Launching a new business comes with its fair share of headaches. If you are an entrepreneur who does not want to go through these troubles, it is a good idea to buy your way into an existing business.
Hopping on a train that’s already going somewhere can be beneficial for several reasons. Firstly, you would be putting your money into a venture that has previously been validated and is making money.
Unlike starting your own eCommerce business, you know just what you are getting into with a company that already has customers – there are fewer surprises along the way.
But buying a business is not for everyone. As an outsider, it is difficult to audit all the revenue sources to be able to arrive at the right buying price for negotiation.
It is not uncommon for sellers to artificially pump their revenues before a sale. As a result, your taxes and customers may dramatically fall soon after acquisition.
Appoint a third party website auditor.
If you are investing millions into buying an existing business, it is vital that you appoint an auditor who can comprehensively study the income and expenses of the company to arrive at a reasonable valuation. Investment banks exist solely for this purpose.
However, this may not be something you can afford if you are a regular business person with just a few thousand dollars to spend.
Even if you choose to do the auditing yourself, make sure you consult an auditor to understand the various ways a potential buyer can be misled during the purchase process.
For online businesses, there are significant ways to audit the company without the need for an auditor. Most large website marketplaces integrate with the company’s web analytics tools like Google Analytics to provide you with legitimate traffic and sales reports.
For those using services like Shopify’s Exchange, you will be provided with direct traffic and sales reports from the seller’s dashboard.
Before you make a purchase an existing business, you need to have a firm grasp on the following:
- Present website traffic
- Existing quarterly and annual income
- Business expenses
- Current order management processes
- Marketing strategies in-play
- Social media presence
- Brand voice
Even with a full understanding of the existing operations as they appear, the onus is on you as the buyer to make sure that the traffic or revenue isn’t artificially inflated through sales to friends and families or with the help of excessive paid advertising.
How to watch for online business opportunities.
Price is not the sole determining factor when buying a business. The objective for a buyer should be to identify opportunities to recover their investment quickly. In other words, you should choose a business that you can add value to and increase the growth rate of; there are several ways to do this.
If you are a buyer with experience in procurement, you must pick a business that is riddled with procurement inefficiencies.
With your experience, you may be able to improve margins and recover your investments quicker than projected instantly.
Another way to do this would be through identifying businesses that complement your existing portfolio.
If you are in the wedding industry, you could go for websites that cater to the same demographic.
The synergy between your existing clientele and the new business will accelerate revenues and decrease the time you need to break even on your investment.
Note: Keep in mind the amount of work you’d have to put into your new business and whether it might be easier to build a simple eCommerce business from the ground up. In the case that you’ll invest more time fixing someone else’s mistakes, your so-called opportunity might, in fact, be a money pit.
Work out a transfer contract.
Buying a business is not as simple as sending a check and getting the ownership transferred to your name.
Established companies, especially eCommerce stores, have a loyal clientele and any change in ownership is likely to alter their relationship with the business. There are also legal considerations involved which are there to protect both buyer and seller.
First and foremost, it is essential to slow down the transition from the old buyer to the new. An excellent way to do this is by asking your seller to work with you on operations over a three or six month period.
This way, your team may be in a better position to take complete ownership at the end of the transition period.
You may also use this period to introduce yourself to the customers and reassure them about sustaining the same service quality as before. Such an arrangement may, however, alter the purchase value but is well worth it.
Work out a contract with the buyer before the sale is complete to make sure that there are no surprises for either you or the existing customers.