Build or buy? Entrepreneurs are often tossing up between building an e-commerce business or buying one. Many individuals will opt to build a website in order save money, or simply because they love the process. However, a growing number are finding that buying an e-commerce business is the quicker option to success.
So, why spend the money buying an e-commerce site when you can build one for far less? Firstly, it’s already established. It already has customers, suppliers, traffic, and awareness. The previous owner has done most of the hard work for you. The downside? Obviously, the upfront payment.
When departing with any decent amount of cash, you want to be ensured it’s a quality investment. So, what makes an e-commerce business a good investment? What elements of a site need to be looked at before buying?
Here are 5 things consider when buying an e-commerce business:
Financials will most likely be the first thing you look at. Verifying the claimed revenues and expenses is critical in an acquisition. To check the income for the last year at least, ask for all the shopping cart reports on a monthly basis. Then cross-check this against the payment processor statements and bank statements to follow the money back to the owner.
Ask for all the invoices, including stock purchases, hosting, wages, advertising, processing fees, refunds, and chargebacks. Additionally, be as thorough as possible with your search for hidden costs.
You want to have a good understanding of the supplier dynamics. Supplier arrangements are critical. Are all products from one supplier? What is the length and terms of the agreement? Consider other aspects like shipping and discounts. Existing relationships need transferability. You don’t want a supplier to not honor a discount after the sale.
The ideal situation would be a business with low supplier concentration and long-term relationship with favorable rates that are already agreed on.
- Website traffic
Traffic is as important as the financials. It’s the core of any online business. Use Google Analytics to observe traffic data. You need to look for trends in each of the traffic sources, week-by-week and month-by-month. What is the traffic doing, going up, down or staying put? Are there spikes in traffic? If so, what is the explanation for that spike? Also, look back as far as possible and check for Google penalties.
Next, look at the at traffic sources, organic, social and referral. If there is high search traffic, focus on keywords it ranks for. You want it to rank for popular keywords.
Finally, review the link profile. The link profile is all the incoming links or backlinks. Check for signs of paid links or links that look spammy; they can be detrimental. The link profile should have grown smoothly. Examine any large spikes in links. Use Ahrefs to examine a link profile. If there are low-quality links, you can submit a disavow file to Google to get rid of them.
- Evaluating customers
Customer engagement and care is crucial. Evaluate the percentage of returning visitors, repeat customers, product reviews and anything else relating to customers. Also, make sure you go through customer support logs. Check the number of inquiries, response time and feedback. You should look for refunds or chargebacks, a high number of these can be an indicator of issues. Consider using services like Digital Exists. It’s smart to seek advice from professionals who know their way around the online niche and can help you in accurately evaluating a website’s value.
- Managing an e-commerce business
Finally, if you are the one buying a business, you are probably going to be the one running it. Don’t buy something if you can’t manage it! If you buy something you can’t handle, you may regret it. Ask the seller what a typical week is like, this way you can gauge the workload.
If you are taking care of the customer support, ordering stock, the website blog, social media pages and more, can you manage it? How many hours a week can you invest?
Buying an e-commerce business can be very profitable if done right. It can also be a very pleasant way to make money. Just remember to look for inconsistencies in the seller’s story. If you start seeing red flags, proceed with caution. Usually, you can tell if an e-commerce business is not worth buying, the seller will not be transparent and withhold details. Good luck!
With a background in communications and management, Amber often writes about small business and budding entrepreneurs. When not working, you can find her online chatting with her friends or be reading industry blogs. Connect with her on Twitter.