You do not always have to start a business from scratch. It might sometimes be easier to buy your way into the startup world. E-commerce is one of the most sought-after sectors when it comes to acquisitions, so buying an e-commerce startup could be the perfect option for you.
There are two reasons why people pursue the e-commerce industry. One is that you do not have to rely on organic word of mouth marketing to spread the word about what you do. You could instead identify relevant keywords on Google and advertise to your target audience using PPC.
It is easier to achieve returns than it is in other industries, and your returns can justify your acquisition cost. Secondly, e-commerce is one of those industries that you can easily outsource. You could find a drop shipper who can handle the logistics and hire a VA who will take care of customer support.
But e-commerce acquisitions can also be tricky. The sellers might not always give you the complete picture about their traffic acquisition methods.
Perhaps they are spending more money on ads compared to the money they make through the sale of their products. If so, then a revenue statement might not mean anything.
At other times, they might overstate their margins. In all of these scenarios, an oversight could lead to you paying for a business that is not really worth it. There are a number of areas where you must use caution when evaluating the credentials of a potential buy.
E-commerce businesses tend to overstate their revenue. It is not uncommon among sellers looking for a higher valuation to fake receipts or “sell” their wares to their network of friends and family.
Looking at the revenue numbers on the dashboard is not sufficient. Instead, insist on taking a look at the shipping receipts from the courier company with whom the seller is working.
See if the seller really has shipped the products and check for the addresses where the products have been shipped. It is also a good idea only to deal with sellers on trusted marketplaces such as Shopify.
On platforms like this one, the stated revenue and traffic figures are legitimate. You cannot manipulate them, as is sometimes the case on third-party forum marketplaces.
In e-commerce, how your customers get to your website impacts the value of your store. A business that relies solely on Adwords for traffic might not be as valuable as one that has a steady stream of organic visitors.
It is also important to look at the share of referral traffic in order to see its contribution to your bottom line.
Sellers who own a network of stores and websites tend to cross-promote their websites. If you acquire a store, the seller might no longer promote it on the sites that he or she owns. Then the business you expected to gain from those traffic sources can come to a halt.
If the store procures products from a third party vendor, it is important to talk to those businesses. That way you can make sure they will continue to honor the contracts they signed with the previous owner.
You should also check the relationship between the vendor and the current seller. You want to see if they are part of the same group company or have any other business relationship.
If they do, it could make your business vulnerable. The vendor might not give the same priority and price advantage to you once the business is under your ownership.
For most of 2017, the number of e-commerce stores selling fidget spinners has grown quite dramatically.
While it is still early to know if fidget spinners are a fad, there are already early signs of the product losing its popularity. If you are buying a business that exclusively sells one product, make sure that the product is not a fad.
As a general rule, avoid businesses whose domain name and branding could restrict you from expanding your offerings in the future.
In other words, ToysForBoys.com might be a good business to buy even if it only sells fidget spinners, but fidgetspinners4u.com might not be equally valuable.
Be Smart When Buying an E-Commerce Startup
There is always an element of risk that goes into buying a new business. However, it is important to look deep into the financial and operational aspects of a business before making a call on its viability.
Have you bought an e-commerce business before? Share your lessons in the comments.
Latest posts by Aakash Patel (see all)
- How To Turn A Failing Business Around - April 14, 2019
- Your Guide To Launching Your Own Marketing Agency - March 7, 2019
- Understanding Customer Churn and How to Prevent it - January 22, 2019