certain paid ad campaigns aren’t getting the desired conversion rate.
Social media marketing is one of the most underutilized traffic channels, so it could be a valuable asset if a business has built up a large following on a platform.
Number of products sold
One of the biggest influences on a multiple is the number of active stock keeping units (SKUs) a business has. While you’re growing your brand, “the more the merrier” is a normal approach to test which products your target audience buys the most.
As a brand grows, it’s better to start optimizing a SKU range by reducing how many products are active in different marketplaces.
For Fulfillment by Amazon (Amazon FBA) businesses valued at over $750,000, the ideal SKU range was around 30. This number is manageable if there is a core of best-selling products and the majority of SKUs are color and size variants of the popular SKUs.
If you’re looking to run a business on your own, we’d recommend acquiring a business with three to eight SKUs. Any larger and it may take more time than expected to optimize the product listings.
Customer reviews and ratings
While it’s tough to measure exactly how strong a brand is, reviewing an eCommerce business’s reviews and product ratings gives some idea of what the customers’ sentiments are toward the products and the store.
Compared to 10 years ago, when eCommerce was very young as an industry, reviews are harder to gamify since punishments are much harsher on sellers these days if fake reviews are detected.
When valuing an eCommerce business, at Empire Flippers, we’ll consider what some common complaints are around a brand. Are they consistently brought up by different customers? Or are they one-off bad experiences? This is a softer valuation factor but gives more context around the brand strength.
Another indication of a high-quality brand is to see how many brand evangelists are actively promoting and talking about the company. Brand evangelists are previous customers who wax lyrical about a product they recently bought. Whether they share their experience through a selfie or through text, it’s free and unsolicited promotion. It’s worth noting that this is a soft measure, but it gives more insight into how strong a brand is.
The presence of a large and monetized email List
Email marketing is far from dead.
While many types of digital marketing strategies and approaches have emerged since email was introduced, email remains one of the best traffic sources for conversion rates and a source of revenue.
There’s a common misconception that having an email list alone will boost your valuation. However, the true value of an email list lies in its audience. The reason why email lists can be so powerful is because subscribers are waiting to hear from you in your own time.
This means you can reach this audience without relying on search engine algorithms. Even if the email list hasn’t been monetized, a large email list takes a long time to build and is still a valuable asset.
That covers how an eCommerce business is valued, which leads us to the next step of finding a business that suits your needs.
What to look for in a great deal
As with any purchasing process, you’ll need to make a checklist of criteria to tick off during due diligence.
You’ve had more experience with this than you realize. Whether you’re buying wireless earbuds or researching which car to buy, your choice is based on a set number of criteria.
So what should you include in your due diligence checklist?
As well as the factors outlined above, there are several things to consider, such as what niche are you comfortable with, the size of your budget, and what type of eCommerce business model is “best” for you
Let’s dive a little deeper into these factors.
Choosing the “best” niche
It’s tempting to snap up the first business you see that’s profitable in a trending niche. However, we advise that you stick to your interests.
Before we leave you with the impression that you absolutely shouldn’t pick niches you have no idea about or interest in, keep in mind that this isn’t a blanket statement. The main reason why it’s recommended that you acquire an asset that you have some knowledge of and have some interest in is so it’s easier to run in the future.
Unlike other online business models, eCommerce tends to be more hands-on, which means you’ll need to work on the business regularly.
Even if the asset is profitable and growing, it’ll be hard to sustain that growth if you dread waking up every morning to make sure everything is running smoothly.
If you decide to buy a business that you don’t know much about, make sure you have concrete goals and know what your next step is. This might mean selling the business when it reaches an annual revenue goal or when you’ve made a certain number of total sales.
There’s a slim chance that you’ll end up falling in love with the niche, but this doesn’t happen very often. It’s best to have a plan in place so you know when to start your exit strategy.
What’s your budget?
While capital is a large deciding factor, your budget range also comes down to how much experience you have with eCommerce businesses.
If you’re just starting and have little to no experience, it’s recommended you buy an eCommerce business in the five-figure or low six-figure range. These types of businesses tend to have an in-demand product but could be optimized further in a number of ways, like removing SKUs with poor sales performance or improving traffic channels.
If you have more experience in growing or scaling a specific area of eCommerce businesses, you might consider buying a six-figure asset and outsourcing any areas of expertise you’re not familiar with to freelancers.
There will be exceptions to the rule, as larger businesses might be streamlined and relatively hands-off for the seller thanks to processes and standard operating procedures (SOPs) in place.
If there’s an asset you’re interested in, ask the seller how much time they spend maintaining the business. This will give you a good idea of what types of skills you need to run the business as it is in its current state without sacrificing performance.
Which type of eCommerce business model?
As an extension to the point above, the type of eCommerce business model can have an effect on how involved you need to be in the business.
The most popular eCommerce business models that are bought and sold in our marketplace are Amazon FBA, DropShipping, and traditional eCommerce.
Traditional eCommerce is by far the most demanding approach, especially if you’ve never done it before. With traditional eCommerce, you’re in charge of logistics, manufacturing the product, fulfilling customer orders, arranging packaging, storage, and the whole gamut.
Some entrepreneurs prefer this business model because it has the greatest flexibility over all stages of the product life cycle, which means you can lower expenses and increase profits. However, for someone new to the industry, it’s a lot to take on to manage all these moving parts, as well as put up the capital to start off the business.
DropShipping is a much friendlier approach for newbies. With DropShipping, you create an online storefront, usually with an eCommerce platform like Shopify or Bigcommerce, and list products for sale. You never see the inventory, as the vendors who supply the products also handle order fulfillment.
Outside of creating the storefront and forwarding orders to the vendor, with DropShipping you only really need to dedicate time and effort to marketing the business. While it’s much more hands-off than traditional eCommerce, profit margins are very thin per sale, so you’re relying on selling in volume.
Amazon FBA hits a sweet spot between the previously mentioned eCommerce models.
With FBA, once you’ve found a supplier who can manufacture your products and you’ve figured out how to transport them to Amazon fulfillment centers, the rest is handled. Customers can find your products on Amazon’s marketplace, and the FBA warehouses will fulfill customer orders for you.
The great benefit of FBA is being able to leverage Amazon’s extensive fulfillment network while having control over product quality and type to meet market demand.
In terms of the skills you need to know for FBA, logistics can be outsourced to a third-party logistics (3PL) service provider. Many FBA owners tend to do so. However, having knowledge of paid advertising is important to successfully launch products or to keep your product range top-of mind for your target market.
There isn’t a right or wrong way to choose an eCommerce business model. It depends on how much capital you have available to pour into your business, as well as how much time you’re willing to invest each week.
How much profit is the business generating?
The great thing about online businesses is the recurring monthly revenue and profit that comes with them.
Unlike traditional stocks that don’t pay out dividends, your new investment continues to pay you as you run your business.
You might want to consider how much profit a business is making to see if it matches your financial goals. Whether you’re looking to retire sooner or buy a house without a mortgage, it can help to map out what you’re planning to do with the profits.
Many entrepreneurs will pour their earnings back into the business so that it keeps growing, but if you’re just looking to create another stream of income without working too many extra hours, profit may be more relevant for you.
What are the growth opportunities?
Any investor wants growth from their investments. In the same way, you’d naturally want to buy an eCommerce business that has room to scale.
Ask the seller what they think the growth opportunities are for the business. This discussion can be really helpful in finding out whether you want to stay with the business for the length of time required to take it to the next level.
It might also help you see whether you’re the right person to take over the business, as the required skills might not be in your wheelhouse.
Penalties or outstanding lawsuits
As uncomfortable as the topic might be, asking if there were any penalties or if there are any outstanding lawsuits is as much a matter of trust as it is to keep your own risk as low as possible.
Common penalties might include listings being taken down from marketplaces or platforms when certain copy triggered the algorithm to blacklist the product temporarily. These are smaller concerns and happen to many sellers.
However, ongoing lawsuits can be a red flag, especially if the seller isn’t upfront about them during initial negotiations. Ideally, the seller will explain in detail what each of these infringements involved and if they were resolved.
Pursuing the right deal works both ways for buyers and sellers. A seller doesn’t just want to get a huge capital windfall from the sale. They also want to pass the business on to someone who will keep the business going.
Transparent communication around these kinds of topics is a good sign that a deal can be worked out and is the start of further negotiations to make sure you’re on the path to success once you’ve acquired a business.
Tips for staying profitable after you acquired the business
The feeling of excitement can quickly turn into worry if you’ve never run a business before.
Specifically, you might ask, “What if I can’t keep the business profitable?” This is a common concern that many first-time buyers share. There are many steps you can take to improve the chances of your business maintaining its performance after changing ownership.
Consider asking the seller to support you after the sale as a gesture of goodwill. Thirty days of post-sale support via email or video calls is generally offered as a way for a buyer to ask the seller any questions about running the business or for troubleshooting.
If you’re not confident, you might consider hiring the seller in a consultancy role for a longer period of time so you can lean on their expertise and experience. Most sellers won’t agree to being employed, so you’ll need to have a chat about what their exact role will be to avoid any misunderstandings further down the road.
If you can come to an agreement for paid support, this gives you extra breathing room to learn the necessary skills and get up to speed.
Another important factor to consider is whether any crucial employees or freelancers attached to the business are happy to continue working with you. Outsourced help is usually agreeable because it means there’s guaranteed projects for them to work on. However, employees might wish to continue working with the seller in their other ventures. In this situation, you’ll need to figure out what their role is and how to arrange for someone to cover the tasks of that job.
The seller can ease this process by providing solid documentation and SOPs. These documents will serve as a sort of user manual, so it’s easier for you to transition into the business. If you hire a team, documentation and SOPs will help the team transition, too.
If the seller has a team that will not be continuing post-sale or if the business is a one-man band, hire experts for specific skills so you can keep the business running at optimal levels.
Another important point is to continue using subscribed services and software that help with running the business.
One of the most overlooked parts of running a business is keeping track of your finances. If you aren’t already, consider using a service like Bean Ninjas to help with eCommerce accounting so you can see your profit and loss regularly. It’ll make it easier for you to grow your business when you have a firm view of what your budget is.
Keeping the books in order also helps you stay on top of tax obligations, especially if there is an EU or UK component where value-added tax (VAT) is involved.
Where to buy a good eCommerce business
While we might sound very biased in saying this, we recommend that first-time buyers use a broker for their first acquisition. With the right broker, you’ll save a lot of search time for the right deal since curated marketplaces tend to list high-quality businesses for sale.
On top of quality control, you’ll also have access to industry experts who can recommend the businesses that meet your criteria, as well as advise you during the negotiation period.
A niche service that Empire Flippers offers is a dedicated migration service, where we help you transfer the business and all of its assets to you in a secure and transparent way. This might not matter as much for experienced buyers, but it can make the world of difference between a successful deal and delaying a transaction by weeks or months because of an overlooked detail.
Outside of using a broker’s service, you could look for a private deal in order to negotiate a much lower sales price. Keep in mind that with a private deal, you won’t have the same level of transparency with the available details and finances for your due diligence if the seller isn’t prepared.
It’s possible to find a diamond in the rough, but it’s usually hard for first-time buyers to spot these types of deals.
With private deals, there are also no processes in place that serve as protection for the buyer or seller. With a broker acting as a middleman, you can significantly lower the chance of bad actors trying to pull a fast one at any stage of the deal.
Buying a business takes time. It’ll likely be one of the biggest purchases you’ll make, so it’s worth it to be patient in your search. Consider starting off your search by registering on the Empire Flippers marketplace for free to begin your wealth-building journey.
Ready to buy an eCommerce business? Then register on the Empire Flippers marketplace for free to begin your wealth-building journey.
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