Does The Cyber Monday Hype Have You Thinking About Buying an E-commerce Business?
Buying an E-commerce Business
BFCM is nearly here …
This abbreviation will excite online shoppers (and isn’t that many of us? - it’s Black Friday and Cyber Monday Sales), but what if you are thinking of buying an online business instead of buying from an online business?
The e-commerce industry is booming, and purchasing an established e-commerce business can be a smart move. BFCM resulted in $6.36 billion in spending last year, and this year is expected to be even higher!
But how do you know if it’s a good deal? Do the traditional measures still apply to these businesses?
As with any business acquisition, understanding its performance and growth potential is crucial. However, to make an informed decision, you must evaluate additional metrics that provide a clearer picture of the business’s health and prospects.
1. Revenue and Profit Trends
You still need to start with the basics: revenue trends (monthly and annual). Is there overall growth in revenue from year to year? Are there unexplained monthly fluctuations?
Overall sales growth is a good starting point, but profit tells the real story (as it does in all types of business.
Gross profit margins indicate how efficiently the business generates profit from sales (if the business sells physical products). In contrast, net profit reveals what’s left after expenses like marketing, shipping, and administrative costs.
To state the obvious, consistent or growing profits signal a healthy operation, whereas declining profits may require further investigation into cost management, pricing or reasons for declining sales.
2. Customer Acquisition Cost (CAC)
Most businesses, including e-commerce, need a steady stream of new customers to grow. Unfortunately, to gain those customers, businesses must incur marketing and sales costs.
CAC is calculated by dividing total marketing and sales costs by the number of new customers acquired in a given period.
But, knowing the CAC is not enough.
You also need to know the sales generated by those new customers. If the business is spending $500 to acquire a $300 sale, you need to consider the long-term viability of the business strategy.
But remember, this was the Amazon strategy for years, so it can work. You need to know all the facts (and I assume you aren’t buying Amazon!).
One way that strategy will work is if customers have a high lifetime value, so we’ll consider that next.
3. Customer Lifetime Value (CLV)
CLV measures the total revenue a business can expect from a single customer over their lifetime. A high CLV indicates that customers are making repeat purchases, which can significantly boost profitability.
Businesses built on a subscription model will typically have a high CLV as will businesses with effective sales/marketing processes.
4. Traffic and Conversion Rates
Review website traffic data to understand how many visitors the site attracts and where that traffic comes from (e.g., organic search, paid ads, social media). High traffic is useful, but only if it translates into sales.
The conversion rate, which measures the percentage of visitors who purchase, is more important. A strong conversion rate (typically 2-3% or higher for e-commerce) indicates that the website effectively turns visitors into buyers.
5. Inventory Turnover and Fulfilment
Efficient inventory management is crucial in e-commerce.
Inventory turnover measures how quickly products are sold and replaced. A high turnover rate often indicates strong demand and efficient operations, while low turnover could signal excess or slow-moving products.
You must assess the fulfillment process too. A reliable fulfillment system can make or break an e-commerce business.
Does the business use third-party logistics or handle shipping in-house? Look at shipping times, costs and customer satisfaction related to delivery.
6. Return and Refund Rates
High return and refund rates can eat into profits and signal problems with product quality or customer satisfaction. Review these rates to understand how often customers are returning items and why.
Final Thoughts
Buying an e-commerce business can be profitable, but you must perform due diligence and analyse it carefully. Evaluating revenue trends, customer acquisition and retention, website performance, and operational efficiency will help you make a well-informed decision.
Tags: buying a business ecommerce online business websites
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