Learn how to buy an online business. This guide includes everything you need to purchase a website and kickstart your journey to a profitable online business.

Why buy an online business?

Learn why you should buy an existing business.

For many, starting a business is a gratifying experience. Those early mornings, that daily grind, it all pays off as the business gradually takes off. For others, and most likely the readers of this guide, the challenge lies in other aspects of the business: the turnaround effort, the scaling strategy, and so on. This guide is designed for those seeking to buy a business and continue building it. Here you’ll find the guidance and tools you need to acquire a business that aligns with your goals.

Every business can be improved, every business needs refinement. As a potential buyer, you need to ensure that the business you’re buying complements the skills you bring to the table. An incredible product that needs marketing expertise; a high-revenue operation that needs to source better products. With this guide, you’ll develop a strategy to buy the right company for you and one that you’ll be able to take to the next level.

For beginners

For those who have never run an online business before, buying an established online business could be the fastest way to get a foot in the door and start learning by doing. Compared to starting an online business from scratch, buying an established business gives you the following advantages:

1. An established business usually has a proven business model and a set of operational procedures. You can take that right away from the current business owners without risking a lot of time and money trying to build everything from scratch.
2. Buying from an experienced online business owner also means that you can learn from him/her and get yourself a “teacher.”
3. An established online business usually has a certain amount of traffic to the website and existing clients. That means the business can be cash flow positive on day one after you take over it. You don’t need to worry about where to find customers or whether you can find customers.
4. An established Shopify online business also has a website that has already been built, so no need to worry about your upfront investment in the technology. All you need to do is to learn how to manage the store.

For Experienced Entrepreneurs

If you have worked in online businesses for many years and think of yourself as an expert in one specific area, such as marketing and branding, SEO, growth strategy, or user experience, or if you have a ton of social media followers or blog readers, buying an online business means you can apply your skills and resources to help a business grow. And best of all, it’s your own business.

For Business Portfolio Owners

If you already have a portfolio of businesses, buying an online business can help you gain access to new products and new clients, which could help you effectively grow your current business portfolio.

How to find an online business to buy

Learn how to find a business for sale.

In order to understand what type of online business you should buy, the first step is to evaluate your current situation. Ask yourself the following questions:

What do you want to achieve?

Specify your goals at the beginning and ask yourself “is this online business buying opportunity going to help me achieve my goals?” Keep asking yourself this question throughout your search. Otherwise, you might end up looking at so many different business buying opportunities and lose sight of your initial goals.

If you are buying a business to learn as a beginner in online business, think of the money you spend on the acquisition as your “tuition fees.” Buy an online business that doesn’t cost you too much money, but has a fairly established process and an experienced and helpful current owner you can learn from. Each listing on Exchange Marketplace has a “bio” of the seller that can help you learn about the sellers and how much experience they have.

If you are buying a business with the goal to help it grow with your skills and resources, make sure the business has the potential to be further optimized with the type of skills or resources you have.

If you are buying an online business so that you can be location independent and have the freedom to travel more, make sure you already have the skills and knowledge needed to run the business as it is and that the business doesn’t take 80 hours a week for the current owner to operate.

What do you enjoy doing?

Make sure you will have fun working on the business you buy. Ask yourself “what do I enjoy working on based on my previous experience?”

If you are passionate about a certain topic or a group of people, for example, health and fitness, newborn babies and moms, robotics and drones, you will be more likely to enjoy working on the business as it brings you a purpose of helping others who have the same interest as you.

The same thing applies to your skill set. For example, if you enjoy optimizing website landing pages, look for an online business that is fairly strong in all other aspects but still has an opportunity to be further optimized in its user experience.

What are your strong skills and knowledge?

When buying an established online business, the bottom line is that you will be able to run the business as it is with your current skills and knowledge. It doesn’t mean you have to know everything about running an online business before you buy it, but it does mean that you need to at least have a knowledge base strong enough to support your necessary learning to take over the business.

For example, it is ok if you have never run a Pay-Per-Click (PPC) campaign with Google AdWords, but you need to at least understand how it works before you acquire the business. Otherwise, you will have a hard time when you start evaluating business opportunities.

If you have a strong skillset that can help you pursue obvious improvement opportunities in the business you buy, it’s even better. List all the skills you have, such as online sales, SEO, content marketing, social media marketing, user experience design, conversion rate optimization, business process automation, etc. Keep that in mind and find businesses that can be further optimized with your skillset.

Some online businesses do require special knowledge to run. It’s both a bad thing and a good thing. It’s a bad thing because it limits the types of online businesses you can effectively run, but it’s also a good thing because if you do have specialized knowledge in a certain space, it’s going to be your competitive advantage. Think about what specialized knowledge you have. For example, with specialized knowledge in electronic engineering, you will be able to handle a Robotics online shop’s product inquiries and create related content marketing materials much easier than others who don’t have that knowledge.

What resources do you have?

Besides your skills and knowledge, your current resources can also form your competitive advantages. Think about how you can utilize your resources to maximize the business opportunities you are looking to acquire.

For example, do you own a social media account with a large number of followers? Think about buying an online business that sells products they might like.

Do you have a previous product supplier you have worked with that can dramatically improve the product quality or profit margin of an established online business buying opportunity you are looking at?

Do you have a large amount of cash flow that can be used to put into an online shop’s paid marketing campaign, if the business’s current cost of user acquisition is dramatically lower than its revenue per user?

Determining your business buying parameters

Once you answered the above questions, you’ll have a much better understanding of what kind of online businesses would be a “good fit” for you. You can specify your business buying parameters such as the niche, the type of obvious improvement opportunities within the online business, the time and skills required to run the business, etc.

The majority of online businesses are either dropshipping, inventory-holding, or Fulfillment by Amazon. Different types of online business models will have different requirements on time, skills, and cash flow. Understanding the advantages and disadvantages of each model and determining which type you want to buy is another important buying parameter. You can read more about the comparison of dropshipping and inventory-holding online through this article: https://www.shopify.com/guides/dropshipping/understanding-dropshipping

One of the most important business buying parameters is how much you want to invest and what you can get with that price. Most online businesses in the low-end market are valued at 10x – 24x monthly earnings (we will talk about valuations in detail later in this guide). That means if a Shopify business is making $1,000 per month in profit, it is likely going to cost you $10,000 – $24,000 to buy. If you have a specific budget you want to invest in, you are likely able to specify the revenue range of the business you’re looking for with this formula.

If you are a beginner who wants to spend the least amount of money to buy an established online business in which you can learn everything about how to run it, my recommendation is that you look for an online business with monthly earnings in the $500 – $1,500 range with a good amount of monthly traffic (above 1,000 unique visits/mo). You’re likely able to buy those businesses with a budget of $6,000 – $36,000. Only invest the amount you can afford to lose if you are a beginner.

If the business is making less than $500:

1. You might not be too motivated to work on the business since the financial reward is too low.
2. The business itself might not be established enough so you might not be able to learn all the aspects of running an established online business.
3. The business is risky because the cash flow is too low.

Why $1,500/mo in profit in the upper range?

Based on my general observation of the lower-end online business market, an online business with $1,500 earnings per month could have a well-established business procedure just like a business that’s making $3,000 per month. That means your learning experience could be the same with a lot less initial investment.

Once you’ve started your search on Exchange Marketplace and have a couple of business buying opportunities in mind, you can use your business buying parameters to guide you through your search.

Keep in mind that you might not be able to find as many eCommerce business buying opportunities that fit your criteria as you would want to. In that case, you’ll need to drop or broaden some of your criteria so that more buying opportunities could fall into your range.

How to evaluate an online business?

Learn how to evaluate an online business.

Once you have located a couple of interesting business buying opportunities, it’s time to do a full-on analysis of the business. When you are directly approaching the sellers, you will need to get a list of questions answered by the sellers in order to do a thorough initial analysis of the business.

Either way, make sure you get the following information:

1. Seller interview questions and answers
2. Google Analytics read-only access
3. Profit and loss statement with monthly stats.

Seller interview questions and answers

You will want to know some basic information about the sellers before you seriously consider buying a business from them. After all, a trustworthy seller is one of the most important and the most ignored metrics in online business buying.

My suggestion is to always validate the information you get from the seller and ask follow-up questions when you get answers. You’re more likely to uncover hidden details and potential opportunities in the business.

The list of questions you should ask sellers are:

1. Tell me a bit about yourself.

When you are working directly with a seller, it is important that you do a background check yourself. Search for their name on Google, and ask for their LinkedIn profile and social media profile. Make sure the seller is not using a fake identity. If you are working with a seller from overseas and it’s very hard to find his or her identity information online, stay away from such an opportunity, especially when the opportunity looks exceptionally appealing

2. Tell me about the history of this business.

When was the business founded and why? Is the current business owner the original owner of the business? Who are the business partners and what are their roles?

In general, online businesses with a long history are more attractive than younger businesses. Most online businesses are affected by seasonality. In order to do a proper analysis of the impact of seasonality on a business, the business has to have at least 12 months of history. The longer history it has, the better you can analyze its historical data and trends. An online business with a shorter than 6 months history could be too risky to take over. It won’t have enough information on the seasonality of the business, and it has much less predictable metrics for you to base your valuation.

An online business with a shorter than 6 months history could be too risky to take over. It won’t have enough information on the seasonality of the business, and it has much less predictable metrics for you to base your valuation on.

If you find an online business buying opportunity with less than 6 month’s history, a very high growth rate during the first 6 months, and a relatively low purchase price, you would want to question why the seller is selling it. Be aware of the type of online businesses that were created for the purpose of selling.

3. Why are you selling it?

Why does the business owner want to sell the business? If the reason for selling is that the business has encountered adversity, the owner might not want to tell you the real reason. You need to dig into the business data and ask follow-up questions during your conversation with the seller. Other reasons for selling could be certain life or career changes, other time commitments, new startup opportunities, or loss of interest in the businesses.

4. What other businesses do you own?

If the business owner owns multiple businesses and he or she is only selling one of them, you need to evaluate how much this business is related to the other businesses.

For example, if the business owner owns multiple websites or online stores in a competing niche, be aware of the potential competition from the seller’s other businesses after you acquire it. If the owner cross-promotes products from the business for sale with other businesses he or she still operates, you need to evaluate the potential loss of customers after you take over the business and they stop the cross-promotion effort. It’s better to buy the entire portfolio of web businesses from the same seller if the businesses are highly associated and the operations are inseparable.

5. How do you operate the business?

What types of tasks do the current owners do to operate the business? How many hours does it take the current owner each week to perform those tasks? Are there any expenses related to the operations?

Depending on the business model, major operational tasks in an online business could include marketing, advertising, customer support, supply management, inventory management, and logistics (if it’s inventory-holding online). Some businesses have more established and automated processes than others. Make sure you ask how the business is currently operated and how many hours it takes for the owner to do each task. Also, ask the owner if there are any expenses associated with the tasks. You can find out more about common online business expense items in the Operating Expenses section of the guide.

When you evaluate the operations of the business, think of the following 3 questions:

1. Are there Standard Operating Procedures (SOPs) already documented and ready to be taken over? If not, this is something you should consider working with the business owner on post-closing to ensure a smooth takeover.
2. Are there any special resources required to accomplish the tasks? Will you be able to perform the tasks as well as the current business owner? For example, if the current business owner has a special marketing channel (free or below-the-market cost of access to social media influencer networks, ad networks, etc.) that is not transferrable with the sale of the business, taking over the business means losing that marketing channel.
3. If some tasks are outsourced, will those contractors stay onboard after you take over the business? Will you be able to take over the business’ current contracts with its main partners, suppliers, etc. with the same contract terms?

Those questions can help you evaluate whether you will be able to run the business as well as the current owner. If some part of the operations are not transferrable to you, you need to think about how to replace it with other resources and how much more or less it will cost, and take that cost into account when you do the valuation of the business.

Google Analytics Access

Ask the seller to grant you Google Analytics access so that you can evaluate the website’s traffic.

When evaluating the traffic stats, you want to find out:

1. Are the traffic stats authentic?
2. What’s the traffic trend and what’s the reason behind that?
3. Is the traffic organically sustained or does it require paid acquisition?

1. Are the traffic stats authentic?

Keep in mind that some traffic stats can be manipulated. Fake traffic is generated by bots or softwares and can be bought from 3rd party providers. They will inflate the traffic stats before the sellers put the sites up for sale.

The best way to identify fake traffic is to check the Audience Overview in Google Analytics.

Google Analytics Audience Overview gives you a nice overview of the site’s key performance metrics. Sites with very high or very low Bounce Rate (>90% or < 30%), very short Avg. Session Duration (<40 secs), low Pages/Session (<2 pages / session) are skeptical to fake traffic or traffic from untrustworthy sources. You can learn more about Google Analytics metrics through Google Analytics Academy if you are not familiar with some of the metrics I mentioned above.

Installing Google Analytics tracking code twice on a webpage can also result in a very high or very low bounce rate. You can check that by viewing the webpage source code search for Google Analytics tracking code, which usually starts with “UA-”. If the code appears twice on the same page, double-check with the seller to see if this is an error. Once the duplicated tracking code is removed from the site, after 3 – 5 days you should be able to see the bounce rate stats going back to normal.

From the Audience Overview, you can also check the Language, Country, City as well as Browser to help you identify fake traffic. If the top language of the traffic doesn’t match with the top country, or if the site is mainly selling products to US customers while its Top Country is India, you should double-check with the seller to figure out why. The top Browser is usually Chrome, unless the site is targeting a specific demographic group that prefers another browser such as Internet Explorer. Always ask yourself “does this make sense?” when you look at the traffic stats. This will help you uncover traffic from untrustworthy sources.

2. What’s the traffic trend and what’s the reason behind the trend?

In the Audience Overview, change the metric to “Users” where the default is “Sessions”. Users are a better indicator of how many unique customers visited the site.

Change the Date Range to view the traffic trend for the past 3 months, past 6 months, past 12 months, and since the beginning of the traffic history.

You can also adjust the granularity of the traffic data to see the trend. First look at the graphic by month, then by week, and by day. If there is a traffic spike during a certain time period, you might want to inspect that closely by narrowing down your Date Range to that specific time period, then look at the key performance metrics and traffic sources in Acquisition. We’ll discuss traffic sources in more detail later on.

Notice that when you adjust the Date Range to show traffic data from the different time periods, the key performance metrics like Pages / Session, Avg. Session duration, Bounce Rate, and % of New Users could change accordingly. If you notice one of the metrics changes dramatically during a certain time period, you might want to figure out why. For example, if Avg. Session Duration doubled when you adjust the Date Range from the past 12 months to the past 3 months, it probably means during the past 3 months, users spent a lot more time on the site on average during each visit session. This could be due to changes in site content and design, or due to changes in the traffic quality (perhaps more targeted traffic). You will want to ask the seller for possible explanations.

Some online businesses are strongly impacted by seasonality. For example, an online business selling gifts might have much higher traffic and sales during the holiday season. If the site has over 12 months of history, you can also spot the traffic seasonality trends by comparing the same time period across different years.

3. Is the traffic organically sustained or does it require paid acquisition?

You can go to Acquisition -> Overview to see the top customer acquisition channels.

Paid Search

This type of traffic comes from Google Pay-Per-Click (PPC) campaigns. If a big portion of traffic to the site is through Paid Search, make sure that all the details of the PPC campaigns are transferred to you after the sale, so that you can analyze the current ad campaigns and continue to manage them effectively. If you do not know how to manage ad campaigns, you might need to hire someone to do it for you. This should be counted as a part of your future operating expenses.

Ask the seller to share his PPC campaign data with you if possible so that you can analyze the ad expenses and match it with the Profit and Loss Statement you get from the seller. Analyze the cost per click as well as the goal conversion rate and conversion value from Paid Search (if the seller has set up Google Analytics Goal Tracking for checkout). If the cost per user acquisition is lower than the earnings from that user, the ad campaign is effective.

Paid traffic is more controllable compared to other traffic sources such as organic search traffic because you can increase or decrease the paid search traffic by adjusting your ad spending. However, make sure you do proper due diligence to uncover how much ad spending has actually occurred. Internal factors like how you design and run your ad campaigns can influence the paid search user acquisition cost. That’s one of the reasons you should always get the PPC campaign data from the current owner as a part of the asset transfer if that’s an important part of the traffic acquisition. External factors such as competition, and market trends, can also influence the paid search cost in the longer term, that’s why you should also do some industry research and PPC cost research.

Organic Search

Organic search traffic comes from search results that aren’t paid for. You can use tools such as SEMRush to evaluate the website’s organic search traffic quality. It gives you an overview of what keywords the site is ranked for, and how much estimated organic traffic is going to the site because of which keywords.

Organic traffic is free, hard to fake, and it’s relatively stable and predictable (exceptions are mentioned below). Thus, organic traffic is usually considered as a favorable traffic source. The best type of organic traffic is when the site ranks for many relevant keywords and the traffic from different keywords are evenly distributed. Imagine if a site ranks well for only one keyword that brings in 90% of the site’s organic traffic, when a competitor beat that ranking one day, the organic traffic to that site could drop dramatically overnight.

Although organic traffic is relatively stable, keep in mind that organic traffic could change suddenly when there are search engine algorithm changes or penalties. A general rule of thumb is that search engines will always prioritize high-quality original content. If a site has consistent organic traffic history over a long period of time, it means the site’s content is relatively risk-free from algorithm changes. If a site uses a lot of black hat SEO, it could be vulnerable to algorithm changes and penalties. You should use tools such as ahrefs.com to look up the site’s backlinks and do proper due diligence on the site’s SEO methods when organic traffic is the main traffic source.

Referral

Referral traffic comes from other websites that link to the current website. Click on Referral from the Acquisition Overview to inspect the referral traffic details. Add Hostname as the Second Dimension to inspect referral spam traffic. If the hostname doesn’t match the website’s domain or any services relevant to the site that has Google Analytics tracking code installed (such as Youtube, email service provider, etc.), it’s likely referral spam traffic. Sites with less traffic usually have a relatively higher portion of referral spam traffic (unless the seller already filtered out those traffic on GA). Keep in mind that it’s common for websites to attract referral spam traffic. What you need to do is to filter them out when you are evaluating the site’s referral traffic, if the referral spam is a relatively large portion of the current traffic volume.

If the site has legitimate referral traffic from article mentioning and backlinks, make sure to check out the referral sources, read the articles where the referral links appear and see if the content is legitimate, and find out whether there is any expense related to the referral traffic in case the store owner paid to get featured/ mentioned in those articles or did something in exchange. You can do a thorough backlink check using Ahrefs.com if the site has a large amount of referral traffic. You can also ask the seller to elaborate on their referral partnerships when you spot a large amount of referral traffic coming from certain websites.

Social Media

If the site has a large chunk of traffic from social media sites such as Facebook, Twitter, or Instagram, you will want to do proper due diligence on how the site’s current social media accounts are operated and how much it costs to maintain the current social media marketing strategy.

First, you want to assess the existing social media account followers. Find the social media accounts related to the site, the number of followers for each account, and assess how engaged the followers are with the posts. The more engaged the followers are, the better. Keep in mind that fake social media followers and likes can be bought from 3rd party providers. You can usually spot fake followers or likes by checking the profiles of the people who liked or commented on the posts.

Second, you want to understand how much money is being spent on social media marketing. There are two types of social media costs. The most common one is sponsored posts where you pay the social media networks directly to gain targeted impressions. You should ask the sellers whether they have done paid social media marketing, and if so, ask them to share the advertising reports with you so that you can check the performance. Same with PPC campaigns; you will want to keep the ad copies, creatives, and all other settings when the seller transfers the social media accounts to you.

The second type of paid social media advertising is when the site owners pay social media influencers or 3rd party social media ad networks to promote their products. In that case, they’re not directly paying the social media networks to sponsor their posts so it might be harder to discover. You can usually find it out by doing a search of the site’s domain or brand name on the social media network website to see if there are posts promoting their products from other social media accounts. If the posts don’t look organic, ask the seller to disclose the costs associated with the promotion, and provide relevant invoices to prove the amount of the expenses for your confirmatory due diligence.

In rare cases where the site owners have access to large social media influencer accounts where they can promote their own products for free, you will want to assess how much that will cost you once you take over the business without access to those accounts. Add the cost to the current business’s Profit and Loss statement to evaluate the actual profit you can earn without those non-transferrable resources.

Direct

Direct traffic usually comes from users directly typing the URL of the site into their browser. There are other cases where the traffic is also counted as direct traffic. This is the least controllable traffic source and the easiest to fake. Ecommerce sites with an established brand, great PR, and word-of-mouth can get a lot of direct traffic. If direct traffic is the main source of the traffic to the site, make sure you ask the seller enough questions to figure out if that makes sense.

Summary

A couple of points to keep in mind when you are evaluating the traffic profile:

1. Focus on the traffic sources that have the most impact on the business’s bottom line. Don’t spend too much time digging into a small volume of traffic you couldn’t explain that has minimal impact on the business.

You can check Acquisition -> Overview to see the % of each traffic source:

In this chart, Organic Search traffic appears to have the most volume.

When you go to Acquisition -> All Traffic -> Channels, you might see something like this:

If the current Google Analytics setting tracks eCommerce revenue, you can see some revenue numbers attached to each channel. As you can see, although Organic Search has the most volume, Direct traffic source actually generates the most revenue.

1. If an online business has evenly distributed traffic through multiple acquisition channels, it’s usually a good sign, as the traffic is less risky compared to a site only has traffic coming from a few channels. Whether the current traffic mix makes sense depends on the business model. For example, an online business has a unique brand with lots of press coverage could have a large amount of direct and referral traffic, and an online business selling less unique goods in a relatively competitive niche focusing on buying and monetizing traffic could have a large amount of paid traffic.

Profit and Loss Statement (P&L)

Ask the seller to provide you with a Trailing Twelve Months (TTM) profit and loss statement that shows you the revenue, operating expenses and net income per month for the past 12 months (or more if available).

A typical P&L for small businesses has 6 sections: Revenue, Cost of Goods Sold, Gross Profit, Operating Expenses, AddBacks, Net Income.

Revenue

The revenue stats can either be a sum of all revenue generated from the business, or can be a breakdown by different revenue sources, distinct product categories, by customer segments, etc., depending on how the business owner record and analyze the revenue stats.

Cost of Goods Sold

The cost of Goods Sold section includes variable costs associated with the products or services sold through the site.

If the business has a high Refunds and Returns rate (Returns / Product Sales), you should be alarmed and inspect the reasons. Some causes are easier to be fixed than others. Low product quality, poor product shipping, and handling, and misleading or wrong product descriptions on the websites could all lead to high refunds and returns rate.

Gross Profit

Gross Profit = Revenue – Total Cost of Goods Sold

With the Gross Profit number, you should be able to calculate the Gross Margin.

Gross Margin = Gross Profit / Revenue

Having a healthy gross margin is important for small to medium online businesses. A high gross margin generally indicates that the business has a good brand value, unique products, or other competitive advantages that it can operate on a higher gross margin without losing to competitors.

Operating Expenses

Operating expenses include expenses that occur during a certain accounting period. Depending on the business, the expense items could vary. Most small online businesses are run by the owners and they do not take a salary from the business.

Marketing and Advertising expenses are typically a large portion of the total operating expenses for online businesses. Make sure you double-check the Advertising expenses in the P&L and match it with the advertising network reports such as Google AdWords report and Facebook advertising reports.

Some marketing and advertising expenses might be harder to track down. For example, if the business owner has a direct advertising partnership, sponsorship, or referral partnership with other websites, there might not be an expense report you can track down or match. In this case, you should closely inspect the Google Analytics user acquisition sources, and ask the seller whether they have paid for any of them. Sellers hiding certain marketing and advertising expenses and leaving them out of the P&L is one of the most common reasons for disputes in online business buying and selling.

There could also be hidden costs in marketing and advertising, where the business owner also owns other resources they can utilize to promote their products for free. If you do not have similar resources, you will likely have to pay for those types of user acquisition. One example is that the business owner also owns a social media influencer account with 1m+ followers, where he or she can promote products without paying for the traffic.

Higher marketing and advertising expenses can also drive up sales. Some sellers might deliberately increase their marketing and advertising expenses before they put up the site for sale to generate more interest from buyers. You can calculate the expense ratio to avoid being misled by the absolute numbers. Calculate the Marketing and Advertising expenses to Product Sales ratio and inspect how that changes month over month. The ratio could increase due to decreased market demand (such as during slow seasons), increased competition, penalties, or policy changes from advertising networks. If you noticed a big change in the advertising-to-revenue ratio, you should ask the seller about the reasons behind it.

When you’re buying a Shopify eCommerce business, one of the most common operating expenses is the monthly recurring subscription fees paid to Shopify apps installed in the eCommerce store. Make sure to double-check it with the seller if that’s not in the P&L.

Add-Backs

Since most small online businesses are operated by business owners, their reported earnings could be kept low for tax purposes. We will want to see an adjusted P&L which tells you how much Seller Discretionary Earnings the business is making in order to fairly judge the available cash flow and returns on investment of the business. We can do that by adding back some one-time expenses or expenses that are not likely to occur after the change of ownership.

Net Income

After the Add-Backs, we can get to the Net Income using Seller Discretionary Earnings (SDE) method. This will be the number you use to base your valuation on. We will talk more about valuation in the following section.

The Net Income could go up and down for many different reasons. Besides looking at the Net Income numbers and trends, you should also look up the reasons for the trends from the P&L – whether it’s due to the increase/decrease in revenue, or increase/decrease in cost. External factors such as seasonalities, competitions, and changes in market trends as well as internal factors such as changes of product suppliers or changes of operating processes, can all contribute to the changes of Net Income.

A thorough analysis of the P&L can help you discover a lot of information about the business, choose the right questions to ask the sellers and find opportunities for improvements in the business.

Website valuation: how much to pay for an online business?

Learn how to value a website.

In the previous chapter, we talked about what questions to ask the seller during the seller interview, and how to analyze Google Analytics data and financial data. The goal is to collect as much information as needed to get a thorough understanding of the business and to uncover information that could be important to you as a buyer. With the information you collected, we can now go through the valuation method for online business.

Online businesses are generally sold for 10x – 24x monthly earnings. This is a relatively large range, and there are exceptions that were sold above or below this range, because each business is unique and each buyer is different. Ultimately, the business will be sold for how much the buyer is willing to pay. However, there are some general guidelines that could help us determine how much the business is worth to us.

As a buyer, the principle is to achieve the highest return on investment (ROI) when we decide to spend money on a business buying opportunity. Depending on your different goals, your ROI could be a monetary value that is measured by how much money you can earn in the future from the business, or it could be a non-monetary value such as the amount of learning or joy you can gain from operating the business post-acquisition. In this chapter, we are only discussing the measurable part of the acquisition, which is the monetary value of your return on investment.

Keep in mind that although historical data is a good indicator to help you value the business, you only want to pay a purchase price that can justify how much the business can make in the future. Since each buyer is different, their ability to generate profit from the business after the acquisition is different too. Thus, the same business could be valued very differently by different buyers. The most valuable type of business buying and selling transaction is when the buyer has better resources and the ability to bring the business to a more profitable level than the current owner. That means the business is worth more to the buyer than it is to the seller, and that’s when a buyer and a seller can get to an agreement on the purchase price where both parties are going to win.

When you look at how much to pay for a business, you want to use historical data to reasonably predict its future earnings as much as possible. You can look at the previous business performance from the following aspects:

History

How old is the online business? Businesses with longer history are usually sold for a higher multiple compared to similar performing businesses with a shorter history.

As I mentioned in the previous chapter, a lot of online businesses are impacted by seasonality, and you can only spot the pattern if you have a longer history of operations. Businesses with longer history usually have more data available for us to analyze, and more previous learnings we can take away from to help us operate in the future.

If the type of online businesses you are looking to acquire are largely dependent on brand and word-of-mouth, a longer operating history also means more returning loyal customers who could potentially refer new customers to the brand in the future.

Customer Acquisition

How does the online business acquire customers? Does the business requires a lot of marketing effort and a large advertising budget to acquire customers, or does it have more organic traffic and word-of-mouth growth effect?

Usually, a business with more organic traffic and word-of-mouth growth is more predictable in the short term and less risky post-acquisition when the buyer takes over the business. The reason being that if a business requires constant marketing and advertising effort, it is uncertain whether the new business owner can put in as much high-quality marketing and advertising work as the previous owner did with the business. Compared to other online business models, most online businesses require a decent amount of marketing and advertising effort to keep up the customer acquisition. Since customer acquisition is such an important part of running an eCommerce business, how easy it is to acquire customers, either organically or through paid marketing, should be taken into consideration during your valuation process.

Focus on three things when you evaluate the business’s customer acquisition: the website’s traffic profile, the business’s current marketing, and advertising practice, and the cost of customer acquisition compared to the average profit from each customer.

Traffic Profile

Check the customer acquisition channels on Google Analytics and ask yourself whether the current traffic level is likely to sustain over time. I have explained different traffic sources in detail in the previous chapter. An example of a sustainable type of traffic source is when the online site has lots of keywords ranking well on Google, and the organic traffic coming to the site are relatively evenly distributed over different keywords instead of concentrated on one or two. An unsustainable type of traffic source would be a significant percentage of traffic coming from one or two articles that have recently featured the online business you want to acquire. The press coverage could generate a huge spike in the website’s traffic profile during a short period of time, but over time fewer and fewer people will read the article and visit the online site through the referral links.

Current Marketing and Advertising

During your seller interview, you gathered quite a bit of information on how the current business has been marketed and advertised. Do the current marketing and advertising practice require a lot of specialized knowledge or skills? For example, if the majority of the current business’s marketing effort is focused on constantly writing new creative content to get a lot of press coverage and social media sharing, it might be hard for the new owner to achieve the same level of success if the new owner is not a marketing and PR wizard. However, if the current marketing effort is more focused on scheduling specific social media posts that have predictable content, putting a certain amount of advertising budget into a couple of simple AdWords or Facebook Ad campaigns that have already been optimized, it will be easier to take over and maintain the same level of customer acquisition in the short term (although in the long term you might still need to continue to optimize the marketing and advertising in order to keep up with the competitions and changing market trends).

Cost of Acquisition

If paid advertising brings in the majority of the new customers, look at how much it costs to acquire new customers by drilling down to the online business’s advertising performance report. If the online business has tracking pixels set up on their ad campaigns and through their Google Analytics, the report should be able to show you how much they have paid for the campaign and how much order value they have generated through the campaign. If the customer acquisition cost is too high, an ad campaign might not be very profitable because the profit earned from the new customers could be very close to how much they have paid for the ads. However, if there is large profitability in the ad campaigns, there might be an opportunity for you to scale up the profit by putting more money into the ad campaign.

Market Trends and Competition

Market trends and the level of competition are external factors that impact the business’s future performance. Thus, it plays a role in the valuation of a business. Chapter 4 in The Ultimate Guide to Dropshipping has discussed how to measure market trends and competition in detail. If the online business you’re looking at is in a highly competitive niche and a stagnant market, it should be valued less than if it’s in a fast-growing market with less competition.

One internal factor you should evaluate is the competitive advantage of the online business in its niche. Is there a high barrier of entry in the niche the business is operating in that can protect the business from the competition? Is there already quite a lot of brand awareness and brand value that can effectively differentiate this business from its competitors? Does the business have unique products or designs that are hard to replicate? How about patents and trademarks? If the answers are yes to some of those questions, the business is likely to be able to protect itself from competition at least in the short term.

One last thing you need to consider in your valuation is how much value you can add to the business and how much “lift” you bring to the business’s current profit level. Although this could be hard to predict, if you do see some low-hanging-fruits for you to pick up based on your current resources and skills, this could effectively justify a higher valuation for you, and this might be your chance to win the business buying opportunity over other potential buyers.

How to finalize the sale and transfer business ownership

Learn how to transfer business ownership.

After finding a great business buying opportunity and understanding how much you want to pay for it, it’s time to communicate that with the seller to finalize the sale.

Communication and Negotiation

Communication and negotiation play an important role in achieving a successful acquisition. Spending money to buy a business online from someone you’ve never met before is both risky and a bit scary, same for the person on the other side who is selling the business. You should aim to build trust with the seller starting from the beginning of your communication.

Here are a couple of tips for communication and negotiation:

1. Tell the seller who you are, what you do, and why you want to buy the business. Providing more background information about yourself is always helpful in building trust.
2. Show the seller you are serious about the opportunity by asking well-thought-out questions. Carefully review the information provided by the seller and do enough research before you ask questions. Do not ask questions where you can easily get the answers yourself. It’s both about respecting the seller’s time and about showing the seller that you are capable of taking care of the business they have spent years building.
3. Tell the seller more about what you are planning to do with the business and what value you can add to it after you acquire it if possible. If this is a serious business the seller has spent years working on, he or she will want to know the business is going to be well taken care of.
4. When you negotiate with the seller on the price of the business, be transparent and show them your valuation process. Use facts and numbers to back up your valuation and the price you want to pay during the negotiation.
5. When it comes to an important discussion or negotiation, try to communicate with the seller over the phone instead of going back and forth via email.

Steps to Finalize the Sale

When finalizing the sale, conducting due diligence, and drafting the related legal documents, both buyer and seller should consult their own lawyers to ensure that their interests are protected when the deal involves a large amount of money.

Confirmatory Due Diligence

After you have agreed to buy the business and mapped out the timeline for closing, it’s time to conduct your confirmatory due diligence.

You should verify the revenue statistics with the seller either by getting access to the seller’s online store dashboard or through a live video walk-through. Since Exchange automatically verifies revenues on Shopify store listings, it makes things easier. It’s recommended to ask for a full Profit and Loss Statement with historical stats tracing back to the beginning of the online store from the seller during the Due Diligence process. Check the revenue report, operating expenses, customer order details, and bank payout records to see if the numbers are matching. Carefully inspect the traffic data to see if the traffic trend matches the revenue trends, and if there are any hidden expenses that haven’t been disclosed.

With the help of your lawyer, research the legal aspects of the seller’s online business. For example, are there any legal restrictions or issues with the type of products the business is selling? If the business is currently operating outside of your home country, you should consider whether there are applicable rules and regulations in your jurisdiction that could potentially impact the business. Are there any trademark infringement issues? Are there any current or previous unresolved lawsuits related to the business?

Most online business transactions are structured as an asset purchase, which means there is no transfer of business ownership. In an asset purchase, you’re essentially buying the Shopify store as an asset from the seller. You will not take over most of the business’s previous liabilities through the acquisition, which means you’re not responsible for the business’s previous debts or obligations. This is good because it frees you from most of the legal due diligence work, but any legal disputes attached to the assets should still be under your concerns, such as patent/trademark infringements.

If there is current employment or contractor relationship, supplier relationship, or advertising partnership in the current business, do your due diligence on the contracts and see if those relationships could be carried over with little risk.

Ask the seller to send you a list of assets included in the sale, and carefully inspect each asset (domain ownership, social media account follower authenticity, etc.) during the asset transfer.

Asset Purchase Agreement

The next step is to draft an Asset Purchase Agreement with the seller with the help of your lawyer. You will need to work with your lawyer to customize the agreement and add terms relevant to your specific deal. To start you off, here are some things you could consider:

• Timeframe and logistics on closing. When should the buyer transfer money into Escrow? How long is the inspection period? Under what conditions can the buyer or seller withdraw from the binding agreement? What are the responsibilities of each party during the closing period?
• How long is the post-transaction support period? How will the seller assist the buyer in post-acquisition integration?
• Terms on holdbacks, earn-out, milestones, or any other types of delayed payments, if any.
• Is there a non-compete period? How long is the non-compete period and what kind of restrictions the non-compete will have on the seller?
• The list of assets included in the sale as an attachment to the Asset Purchase Agreement. Examples are:
  • Social media accounts
  • Customer email lists
  • Shopify store and apps, design files, product image files, marketing materials, etc.
  • Other subscription or tool accounts, Zapier, internal processing like Trello, etc.
  • Advertising accounts like Google Adwords if transferrable. If the advertising accounts are not included in the sale, make sure you can replicate the ad campaigns by get the ad campaign details from the seller.
• Standard Operating Procedures document (if any)
• How do your local tax laws apply? Is there any applicable withholding tax that may arise as a result of a sale of your business?
• Whether and how you will transfer intellectual property
• Other special terms, including whether the buyer and seller will give representations and warranties or any indemnities.

Transferring the Business

After the asset purchase agreement has been signed, a typical business transfer looks like this:

1. The buyer transfers money into Exchange’s partner: Escrow.com.
2. After the Escrow service confirms the deposit of money, the seller will be notified and he/she starts transferring the business and the relevant assets to the buyer.
3. After all the assets have been transferred, the buyer has a period of time to inspect the assets to make sure everything is as described and agreed on in the Asset Purchase Agreement. Depending on the complexity and the size of the transaction, the inspection period could be anywhere between 24 to 72 hours.
4. By the end of the inspection period, if no discrepancy has been found, the buyer should release money from Escrow to the seller’s account.
5. The seller receives money from Escrow. The transaction is officially closed.
6. The seller provides training and support as agreed in the Asset Purchase Agreement.

Conclusion

A summary of how to buy an online business.

Whether you’re just getting started, an experienced entrepreneur, or building a portfolio of companies, the process of acquisition is similar. The variable instead, is you, and what your goals are. You may be looking for a low-cost operation where you can start experimenting and learning about sales and marketing. Or perhaps you’re willing to invest a substantial amount into a proven online machine. Ultimately, buying an online business comes down to what you’re looking to get out of it.

With Exchange Marketplace, powered by Shopify, you can find online stores ready to purchase. You can find online businesses for sale with steady revenue or trending stores with increasing revenue over the last 3 months. Exchange is a great starting point to acquire a business. All Shopify shops listed for sale have their revenue and traffic data automatically shown from whitelisted sources that the sellers cannot modify or edit. Learn more about AppealAPCN and start browsing businesses for sale today.