How to review an eCommerce store P&L
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%)
| Revenue | $213,012 | |
| 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% |
| Operating Expenses | ||
| – 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.