Super stoked for this interview. This month I got to chat with Greg Elfrink about his advice on buying and selling eCommerce businesses.
Greg is the head of marketing at Empire Flippers, the number one curated marketplace for online properties, so he has awesome insight into what works, things to look out for, and some great tips, too.
When should you sell your eCommerce website?
The time to sell your eCommerce website is when you realize doing so will take you closer to your goals. For example, you will need to think about whether or not you would like the income or lump sum realized from the sale.
If you do go bout if you do plan to go about selling it, make sure you have a plan in place for both your business and personal roles. You need to go in with the right expectations, you have to be flexible, and you have to think win-win for both buyer and seller.
This is really important. You have to think about it as a collaboration. Somehow when people get to a transaction, they tend to turn off the copywriter and marketer in themselves and go down into showdown mode. There have been plenty of multimillion-dollar deals that sell for less than there ideal value simply because the seller did not understand what the buyer wanted to get out of the deal.
What makes a good buyer? Who is a bad buyer?
An example of a buyer who’s not really going to get anywhere is somebody who doesn’t really have a plan. They are going to look at a lot of things, different types of businesses, won’t verify their funds, and don’t really have any reason for looking at any particular business.
An ideal buyer will have a plan and a 3 phase checklist.
Phase one, is a checklist of quick hits to go through. This should take about 5 minutes, and helps you qualify and disqualify businesses to look at it more deeply.
Phase two is the deeper checklist. This is where you will examine the numbers, stats, product performance and maybe unlock the business’s intimate details such as Google Analytics and Google search console, product and loss statements etc.
Phase three is where you ask the strategic questions directly with the bio there will be questions that come up in phase two as to why the numbers are a certain way. For example you may see situations with strange calculations on the cost of goods sold for profit and loss statements. This is the time to seek answers to those questions.
Note: you will probably skip this if your transaction size is under $250,000.
Also, the criteria for your checklists will be different depending on what you’re looking. For example, if you’re looking for a lifestyle business then you will be looking for something stable. If you’re looking for something to grow in value, then you will be looking for criteria that shows whether or not the business is a growth machine.
What is an example of a strategic question you would ask in phase 3?
In phase three, you will be looking for questions that you can’t easily understand just by looking at the numbers.
For example, you may see in the sales information an abnormal month that was very low compared to the others. In phase three, you would ask the seller what is the reason for that abnormality. You may also look into why a particular skew was unprofitable, and find out something like, the product doesn’t sell enough so the vendor is liquidating it to reduce costs for warehousing.
How many businesses should you look at when looking to buy an eCommerce website?
There are two answers to this question.
If you’re starting out, it is recommended that you do the exercise of evaluating a lot of businesses quickly, far more than you are used to. What you are doing here is learning the category and finding out what is normal and not normal. This will really help in the buying process to give you enough reference information. The line
On the other hand, once you’re ironclad on your criteria, you may just look at just a few. This depends on how prepared you are and how specific is your criteria.
Should sellers try to downplay the business’s problems?
There is a strong case that you will actually go further by not trying to cover up the faults of the business.
Mistakes and issues in the business in many cases can actually increase the demand from the buyer.
For example, if you admit to not being strong in a certain area, such as paper click advertising, a buyer with access to that exact skill set will in turn see it as an opportunity to add more value to the business fairly easily. This is the benefit of not covering up the issues and mistakes of the business.
What eCommerce businesses stand out as better buys than others?
Some general thoughts here are that drop shipping is often one of the hottest business models, both from a cash flow and an asset value POV. They are still workable, and can be sold, but can often be easily copied and the margins are very low.
Many direct-to-consumer and Amazon FBA sites don’t have strong brands, and have not gone deep on one thing, because their owners have been spread too thin. This presents an interesting opportunity for bigger buyers who have the resources to go deeper and work more efficiently on these businesses.
Long term, direct-to-consumer is going to be more scalable than often has more potential. For example, you can move or expand from direct consumer to Amazon FBA, but not the other way around.
Also, in D2C you’re going to learn some great skills and build some key assets such as your email list compared to an Amazon FBA business.
Why are people buying dropshipping businesses?
As a whole, buyers are a very diverse group compared to sellers.
For many buyers, dropshipping is one of the easiest versions of an eCommerce business to get into. You can often just focus on the marketing and customer service.
However, dropshipping businesses can be harder to sell. The delivery can be very slow.
Another reason for buying a dropshipping store is that you can use the catalog as a research and development arm of another business.
For example, you may be selling wine fridges and see that one product in your catalog is selling super well. You could then remove it and source your own better version of the product, or produce your own better version of the product and know how well it will sell already.
Another reason for buying a drop shipping business is to use it as a catalog of products too, down, or cross-sell. For example, if you sell coffee makers, you can use the surrounding products to suggest as alternative purchases.
Do certain categories of D2C sell better than others?
Generally, website sales are fairly niche agnostic.
However, some of the hardest nations are going to be tech and apparel.
Electronics can be difficult because of some of the problems really guarding warranties product requirements for sale.
Apparel can be a more challenging niche because you will need to have so much inventory. For example, even for just one product, you will likely have a lot of inventory for the different sizes.
Supplements can also be challenging because they are in a bit of a grey area.
As for higher valuations, it is not always necessarily due to the niche. However, there is a lot of demand for the pet category, such as dog and cat products.
Generally, most niches have demand if you have a strong brand, quality business, and good customer feedback.
How should you structure your deals?
For structuring deals, is generally advised to do asset sales. Because you don’t sell the liability, you’re just giving up the assets of the business. It is often the simplest and the cleanest way.
There are some exceptions, but rare. For example in the United Kingdom, there was once a stock sale because of the tax benefits associated. But you will need to research this yourself.
When it comes to buying a business, what things can go wrong?
There are a few things that can go wrong.
Sometimes not understand that things can be incorrect on the profit and loss statement if they’re buying directly from a seller and not through a broker.
Also, a buyer may not be unsure what is exactly unusual about a profit and loss statement or a business itself. Is this also why I suggest looking through a lot of businesses and learning your category to understand what is normal and not.
For example, you may find a business with an 80% profit margin. This is very strange compared to most E-commerce businesses which may have a high-profit margin of 20 to 30% on the high end. So you would need to dig in and find out more about whether this seller is a genius or if something’s wrong in the calculation.
The profit and loss should be the key document to review here. And it should tell the story of the business.
My suggestion is to work with someone who can help you understand what is unusual and whether that is a good thing or something to be cautious of.
Do professionals like accountants help with analyzing P&Ls and financials?
Yes and no.
Sadly, a lot of people on the smaller end of transactions are trying to do the right thing by hiring accountants to review the financials. The problem here is that people often hire the wrong type of account. For example, they may be hiring accountants who are experts in tax for regular small local businesses, such as a local plumber.
What you really need here is an expert in buying and selling eCommerce businesses.
The accountant for your local plumber is not going to understand what is wrong with the financials or see the red flags in the business.
The other point here is that you may not always need it. If you’re looking at a transaction under $200,000, it may not be worth spending so much money on an account.
However, if you are looking at a deal size of over $1,000,000, having an accountant to help with the transaction makes total sense.
A side note to make here is that whenever you hire an accountant or lawyer, they often have an interest to tell you not to do the deal. They will be looking out for the risks and not necessarily the opportunities. Sometimes this is a good thing, to slow down your excitement, however.
Are some stores more suited to being run semi-absentee or as a lifestyle business than others?
Amazon FBA used to be ideal here, but now it’s becoming more competitive as there is a rise in competition particularly from aggregators.
So the advice here would be to target a well-run direct-to-consumer eCommerce brand. If you have the right systems people and processes in place.
You need someone doing customer service, and a team, even if it’s only a few people. Get this put in place.
The pain of sacrificing your lifestyle for five to six months is definitely going to be worth it. The most valuable business you can sell is one where you are the most useless person to that business. At that point, you have built an income machine with real leverage. Unless you want to work on the business yourself for 10 to 15 hours a week.
What is the ideal team to run a lifestyle eCommerce website?
I would say that you need at least three people.
A marketer to run the promotions of the business.
A customer service person who can also act as your logistics assistant. They will be looking at your product sales data and make sure that your ordering forecasting is correct.
A full-time or part-time project manager or brand manager to take care of the business as a whole and supervise these two team members.
A key thing here is the three-person dynamic. It is better than having one person, as then it will become a one-person show without that person being challenged. If you have three people, you will always have a balance of opinions in the business.
With these three combined heads, you will have enough human resources is to grow the business without needing the owner to meet excessively.
You should also keep it simple by using a third-party logistics provider.
Where can you find financing for eCommerce deals?
Funding financing for eCommerce and digital property owners can be really rough.
The easiest way is to do seller financing, which is to have the seller do an earn-out deal with you.
However, if the deal is under $200,000 value, then you’re not really going to be able to suit seller financing. There are enough cash buyers in the market to squeeze you out of the deal, and there’s too much risk for them for not much reward.
There is something that EmpireFlippers is working on, only available to people in the Amazon FBA space, where we will work with vendors who can finance upwards of $150,000 value. These investors will be interested in potentially up to 60 to 70% of the deal.
What makes somebody a good e-commerce operator for an investor?
A good operator is going to be somebody who looks at everything from the perspectives of systems and processes.
You could call it a three-step process.
What can be automated?
How can I apply processes?
How can I apply people?
These operators also have other traits:
Usually have run multiple businesses
usually have bought a business before
Are comfortable operating under a lot of stress
The right person is generally a superstar in the making. Somebody with great talent but they haven’t yet had their big break. They haven’t built their business large enough to get a lot of capital, but they really know how to work a particular vertical such as Amazon FBA or direct-to-consumer.
What these people looking for is a way to take themselves to the next level financially by working on a much larger business, such as in the three to $4 million range.
What do e-commerce sites need to have in place to make them more sellable?
There are a couple of key things to have in place to make an eCommerce business more sellable;
Have 3–8 strong products
No single product making up more than 50% of the rev
Avoid large collections — e.g. 500+ products
A good email list
You can alternatively sell at one product business but there will be less interest in general unless it is a fairly large business.
Having an email list is often quite underrated. These can be the most important marketing channel for your business and have so many other benefits. For example, they provide you first-party data, feed your other marketing channels such as Facebook, and can’t easily be suspended or removed.
Having a strong brand is also very important, this is what people are saying about it on Reddit, Quora, and other social media channels.
How can people learn more about the e-commerce M&A process?
At the risk of sounding too self-promotional, it is suggested that you contact a broker like empire flippers for an easy 45-minute call to talk through your goals.
About 18 months before the time you want to sell is about perfect. This gives you enough time to make reasonable differences in your valuation.
By planning ahead, this would give you about six months’ runway to make big changes to your business and improve the valuation.
If for example, you wait until three months before you would like to sell it, then there is very little you could do to maximize your sale value.
The suggestion is the same thing for the buy side. If you’re new and don’t know what to do talk to a broker and get help with coming up with criteria and what the current market is like.
Hopefully, this is giving you some good insight into the ecommerce website buying and selling process full stuff. For me I thought it was very interesting to learn about how preparation can really help you increase the valuation of the business. The other thing I thought was very cool is that you don’t need to cover up the weaknesses of the business, and by not doing so you can increase the demand from the buyer.
It sounds pretty clear what the next steps would be but I have summarised the key takeaways for both groups below.
Advice for eCommerce website buyers:
Contact the right broker to help you in the process
Work out what is your expertise
Define a target criteria
Start the process earlier than your target transaction time
Do not expect seller financing under 200k valuation
Advice for eCommerce website sellers:
Aim to begin the sales process early
Work with the right broker to help you unlock better valuations
Improve your branding, email list, people and processes
Minimize your revenue reliance on a few key products
Do not hide the faults, be transparent