Ecommerce is growing at a rapid rate. No longer reserved for buying books off Amazon, online shopping has become an all-encompassing part of how people purchase everyday items, including essentials like groceries and medicine. With this in mind, it’s no surprise that global retail ecommerce sales reached $4.9 trillion in 2021, nor that experts forecast this figure to exceed $7.4 trillion by 2025.
For those looking to become ecommerce business owners, this means one thing: they are now in the prime position to join the online shopping revolution.
But acquiring an ecommerce business isn’t as easy as browsing through a few ads and picking a random online store to buy. To prepare for purchase, you first need to learn how to value an ecommerce business. You’ll want to develop a thorough understanding of all the different valuation drivers that will determine your investment’s potential.
So, if you’re ready to buy but still aren’t sure what to look for, this is how to assess an ecommerce business for acquisition.
The success of any ecommerce business relies on the amount of traffic it’s capable of generating. For mega-corporations like Amazon, monthly visits continually exceed 2 billion per month. And, sure, most ecommerce stores won’t get nearly as much traffic. Nevertheless, new business owners need to understand how traffic-related metrics impact a venture’s performance and potential.
One of the best ways to gauge the quality of traffic to an ecommerce website isn’t to simply differentiate between paid and organic traffic. Instead, to discover whether a business has the required potential and resilience to attract customers and make a profit, measure traffic diversity.
In simple terms, traffic from several sources spread over various keywords indicates a business resilient to potential Google algorithm changes. On the other hand, a brand that relies on a single high-ranking page to bring in all its traffic may lose business if Google rolls out a major algorithm update.
The good news is that diversifying traffic, even post-purchase, isn’t an impossible feat. To upgrade a business from a high-risk investment to a low-risk operation, you can focus on achieving a balanced keyword spread by investing in content marketing and SEO. Yes, both of these activities will cost money. However, if you’re prepared to dedicate some of your available resources to boost your new ecommerce business’ value, start with keyword spread.
Number and Quality of Backlinks
Another tell-tale sign of whether an ecommerce business is worth investing in is the number and quality of backlinks. These are important because they drive Google rankings and organic traffic. An ecommerce business with a strong backlink profile will inevitably do well at attracting customers without having to invest in paid ads, maximizing your profit potential.
To assess where a brand stands in this matter, use a tool like Ahrefs to analyze the site’s domain authority. Then, if you notice there’s a need for you to make improvements post-purchase, invest in link-building to drive more relevant and high-quality traffic to the store.
For some ecommerce companies, a large portion of their traffic comes from referrals or affiliates. So, when valuing an ecommerce business for acquisition, you need to look at the quality of these referrals.
Secure and future-proof referrals are likely to benefit a business. However, affiliate links that only boost traffic or conversions for a limited time may not contribute as much value in the long run.
When assessing an ecommerce website for purchase, determine the number of affiliates the business has, how many referrals they generate, and the quality of the brand’s relationship with affiliates. The stronger the network, the more likely it is to future-proof your investment and secure a steady stream of high-quality traffic.
Finally, as you look at how ecommerce website traffic drives value for a business, don’t forget to pay attention to the outcomes of all those website visits.
Visitor behavior will say a lot about a site’s revenue potential. Specifically, when assessing an ecommerce business for acquisition, look at KPIs such as:
- time on site
- bounce rate
- the number of pages per session
- conversion rate
These will indicate whether, after purchasing, you will need to optimize the website with design and UX changes, add more relevant (and logical) internal links, or update the content to deliver even more value to web visitors.
For an excellent example of a high-ranking page that effectively encourages desired visitor behaviors, check out the Composting Guide by Eartheasy. The resource doesn’t just present readers with valuable info on a specific subject. But it also utilizes fully-optimized CTAs, encouraging visitors to interact with multiple pages on the site and, ultimately, convert.
Social Media Footprint
An established social media following is another significant value driver ecommerce business buyers need to consider when preparing to acquire a company.
Generally, a large number of followers can be equated with profitability potential. After all, it usually indicates a well-established brand that already holds authority and credibility in its niche. However, keep in mind that having many followers doesn’t necessarily signal a social media presence that generates store traffic and conversions.
When deciding whether to invest in an ecommerce business or not, look at engagement metrics such as likes and comments. These will be a reliable sign of a significant social media footprint.
Ideally, when assessing ecommerce brands to invest in, look for ones that have already built strong relationships with their audience.
If you’ve set your sights on a particular investment, don’t be discouraged if the brand’s social media presence isn’t there yet. You can just as well develop and implement a social media strategy after the acquisition process is over to reach the venture’s maximum potential.
But beware: don’t make the mistake of simply churning out sales-oriented posts that are self-promotional. (Research shows 81% of consumers will unfollow creators who publish too many sponsored posts.) Instead, focus on creating value, building relationships with the target audience, and investing in the brand so that it becomes people’s go-to in the industry.
A website’s core metrics are another element to consider when valuing an ecommerce brand. These include:
- Conversion rate.
- Average order value.
- Customer lifetime value.
- Customer acquisition cost.
- Shopping cart abandonment rate.
To get a better idea of the performance you can expect from a store, ask to look at the Google Analytics reports. Then, consider whether the performance you’re after is there or if you’ll need to optimize the website to achieve the results you want.
Note that less-than-perfect core metrics don’t necessarily mean you should pass over the opportunity to acquire a business. Sometimes, the fixes are easy and cheap, and the returns are significant.
For example, doing something elementary like Firepit Surplus and employing a cross-selling add-on on product pages could allow you to significantly boost profits. Or, you could choose to create an automated cart abandonment email campaign that will boost conversions and help you win back some of the 69% of consumers who abandon their purchase before completing their orders.
Most ecommerce businesses see some seasonality — particularly around the holidays. But, if you know that an online shop only becomes active during specific times of the year, know that this will have a significant effect on the store’s value.
For instance, ecommerce stores like Softball.com are likely to see an uptick in interest during the back-to-school shopping season. However, the website traffic and conversion rates might significantly drop during other times of the year, which might not allow you to generate enough revenue to justify purchasing the store.
On the other hand, brands like Klean Kanteen also cash in on back-to-school shoppers. But, in addition to student and parent-oriented items, this ecommerce store also sells a variety of evergreen products. That’s a significant valuation driver and shows the brand’s potential to make a profit year-round, with only mild seasonal changes.
Fulfillment Processes and Inventory Management
When buying an online retail business, remember that a well-oiled machine is easy to maintain. In ecommerce, the two elements that reliably indicate the health of a business are streamlined fulfillment and inventory management processes.
Aspire to invest in a brand that outsources fulfilment (whether to Amazon’s MCF service, FedEx’s Fulfillment, Shipwire, etc.). These processes are easier to handle, requiring almost no owner involvement. On top of that, they can also be cost-effective, as they won’t rely on you hiring extra employees or keeping a physical warehouse for inventory management.
Moreover, note that outsourcing fulfilment directly contributes to customer satisfaction, which plays a substantial part in determining the future of an ecommerce brand. This is true because outsourcing speeds up shipping, helping you meet customer expectations, with 66% of online buyers wanting fast and free shipping.
Then there’s the question of the quality of your supply chain. Generally, if you’re looking to invest in a venture that’ll be reliably profitable, you should look for a strong and diverse supply chain. Pick a brand that sources products from at least two separate suppliers in different countries. This is essential in the post-Covid 19 era, as we’re still dealing with the ramifications of a disrupted supply process.
Small ecommerce businesses often rely on the work of one person, usually the owner. And, when securing the initial success of a venture, this can be a good (and essential) thing. Business owners are passionate about their projects, know what they want to offer regarding product quality and customer experience, and aren’t afraid to put in lots of hours to achieve the results they’re after.
But, the thing about buying an ecommerce business is that you might not want to purchase a brand that will have you working full-time (or worse yet, 60 or 80 hours per week). Ideally, you should be looking for a business that takes 5-10 hours per week to operate. Or, with bigger purchases, you might be looking into ecommerce businesses that already have a well-established team that will continue working after the acquisition is completed.
In other words, a business that requires a high level of owner involvement may not be your best choice when purchasing an existing ecommerce store. In fact, in a poll in my investing community, we discovered that having existing operations team in place was one of the top qualifications leading to successful growth of an acquired company. Without a solid operations team, sometimes the new owners spend more time managing the business than being able to grow it.
Nonetheless, if you’re ready to take on an “imperfect” organization and do some initial work to set it up just the way you want (and to get more leverage), consider the following points:
1. Expert Knowledge
Does the owner’s expert knowledge make them indispensable in running the business?
A brand like WASD relies on the ideas and input of a core team of creators and production specialists, whose work drives business success and differentiates the company from its many competitors. If an acquisition took place and these employees were to leave the company, it’s safe to say that continuing to run the brand would take an immense amount of effort and learning, which may not be the type of set-up you’re after.
2. Relationships with Partners and Suppliers
Do the owner’s relationships with partners and suppliers mean they will have to stay involved in the future running of the business?
For instance, a brand like Kopi Luwak Direct, which sells a product that’s super-niche and complex to obtain, is likely to require a higher level of owner involvement than a generic dropshipping business. If you’re ready to take over these relationships, this won’t pose a problem. But if you’re looking for a zero-fuss operation, this type of organization may not be your best choice.
3. Personal Brand
Is the owner’s personal brand attached to the reputation of the business?
For example, the Think Like a Monk ecommerce site could never work without it being tied to the author, Jay Shetty, whose public appearances and content creation actively influence sales. This doesn’t mean that you wouldn’t be able to make a living from running the site. But it does mean that you will have to work very closely with the previous owner.
Preparing for the Transitional Period
As you approach the acquisition process, keep in mind that your willingness to be involved in operations has to inform your final purchasing decision.
Whatever your final choice, make sure you thoroughly prepare for the transitional period. Ensure that you’ll be getting what you want from your purchase, and don’t hesitate to work with the current owners to ensure maximum success.
Once you’ve taken over, you might want to minimize your involvement by making some operational changes. This will allow you to drive bigger profits with less work as well as to prepare for a possible exit down the line.
Multiple Sales Channels
According to data from Salesforce, appealing to today’s consumers necessitates an omnichannel approach to sales. The organization’s research discovered that as many as 78% of buyers have used multiple channels to start and complete transactions in 2022. This further emphasizes how important it is for ecommerce brands to have a full-scale presence online.
With this in mind, understand that the ideal ecommerce business investment will be an online store that already employs multiple alternative sales channels. If you’ve set your sights on a particular brand that doesn’t do this, don’t despair. The good news is that sales channel diversification isn’t too resource-intensive while still making an exceptional strategy for increasing a company’s profitability.
If you decide to buy an ecommerce brand that doesn’t employ an omnichannel sales approach, set up the following two channels right after the acquisition. Then work your way up to more as you see fit:
1. Sell on Social Networks
Although social commerce is still in its initiation phase, forecasts show that, in the US alone, it’s projected to reach $79.6 billion in 2025. With this in mind, it’s no surprise that popular brands such as Alpine Swiss make sure they use all selling opportunities on social media, including those that allow them to turn traditional content into shoppable posts.
2. Create an Amazon Store
Another sales channel to make use of if you want to add value to your ecommerce store is Amazon. Amazon Prime memberships are expected to reach 76.7 million households in the US in 2022.
So, it’s no surprise that businesses like Ray-Ban have created dedicated Amazon storefronts. The platform doesn’t just allow Ray-Ban to reach its audience at a digital location most people go when shopping. More importantly, Amazon also allows the business to combat counterfeits, which are particularly widespread for Ray-Ban’s more popular models (and which could potentially harm the business’ reputation).
Product Page Quality
When looking for a high-ROI investment, you need to pay close attention to the web design of the ecommerce stores you’re considering acquiring. Appearances significantly impact conversion rates (and may not always be easy to fix on a budget).
Product Page Descriptions
Informative product page descriptions optimized for SEO have a high chance of ranking on Google and attracting buyers. They can also position a business as trustworthy and convince web visitors to convert.
But many ecommerce stores with a massive inventory allow their product descriptions to slip, with underpopulated product pages compromising organic traffic, conversion rates and the seller’s reputation. This is something you need to look out for when considering a potential investment.
Good product pages contain all the information that potential customers and search engines need. They answer every single question that a shopper may have and they’re full of keywords that resonate with Google.
Auditing and repopulating a giant inventory of product pages is a massive, potentially very expensive, undertaking. Which means that any ecommerce site with great product pages is immediately more attractive to me as an investor.
KURU Footwear is a terrific example of a site with an extensive inventory that consistently populates their content pages with excellent, in-depth, SEO-friendly content. From product descriptions and technical specifications to frequently asked questions and special features, these pages present the ideal benchmark of what a product description should look like.
Consumers make purchasing decisions based on visual and tactile information. That’s why a rich and user-oriented product gallery can effectively add value to an ecommerce business.
When assessing ecommerce businesses for purchase, look at how they use imagery on product pages.
You don’t necessarily need dozens of pictures of the same product — in fact, brands like Fishwife manage to find exciting ways to visually present their products with just a few images.
But, you do need to ensure that the images that are present do a good job of attracting customers. For example, this particular brand uses photos that show the inside of its seafood tins, specific recipes that use the ingredients, as well as a nutrition facts table, making it easy for potential customers to see what they’re getting by purchasing each product.
If you’re worried that setting up product photography might be a resource-intensive fix post-purchase, consider whether you can minimize the cost of populating your product galleries through DIY or outsourcing solutions. Hiring freelancers to shoot product photos, for instance, may allow you to acquire a lot of value while keeping your costs to a minimum.
Another excellent way to boost revenue (and revenue potential) without breaking the bank is to explore opportunities to include social proof on your newly-acquired ecommerce site.
If the store you’re assessing already has it, you can rest assured that this element will be a big valuation driver. And, if it doesn’t, you can still find easy ways to employ it down the line, even if you’re on a very tight budget.
Customer reviews are an excellent indicator of brand strength, so look for them on any site you’re considering buying. Generally, a greater number of quality customer reviews will indicate a strong and healthy business, while a lack might suggest a lower brand value.
For instance, if you look at a business like Mannequin Mall, you’ll see that the brand employs a flyout that says a lot about its strength. This widget doesn’t just differentiate between product and brand reviews signaling that the brand has a trustworthy reputation. It also allows potential investors to see multiple instances of customer feedback, some dating several months back, showing how successful this ecommerce business is at consistently meeting customer expectations.
Furthermore, when assessing ecommerce brands for acquisition, don’t forget to comb through their social channels. For instance, if a business knows how to repurpose customer reviews into social content, as done by Welly, that’s an indicator that the brand is capable of using its success to create more revenue through channels like Instagram or Facebook.
Looking for earned media mentions on a company’s website is another great strategy when assessing an ecommerce business. Mentions from reputable publishers and reviewers are an excellent way for brands to prove their authority, and they will usually show them off on their homepage, as done by GILI Sports below.
The lack of earned media on an ecommerce site doesn’t indicate that it’s not going to be a profitable investment. (Sometimes, the owners just hadn’t thought of the benefits of displaying media mentions on their site). Nonetheless, if you want to be 100% sure you’re acquiring a business with high potential, you’ll at least do a Google search to better gauge the brand’s reputation.
Furthermore, note that a brand doesn’t necessarily need an entire feature article in Forbes magazine to prove its authority. Sometimes, a mention in a publication that’s relevant to the target audience will carry more weight than a generic quote from a large publication.
Third-party Certifications and Expert Validations
In the absence of customer reviews and media hype, look for relevant third-party certifications or expert quotes to assess an ecommerce business.
Research from Edelman shows that young consumers trust scientists and experts, with 66% of these buyers stating that these are the ambassadors they find the most credible. So, when looking to buy an ecommerce business, remember that trust is crucial for generating sales.
If you’ve set your sights on a particular company, see whether they’ve worked with spokespeople to add value to their brands, as done by SomniFix below. This will be particularly important in the health and fitness industry, where trust tends to be low and lack of social proof often leads to subpar sales outcomes.
Alternatively, look for badges that show that the brand meets relevant industry standards. You can see this type of social proof on the Tractor website, a brand that includes a USDA Certified Organic trust badge on its product page.
The technology an ecommerce business uses makes for one of the company’s most valuable assets. Well-developed and maintained software can be a huge value driver when purchasing an online business — especially if it follows coding best practices that will allow any new developer to make necessary changes down the road. However, if the tech is outdated or even redundant, it will inevitably take away from the store’s potential.
When assessing an ecommerce business for acquisition, it’s essential that you have an objective understanding of your tech skills. If a company you’re looking at buying uses custom software, you’ll either need to have the skills to run the ecommerce business yourself or find and hire an in-house developer just to allow you to continue business operations. This will significantly affect the profitability of the investment.
On the other hand, popular ecommerce platforms like Shopify and WooCommerce allow non-tech-savvy business owners to sell products online. And the best thing is that they can be easily customized with minimal coding involved. That’s definitely something you should look for if you’re looking for a minimum-involvement investment.
As you can see, numerous valuation drivers — some more complex than others — will determine the potential of an ecommerce business. And, for a large portion of these, there’s not much you will be able to do to boost the value post-purchase. At least not within a short time period and without a hefty budget.
So, if you’re considering buying an ecommerce business (or even if you’re just curious about how big of an investment it would require), it’s best to cover your bases and do your research.
By carefully reviewing potential investments and paying attention to the elements discussed in this guide, you’ll have a higher chance of finding a profitable opportunity. Plus, by knowing what it is that helps ecommerce brands create value, you’ll also have the chance to draw a clear roadmap for the future of your new business venture, ensuring you get the biggest bang for your buck, no matter the size and niche of the company you’ve taken over.