Should You Buy An Ecommerce Business and Jump Start Your Progress
Today’s post is a guest post from David Newell, Brokerage Director at FE International. While not everyone is financially in a position to buy an ecommerce business, it is an option for others.
We have bought and sold online businesses before and we wish that David and the guys at FE International were around the last time we sold an online business. They are bringing a level of professionalism and transparency that has been missing from the field.
David has been kind enough to share a few reasons you might want to consider buying an ecommerce business. ‘
Take it away Dave:
In recent years, a new wave of online entrepreneurs are looking to leverage their skills to buy a website or online business for profit. One of the popular business models to acquire is an eCommerce store.
At FE International, we specialize in the sale of online businesses between $20K and $5M and we’ve seen hundreds of eCommerce stores sold to buyers over the last five years.
Why Buy When You Can Build?
From bolt-on acquisitions to turnaround business situations, there are many compelling reasons to buy versus build when it comes growing your eCommerce empire.
From an investment standpoint, most eCommerce businesses sell for between 2 – 3 times annual net profit, which means an annual return on investment of 33% – 50%. An attractive prospect versus comparable assets.
Of course though, if you can build you can likely achieve similar returns over the long term without the large capital investment, so we asked various eCommerce investors; why buy at all?
1) Proven Business Model
The most common reason cited was to acquire something with a proven business model. Oftentimes business buyers have been looking to get into a popular niche (e.g. fashion) but are not sure where or how to make money in the space.
Acquiring a successful eCommerce business in your target niche can be a great way to gain an early foothold or bolt on to your existing offering.
The business has proven itself as a profitable venture, it has customers, suppliers and traffic established already and it has benefited from someone else taking all the risk during the early years.
The key of course lies in the ‘proven’ model. Be sure when vetting an online business for sale that you assess their traffic and financial history as well as their operating metrics. Generally speaking you want to look for businesses that are 2-3 years old or older.
2) Cross Sell Potential
Many business buyers are business owners themselves and this holds especially true in the eCommerce space where owning a portfolio is quite popular.
As such it wasn’t so surprising that the second most popular reason for acquiring a business was to gain access to the additional traffic, customers and email addresses for cross-selling existing products to.
If you own an eCommerce business in the same or complimentary niche it can mean great cross sell capability. We’ve seen many business buyers reap significant returns right away from cross promotion between email lists including targeted ‘competitive’ discounts to move customers between the two platforms.
The key to assessing cross sell capability lies in the operating metrics of the business. Be sure to use Google Analytics as well as shopping cart data to analyze the product sales mix, returning customer rate and items per order.
It’s also a good idea to check the open and click through rates on newsletters to get a sense as to whether the list is captive for cross promotion over email in the future.
3) Gain Strategic Advantage
The internet is a weird, wonderful and above all innovative place for making money. It’s not unusual to see businesses come to market that have something truly unique about them which buyers wish to acquire for strategic purposes.
Over the years we’ve seen investors buy eCommerce businesses to gain specific customers, supplier relationships and warehousing contracts.
It’s not limited to the assets of the business either. All business sales through a broker will usually come with training time with the seller to familiarize the purchaser with the business. Oftentimes buyers have used this period to gain the knowledge, experience and contacts of the seller for use in their other businesses.
Sometimes the value of a relationship in one business can mean significant returns elsewhere.
4) Cut Out the Early Days
For aspiring eCommerce entrepreneurs, buying a business can be seen as obvious way a way to get around the hard work in the early days of doing things like keyword research, setting up advertising, developing the site, finding suppliers, SEO, customer service etc.
Online businesses are generally priced off a multiple of net income and if the business is earning a relatively modest sum, there is opportunity to acquire it for a comparatively small one too. This can mean potentially acquiring a business with a good amount of sunk effort already baked in. For those who know how to grow the business right away, this can mean buying a cheap platform for growth right away whilst avoiding the hassle of making that platform to begin with.
Ultimately buying an eCommerce business can be a very profitable, enjoyable and now much easier experience with the establishment of internet business brokers like FE International.
New and experienced online entrepreneurs alike should give serious consideration to buying an ecommerce business either for the standalone profit opportunity or the cross sell potential.
You could be just the person to bring that marketing expertise, supplier relationship or even just the man-hours that takes an established business to the next level and makes you a handsome return along the way.
Want to learn more? We’ve just written a free 127-page guide to buying an online business that has everything you need to get started.
David is Brokerage Director at FE International. Starting out as an investment banker, he moved online to use his transaction experience for website brokerage. At FEI, he spends his time speaking with buyers, executing deals and working on raising industry standards to encourage more investments. In 2014 he closed more than $6M in sales and wrote a book on buying internet businesses for investors new to the space.
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