Online business is the new real estate. Many internet-based entrepreneurs are either building an online business, selling one or looking to obtain one. Buying is a great option if you are looking to own and grow a successful e-commerce business without having to start from scratch. However, it takes careful consideration to spot and buy a profitable business.
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Here are some guidelines to help you find and buy a profitable and scalable online business.
Finding the right business
The first step is knowing where you can scout for e-commerce businesses on sale. For instance, if you live in Houston, a simple Google search for “e-commerce business for sale in Houston” will bring up a number online business on sale in that area that you can look into.
How to valuate prospective e-commerce business before buying.
For each business, you are considering, determine whether it is profitable. Consider the following information:
1.History of the business.
Find out when the business was founded. You want to go for a business that has been in existence for at least 6 months. Longer may be better because you are able to track the business’s trend and growth. You are able to tell how the business performs in high season and in low season.
Even though a business has been in existence for only 6 months and it has shown a high growth rate, it is important to be cautionary before buying it. The challenge with a business that has been around for less than 6 months is that you can’t predict how it will perform in different seasons.
2.Why the owner is selling.
Some people sell due to life changes, career changes, change in commitments, loss of interest in the business, new opportunities or because a business is not doing well. It is best to steer clear off businesses being sold because of adversity unless you have a plan to make it profitable and sustainable.
3.Performance of the business.
Look at the key performance metrics such as website traffic, bounce rate, the average amount of time visitors spend on the website, and generated revenue.
Ask for a copy of read-only Google analytics report of the business. The report will also give you an overview of the audience demographics, location and behavior while on the site.
Scrutinize the source of the traffic and its cost. Traffic that is gained organically is sustainable in comparison to paid traffic. Also, be on the lookout for fake traffic that might be generated through bots and third party software.
4.Profit and loss statement.
Ask for the business’s profit and loss statement for at least 12 months. The statement should give you an idea of the business’ operating expenses, revenue, stocking costs (in the case of an online business selling goods), and gross profit.
Look beyond the gross merchandise volume and focus the profits. For instance, a website may be selling products worth over 50 million dollars annually. However, if the profit is $10,000 annually, then you wouldn’t consider it remarkably successful.
In the same light, ignore seller’s aspirational pitches that try to convince you that the business would be doing better if more effort were put towards a certain aspect of it. Analyze the viability of the business based on the facts and figures without being lured by the seller’s aspirational potential.
5.Find an effective valuation tool.
You want to have a way to determine whether a business is worth the amount it is being sold out for. For instance, you can use a method to determine how long it will take you to recover your investment cost if the business sustains its annual net income. Also, factor in whether you will incur extra costs in improving the website design, growing the business sales channels or hiring additional employees.
Buying an e-commerce business can be exciting. However, it can also be a risky undertaking. Do your due diligence to ascertain that a business is feasible before making the purchase. In the case of costly purchases, it is best to consult an e-commerce financial advisor and an e-commerce business lawyer.