095: 4 Reasons Why You Should Buy An Ecommerce Business & The 6 Key Tenets To Proper Due Diligence
Posted by October 14, 2015on
You might not be the right type of person to start a business from scratch, so maybe you should buy an ecommerce business instead.
The amount of time, energy, money and sacrifice it takes to build a business from the ground up can be exhausting (we know first hand), so why not skip all of that and buy an ecommerce business that is already established?
We never really considered the benefits of buying an already established ecommerce business, but after talking with David Newell of FE International we’ve been convinced that buying an ecommerce business might actually be a better option than starting one.
In this episode, David will cover the 4 main reasons why you should buy an ecommerce business including a few reasons we never thought about that now have us consider it.
He’ll also cover the 6 areas you need to focus your due diligence process on so that you can make sure you’re not getting hosed when negotiating with the seller.
Oh, and if you’re thinking about selling this would be a great episode to listen to so that you know exactly how a buyer is thinking and the steps they’re going to take (with the help of their broker) to make sure your business is legit and worth the investment.
Key Takeaways from the Show
- The 4 reasons why you should buy an ecommerce business instead of starting one from scratch.
- How to know if you’re the type of person who should be buying
- The 6 key tenets to robust due diligence when buying an ecommerce business
- The biggest mistakes most first-time buyers make and how to avoid them
- How to find financing when you want to buy an ecommerce business
Links / Resources
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Chad: Austin, what’s up buddy? I see you through the window over here in the fart cube.
Austin: I think we should refrain from calling it a fart cube.
Austin: Because I don’t want our listeners to think that we’re recording this in a fart cube.
Chad: But we kind of are.
Austin: Yeah, but the perception needs to be different in reality in certain instances.
Chad: You know what; it’s called authenticity, man.
Austin: Sure, authentic, like, I mean just changing the name, for me.
Chad: Okay fine. We’re in the podcast cube.
Austin: A dynamic, isolated, podcast cube or a fart cube.
Chad: I’m keeping all of this, this is all staying. I know you’re questioning this right now but it’s going to stay.
Austin: I’m absolutely questioning it, so.
Chad: Either way man, how are you doing today?
Austin: I’m doing well. I’m actually excited to be here. This is one of the first episodes that we have recorded not across the country or in – you know, one of them was in, the farthest one was when I was in New York, Chad was in Brazil, and –
Austin: – Avinash Kaushik was in San Francisco, but yeah, this episode we are recording right next to each other, and it’s a very interesting episode because it touches on something that we didn’t even really know was possible. We knew it was possible but didn’t really know how the details work on this specific thing that we’re talking about, which is buying an ecommerce business, and we’re going to dive deep, deep, deep into it and explain some, and just kind of bring up some of the things that we’ve learned.
Chad: I think it’s super interesting. It was definitely interesting for me because you’re right, we’ve known that this is possible, I mean I guess it’s kind of obvious that it’s possible to buy a site, but for some reason it was never obvious to me to actually be one of the buyers, or for us to be a buyer, because we’re so used to starting things from the ground up and calling them start-ups, and like grinding our faces off in all this good stuff when maybe that’s not the best route to go for everybody.
Austin: Yeah, maybe it’s not, and I know that there are people out there that have gone that route over and over and over again. Bill from the Rebel CEO, he’s bought a couple of businesses and he’s talked about that. He talked, you know, gave a great presentation at Ecommerce to a live – like a year half ago, but today we’re going to go into the kind of, do the deepest dive we can into what it’s like on the buying side. The things you got to learn before you put the money down, and also where do you get the money, right? That’s one of the big questions that – if you’re thinking, “Wow, this is potentially a good idea, I don’t want to do the start-from-scratch type thing, I want to have a business that’s already proven.” Well, we’re going to talk about how to make a smart decision, how to go in and figure out if the backlinks they’ve got set up are legitimate backlinks, or if you’re buying something that could get Google slapped within a couple of months. Those are the type of questions that we’re going to go through with our guest, David.
Chad: Yeah, and not only that, but we’re going to find out why it’s so beneficial to buy a business and if you fit that criteria; so, not only are you going to learn if you’re the right person to be an ecommerce business buyer, but of course, according to David, the six key tenets to buying a business the right way.
Austin: That is a good question though; it is a big question to ask, and I think we do cover enough to answer that question. It’s whether you are the right person to buy a business.
Austin: Because there are two things that are going to happen; you’re going to listen to this and you may say to yourself, you might be listening and thinking to yourself, “Wow, this is a new possibility for me.” Even if you run your own business right now, you may end up listening to this thinking to yourself, “This is a really great opportunity for me” or on the other side, there’s going to be some of you listening to this and you’re going to say, “Wow, I’ve learned a lot, I do not think I’m the right person to buy business.” So that’s one thing I think we answer during this conversation.
Chad: Yeah, and you know, we’re going to be talking about this purely because we’ve already talked about the selling side, it’s just a good idea to have the flipside or the buying side for all the reasons we’ve already just mentioned. And I think if you’re going to be a seller as well because if you’re going to be a seller, you’re going to get a lot of benefit from this as well because you’re going to understand how a buyer will be thinking and what they’ll be looking for. So, if you’re thinking about selling, understand how to sell your site for max value, but also understand what buyers are looking for to buy, to buy your site at the best value for them.
So before we, before we get into all of that, just a quick couple notes here: One, we put together a library of free ecommerce training, free ecommerce marketing training; the training includes videos, master classes, and now eight guides including ‘How to generate 80k per month in nine months with YouTube influencer marketing’, ‘Four steps to hiring A-players on Elance’, ‘Selling your business for max value’, and much more. You could get access to all that in one easy way by heading over to ecommerceinfluence.com/insider and of course, when you get your free Ecommerce Influence membership, you’ll get instant access to the treasure chest of all the things that we’ve been able to put together from some of our guests and of course, some of the things we’ve learned from what we’ve done for our clients. So, head over to ecommerceinfluence.com/insider to get access to all of that. And we’re going to dive in now, but before we do, let me a quick background on David. David is brokerage director at FE International. Starting out as an investment banker, he moved online to use his transaction experience for website brokerage at FEI.
He spends his time speaking with buyers, executing deals, and working on raising industry standards to encourage more investments. 2014, he closed more than six million in sales and wrote a book on buying internet business for investors new to space. So we’re pumped to welcome David to the show.
David: Thanks. Thanks for having me on. It’s great to be here.
Chad: Yeah, it’s great to have another accent on the show. It always makes it sound so much smarter, and actually, I was talking to somebody a little while back and they said in YouTube videos, English accents were the best performing, Australian accents the second best, and then you know American accents distant third. So, it’s good to have you on, but anyway enough of that. If you could, take 30 seconds and give us a little background on, I guess, on your marketing expertise. I mean you’re in the buying and selling the business, but give us a little background on that, and enlighten our listeners to who you are.
David: Yeah sure. So, I’m brokerage director at FE International, and what I do is help people buy and sell internet businesses. Right away from 20,000 dollars in value, right up to 5 million dollars. So my expertise is very much taking complex businesses, websites, apps, and so forth, and making them easily understandable for buyers and persuading them, you know, the positives and the benefits of buying this, and how to go about purchasing them, you know, successfully.
Chad: Awesome, cool. So, we’ve already talked about selling for maximum value on this podcast; so, maybe to start, could you give us like a high-level understanding of why, how buying an ecommerce business is so much different than selling? I mean enough so to warrant its own episode on buying an ecommerce business.
David: Yeah, I mean buying really brings out a whole new dimension when you’re on the other side of that sale process. Buying is all about learning the business from the outside in, you know, not having had the benefit of running it, really understanding what makes it tick, and what you can do to potentially grow it. So, it’s a very different skill set, if you like, from you know, developing and selling business because it’s almost like an investigative type of process. And you know, I think it brings into law, like a lot of, you know, important business skills around, you know, learning how to value a business, learning how to understand risks, which are all, you know, very important skills for when you do actually buy the business and go off and develop it. As you can see, as we go through the rest of this chat, hopefully some of these skills and experiences will play out and your listeners will understand exactly what I mean.
Chad: Awesome, we’re definitely looking forward to that. You know, before we even, you know, start diving into that, I mean, why or why not should someone consider buying an ecommerce site instead of building their own from scratch? I mean like I said, high-level overview, just positives and negatives before we really dive into how you buy one.
David: Yeah, super. So, I said there are probably four main reasons why people come to us to buy ecommerce businesses or do it more, generally. The first is that they’re looking for something that’s already got a proven business model. So it’s well-established, it’s generating revenue already and they don’t have to go out and build something from scratch and kind of test that, you know, that theory or that hypothesis.
They know that it’s working already. The second major reason is to really cut-out, you know, the early days of all of that sunk effort, you know, building the website, putting the content on there, finding the suppliers, doing the hard work, you know, of email marketing and so forth, and traffic acquisition. You could really cut a lot of that out, you know, buying a business that’s two or three or four years old already, and then building on the good works that the seller’s already put in. The third, probably a big one is, actually a lot of our buyers are already pretty successful ecommerce business owners already, and they’re looking to buy assets that are complementary to their current store for cross-sell potential or things in other niches to kind of spread their risk and their exposure out. So that’s kind of a strategic business reason as well.
And lastly, along that similar strategic lines, quite a lot of people look to buy instead of build when they see that another business has picked up a particular strategic advantage that they have not found; so we’ve had people buy in the past that has done it just to secure a particular supplier relationship or just to secure a particular customer or even just to secure the relationship with the seller whose got particular knowledge, experience, and contacts that they can use for their own businesses. So, there’s a broad reason, I mean the main negative I would say obviously is going to be the cash out the door on day one, you know. A lot of people are in a position where they can put out 50,000, 100,000, 500,000 dollars on an ecommerce site straight away and obviously starting from scratch is a better call for them with their means, but if you have the capital then it can be very, you know, high-return endeavor if you do it properly.
Austin: Sure, absolutely. I’m interested to dive in a little bit more. Do you have any examples? I thought that was interesting when you’re talking about already successful businesses buying other businesses for cross-sell potential; do you have any examples or things that come to mind, before our listeners that you could share that has worked out or different niches that have done that?
David: Yeah, absolutely. So, I actually sold a green sort of, sustainable products business, ecommerce business about six months ago for about 150,000 dollars and the purchaser of that already had a green products business, albeit with a slightly different plan, and he basically bought on the basis of the 300,000 strong email newsletter that the business had, as well as the broader strength of the business in order to be able to cross-promote some of those products between the two websites. And he quite successfully has managed to push traffic between those two sites and do sort of, money off promotions and cross-selling between the two competitive discounts to drive overall higher products, higher product sales between the two of them. That’s certainly not an uncommon purchasing style of people, you know, buying directly within the same niche.
Austin: That makes sense. It’s interesting to think about that. My mind was kind of flowing with some opportunities, you know, if you have a business. There are so many businesses that have the opportunity to buy something or at least partner, right? We always talk about partnerships, and if you could buy it, even better, you know.
David: Yeah, absolutely. And you know, what we try and facilitate at FE when people buy and sell businesses, you know, it’s not just a buy it and it’s job done, you know, I’ll never see you again. A lot of our buyers and sellers actually end up working quite closely together either on that particular business or on future projects, because a lot of them are serial kind of, ecommerce entrepreneurs, so they have interest elsewhere.
Austin: I had a question, you brought up earlier, you talked about how buying brings up a little bit of the new dimension where you have to, you have to understand the business and understand kind of where you can take the business. What do you recommend people with the questions, the questions people ask, and that's kind of the ideal process if someone’s going to buy a business to go through the due diligence process?
David: Yeah, it’s a really good question, and that’s kind of really the biggest one I think that potential buyers face. So, I’ll take it in, in two parts. I think the way that most ecommerce buyers understand growth opportunities really just to discuss with the seller what they’ve done previously, what’s worked and what hasn’t; a lot of buyers come to the table with expertise, you know, from their previous businesses in, for example, traffic acquisition or converting of social media or optimizing newsletters. So, they’ll be bringing their own skills, talents to the table, and they’ll often look at the business through that lens and be like, well I can improve the email here or I can improve social media conversion here, but they also find a lot of value in speaking with the seller about, you know, previous partnerships they may have been offered in the last three or six months that they haven’t exploited.
So, there’s a lot of, you know, good knowledge and discovery to be had just in facilitating that conversation. Due diligence, due diligence is a big area and this is really where, you know, buyers kind of separate themselves from doing, you know, just the good deal from a great deal. It probably breaks down into six big areas, which is kind of traffic, financials, operations, owner, legal and technical, but it would take a lot longer to go into all of them, but –
Chad: Well let’s, yeah, let’s do a quick overview, because I know you wrote an entire blog post on this; I mean, the six key tenets to due diligence and I think it’d be important for people to have a basic overview with maybe, a few deeper tidbits within each section, specifically, I mean let’s start with traffic and you say that traffic is one these key tenets that you really have to do your due diligence on and what do you mean by traffic? The first thing I thought – I think you mentioned diversification as a big part of it, backlinking, all these good stuff. Can you give us an overview of that, that specific tenet?
David: Yeah, I mean, your audience obviously know, you know, about the trials and tribulations of traffic acquisition and building it towards an ecommerce business. So, when you’re looking at it from the outside-in and not from your own business, you really want to look at the split of traffic that the ecommerce business has, and in many cases, you know, Google organic search accounts for a large proportion of that, 50%, 60%, 70%, sometimes even 80% and so you really want to understand quite deeply what’s going on with that search traffic.
So, what we persuade, sort of encourage buyers to do is to look deeper into that traffic; so analyze the keyword diversification, analyze the ranking historically, look at the kind of concentration across those and then compare that side by side with the link profile to see how the profiles is being developed over the last 3-12 months. Look for signs of a sort of, pay versus organic linking strategy and really kind of get a stronger sense about the quality of the backlink profile. Once you understand, you know, the quality of that backlink profile and type of keywords the business is attracting, you kind of got a lot firmer sense about the quality of the business and the quality of the traffic source that makes up, you know, 50%, 60%, 70%, 80% of that business.
Chad: Is there a specific breakdown of traffic channels? Like, I mean is there an ideal breakdown or is it just kind of look for red flags where somebody’s getting 80% of their traffic from one source.
David: No, there’s a definitely a temptation for people to be overly concerned about a very high percentage from one particular channel but I think that’s unavoidable. I mean, over the course of 300 or 350-plus business sales that we’ve done now, you know, Google search is always the predominant channel for traffic which is why it’s so important just to really dig in to the nuts and bolts of that traffic and really understand what the trend’s been over the last 3-12 months, what’s the keyword rankings like and how is that likely to play out under your ownership over the next six months and beyond. So it’s really a case about digging into the detail rather than getting too worried about, you know, the size of the overall pie.
Austin: I like when you were talking about with the quality of the backlink profile because to me that one stands out immediately as something that I would be very interested in, in trying to figure out a way to learn what are the quality of the backlinks because as we’ve seen for the last however many years, 5-10 years, when an algorithm changes and it’s been built on a shaky foundation, you’ll see Google slaps, it’ll just wipe traffic out for businesses. So how do you approach, and how would you advise somebody to go in and understand what to actually – like assess a business and the quality of their backlinks? Where do you start? If you have any tools or how would you approach that or advise somebody when they’re going through that process?
David: Yeah, it’s a really good question. So there’s a good tool called Ahrefs which I’m sure is already popular with a lot of people that’s very helpful at giving both a snapshot summary of the backlink profile right now, but also some analysis on how the referring domains have evolved over time. And what we do when we’re, you know, conducting our pre-listing due diligence on business before we lift it looks to see how that has evolved over time. So, if you start seeing sudden spikes in links, then start analyzing, in the link profile where those links start to come from, and if they’re often, not always the case, but if you see a giant spike and they’re all coming from domains that aren’t particularly related to the business’s activity, chances are they’re paid links.
Another issue and this is, you know, can be quite problematic is that it’s become increasingly common for people to use private blog networks to build up businesses and to build them very quickly. So again, we’ll always encourage people to kind of look for slower growth link profiles because that generally points to someone that’s been holding it in a more gradual and not artificial way. It’s a difficult one to play out, generally speaking though, it’s kind of a, you take a common sense approach. One of the other things, obviously check out, you know, hopefully, if the business is particularly old, you can check for penalties, past penalties as well through penalty checker tools.
Austin: Sure. For our listeners, can you explain what a private blog network is and why they would want to avoid a business that was built on that?
David: Yes, PBN is essentially a collection of websites and domains held by the same entity. So we’ve seen PBN’s in the past, you know, 200-500 sites owned by one person or sometimes owned by a syndicate of people, and essentially they sell links from their network to your website so you can pay to have website links by them from various parts of their link network, and historically this used to be a really fantastic way of scaling new sites very quickly, but unfortunately, as were alluding to, Google have got very good at penalizing or discovering these PBN networks and penalizing the links of the sites that have paid to be on them.
Interviewer: Let this be a reminder that shortcuts don’t work kids.
Chad: All right, I think that’s a pretty good background on the traffic side. Let’s talk about, let’s move to financial; what are we looking for as a buyer on the financial side? You know, when I go into a business that’s for sale, what is the first thing I need to look at and then take me from there.
David: Yeah, so similar to traffic, and you should really kind of try and appraise the two in the same way, you want to look for a trend that’s obviously, in an ideal world, growing or flat ideally, not declining by any means, the thing you probably avoid that sort of business profile. I think similar to traffic, if you see spikes in the financials and you can do with ecommerce businesses that you know, can have seasonality or run particular sales, look to get explanations from the seller for those spikes, and if they can’t be explained properly, then there’s something wrong there.
But really you’re looking for a stable and growing profile; I mean if it’s high-growth, that’s brilliant, but the due diligence aspect of financials comes down, all the way down to documentation, and that’s making sure that the seller has the documentation, the merchant process statements, the bank deposits, the invoices for expenses to back up the numbers that they’re saying they’re doing in whatever marketing materials they’re using to sell the business. That’s probably the mindset you want to engage in when you are valuing the financials.
Austin: Do people go in, and I look at it from somebody coming in into not going through this process of buying an ecommerce business for being on the outside if you’re going to do a new business, what conceptions or preconceptions do people come into the buying process with and where are people usually like nervous about the financial side, whether it’s sellers potentially not being truthful or what are the things that are typically on someone’s mind when they’re going through the buying process that they want to find out about the financials of a different business?
David: Yeah, that’s a great question. I think most people come in skeptical and they should. I think like we encourage that skepticism because that’s caution and that’s – you should be approaching everything like a private detective type approach. I would say that for the most part, buyers are concerned about hidden costs –
David: – when it comes to financials. So you can, most sellers can fairly easily evidence their revenues through, you know, their two checkout statements, their PayPal statements, their Stripe statements, or whatever, or whatever shopping cart software they’re using, but when it comes to expenses, it becomes a lot easier for the seller to hide those. So, what you want to look for, and this is very helpful if you run your own ecommerce business, is tally up the type of expenses that you’d expect the business to accumulate.
So, obviously there should be credit card expenses, should probably be shipping expenses, should be you know constant subscriptions to software, if there’s a video attached to the business, there should be payments out for them, there should be cost of acquiring inventory and so forth, if it’s that type of business. And really you want to be auditing on a monthly basis exactly the invoices and expense lines that they have for at least the last 12 months and making sure that everything checks out.
Chad: Where do sellers typically hide some of these things? I mean obviously you’re saying look for these – add these up and make sure they make sense, but is there any like standard place or place you’ve seen consistently where it’s like okay, that’s, that’s something fishy?
Austin: A trouble area? A sketchy area?
Chad: Yeah, yeah.
David: Yeah, and it’s in really dumb areas like, I think some sellers think that they can get away with hiding marketing spend and you know, you can use the party tools like Spyfeed for example, to see whether the business has run paid marketing before, and so they can become undone by not disclosing, you know, what paid marketing campaigns they’ve done in the past.
David: So that can be a pain point. A lot of the other concealing I would say is probably when the owner is like, topping up the work that other people are doing, or that they’re paying for in the company. So for example, the ecommerce business might have a blog on the side and that blog might have, I don’t know, three posts written on it a week, and only one of those posts is being written by a VA, but all three are being passed off by the VA and the owner’s writing the other two. So that’s a case of – you know, that’s where the bio would come in and you know to ask the contractor, you know, how much are you actually writing a week. It’s an easy question but that’s one thing that could get missed.
Chad: Yeah, which I think actually leads to the next tenet, right, the owner aspect of this. You mentioned something in that blog post called key man risk. I read it up, I read up on that a little bit, and it’s a very interesting but it’s very accurate, something we talk a lot about here is building systems so that the business doesn’t rely on an individual. I mean is that what you are meaning by key man risk at this point?
David: Yeah, absolutely. I suspect you probably covered this, you know when you’re talking with Jack on the cell phone. Like if you want to build a business that’s valuable, you have to get it to a point where you’re working on it, not in it, and the same approach applies when you’re looking at it from the outside in and buying it, because remember all of the problems and tasks and issues that the seller has, are going to be yours in the next week if you buy this business. So, it’s really important to understand very carefully what the current owner is doing. What skills and expertise and money and effort is required to replicate that because you’re going to be doing that yourself. It doesn’t tend to play out too much on ecommerce businesses, key man risk, but certainly on, for example, blogs that are built around a particular personality or digital products with people’s faces all over them, that can present quite an issue when it comes to key man risk.
Austin: What about following around? I think of it from a perspective, if I’m a buyer, I got, I want to know what this person’s life is like on like a week to week basis, how common is that? Do buyers follow people around and say, “Hey, I want to see what you’re actually doing on a weekly basis.” Is that common? Is that weird? What would you recommend on that? How would you, how would you approach that?
David: Yeah, so I mean, we try to like due diligence in the like sort of key man area, we’ll always recommend that people try and do like a task order so that gets the owner to break out exactly what they’re doing hour by hour on the website a week, and then go away and independently verify that. So, you know, they might say that they’re writing or posting on social media X times a week, go on the website, go back two months and see whether that’s consistent or true.
David: And really, and again this comes into play if you have your own ecommerce business, chances are you’re going to be pretty expert and have a good idea about, you know, what – to run this business I actually reckon that they’re probably spending this amount of time uploading new products, this amount of time doing support quests, this amount of time – It’s useful to have your own data points and be able to kind of sense check that against what the seller’s telling you.
Chad: You know, I got a question here, it’s like when I think about key man risk and if I’m going in to buy a business, obviously you know, a lot of these businesses sound like they’re a bit smaller so they’re still growing, I mean I think all businesses want to keep growing, but there’s a certain point where you are still going to be working quite a bit in the business while trying to work on the business at the same time, and you go in and you see an owner who seems to be working quite a bit in the business but it could be just at the stage of where that business is.
Is there like a, is it more like a personal, I guess, feeling of like hey this guy seems like he’s too much in it, it’s not something I want to do. Does that question make sense at this point? Like I’m trying to figure out how to ask the question of how much working in the business is too much when buying something?
David: Yeah, it’s a great question, and it really depends on the buyer because some people come looking for a pretty passive income and are like, I don’t want to buy a business that’s, you know, more than five hours a week of my time, and some people come in and say, look I’m ready to quit my job, I don’t mind working 30 hours a week. Obviously, the size of the business and how much revenue it’s generating kind of dictates a little part of that, but definitely buyers look at businesses, and they’re not turned off by if an owner is spending a bit too much time in it because quite a lot of people do an effective job post-sale of starting to move the business more towards autopilot. So, you know, bring in a VA to replace some of the work streams that owner was doing, and they do that for two reasons: one is it’s less effort for them, and the second is any business that is de-ownerfied or becomes more passive is I’m sure, Jock was telling you, is going to increase in value to the next person that buys it.
Austin: Well do you want to cover the last couple of these tenets quickly and then I got a couple of questions for you about actually financing? So, why don’t we run through the last, so there’s like, you have three other tenets, one of them was operational, there was also technical and legal; can you touch on those three maybe a little bit more briefly than the other ones, just so we have an understanding of what they’re like and we’ll going to go from there?
David: Yeah sure. So actually operational, I think we sort of semi-covered when we were talking about the owner and what they are up to, but yeah that’s really understanding, you know, what the people in the business are doing on a day to day basis. So we sort of covered that off. Technical, technical is a very important one, particularly as it relates to understanding, you know, the ecommerce platform that the business is built on. Sometimes, I’ve been seeing this quite a bit, people are starting to use custom versions of platforms.
So it’s important to get a good understanding of what that’s going to mean in terms of having a developer on tap to service it and maintain it going forward versus just a very standard hosted platform build, and it also relates to another important point, for example, around email. So making sure that you’re checking the newsletter subscriber growth, the opening click-through rates that have, you know, they’ve previously received, the bounce rates, and what the kind of marketing they’ve done in the past, you know. It’s important to look for consistency; if you start, so if you’re seeing the decline in opening click-through rates, it’s probably because reader fatigue or lack of interest in the business, and that’s an important part. Legal, to finish things off, is something that everybody should do. The amount you do kind of scales up with the amount of work, but basically, it’s checking, you know, that the corporate entity the seller says they have exists which you can do a straight search in Google for.
Austin: Sure, that makes sense. You got to do that, talking about, because it is a big chunk of change, right? You know, I look at some of the – I was on your website taking a look at some of the websites that are for sale, and there’s a wide range of prices up to five million dollars. So for people listening, say they’re interested in potentially making a purchase or they want to explore something like this, can you talk a little bit about financing options? Where can you get money to buy an online business, internet business? And has that been changing? Has the environment getting better, worse, and what does it look like for the future?
David: Yeah, so I think the most popular external financing group, particularly if you’re in the US is to get an SBA loan or Small Business Administration loan, and typically that used be a lot harder to do because of credit conditions, but also because those banks just didn’t really get lending on online businesses. You know, you go into a normal bank and say, “Hey, I want 500,000 dollars to buy a website” they’ll laugh you out the door because they’ve got no way of re-getting that money back, whereas if you want to buy a shop, you know, that’s bricks and mortar and it’s easy to sell it later, but that’s changing; it’s definitely been changing in the last three or four years, and now you can, there’s a range of pretty mainstream banks in the US where you can go in as a buyer and you know, with a 10%-15% deposit, you can look to get a loan from any or up to five million dollars to buy an ecommerce software or another type of internet business as long as it has a proven track record, the revenue and financial stack up properly, and it looks like a growing concern is something that you’d be able to manage.
Austin: That’s good to hear because there’s a lot of people are going to need to buy, like want to buy businesses and I know exploring this a couple of years ago was not the same way. So, besides SBA, right, where, there’s self-financing other, any other options that you could recommend or explain to people?
David: Yeah, so another common one is for, and you know this, there’s always something that people should really kind of speak to their financial advisors about, but you can draw out from 401k before you’re sort of 59-and-a-half without financial penalties. If you do what’s called a 401k rollover, or also known as a Robs, which basically is quite a complex little scheme where basically you can draw cash out into a different corporate entity and then use that to purchase a business with, which we’re starting to see a lot of kind of baby boomers that are, you know, looking for passive income or looking for online income in their fifties start to do that, pull on, you know, some very sizable 401k that they’ve got. But yeah, I think, you know, the rest of the market really uses – really sort of relies on owner financing which, you know, can be up to 30% -40% percent on some deals to help, you know, stretch their budget to buy that business that they want.
Austin: Can you revisit owner financing? We’ve talked about it on the podcast before, but can you go through what that means, what that looks like for people listening?
David: Yeah, sure. So owner financing is where the seller agrees to hold back a certain purchase. So, let’s stay the price of the business is 200,000 dollars and the buyers only got 150,000 dollars, the seller would agree to finance the other 50,000 dollars, that’s over a 12-month period, and be paid back in monthly installments of say 5,000 dollars for the rest of that year. Sometimes they’ll charge a small interest rate for it, that’s pretty hit-and-miss wherever that’s the place, and that’s a pretty commonplace sort of instrument in helping finance deals particularly in businesses, sort of, 100,000-150,000 dollars upwards. Most of the deals below that are all cash primarily because there’s a lot of bias in the marketplace with that kind of cash deployed, but above that you certainly start to see seller financing play a role, you know, in 10%, 20% or 30% of overall sale value.
Chad: Say what, it’s actually been pretty interesting because for the last two years doing this podcast, I guess I’ve never thought of potentially buying a site because I’m so used to building things from the ground up, but the more we talk about it, it becomes more compelling, just because A) your help in understanding what we should be looking for, and B) the expertise that we’ve gained from just working on ecommerce businesses, it’s something that’s definitely crossed my mind, more so than I realize about buying a business because they’re, there are some definite advantages to doing so. So, appreciate that.
David: Yeah, I mean we have quite a lot of people that have very specific buying criteria, so they’ll say, “I’m only going to buy an ecommerce business if I know that I can do PPC on it.” Like they’ve not done PPC and I can, that’s my forte, I’m going to come in and I’ll crash it, and we’ve had people like 10-fold businesses within the space of a year and come back and sell them with us, just using their specific skill set.
Austin: Sure, I can imagine that’s a big opportunity because, especially in the smaller niche, or the smaller – like the smaller businesses are usually built from what, what we’ve seen by somebody with the specific skill set, who ramps to like a million dollars by pushing on whatever they’re really good at, and if you come in and you’re good at something else, you can take what they’ve done and then ramp it to the next level, like I imagine, like 10x level, you know.
David: Yup, 100%.
Chad: It’s just filling in voids and that’s what helps, so. We’ve had a – we’re running out of time here, so I’ve got one, one last question if you could really, you know, I guess give us some quick snippets so to speak, but what are some of the biggest mistakes that you see first time, maybe even you know, seasoned ecommerce store buyers make, and how do they avoid these things? What are the mistakes you see most often?
David: Yeah, I think not fully understanding what’s required to run the business, I think. So, when we’re talking about, you know, understanding key man risk and understanding the operations, a lot of people can get caught up in like, “Wow, the traffic trends are great, the financial trends are great, I’m going to make a killing on this business.” They got a good price, but then they’ll buy the business and realize that it’s a whole lot more work than they thought it was going to be, and some of that work they’re not capable of doing themselves, and so it becomes a kind of, costly or a bit of an effort nightmare.
So, I think that my number one advice to buyers looking at a business is make sure all of the numbers check out positively, but get the seller on the phone and really get a good understanding on the nuts and bolts and the boring kind of operational day-to-day stuff, because that’s going to be what makes the difference when you’ve bought the business and you’re stuck with it. I think to have a clear plan in place for the business before you buy it is good; so have a good theory on what you’re going to do on the first 3-12 months, and use – like work with the seller as much as you can to really understand the business before you buy it. So, like use like the deal process as a massive kind of information discovery exercise; don’t use it as just a ‘I now know that the financials check out and the traffic checks out’ by the end of it you want to know, you know, every single aspect of the business and top 3-5 great ideas for it going forward. So like really kind of have a rich deal of experience I’d say.
Chad: Well that’s, that’s some good stuff. David, before we hop off here, where can our listeners connect with you if they’re interested in buying a business or learning more about that? What’s the best place to connect with you?
David: So, if they want to learn, I highly recommend going on our site which is FEInternational.com, we’ve got a couple of big guides on buying internet businesses and an advanced guide, and we’re launching a very new one on ecommerce specifically in the next two or three weeks that will be up on site, and you know, if they’re already looking at business, and you know wants some advice then please do like get in touch. I’m on David@FEInternational.com and I’m always happy to, you know, give businesses once over and give people some advice on deals.
Austin: Yeah, you’ve got some great, also just interesting to go to the listings, spend some time going in there, looking at the bio website section and just take a look at some listings, there’s some, some interesting – It’s a good way, if you’re listening to this episode and it’s something that interests you, go there because you can check out and look at some actual businesses, see the revenue, and asking prices, and kind of learn some more details about it. David, it’s been a pleasure having you on the show. Thank you so much for joining us. I think we learned, I learned a lot.
Chad: Yeah. Like I said, I wasn’t really thinking about this at one point, and after chatting more about it today, I’d tell you what, it’s definitely a different thought process now. So, thanks a lot David, appreciate it.
David: No problem. It’s been a pleasure guys.
Austin: Thanks so much for joining us today and listening to Chad, David and I rant about buying an ecommerce business online. If you want more information, stuff like this, we have really worked hard to put together a library of videos, master classes, and guides that are similar to the stuff we’re just talking about. So we’ve got, you know, guides about how to generate 80k per month using YouTube influencer marketing, we’ve got guides about hiring A-players on Elance, Facebook advertising, a lot more – really what we did is put a lot of our best material, condense it into guides, condense it into videos and then moved it to our insider section which is free.
You can go to ecommerceinfluence.com/insider to claim your membership, and you’ll have access to all of our materials, and then as we progressively build more, they’ll be added there. So, head over to ecommerceinfluence.com/insider; if you have not done that already to gain access and download the guides, it’s kind of a – you can just jump right into it. Also, if you have any, if you have any comments or feedback, we’d love you to go to iTunes and write us a review, or just share the episode with somebody who you think this episode will be good listen to. So, we appreciate it and until next time, we’ll see you on the next Ecommerce Influence episode.
Chad: Austin, what’s up buddy? I see you through the window over here in the fart cube.
Austin: I think we should refrain from calling it a fart cube.
Austin: Because I don’t want our listeners to think that we’re recording this in a fart cube....
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