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?