There are a multitude of reasons why investors and entrepreneurs have been flocking to the e-commerce industry. Owning a small business has always been appealing to the 40 hour per week crowd. Combine this with the rapid growth of the e-commerce industry and the option to work from your laptop anywhere in the world and it becomes easy to see why the industry is growing so quickly.
What to look for in an e-commerce business
Depending on what your skill set is and what you are looking to accomplish, there will be a different type of e-commerce business that lends itself to your lifestyle, price point and skill set. If this is your first time in the e-commerce industry, chances are that you’ll want to acquire a business that is safe, doesn’t take more than 15-20 hours per week and doesn’t need any particular skills.
There are also investment firms that focus primarily or exclusively on investing in e-commerce companies. These firms will likely have skilled marketers, content creators and strategists in house as well as access to more capital. This of course widens the scope of what these firms can acquire.
For this article, we will be focused primarily on the novice to intermediate e-commerce acquirer.
Financing an e-commerce business
If you’re looking to buy any type of business you’ll need to bring your credit and cash to the table. For e-commerce and other online business models, it is even more important to have cash as there are rarely any fixed assets that a bank can finance.
For US based business buyers, there is a possibility of getting favorable bank financing terms via the US Small Business Administration (SBA). Creditworthy US based buyers can get 10% down with 90% paid over ten years with reasonable interest rates. For those that qualify, this structure offers the most beneficial terms. One of the downsides is that a large number of e-commerce businesses on the market won’t qualify for an SBA acquisition loan due to the business being based outside of the US.
What is a fair value for an e-commerce business
There are a multitude of factors that determine what an e-commerce business will sell for. We’ll outline a few of the more common determining factors here.
Cleanliness of books and records. In order to conduct proper due diligence, you’ll need to be able to verify all of the business assets and cash flow. If the business owner has gone through the steps of hiring a CPA to keep the books or to do a quality of earnings (QOE) analysis, this will help verify that all of the assets being sold are as represented by the seller. If the buyer has nothing but a Google sheet and a pile of receipts, you may not necessarily want to write the business off entirely, but you should certainly take this into consideration when coming up with an appropriate value for the business.
Diversified traffic channels. If a business is reliant on one traffic channel, it is generally more risky than a business that has three or even four productive traffic channels. Ideally, a large e-commerce business would have sales generated from affiliates, SEO, Google Shopping, Social media marketing and retargeting past customers by email.
There are even buyers who will take this a step further and want to see a business that also wholesales the products and sells on third party shopping sites such as Walmart and Amazon. While it is very rare to see a business that checks all of these boxes. It is generally better for the products to be sold through multiple channels than just one.
Product Quality. Many e-commerce retailers will simply resell other companies’ products. There are benefits to running a company like this and it can greatly simplify the business by cutting out product development. However, you’ll still want to make sure that the products sold by this e-commerce business are well reviewed. You can check this by asking the seller for information on returns and looking at the product reviews on Google Shopping, Amazon and through other verified review platforms.
If the business creates its own products, reviews and reputation will be even more important. In this case, you’ll want to make sure you understand the supply chain and are able to successfully source quality products and get them to your 3PL and into your customers hands.
Employees and Contractors. One of the benefits of online business models such as e-commerce is there is often little need for employees. At Upward Exits, we have seen businesses doing $7M in revenue that have no employees and the owner is able to manage himself in as little as 10 hours per week.
If the business does outsource work to contractors and/or have full-time employees, it is wise to make sure you understand what they do so you are able to replace them if they choose to leave the business. You should also have documentation of any employment and compensation agreements that may have been signed.