How To Buy and Grow An Ecommerce Business

I bought an eCommerce business; you can do it too.

Here’s how…

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.

Where to find eCommerce businesses for sale

In the good old days, you’d have to go through a business broker, but there are now some great marketplaces you can find deals.

I bought my eCommerce store from Shopify Exchange, the advantage being you get to see all the actual revenue stats, not just claimed. It is a bit of a clunky system to communicate with the sellers.

Here are the best places I found, many having listings from $500

Shopify Exchange

A good amount of listings and gives great reliable data. Found only 1 in 5 sellers responded, though.
https://exchangemarketplace.com

Flippa

Lots of listings on different eCommerce platforms. Has a lot more thought put into it than Shopify Exchange
https://flippa.com

Empire Flippers

More focused on bigger deals. As I was looking for the smaller project didn’t find many that fit.
https://empireflippers.com

Micro Acquire

Great site with a variety of types of businesses. Well worth a look.
https://microacquire.com

Aussie Aquire

As it says on the tin, it is aimed at Australian-based businesses. Pretty new, so only a few listings.
https://www.aussieacquire.com.au

Hope you find a good one.

How much are Ecommerce stores worth?

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.

How to fund buying an eCommerce store

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.

Should you buy an eCommerce business in a niche you love?

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.

Why?

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.

How to pick an eCommerce store to buy

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.

A great trick for finding an eCommerce business to buy

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.

Ecommerce stores to avoid buying

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.

Dropshipping stores
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.

Fashion Brands
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.

Questions to ask a seller

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.