The reason most people sell an eCommerce business is they aren’t running it properly. They will make other excuses like not enough time etc, but the numbers don’t lie.
Often the cause of that is not being across thier numbers.
I get it, it’s hard. We’re not all accountants (I’m not but learnt the fundamentals). However there are a few simple tricks to get you 80% of the way.
In a P&L you’re looking for roughly these ratios to spot a good business or opportunities to fix.
From the stated revenue make sure GST/VAT/sales tax is removed. This should always be the case, but double check.
50% Gross Margin (aka cost of product)
30% Operational costs (marketing, staff day to day stuff)
20% Profit (Money left over before tax)
This always help me understand where to start looking in a P&L.
The next trick was working out where all the costs fitted into those ratios between what a seller provides and a traditional P&L format.
To make it just a bit harder most small ecom business will send you a screen grab looking like this…
How are you ament to match those up!
This is where the rubber hits the road and those of you who won’t buy and realise the advantages of having and eCommerce business tend to peal off. Don’t be one of those, learn a new skill and keep going.
The generally rule of thumb for allocating costs into Gross Margin or expenses goes like this.
Does the cost go up the more you sell? For example if you sell more products does that cost go up, for example manufacturing of goods. If you rent an office, unless you get a lot bigger that doesn’t go up.
Common costs in working out Gross Margin for eCommerce business are…
Cost to manufacture
Cost to ship from factory
Cost to ship to customer
Warehouse processing fees, if you use a 3rd Party Logistic business (3PL) like I do.
Now you have a P&L from the seller allocate expenses to calculate your Gross Margin.
Is it 50% or less than revenue? (Remember or ration 50% Gross Profit, 30% Expenses, 20% Profit)
See, this is isn’t so hard!
Next we need to put costs into expenses. What is a fixed cost in the P&L they sent? By fixed I mean don’t vary the more you sell unless you sell a lot more!
Any staff fees, advertising, rent, platform fees (Shopify or hosting etc).
Do these come in at 30% or less?
The cash left over is your profit (or at least pre tax). If that is 20% or close, we’re looking good.
A key thing to check is if the owner is adding thier time into expenses. Often they don’t making the profit look higher.
But if they haven’t they are selling a job not a business. It’s fine for the owner to be working in the business as it grows, but we want a business not a job.
In the example above the profit claimed was 15%. However when we add in everything including owner salary it made a loss of 6%!
What if my ratios aren’t 50/30/20?
That is commin, the question is with your “Buying super power” what can you change to get it there?
The eCommerce business I bought had a 30% Gross Margin. So I figured out if I bought more stock it would get increased to 50-55% (higher the more stock I bought).
Often eCommerce business are over spending on advertising, especially Facebook and a Instagram ads. If you’re a specialist in this you can look to reduce this.
So now you can analysis a P&L and make some decisions if you want to ask the seller more questions.