For those interested in buying an ecommerce business (first timers and people buying business <$100k) I have listed a high level criteria and questions for doing the due diligence. If you have any additional tips or questions feel free to post them!
- All figures and stats that you can find. Usually you will require at least the Asking Price, Employees, Avg. Monthly Revenue, Avg. Profit, Avg. Profit Margin, COGS, Ad Spend, Total Revenue Since Launch, Social Media Following, Social Engagement (FB/IG/Pinterest etc) and Mailing List.
Estimated valuation based on current data
- Use Multiple of Seller Discretionary Earnings with 1.5x annual profit and 3x annual profit. I also tend to subtract 5-10% off annual profit as well just to give me a couple of different estimations. Can also use this as leverage for trying to negotiate something cheaper. Some marketplaces will already have this calculated for you.
Things to consider
- General points. What's the engagement like on their social platforms? (social blade). Have you reviewed their facebook to take a look at all the ads they're running? Do they look updated? Have you signed up to their newsletter? What is their real intent for selling?
- Industry Trends. Make sure that the business you're looking at isn't in an industry that isn't evergreen. I tend to stay away from industries that don’t have other players who have been around for at least 10 years.
- COVID Adjustment (make sure you review whether or not the business and industry has been heavily affected in the short or long term by COVID). E.g. According to Stackline camera sales in March 2019 compared to 2020 have declined 64%. Purchasing a business in this industry would be a good idea considering photography is evergreen. Could very easily use leverage to get a cheaper deal.
- Competitor analysis. Find 5 competitors and compare their businesses including their social accounts (i.e. engagement on IG and the ads they run via facebook). Some ecommerce businesses might not have an IG, FB or Pinterest account and if they don't make sure their mailing list is substantial.
- Write out all the strengths, weaknesses, opportunities and threats to help get a clearer picture of what it might look like for you if you did purchase this.
High level strategy
- Which direction would you take the businesses if you had to start running it tomorrow? (e.g. maintain current offering? Pivot to a different category? Invest in hero products?)
- Quick wins. Are there any quick wins you can do to see an immediate result? After the competitor analysis you should have some ideas on how you can do this. This could include anything from optimising the stores homepage to running a FB giveaway campaign.
- Long term strategy. How can you future proof the business? This could include things like investing in SEO, building a community via facebook or slack, developing free courses in your niche ,extending your product range or buying out a competitor.
- What isn't being done efficiently? Can you optimise? This can be absolutely anything but it is important to ask for an in depth process from pre sale to delivery. E.g. some business owners aren't using 3PL or manage the social media pages on their own.