When it comes to entering the world of e-commerce, many budding entrepreneurs assume that they need to come up with an idea, create a business plan, and set up their site. But this isn’t necessarily the case.
Buying an existing e-commerce business can be a great alternative. After all, when you buy an existing e-commerce business, you’re cutting out the lengthy set up process and the initial risks, meaning you can get to where you want to be faster. An existing e-commerce business will also have already proven itself as profitable.
But, if you’re considering investing in an e-commerce business for sale, it’s important not to rush into anything. You need to carefully consider several factors before buying a company.
So here’s our expert guide to buying an e-commerce business:
Any online business depends upon traffic to thrive, expand, and succeed. After all, if no one visits your site, how do expect to convert them into customers?
Before investing in an e-commerce business, the first thing you should do is look at how much traffic it generates, focussing on trends and sources.
First up, trends. Using Google Analytics, you can identify any trends present within the traffic sources, on a weekly, monthly, and annual basis. You should also consider whether the traffic is going up or down, or remaining consistent and, if there are any spikes, what has caused them?
Once you’ve got an idea of the site’s traffic trends, it’s time to look at the sources of the traffic, focussing on the top sources.
It’s also vital that you ensure that the e-commerce site you’re thinking about buying has secured a good niche, with good demand and low competition.
For example, if the site is based within a broad marketplace, such as electronic products, you will naturally face a huge amount of competition and, unless your prospective site has a clear USP, you’ll be forced to drive down profits to stand out against your competition.
When looking for a suitable e-commerce investment, it’s all about finding a profitable niche – typically either one that you’re interested in and can add value to, or else one that offers products that are hard to find within local stores and have low turnovers.
Before you invest in an e-commerce business, make sure you familiarise yourself with the existing suppliers.
Looking at the current supplier arrangements, are all the products from one supplier? How long are the respective relationships? And what are the terms of the agreements?
The best scenario is to find yourself in is to be taking on a business with low supplier concentration, long term relationships, and favourable rates written into the contract. The worst-case scenario is to be faced with unreliable suppliers that have the potential to mess up orders and cause problems further down the line!
If your research shows that the suppliers are reliable and you would want to continue the relationship, you’ll need to clarify whether the existing relationship is transferable. Speak to the suppliers and ask them to confirm whether or not they will be willing to transfer the existing contract, rates, and terms when the business changes hands.
Next up are the business’ financials. Before you invest in any business, online or offline, it’s important that you thoroughly examine the financials.
Ask the seller for detailed income and expenditure statements and then examine them yourself, with the finest of toothcombs, to validate the figures they are claiming to be accurate.
In particular, you should look out for any financial trends, rising or falling margins or revenues, and any sudden spikes in costs. Also, check carefully for any hidden costs – you don’t want any nasty surprises when you start running the business.
Another important factor when it comes to buying an e-commerce business is the legal implications. Perhaps most importantly, you need to ensure that you obtain the intellectual property (IP) you need to continue operating the business once the purchase has gone through.
This process starts with ensuring that the seller actually owns the IP rights in the first place. After all, many images and photographs used on websites are licensed through stock photography agencies. This means that the seller is not, in fact, the copyright owner. If you find that this is the case, you may need to purchase a new license directly from the agency rather than paying the seller. Under no circumstances should you pay the business’ sell for content that they do not own and, as such, have no right to sell.
If you do decide to go ahead with the purchase, once you’ve secured ownership of all relevant content, you’ll need to ensure you protect it as you move forward with the business. This should be done via methods such as copyrights, trademarks and service marks, patents, non-disclosure provisions, etc.
Your customers are an integral part of your e-commerce business. When you’re looking to buy a business, make sure you carefully look into customer engagement both on and off the site, focussing on the percentage of returning visitors, the number of repeat customers, and the number of product reviews. Remember you’re looking for positive customer engagement!
You should also go through any customer support logs the company currently holds, looking at the number of enquiries, the typical response times, and feedback. Beware of a high volume of refunds as they can suggest issues with customer support.
Once you’ve given all of the above your careful consideration and you’re happy to go ahead with the purchase, you need to consider the price, specifically whether the seller is offering the business for a premium or a discount.
More often than not, a seller will try to sell their site at a premium based on the time and money they have invested in setting it up. But, before you commit, you should think about whether the business is actually worth the asking price.