How To Buy and Grow An Ecommerce Business
I bought an eCommerce business; you can do it too.
We’ve all had that great idea for an eCommerce store. But you’ve probably got a full-time gig, and having the spare time to execute is tough.
You’ve probably have an area of expertise that you can leverage to run a store.
You may work for a digital agency, platform, SaaS business or have an interest outside of your day job. This experience will be your advantage.
Step 1. Identify what type of eCommerce business you want to buy
I suggest an area you have some interest in but not necessarily your hobby.
For example, I love wakeboarding, but it’s a hobby, and it’s unlikely a wakeboard store will come up for sale.
Decide where it mainly sells. I picked Australia as I’m based here and it’s easier to manage stock.
Avoid dropshipping unless you plan on holding stock to increase profit.
Set out how much you want to invest also. It can be as little as a good holiday.
Step 2. Start looking
There are lots of marketplaces popping up for selling websites. Many eCommerce stores got set up in covid but aren’t run well. This is your opportunity.
Ask for a summary P&L at first. I found only 1 in 5 responded, so build a pipeline of potential sales. This stage took me about two months. Consistently looking is the key.
Step 3. Identify if you can add value
What would you do in the first week/month to improve it? If you can’t think of anything, move on.
Step 4. Make the offer
You can put 50% of the asking price down and pay the rest out of profit in the following months. This makes your money go further.
Many owners overvalue their stores, especially if they paid a lot to build it. You’re looking for multiples of net profit minus the owners time. This can make them very affordable.
Step 5. The handover
You can use a third-party escrow service to hold the payment (I used escrow.com). Do your due diligence to make sure everything adds up if happy, go for it. This is where things start getting real. Commit.
Step 6. Running it
Set aside set times for working on it. First thing in the morning or evenings and stick to it. Tuesday is my main day plus 30 mins – an hour each morning.
Read on for more specifics on each of the steps or follow me on Linkedin for live updates on how it’s going.
This was pretty key for me to understand when buying an eCommerce business. The prices vary wildly from $500 to Millions, and I had a budget.
I bought mine for the price of a good holiday excluding the stock. Stock is normally on top of the cost of purchase.
The critical thing to understand about price is what the buyer (us) is willing to pay. That is true of all transactions, buying a coffee, a house or a business.
Therefore you have to determine what you’re buying for. I wanted proof that there is a market for the product.
I worked out to set up and try an eCommerce product idea was $15k ago and would probably take 2-3 goes to find a market.
Therefore I was willing to pay less than that for something that already was selling and had cash flow.
We also have to consider the multiples of profit the store makes. If the store has been making a profit for a few years, ideally three years, the value is a multiple of the annual profit. This can range from 2-5x depending on the growth opportunity. The lower the opportunity the lower the multiple.
You’ll notice lots of sellers think the store could be a “million-dollar” store. The trend of sales more often tells you something else!
The other catch is that owners don’t factor in their time as a cost, and when you do, the store can be unprofitable.
Sellers also think because they spent a lot setting it up (website design etc) it is worth what they paid. I personally didn’t value this as it’s easy to overpay for web design, and I can make them myself.
When you find a store you’re interested in, see what multiples of net profit they’re asking for.
I found two types of stores, really over or undervalued. You want the latter!
It took me two months to find the right store to manage your expectations. Consistently looking on the same day each week was key here.
The good news is that you don’t need the total sale price in cash. However, you will need some money upfront. Otherwise, you won’t get far.
When buying a business, you can structure different deals. For example, you can pay 50% upfront and the rest out of profit over six months, this is common in larger business transactions.
Now all of a sudden your store budget has doubled!
I found the prospect of spending my hard-earned cash a little tricky. What if I got it wrong and lost the cash? The trick is committing the cash and putting it in a separate account, then treating it as spent.
As with any investment, only put aside what you can afford to lose. The upside is that the returns can be great.
Funnily enough, I ended up spending a 3rd of my budget and bought it outright because it fit my criteria. However, it was great having the option to buy more stores with more significant price tags.
I love wakeboarding and surfing. A lot of my major life decisions were made around being able to do these hobbies more, like moving to Australia and working remotely.
However, when picking an eCommerce business to buy, I didn’t look for a wakeboarding or surfing one.
I learned from some astute business operators that the key is having a business with sound fundamentals. That became the primary thing I was looking for if a wakeboard/surf store fell into that great.
Also, looking for a specific niche limits your choice.
With that said, I decided in my investment thesis (more on that later) the types of business I didn’t want. One of these was cosmetics. As my wife says, “you’re basic with skincare!” By that, she meant I don’t have an interest in it.
You have to pick something that you have some interest in, but it doesn’t have to be your passion.
This will give you a bigger pool to choose from and make it easier to run over the long term.
The first step to buying an eCommerce store isn’t searching listings.
Like going to the supermarket, buying a business involves setting out a list of requirements so you don’t end up coming away with just doughnuts and Nutella. Which makes you feel good in the short term, but doesn’t last long term!
It’s time to write an investment thesis.
They don’t have to be complicated, just a basic set of guidelines to keep you from making an emotional decision.
Here is a basic version I used to buy an eCommerce store…
- Established business at least 12 months
- Could have bumpy sales due to lack of stock control
- Inventory no drop shipping
- No fad-products
- Ideally in Australia (I live there)
- Could also be the UK (I’m from there)
- $X,XXX – $XX,XXX AUD cash down plus earn-out.
- Decent conversion rate
- Perennial product
- No extensive sizes i.e. clothing
- Average order value over $100
This is just what suited me and my position. You can buy them for as little as $500 and you might have other areas of expertise.
Also, I didn’t expect to (and didn’t) get each one of these, but the majority with a few non-negotiables.
The main limiting factor in my investment thesis was Australian based, but as I wanted an inventory holding business this was key for me, but might not be for you.
Time to write yours.
Time to get serious about buying an eCommerce business.
Now you’ve written down your investment thesis also known as “What eCommerce business you want to buy”, time to start finding it.
Most people look on one of the market places that sell them when they have some free time, let life get in the way and don’t end up buying one.
Consistency is the key here. It usually takes me two months to find and get to an offer stage.
I found the best approach was to make a habit of looking once a week for a store that matches your investment thesis. I used to do it every Tuesday. You have Monday out of the way and can focus on this project.
Create a spreadsheet of potential businesses and start contacting them. The first thing you want is a summary P&L.
I only got responses from 1 in 5 stores, as some list without conviction to sell, and I suspect the messages from the marketplace got stuck in spam folders.
I avoid these eCommerce stores when looking to buy
With COVID, there was an explosion in eCommerce stores being set up. Now things are getting back to normal; the founders are looking to sell, which means a lot is on the market, making it harder to find the valuable ones.
To help find them, I suggest you avoid stores which have the following.
No previous sales
The whole point of buying an eCommerce business is it has a proven market. This helps increase your chance of success.
Very few sales and lots of stock
Be careful of stores selling where the sale price is mainly the stock you’re buying and has very few sales. This means they’ve developed/imported a product that isn’t selling.
Most dropshipping stores are reselling the same products as 100 other stores. It becomes a race to the bottom as they compete on price, killing your margins. If you can see an opportunity to hold stock to increase margins and the product is unique, consider it.
These are HARD. The competition is enormous and you have to hold stock of lots of different sizes. Unless you REALLY know the fashion industry, I’d stay clear.
Hopefully, by now, you’ve spotted an eCommerce store that has piqued your interest. If not, see here for a list of places to find eCommerce stores for sale.
Now is the time to start asking sellers for more details.
The first thing I ask for is a summary P&L. I want to know if the store has a chance of being profitable before I invest more time in researching it.
I’ve had the information come back in varied forms; one was a screenshot of an excel spreadsheet! So don’t expect a full export of their Xero file.
Here you’re looking for how much profit you’ll make per sale, also known as unit economics. I’m always looking for products that sell for over $100 and have a gross margin of $50. This gives me some buffer to pay for ads, as it’s hard to make a sale on Facebook for under $25.
Gross margin is the money left after GST/VAT/Sales tax, the cost to buy the product and get it to the place I ship it to customers from (i.e. warehouse).
If those numbers stack up I then send a word doc with more detailed questions, depending on what I want to know.
The first thing you need from the seller of an eCommerce business is a P&L for the last 12 months. We buy based on numbers, not feel.
Depending on the size of the business the “quality” of this P&L “document” will vary wildly! I’ve seen all sorts from notes on the back of a napkin, photos of excel spreadsheets and if you’re lucky, really lucky a Xero export!
The format doesn’t really matter, but what does is getting the correct information so you know if it’s worth investing time finding out more about the business.
I’m not a trained account, even though my name is Iain which would have you believe I am, but I’ve run businesses so know the structure and what to look for in a P&L. I learnt for eCommerce businesses there is rough percentages you’re looking for, as it’s easy to get caught up in the all the details and conflicting terms.
First thing is first, always remove the GST/VAT/Sales tax from any figures. That ain’t our money, we’re collecting it for the government!. If you don’t you could find yourself making a lot less profit than you thought.
With that out of the way, we’re looking for these percentages…
- Cost of Goods 50% (aka the percentage left after the cost for product is taken away)
- Operating Expenses 30% (staff, advertising, software fees etc and anything not directly related to product costs)
- Profit 20% (Money leftover before earning/income/corporate tax is paid)
If we find a breakdown like that we’re onto a winner. Now only if they supplied that information in a clear and concise manner. What you normally get is something like this…
Let’s start breaking this one down into Cost of Goods (50%) Expenses (30%) Profit (20%)
|Cost of Goods|
|– International Transaction Fees||$836||No notes came with this so we’re assuming this is the cost of currency exchange etc|
|– Production||$26,101||Cost from the factory to make the product. Often call Cost Of Goods (COGS)|
|– Sea Freight||$10,667||Cost of getting the product from the factory to where we send it out to the customers|
|– Air Freight||$37,719||The buyer mentioned they didn’t order in time for Christmas so had to get the product shipped quickly but expensively via a plane not boat|
|– Shipping||$15,899||Cost of sending to customer. This store offers it for free so we include it in Gross Margin|
|Total Cost of Goods||$91,222||How much profit left over after these costs.|
|Cost of Goods||42%||Of the revenue the cost of goods was 42%, giving a 58% Gross Profit, this is looking good. We wanted 50%|
|– Director Drawings||$48,427||What the owners pay themselves. This is a good sign as most owners don’t include this|
|– Domain||$19||Domain name|
|– Facebook ads||$71,449||Advertising costs are high! This might be a problem.|
|– Google Ads||$1,301||Same as above, but lower cost|
|– Google Suite||$328||Not obvious, but this is for sending emails from Gmail|
|– Graphic design||$316||Hopefully, this is obvious!|
|– Marketing software||$10||Most likely Klaviyo for sending email marketing|
|– Pinterest Ads||$70||Again hopefully obvious|
|– Shopify Software||$1,231||Cost of running Shopify eCommerce software for the year|
|– Tech Packs||$798||Assumed Shopify apps to make the website do clever things|
|Total Expenses||$123,949||All operating expenses added up|
|Expenses as a percentage||58%||This is equal to 58% of the revenue! We were aiming at 30%|
|Profit||$-2,159||What is leftover, of which they made a loss.|
|Net Profit Margin||-1%||% of revenue which is profit. We wanted 20% but they made a loss.|
Summary of this P&L
The cost of goods is 48%, we were willing to go up to 50%. This is a great start. However, the operating expenses are really high with the main cost being Facebook ads. They spent 58% of their revenue on running the business. This is certainly a worry as we’re targeting 30% and these can be hard to control. Because the operating expenses were so high they made a loss of $2,159.
Based on this simple assessment, it is worth asking the buyer some more specific questions and investing some more time to see if we can add value somewhere to make the business profitable.
This is a very good example of a business that looks promising with revenues of $213k but clearly has some issues to solve. The key to buying and growing an eCommerce business successfully is applying what I call your superhero skills to a problem the current owner can’t solve.
Most business owners will claim to be selling for some reason like “not enough time” or “other projects”. The reality is there is a problem they can’t fix. You have to ask yourself, can I fix the problem? With the example above the problem was spending too much on Facebook advertising.
IF, and I mean if, the P&L shows promise or you know-how, not hope, to improve it, you then send follow-up questions.
I looked at one that only had a Gross Margin of 30% and an average order value of $30 with no obvious way of increasing order value and Gross Margin. I didn’t pursue this as I wasn’t in the business of wasting people’s time. Remember our 50/30/20 ratio.
The first set of questions should be around clarifying anything on the P&L. You don’t have to be a trained accountant, so ask questions about anything that doesn’t make sense to you.
Remember, you’re looking for a business you can add value to by applying something you know well, like digital marketing, web design/dev, selling etc.
One of the first questions I asked of the business I bought was how much each item would cost to manufacture if I ordered 100, not 10. The reason was the Gross Margin was only 30% when they were ordering 10 at a time.
I did this as I knew to make this store work, I had to increase Gross Margin.
The questions you ask at this stage will be unique to the business you’re looking at. However below is the main areas you should be covering.
A key question to ask is if advertising costs have gone up since May 2021. The reason for this question is that is when Apple made significant changes that affected Facebook and Instagram in particular. This means advertising costs soared and could be the reason they’re selling.
I’ve seen stores with a Gross Margin of 70% but spending 50% on Facebook ads, which meant it was making a loss.
Relationship with suppliers
One of the beautiful things about buying an eCommerce business is you don’t have to find new suppliers. You’re looking for excellent relationships with the factory. Has the owner swapped suppliers often? If so, why? It’s a potential flag.
Ask about any product defects they’ve had to deal with and how good they are at communicating, especially if the factory is based in China.
Why are they selling?
The reality is no one sells a profitable easy-to-run business. Keep digging to find the real reason. “No time” means not worth their time. You’re looking for a reason they’re selling that you can fix. Again can not hope to fix.
Ask how many returns they get. Returns kill eCommerce businesses and might also mean poor product quality.
Exact Questions I asked
To give the above question categories a bit more flavour, here are the questions I asked for the two eCommerce store that I’ve bought so far (1 only came off, but that’s another story!).
Tell me a bit about you and your background for example…
- How did you get into eCommerce?
- Is this a side project for you?
- What are your core skills i.e. Facebook ads, web dev, inventory management etc
- Are you personally heavily involved in the 4×4 scene?
- What is the new industry you’re moving into?
What other stores have you set up and run, and roughly how many, in a similar industry?
Have you sold an eCommerce store before? If so can you provide details without breaking and NDAs?
How many units do you order at a time and what is the MOQ?
Which country is the product made in?
You mention in the listing a Shopify valuation price of $77,080* How does Shopify come up with this figure?
Are you running or tried running Google ads?
Have you tried significantly increasing adspend on Facebook to increase sales, or do you feel this channel is maxed out?
Do you have a trademark for the brand name?
Who do you see as the biggest competitors?
When was the site first listed for sale?
Have you had any offers for the site yet?
Can you provide a P&L for the last 12 months (appreciate the one on the listing was last financial year) broken down by month?
What is the conversion rate for the store for as long a period that it was in stock for? I would ask for an annual conversion rate, but you mentioned dips in sales is due to not having time to reorder, so want to get a clear picture of what to expect.
According to Shopify what is the repeat customer percentage? I’m assuming it’s low as it’s a one-off buy.
What do you see as the biggest threat to the long-term success of the store?