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Starting a business from the ground up is notoriously time consuming. Startups often take 6–12+ months to go from the initial idea to getting paying customers, and that doesn’t include the time it takes to achieve profitability. An alternative is buying a business, and many entrepreneurs who choose to buy a company lean towards online or ecommerce brands.
Why? Ecommerce businesses tend to have lower overhead than brick-and-mortar stores and have the potential to achieve virtually exponential growth. If you’re looking to purchase a well-managed ecommerce company (whether the company sells products on its native site, through a mega-platform like Amazon, other platforms, or a hybrid), you’ll need to know how to find the right business and finalize the deal.
What we’ll cover:
- Why entrepreneurs buy ecommerce companies
- Pros and cons of buying an existing online business
- Step-by-step checklist for buying an ecommerce business
- How to finance an ecommerce business acquisition
- Considerations to make before buying an ecommerce platform
Why entrepreneurs buy ecommerce companies—and why you may want one, too
Ecommerce is an industry in and of itself, but it can be broken down further into more specific industries. For example, people can click and buy everything from pet products and home goods to vehicles through platforms like Carvana. In that, the possibilities at least feel endless for the ecommerce space, an industry that got a huge boost amid the COVID-19 pandemic.
And even though the stay-at-home wave didn’t last and people have eagerly returned to many of their in-person favorites, the trend retains vigor. Morgan Stanley forecasts the ecommerce market could increase from $3.3 trillion today to $5.4 trillion in 2026 despite general economic slowdowns. The future estimate would equate to 27% of all retail sales.
“We have yet to see a ceiling for e-commerce penetration.” - Brian Nowak, equity analyst covering the US internet industry for Morgan Stanley
All things considered, entering the ecommerce industry makes sense—and there are even more reasons why acquiring your way into it makes sense for many entrepreneurs.
Acquisition entrepreneurship (aka entrepreneurship through acquisition, or ETA) is nothing new. It’s also not a risk-free path, despite avoiding the pitfalls of launching an unproven product. Growing a small-to-medium-sized business has its own obstacles, like being able to spot the rising star in a saturated market and buying the business for an appropriate valuation that leaves room for profit. Still, there are many benefits to ecommerce acquisition entrepreneurship:
- Instant impact: You’re acquiring a business that’s already alive, and you’re more likely to feel the positive impact sooner rather than later. While it still takes effort and determination, you can avoid much of the blood, sweat, and tears with the right ecommerce brand. Finding one with brand recognition and an existing track record of repeat customers is helpful.
- Expanding industry: Like Nowak says, ecommerce has growth potential like no other. Naturally, entrepreneurs want to be a part of that, and ETA is a potential path.
- Proven business model: If you purchase an ecommerce SMB that is effectively managed and operated, you benefit from greater flexibility in time and effort than a new business would allow. The company has (ideally) already been through the learning curve and proven itself in the market, even if it hasn’t scaled to the degree you envision.
- Repeatable profitability: If the deal goes well and you find smooth success, you can repeat the process and add more ecommerce brands to your portfolio (potentially creating a parent company for your holdings).
Potential cons of buying an existing online business—and how you can avoid them
While the benefits of buying an existing ecommerce site are strong, that doesn’t mean there aren’t potential disadvantages. So what are the cons and, more importantly, how can you bypass them?
Established businesses have processes in place. In many cases, this is a good thing, but legacy systems aren’t always as efficient as they could be. For example, you may be inclined to implement automation in digital advertising or inventory management for greater scalability, and that takes some upfront work. There could also be hidden inefficiencies that might be hard to correct.
How to avoid this: Find a successful ecommerce business that is organized, so you can adjust operations as needed with minimal effort. If this isn’t possible, employ a contract consultant to shore up processes at the start and adjust as needed. You could also consider hiring the previous owner for a set transition period.
Buying an entire company can have higher upfront costs. After all, the current owner wants a return on their investment. This can be especially true if you’re buying a business with a very strong market presence and profitability.
How to avoid this: You may not avoid upfront costs entirely, but there are ways to mitigate it. Consider sticking with SMBs that have lower valuations. You can also focus on online brands that have proven themselves regionally or in particular niches with a well-thought-out plan to scale. Vaibhav Kakkar, CEO of Digital Web Solutions, says, “You'll be able to significantly reduce your costs and achieve greater outcomes if you narrow your specialization and concentrate on a particular product or audience.”
Additionally, finding the right business partner(s) or financing avenue can be a game changer (more on financing an ecommerce acquisition below!).
Future success is not guaranteed. This may sound like a quote of the day, but it’s relevant to buying existing ecommerce businesses. The failure rate of mergers and acquisitions is more than 50%. While that’s lower than the startup failure rate of 90%, it’s still important to be aware of. Just because a company has brand recognition and a repeat customer base doesn’t mean it’ll stay that way. The work continues long after the deal ends.
How to avoid this: Put an emphasis on buying the right ecommerce business, and stay open, flexible, and willing to learn (from the existing company, the industry, and the economy at large). Confidence is key, but hubris can be a detonator.
Step-by-step checklist for buying an ecommerce business
This is our guidance for how to buy an existing ecommerce business, but remember that you may find your own journey looks a little bit different. While all steps are important, you may complete them in a slightly different order than provided here.
Go in as a group, set up a joint venture, or shore up your own finances.
The goal of acquiring any business—even a small, online company—can feel lofty. For some entrepreneurs, the idea of doing so with one or more business partners just makes more sense. Enter: a business consortium.
If you choose to take this path, make sure you get granular about the details of who holds the liability, what percentage of operational responsibility each partner takes on, and profit sharing where applicable.
If you plan on endeavoring independently, now is the time to shore up your cash flow and potentially prepare for financing (aka pay off debt, take steps to increase your credit, and anything else that makes you more attractive to lenders).
Define your requirements for businesses to buy.
Create your own requirements for what makes a business eligible for purchase. This is kind of like an acquisition version of a business plan and is unique to the risk level you are willing to take on. Do you have limitations for employee count, profit margin, or another key metric? What about your level of familiarity with the industry or the type of ecommerce business model you prefer (B2C, B2B, etc.)? Take some time to flesh this out.
Find an ecommerce business to buy.
Once you’re ready, begin your search for a business to buy. You can start by finding an ecommerce business for sale or seeking companies not actively selling whose owners you want to directly pitch. Some ways to do this include:
- Local business brokers, business attorneys, and CPAs (surely, we’re not the first to tell you networking goes a long way)
- SMBs with active social media marketing
- BizBuySell, LoopNet, and other reputable online broker sites
- Reverse sourcing on the Amazon Selling Partner Appstore and Shopify Store Directory on the Shopify app
Complete the business valuation and negotiation process.
To avoid overpaying for an ecommerce store, it’s imperative to get a firm valuation, even if the company’s current owner has already given an asking price. If you have relevant experience to value an ecommerce website, you can do this yourself. Otherwise, don’t skimp on hiring a third-party professional without bias. You can value a business by its revenue, net profit or income, or other methods. Valuing an online store typically involves assessing financials, traffic and conversions, existing search engine optimization (SEO), operations, niche, customer base, and more.
Negotiating typically begins with an unbinding offer and follows up with some back and forth. You can choose to buy the assets or stock of the company (note that a stock sale tends to be more advantageous for tax purposes).
Ultimately, you’ll submit a letter of intent (LOI) that lays out the terms and conditions of the acquisition and grants you exclusive rights for a period of time. An LOI is not a final contract.
Do your due diligence.
Doing your due diligence applies to more than investing in the stock market. Signing an LOI grants you access to deeper financials and company details, including any new products on the horizon, marketing and email lists, and legal, organizational, and financial records, just to name a few. Review all of this before deciding to close the deal. The Federal Trade Commission (FTC) legally requires businesses selling a company to make certain disclosures, so don’t be afraid to protect yourself.
Secure financing and close the deal.
Before you’re ready to go into escrow, get financing. We’re going to dig into that deeper in the next section because it’s super important, so hold tight!
How to finance an ecommerce business acquisition
There are a handful of ways to finance purchasing a small business from a previous owner. Here are the most common:
|SBA loans||The U.S. Small Business Administration (SBA) offers a range of federally backed loans by matching you with a lending partner in your area. You’ll want to look at SBA 7(a) loans for the purpose of acquiring an existing ecommerce small business.
Keep in mind the SBA maintains strict criteria about who is eligible and what the loan must be used for. The program favors borrowers with good credit who can put up collateral. In many cases, the program can finance a majority of the purchase price.
|Traditional bank loans||You can get a secured or unsecured loan from a traditional financial institution. This path generally requires a strong credit background, including a couple of years in business under an existing legal structure (such as a limited liability company, or LLC).
If your credit profile is weak, you may struggle to get favorable interest rates or enough money to finance the purchase.
|Alternative financing||Online business loans tend to be more forgiving than government-backed or bank loans. Because there are myriad alternative lenders and more, you are more likely to find financing quickly with favorable terms.
Be careful to review loan terms before taking anything on to avoid a predatory loan.
|Leveraged buyout (LBO)||In an LBO, a buyer will finance the purchase price of the business with a loan, but leverage that loan with the company’s assets. It’s imperative that you only pursue an LBO if you’re as sure as possible of future company success.
After an LBO deal closes, the new business owner has a lot on their plate, like reducing costs and maximizing profits. At worst, this can come with a loss of both product quality and customer retention. At best, it can streamline profitability and make the risky maneuver worthwhile.
Ultimately, it's the buyer's choice, but do be wary of an LBO, particularly in the instance of an SMB ecommerce acquisition that costs less than your typical private equity investment.
|Debt assumption||You can reduce the cost of the business sale price by assuming the previous owner’s debt. All parties, including the lender of the existing debt, must agree to this before proceeding.
Debt assumption can be risky if the company fails to continue profiting under new ownership, but it’s still an alternative to financing that you should be aware of. Consider the liquidity risk it may put you in before proceeding.
|Seller financing||You may have heard of seller financing (aka owner financing) in the case of purchasing a home. This method can apply to a business purchase, as well. Naturally, the current owner must be willing and able to finance the purchase, but it could be a beneficial situation, especially if you know the owner you’re doing business with.
Previous owners will have to retain a vested interest in the business until you pay off the loan, so it won’t work if they’re looking for a clean exit from the venture.
Final considerations to make before buying an ecommerce platform
With all this guidance, you’re almost ready to make moves in the ecommerce space! Before that domain name is yours, be sure to make some final considerations before embarking on your exciting new business journey.
Make sure you choose the right business for you. After all, you’re going to be the owner of a new-to-you company, and that’s a big deal! Even if it’s just the start of your portfolio, set clear standards for yourself. From metrics to type of business, from size of the business to operational time commitment, it’s all equally important.
Consider the amount of time for transaction completion. Some financing options take longer than others, and you want to calculate that in your estimate of time until you see profit.
Respect the seller. In many cases, they’re the founder of the existing business, meaning that platform is like their baby. If you treat them with respect during the negotiation period, they’re more likely to treat you with the same. Like networking, you never know who you’ll encounter again in your professional career.
Stay flexible. Growth often comes with some discomfort. That doesn’t mean you should jump into something you’re not sure of. However, it does mean you have a lot to learn, even if you carry an MBA from an ivy league school. If this is your first time purchasing an ecommerce business, you’re bound to encounter some learning curves, and that’s okay. The important thing is to keep those reflexes active. As the SBA says about buying an existing business, “Don’t be afraid to ask questions about contracts, leases, existing cash flow, and inventory. The more you know, the better equipped you’ll be to make a sound decision.”
Last word on buying an ecommerce business
Buying a high-quality ecommerce business is a great opportunity—in the right conditions, of course. Most importantly, know what you’re getting into, why you’re getting into it, and all the logistics along the way.
While the process of buying an ecommerce business can be quick, it must not be glossed over. This is a big move, but one that can skyrocket your success as an entrepreneur through acquisition.
“The growth of digital commerce represents a permanent change in how people shop,” Morgan Stanley writes. If anything, that ought to push an already motivated entrepreneur to buy an ecommerce business with all factors considered.