5 Things to Look Out for When Buying an E-commerce Website

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Helmut: The Boat with a View

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E-commerce websites are popular here at Flippa. Wouldn’t it be nice if you could buy a profitable dropshipping site for cheap and travel the world as it earns you a healthy amount every month?

Unless you’re extremely efficient and experienced, it would be hard to replicate the results you hear about from Tim Ferriss and other 4-hour workweek advocates. That doesn’t mean it can’t happen, it just might take some time to get there.

Of course, the entire reason you’re buying an e-commerce site is to get there faster. You don’t have to go through the entire process of setting it up and finding suppliers because someone has already done it for you.

On the other hand, you don’t want to invest a whole lot of money to buy an e-commerce site only to find out that that it doesn’t generate enough money, or that it takes up all your time. So to protect you from making a bad investment, here are five things to look out for when buying an e-commerce website.

1. Niche

You want to make sure that the site you found has a good niche with acceptable demand and low competition.

There are lots of e-commerce sites selling popular electronics, but these are very broad markets and you are competing with thousands of others. Unless the site has some extremely obvious USP (Unique Selling Proposition), this business will end up taking all your time and will force you to drive down profits to compete.

Now, there’s no such thing as the perfect niche, but there are profitable niches around. These niches usually have the same or similar characteristics.

You need to find something that you’re interested in and that you can add value to. This means you have some expertise in your niche and that you’re able to write good content for your site. If the product being sold has multiple components and complex installations, you can add your expertise by creating a free manual to go along with the product, thus giving you an edge over Amazon and allowing you to charge a premium.

Products that are difficult to find at a local brick-and-mortar store, that have a lot of accessories, are small and have low turnovers are usually good products to sell online. Disposable products mean that people will be coming back to your site often and you can build a regular customer base.

2. Suppliers

When it comes to suppliers, you want to ask yourself a few important questions:

  • Are the suppliers any good? Do you want them to stay on?
  • Where are they located? Where do they ship?
  • Are they wholesalers, manufacturers, or middlemen?
  • Are they offering a good wholesale price?

You certainly don’t want to take on a business with unreliable suppliers. If they mess up on orders, not only can that cost you financially, you also have to deal with irate customers, and you don’t want that.

The best way to determine if you want to keep the supplier is to meet with them in person. A face-to-face meeting is always the best way to build trust, and that’s exactly what you’ll need to ensure your store runs smoothly.

You may want to start by creating a few test orders to make sure your supplier is reliable and easy to work with. Also, when starting out with a new supplier, and this applies even if you aren’t buying an established store, you need to set your expectations from the start. Miscommunication is one of the leading causes for problems in business.

3. Website Design and Marketing

Marketing is what brings customers to your site, but design is what convinces them to purchase.

When buying a new site you want to see what it actually looks like. Look at the design with a critical eye and see if it inspires you to buy any product. Click through to see if the shopping cart is user friendly. Poor design means you might have to redesign the site, which might cost, so keep that in mind.

Next, take a look at the site traffic. Specifically, look at the organic traffic, because paid traffic means a further monthly cost, which will reduce your margins. Regular traffic with returning customers is a good sign. Sometimes you might see sellers claiming high average traffic caused primarily due to irregular traffic spikes from some one-off marketing push, but if it drops back to a low level it clearly means people aren’t interested in visiting again. For better performance, remember to keep track of the key metrics for your website.

After that, research the SEO and backlinking work done on the site. Then, use Open Site Explorer to see what work has been done on the site. Remember, poor backlinks means Google will penalize you. Other factors that affect Google rankings are domain age and page rank. Bigger numbers mean better rankings and site quality. Buying a brand new e-store that was set up a week ago won’t give you any added advantage on the marketing front than if you set it up yourself from scratch.

If you’re stuck on this stage, make sure to follow these 12 smart SEO tips to keep you moving forward.

4. Financials

Revenue is all well and good but what matters more is profitability and margins. Low margins means low profits. And if you have to spend money each month on a marketing strategy, you might end up making a loss no matter what your revenue is.

Get detailed income statements from the seller and analyze them yourself. Income statements might sound a bit intimidating, but you should be able to figure them out easily. What you really want to look for are trends over the past five years or so of the business. Are margins rising or falling? What about revenues? Are there any sudden spikes in costs?

5. Sale Price and Valuation

After having gone through the previous steps, if you have determined that this is indeed a good business, with strong financials, you will want to figure out if the seller is selling the site for a premium or a discount.

This is where the concept of multiples comes into play. Sellers will obviously try to sell the site for a premium, claiming that they invested so much in design and marketing. However, you need to figure out whether it is worth it for you, regardless of the investments the previous owner made.

Usually, multiples for an e-commerce business would be in the 1x to 3x range. That means the sale price of the store would be 1 to 3 times the yearly profit. Of course, this isn’t taking into account all the other factors previously mentioned. At the end of the day, each business is different. If you feel like you can take the site and increase sales and profitability, you might want to seriously consider anything less than a 2x multiple.

Conclusion

Buying an e-commerce store has some obvious advantages over starting from scratch. To begin with, it’s already an established business with a website, suppliers and customers so that saves a lot of work right off the bat. However, in some cases, it just might make more sense to start one from scratch if an existing business seems to have too many problems. It really all depends on how much time you’re willing to spend on the site and how much money you have to set aside for it.

Have you bought any e-commerce websites lately? What are your tips and thoughts? Please share your experiences in the comments…

P.S. Did you like this article? Make sure to check out 5 Simple Rules for Running E-commerce Sites

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Comments

  • http://seovet.com/ Lyman Perrine

    Also make sure to integrate conversion tracking. This will only help validate sales being made and allow you to to understand your sales funnels to help improve profit.

    • Olle Lindholm

      Great point, Lyman. Thanks for sharing.

  • Jon

    Couple other things…1..check the BBB rating and other online rating sites. 2. Check local attorney general office for complaints. 3. Check with vendors for any outstanding balances – its easy to hide debt with net 30 vendors 4. Check to see if there are any outstanding refunds not issued. 5. Check contracts with vendors to see if there is expiration terms, or changes that could effect business. 6. Check P/L and how they are file taxes…should be at least a LLC or S corp. If it sole proprietor and P/L is mixed with personal -its nearly impossible to tell if business is making or losing money. 7. Check what customer acquisition costs are. Customer Acquisitions costs will verify P/L

    • Olle Lindholm

      Hi Jon,

      Thank you so much for sharing your tips! Much appreciated. :)

  • SRM

    E-commerce does not equal drop shipping and drop shipping is pretty much a race to the bottom of pricing. Real e-commerce sites have employees and warehouses and source product in bulk to leverage their buying power. Most sites I find here are the ruined remains of now unprofitable or poorly backlinked drop ship sites. Buyer beware.