Buying An Ecommerce Business:
Essential Considerations and Negotiation Advice
Thinking of buying an ecommerce business? Smart move. After all, somebody else has already proved the concept, built the website, lured customers, and secured suppliers -- it's an ideal turn-key opportunity.
But don't be fooled. Once you take possession of an online retail property, work will be a 'waiting. Ecommerce operators must maintain the website and associated accounts, develop marketing campaigns, keep the customers happy, and navigate vendor relationships.
To help you work through the decision, we've compiled this buying guide.
One disclaimer before we begin: It’s important to understand that every situation is different; this outline is only meant to serve as a general guide.
OK! Introductions, housekeeping, and provisos out of the way, let’s get down to the ins-and-outs of buying an ecommerce business.
The single most important thing that potential buyers should consider is the health of the ecommerce business sitting on the auction block. Will it perform as the seller promises, or is it a cubic zirconia cosplaying as the Hope Diamond?
Finding The Right Niche
Finding the right niche is paramount. But unlike nectarines, “good niches” don’t grow on trees. Picking a profitable product involves analyzing several metrics.
Demand v. Competition
Think you stumbled across the perfect ecommerce business? Step one: consider the two pillars of trade.
- What is the demand?
- What is the competition?
Ideally, the answers will be “high” and “low” respectively. Don’t forget to consider both the current competitors and potential future competitors. Is the product easy to replicate? Is there differentiation among the other sellers, or is everyone selling the same product but with a different logo on it? Is it seasonal? Is there room for growth? These are questions you should ask yourself up front.
Cross-Sell and Accessory Potential
The best ecommerce businesses allow for up-sells. For example, in this article, the author identifies a popcorn vending machine opportunity as a high-potential niche because of the add-on possibilities, like popcorn oil and cleaning kits.
Beware of Flirty Fads
Though once a sartorial smash hit, the last time I saw a “snuggie” (a.k.a., the sleeping straightjacket) was in a *BOGO* bin at the local Dollar-Rama. Unless you’re a Jedi-trained merchant, who can buy with cash, sell hard, and then peace out before the craze dies, don’t flirt with fad products. Trends are a cruel and fickle mistress. They’ll seduce, and then dump you on the warehouse floor in six months’ time.
Is the product readily available in brick and mortar stores? Yes? Then keep searching. Sure, shopping online is convenient, and people are leagues more comfortable with it than they were just five years ago. But if someone can pop into their local Wal-Mart or Target, pick up a similar item without paying to ship or having to wait -- the chances of that product doing well for you are between slim and none.
Dust Off Your Monocle
Why is the seller offloading the property? Unearthing the correct answer to this question could be the difference between buying a stud or a dud? Are they moving? Starting another venture? Dig deep; make sure the site is producing; and if it’s not, find out why and if it's fixable. Some businesses can be artificially propped up, so work with someone who can spot red flags. Did they give away a lot of product to improve their sales? Is the traffic to the site organic? Do they use paid traffic? If so who handles that for them and will it continue?
Is the product easy to replicate? Think about it: How disastrous would it be to plunk down thousands of dollars for a website business, only to find out that Joe Shmoe can steal the idea with a quick finger-trip to Alibaba.com and minimal elbow grease?
In fact, since so many products are easy to replicate, it’s important to differentiate with branding. As such, when buying an ecommerce business, consider the brand as a whole and not just the product.
What demographic does the product attract? Is a market turn or sector slowdown likely to affect their purchasing power? Does the website speak to said demographic, or will you likely have to re-brand? Think about all these things in relation to the asking price.
Personal Interest – Selling Something You Believe In
What’s your tolerance for watching paint dry? Could you sit in an empty room for hours on end? Or, would you bolt after 20 minutes?
If you have little interest in the ecommerce product up for offer, seriously consider finding another venture. Because here’s the truth: regardless of customer and profit potential, you’re the one who must market the product -- and that means online promotions. You must keep the website fresh with new articles; you must participate in relevant social media circles.
To wit, if you have zero interest in the product, working will feel like watching paint dry -- and there’s a good chance you’ll “leave after 20 minutes.”
If you’re going to sell something, sell something you, yourself, use and/or believe in.
Failing to thoroughly vet suppliers is a common ecommerce startup misstep. Just because the seller has a relationship with a product supplier doesn’t mean you will, too. So, before pulling the trigger, get answers to the following questions, directly from the vendor:
- How long have you been in business?
- Where do you manufacture the product?
- Will you be able to provide me the same services and goods as you did Joe? (Don’t assume that the current owner’s suppliers will automatically source you. Dealers are sometimes locked into contracts that disallow the establishment of new partnerships.)
- How much would you charge me for the same service you’re currently providing Joe? (Remember: Suppliers have every right to jack the price.)
- How long did the seller work with the vendor? How many orders has the provider fulfilled? These may seem like silly, basic questions, but you’d be surprised at the skullduggery skills of some scammers. There are people out there, just like you, who shelled out tens of thousands on ecommerce businesses, only to discover they’d bought shams. To be clear, we’re not painting with a broad brush. Not all ecommerce opportunities are shady. In fact, the majority are wise, profitable investments. But ne’er-do-wells do lurk, and intense due diligence is necessary.
- When it comes time to sign on any dotted line, don’t just “check here to agree.” Read them! Better yet, find an attorney to read them. If not, you may find yourself promised to things that you didn’t know you were getting into.
Vendor vetting pro tip: Place an anonymous test order with any suppliers tied to the operation. Bad experiences should serve as major red flags.
Website Matters: Look Under The Hood
Websites can be like Potemkin Villages, slick and welcoming on the outside, gutless on the inside. So, before you take possession of an ecommerce property, consider the following things.
Does the seller, actually, own the website or ecommerce channel they’re selling? It sounds like a foolish question, but it happens -- more than you think! Before negotiations begin, formally establish that the seller owns the domain and controls the hosting. In the not too distant past, website development companies retained tenure of domains and hosting. Make sure your potential venture isn't entangled in a similar situation.
Moreover, ensure that you can legally take possession of accounts on retail platforms. Some ecommerce channels don’t allow users to sell accounts. However, depending on the situation, you may be able to transfer the rights to another party.
Is the website sleek? Can users easily find information? Or, does it look like the overstuffed creation of your boss’ 13-year-old nephew, Beavis?
Of course, you can give the website a facelift, but to do it right, it can’t be a freebie. The website is your #1 marketing tool -- make sure it works for your target market!
Does the website design *break* on oddly-sized desk- and laptop screens, tablets, Android phones, or iPhones? What about the checkout process? Does it function properly, or does it time out? Are the right disclosures in the proper places? Does the site feature standard security measures? If the platform needs plugins, are you sure said plugins are stable, and legal? Is the code outdated to the point where search engines may start ignoring it? How old is the site?
Get answers to all of these questions.
If you don’t know much about coding and programming, hire a web developer or ecommerce business consultant to examine the site for compliance and functionality.
How many people visit the site and how often? If visits are plummeting, find out why, and don’t rely on the seller’s answer.
From where do the visitors come and how long do they stay; for less than a second or several minutes? Is the traffic dependent on paid advertising, or do people reliably find the site through search engines like Google, Bing, and Yahoo!? If it’s through an ecommerce site like Amazon or Jet.com, how are the product rankings? Does it stack up against competition?
Will pay-per-click costs masticate your profits? Hold old is the domain? What is the page rank?
Yes, the answers to all these questions matter. Why? Because they affect how search engines view the site. The better a search engine feels about a site, the higher it will appear in search engine result pages (SERPs). The higher it appears in search engine result pages, the more customers will find your product.
Where can you uncover this information about a website? Ask the seller. Any website worth its salt -- especially one on the market -- will provide traffic analytics to potential buyers. Don’t know how to read website traffic data? Enlist a web developer, marketer, or ecommerce business consultant to walk you through it, step-by-step.
Get Down and Dirty With the Financials
If you don’t want an ecommerce deal to bite you in the$$, slap on a pair of gloves and duke it out with the financials.
You’ve watched Shark Tank; you know the first question: “What are the margins?”
If a product sells for $100 but costs $99 to make and ship, what is the point? Unless you’re consistently fulfilling thousands of units a day, there is none.
Do yourself a huge favor, don’t get caught up in a high margin nightmare -- no matter how cool the product. Also, look for any odd expenditures; you don’t want any margin-crushing “gotcha’s” sneaking up on you after the sale.
And again, double check that the cost of production will stay the same once you take over!
As discussed above, just because the seller enjoyed certain terms doesn’t mean you will, too.
Get The Financials
Typically, you want to look at a business that is at least two years old, however a lot of ecommerce startups can become successful in very short periods of time. However, most people would want to see at least 12 months of financials before buying.
If you’re only able to see one year of records, make sure the figures aren’t the result of an inimitable outlier. A weather incident, non-annual event, or fad could have born the boon, rendering the information useless under normal circumstances.
Beware of Ad Back Scams
Financial statements typically include an “Ad Back” line item? What is it? Ad backs are expenses, added back into the profit column, which a new owner won’t likely incur (i.e., an expensive conference or a one-time design charge).
Caveat emptor: Shady sellers may try to hide essential costs in the ad back column to artificially inflate the potential net profit. A typical ad back scam? Including credit card fees as a non-essential expense.
Business Formation and Other Legalities
You’ve uncovered the perfect niche, vetted suppliers, tested the website, finessed the financials, and secured vendor confirmations in writing. You’re almost done! But not quite. It’s time to look at some nuts-and-bolts legal considerations.
Don’t do it. Don’t commingle personal and business assets -- and don’t forgo a business structure for your ecommerce venture. We’ve seen it too many times: people decide to operate as sole proprietors for a few months, just to test the waters; something goes horribly wrong with the products or services; and, in the end, personal assets are dragged onto the chopping block.
It doesn’t cost much to form a business entity, and it doesn’t take a lot of time. In wise words of Nike, Just Do It!
What business framework is best for ecommerce operations? It depends, but most small- and mid-sized online retailers do fine as Limited Liability Companies. LLCs provide a significant degree of personal asset protection without all the paperwork of a C- or S-Corp. That said, the best business structure depends on where you live and your business, so make sure to contact us before doing anything.
Earn-Out Payments v. Lump Sum
Ecommerce business transactions are typically structured in one of two ways. The buyer either pays a lump sum in the beginning, or the two parties agree to a payment plan. Payment plans, however, aren’t necessarily structured like an amortized, interest-bearing schedule. Instead, the buyer and seller agree to a remittance framework based on performance benchmarks. Structuring this type of transaction is ideal in certain situations, as it mitigates risk. Be aware, though, that earn-out payments aren’t always preferred by the seller since the setup keeps them tied to the company.
Earn-out provisions can ensure a smooth transition to the new owner and incentivize the current owner to do keep the money flowing. In essence, it gives the seller payment security and the buyer performance security. An ecommerce business lawyer can review all transactional documents with a fine tooth comb to ensure your deal doesn’t include any trap doors or profit doorstops.
Intent To Purchase Letters
Some people opt to forgo intent to purchase letters. We think that they’re a great first step. Intent to purchase letters lay the groundwork for each parties’ responsibilities and act as purchase agreement frameworks by ensuring that everyone involved has a thorough understanding of the deal, which is crucial to transactional success.
A lot can happen between an agreement understanding and closing the deal. If done correctly, intent to purchase letters can block other buyers from sweeping in and stealing the sale. The letter should also include non-compete and non-disclosure clauses. After all, you don’t want the seller to erect a competing business, across the metaphorical street, the day after they dump the old place.
Backup Everything, Review Everything, And Get It All In Writing
Negotiations may take a few days, or they could amble on for weeks. Regardless, make a backup copy of every document with which you come in contact. Also, get everything in writing. Do not, we repeat, DO NOT fall prey to a handshake deal.
Use An Escrow Service
Protect yourself and your money by using an escrow service. If the seller is against having a neutral third-party (typically a business transaction lawyer), the seller deserves a side-eye. Think about it for a second: Do you really want to plunk down tens of thousands of dollars, only to be left empty-handed? Nigerian princes don’t have a lock on scams; malefactors hail from all corners of the globe, including the United States.
State Law Considerations and Enforcement
When negotiating a deal, remember to be super mindful of applicable state statutes. Many free plug-and-play agreements -- commonly found online -- only reference federal law and ultimately prove useless in the wake of a conflict.
Make sure your contracts are enforceable in a U.S. court. This isn't just advice for international businesspeople, but stateside residents as well.
The Single Most Important Thing To Remember When Considering An Ecommerce Business
We’ve reviewed the business, technical, financial, and legal aspects of buying an ecommerce business. Now let’s talk about that intangible factor -- unemotional judgment.
The first rule of Fight Club is never talk about Fight Club. Well, the first rule of buying an ecommerce business is never fall for the slick sales pitch. Take Flava Flav’s advice, “Don’t believe the hype.” Do the due diligence. Don’t fall prey to sales pitches. Dig in the dirt, stick to the facts, and you’ll be okay.
Ecommerce Business: News, Tips, & Rules
Above, we discussed the ins-and-outs of buying an ecommerce business. Below, we go over case studies, industry news, and regulations for when the deal is done, and you're the proud new owner of an online retail outfit.