Many people look towards starting their own eCommerce businesses if they want to sell products online. However, entrepreneurs can also acquire existing eCommerce businesses for sale and then grow them from there.
We’ll discuss exactly how to find these businesses for sale, what to look for, how to transfer the business and go through some common pitfalls when acquiring an eCommerce business.
What is an eCommerce Business?
E-commerce refers to the practice of selling a product online. E-commerce is a broad term that encompasses selling through 3rd party platforms such as Amazon, Etsy, and eBay or your website.
Many eCommerce businesses are built using software like Shopify or Woocommerce, which allow individuals to quickly set up and start selling products online for a low monthly fee.
There are various types of eCommerce businesses, including Amazon FBA, Shopify, Etsy stores, dropshipping stores, or selling your own products on your own website. For this article, we’ll focus on eCommerce businesses where you sell a product on your own website and not a 3rd party platform like Amazon or eBay.
eCommerce businesses are classified by whether or not they hold inventory.
Dropshipping businesses do not hold any inventory. When an order is placed on their website, they submit the order to the manufacturer, and the manufacturer directly ships the order to the customer.
Traditional eCommerce businesses do hold inventory. They place a purchase order for their products from their manufacturer and hold the inventory at their own warehouse or a 3rd party logistics service (3PL). When customers place an order, they ship it from their warehouse to the customer.
Buy vs Build an Ecommerce Business
The first question to ask when evaluating an eCommerce business for sale is whether you should buy or build an eCommerce business.
This can be a difficult question, and the answer largely depends on your situation and the potential business you’re looking to acquire.
To think through this, ask yourself the below questions when evaluating an eCommerce business for sale.
How long would it take me to replicate this business?
Many dropshipping businesses consist of a Shopify store, a paid traffic funnel, and a database containing the information of their past customers. An individual can create the same Shopify store in an afternoon and copy the paid traffic funnel using spy tracking tools like Adspy.
This lack of defensibility means it can be simple to replicate a dropshipping business. That is why many of dropshipping businesses have low multiples – if they sell at all.
Compare that to a more traditional eCommerce business like Supply which sells its own products.
The founder spent years on product design, continually iterating based on customer feedback. Do you have multiple months/years to spend on product design, innovation, and figuring out the manufacturing process?
Are you better at finding product-market fit or scaling up an existing business?
Many people choose to acquire an eCommerce business because they are better at going from 1 -> 100 than 0 -> 1. It takes a special sort of person to develop an idea, validate it, manufacture it, and get it to the first 1,000 customers.
If you are not good at coming up with ideas but great at scaling up existing operations, you might be a great fit to acquire an eCommerce business instead of starting one.
What is my budget?
While possible, it is rare to find high-quality eCommerce businesses for sale in the <100k range. Businesses below that size simply have not done enough revenue to validate the initial idea. Consequently, if you’re looking to acquire an eCommerce business, you will most likely be looking in the range of 100k – multiple seven figures. Without a substantial budget or external financing, it may be difficult to acquire a business.
Where to Buy an Ecommerce Business
Empire Flippers is perhaps one of the largest and most well-known marketplaces for eCommerce business for sale. Prior to listing, each seller talks to their team and has their financials prepared, an informational packet about their business written, and a realistic list price agreed upon.
Browsing the current listings, there are multiple eCommerce businesses for sale in the 6 to 7-figure range.
Quiet Light is a similar business brokerage to Empire Flippers that primarily focuses on higher-priced businesses in the $250,000 – 7 figure list price range. In contrast to Empire Flippers, every broker at Quiet Light has either run or sold their own Internet business – giving them experience on both sides of the transaction.
Microacquire is a prominent marketplace for online businesses where buyers have to pay a monthly fee to access all of the listings. While primarily used for SaaS businesses, there are currently multiple eCommerce businesses for sale.
Like Flippa, Microacquire is an open marketplace with no due diligence on the listings posted. No brokers are involved with Microacquire, which can result in unrealistic eCommerce business valuations.
When browsing through Microacquire, be sure to look quickly at the asking price and see if the valuation is reasonable. If not, it’s best to move on quickly rather than reason with the seller.
Flippa is the largest open marketplace for internet businesses for sale and contains the widest selection of different businesses for sale. That vast selection, however, makes it difficult to find high-quality businesses among all the listings.
It’s also important to note that Flippa is an open marketplace meaning any seller can list their business for sale. The Flippa team performs no due diligence before the listing goes live, meaning sellers have to be extra careful with their due diligence process and verify that everything in the listing is true.
It is possible to list eCommerce businesses based on category, revenue estimates, and products sold. Using that list, enterprising buyers can find their contact information and inquire about the possibility of selling.
Private sales take much longer than going through a brokerage because you have to
- Convince a store owner to sell
- Convince the store owner you have the funds to complete the acquisition
- Conduct due diligence
- Complete the sale
And you have to go through the process without a broker on either side to help guide the transaction. This difficulty, though, represents opportunity.
A private sale may be the best way to find an undervalued eCommerce business for sale presents a great deal.
How to Value an Ecommerce Business
Ecommerce businesses are typically valued at a multiple of the Seller’s Discretionary Earnings (SDE). The seller’s Discretionary Earnings are similar to net profit but include add-backs for expenses that a new owner may not incur.
Some examples of addbacks include a one-time website redesign, business travel, and your owner’s salary.
To determine the SDE, look at the revenue and deduct all of the operational costs involved with running the business.
An example of operational costs would be the monthly Shopify bill, the cost of goods sold (COGS) for the products sold that month and all of the fees associated with packing and shipping the products to the customer. There may also be ongoing advertising spending to drive traffic to the business.
Determine an Appropriate Multiple for the Business
While typically, the SDE is laid out clearly in the profit and loss statement provided by a brokerage, it is far more important to determine an appropriate multiple for an eCommerce business for sale.
Current industry multiples typically range from 2.5 – 4x annual SDE (30 – 42x monthly) but vary depending on various factors such as business size, age, trends, and category.
The larger the eCommerce business is, the bigger the multiple will be. Most businesses with less than $500,000 in SDE will have a standard 3-4x multiple. Above that range, private equity firms start to enter the picture and will pay bigger multiples. For an eCommerce business doing over $500,000 in SDE, expect to pay a multiple between 5-8x annual SDE.
The longer the business has been operating, the greater the multiple as well. An eCommerce business with steady profits for the past 6 years has proven that it can weather different economic conditions and changes in online advertising.
Perhaps the most important aspect when determining an appropriate multiple though is the overall trend of the business. Is revenue increasing, steady, or declining over the past few months or years? A rapidly growing business will demand a higher multiple because prospective buyers expect the growth to continue.
A declining business will have a lower multiple because buyers will have to come in and fix the revenue decline.
How to evaluate an eCommerce business for sale
When looking at eCommerce businesses for sale, it’s important to go through an extensive due diligence process. You have to evaluate every aspect of the business in order to understand the strengths, weaknesses, and opportunities that it presents.
First, evaluate the financials. You should be looking at both the raw numbers year over year and the margins. Is the business healthy and stable or trending up? Is revenue up year over year? Is net profit up year over year?
Look at the margins as well. Ecommerce businesses sell physical products and typically run at net margins between 15 – 25%. How does this business compare to this standard?
Businesses with low net margins are more difficult to run because there is less room for error.
Important: When reviewing the profit and loss statement, you may see big net profit numbers every month. Make sure to consider the free cash flow though, which is the amount you’ll actually be able to take out of the business. If you’re growing the business, you’ll often need to place bigger and bigger inventory orders tying up cash. You’ll see increasing net profits on paper, but your cash on hand will slowly decline.
Marketing Metrics: CAC and LTV
After reviewing the financials, turn to analyze the marketing side of the business. How does the business acquire customers? Do they pay for ads through channels such as Facebook, Instagram, and TikTok? Do they acquire customers organically through influencers or an SEO campaign?
You should look at each channel’s customer acquisition cost (CAC). How much does it cost them to acquire 1 customer? This will allow you to easily see the most profitable customer acquisition method.
You should also consider the lifetime value of each customer. Is the product a one-time purchase or do customers order multiple times?
A lot of this is product and category. For example, an eCommerce brand in the skincare category may have a high LTV – because it sells consumable products. However, a mattress brand may have a low LTV because many people only need to purchase a mattress once every 5-10 years.
Look through the logistics side of the business to understand the strengths and weaknesses there. How often are inventory orders placed? How long is the lead time?
Many eCommerce businesses have a supplier (typically located overseas) and then use a 3rd Party Logistics (3PL) warehouse to fulfill customer orders.
When looking at the supply chain, you want to fully understand the path a product takes from the supplier to the 3PL to the customer’s door.
Many buyers of an eCommerce business for sale do so with a growth thesis: i.e., they will buy this business for 3x annual profit, grow profit by 50-100%+, and then either decide to keep it or flip it to another buyer.
Consequently, it’s important to consider how you would grow the business if you acquired it. Are there new products you could introduce? New marketing channels that the previous owner is not taking advantage of?
Before acquiring any business, be sure to know exactly what you’ll be doing to grow it.
How to transfer an eCommerce business
Transferring an eCommerce business can be fairly simple, depending on how it’s set up. Many eCommerce businesses run off of a Shopify website, a 3PL, and have 1-2 suppliers from which they get their inventory. To transfer the business:
- Transfer ownership of the Shopify store and change the bank information
- Notify the 3PL of the ownership change
- Make arrangements to move the inventory if needed
- Introduce the buyer to the suppliers for the business
During the transfer process, the previous owner should have a list of standard operating procedures (SOPs) prepared to make the transfer and the first few weeks post-acquisition go smoothly.
FAQs about buying an eCommerce business
How much does it cost to start an eCommerce business?
Depending on the type, you can start an eCommerce business for less than $100 dollars. If you plan to use dropshipping to fulfill orders and not hold inventory, you’ll simply sign up for a Shopify plan, create the website, and start getting traffic to your store. If you want to sell your own custom product, you’ll have to place an inventory order ranging from $2,000 to $5,000+, depending on the quantity you want.
How much does it cost to buy an eCommerce business?
Most eCommerce businesses for sale range from $100,000 – $1,000,000+. Below that threshold, the business really hasn’t sold enough products or done enough revenue to validate the idea. While there are businesses for sale for cheaper, these are typically riskier acquisitions because of their small size.
Why do people sell their eCommerce business?
People sell their eCommerce business for various reasons, including burnout, exhaustion, desire for something new, medical reasons, or even retirement. After years spent running the same business, many owners feel tired of the day-to-day operations and yearn for something new.
Consider also that most eCommerce businesses are valued at 3x annual earnings. Would an owner rather continue running this business for the next three years or cash in now? Selling is an attractive proposition for many owners.