Building your own online store from scratch is hard. Either you need lots of money or lots of time to be successful in the long run.
Additionally, it’s extremely competitive in these times. This is why, if you already have some budget, it can be a good idea to buy an existing e-commerce business!
The advantage is that existing e-commerce businesses are already somewhat established, and you can grow them much easier than building a new one from scratch.
However, if you don’t know what you do, you’ll also fail and at the end of the day, you’ll only lose money instead of building a business.
There are some fundamental rules to consider when buying an e-commerce business. If you want to know these basic rules, you’ve come to the right place.
In this post, you’ll learn the 8 most important things to consider when buying an e-commerce business.
Focus on net profit, not on total revenue
If you look at online businesses, the profit margin behaves somewhat differently than with SaaS businesses (software as a service).
While SaaS businesses usually have a profit margin of about 70% to 95%, it’s not the same with e-commerce businesses.
Whenever you want to buy an e-commerce business, don’t buy a business with high revenue and a low-profit margin.
At the end of the day, your net profit counts, not how much you sell.
Additionally, many disadvantages come with a business that has a low-profit margin.
A low-profit margin also means high costs of administration, lots of fees, and so on.
Finally, make sure to focus on net profit, rather than on total revenue when you’re buying.
Check where the traffic comes from
Before you buy an e-commerce business, you need to fully understand where the traffic comes from for that store.
It matters whether the traffic comes from social media, paid search, or organic search.
Does the business have a high presence on social media or not?
Also, be careful with online stores that get the most traffic through paid traffic sources.
If this is the case, you need to understand how to run paid ads. Otherwise, you won’t be able to maintain traffic numbers after you bought the business.
It is always better and safer if most of the traffic comes from organic sources.
According to Google’s economic impact report, organic search traffic is 5x more valuable than Google Ads.
Check if traffic is sustainable
This point goes hand in hand with checking your traffic sources.
For long-term success, you have to check if the traffic to your online store is sustainable.
In general, organic traffic is much more sustainable than paid traffic.
For example, organic traffic through Pinterest is much better than paid traffic via Facebook Ads.
I think the most sustainable traffic source is Google Search. If your Online Store has good Google rankings and most of the traffic comes from Google search, you’re good to go.
Checking whether sales are sustainable
As a result of checking whether the traffic is sustainable, you also have to check whether your sales are sustainable.
Every year, there are one or two trends that are the hit for a few months.
And what happens then?
After a few months, nobody buys the product anymore.
A great example is Fidget Spinner, which was a hit for 2 months and which nobody talks about anymore today.
When you buy an e-commerce business, you have to check whether the product will sell in the long run - If not, it doesn’t make sense to buy the business.
Check service providers and other partners
If there are any problems, for example with suppliers or with other partners, this could affect the performance of your business and at the end of the day will cost you a lot of money.
For this reason, make sure that there are no problems with logistics, such as suppliers, shipping companies, or other partner programs like affiliate programs.
Find out why the business is for sale
This is one of the most important points you’ve to consider when you go to buy an e-commerce business.
In most cases, e-commerce businesses are sold because the sellers want to focus on another project or want to quit doing business because they want to enjoy their life.
But as often an e-commerce business is for sale because the seller knows that it’s worth noting.
In this case, the seller just wants to rip you off.
So always be careful and find out why an e-commerce business is for sale.
Find a business valuation method
To evaluate the business, you’ll need a business valuation method.
The easiest way to determine whether it’s worth buying the business is to calculate how long it will take to get the full investment back with the existing monthly net profit.
For example, suppose a company makes $20,000 a year and you buy it for $40,000.
In this case, it would take you two years to get your initial investment back.
In general, I do not recommend buying a company where this multiplier is more than 2.5.
Anything else will take too long to make a profit, which is not an advantage since the e-commerce market can change quickly.
Also, keep in mind that you’re able to increase your sales and make more profit after you bought the business. Thus, you can achieve your break-even much faster.
Determine whether you can improve business performance
In most cases when you buy a business, you want to improve the performance of the business.
Accordingly, you first have to check whether it’s possible.
Will it be easy to increase the net profit or are they any hurdles?
In general, if you want to increase your net profit, you’ve to options:
You can increase your total turnover
You can lower your costs
So, before you buy an e-commerce business, check these things:
Lower your costs: Check whether it’s possible to get a discount from your suppliers. For example, you can get a discount on bulk orders.
Better Marketing: Check whether you can improve the marketing of an existing e-commerce business. For example, there could be underused marketing techniques, or you can just improve the design of the online store.
Increase the number of sales channels: You can check whether all available sales channels are used. If not, check which other distribution channels you can use to increase your sales.
Lower the cost of other expenses: Check whether it’s possible to lower other expenses such as subscription costs for software.