Due diligence checklist

Due diligence checklist

Revenue, Cost, Profit Claims

Flippa can only verify the numbers claimed and request that all sellers add proof of revenue for all businesses generating a profit. 

Websites / Apps:
Read-only access or video walkthrough of revenue analytics, Admob, or eCommerce reports. Always ask for any analytics that may be associated with the account.

FBA:
Amazon Seller central video walkthrough or read-only access. Make sure to get proof of stock costs and shipping costs from the manufacturer. Look at every line item in the P&L and request for proof.

 

Verifying Ownership

Flippa verifies ownership of the main asset. However, if the listing has multiple assets we recommend that a full verification is done by the buyers.

Websites / Apps:
You can request read-only access to any analytics on the site or for other proof from the seller to verify ownership of the asset.

FBA:
Amazon Seller central video walkthrough or read-only access.

 

Monetization

Many online businesses will have more than one revenue source, so it is important to fully understand how the business is monetized.

Websites / Apps / FBA:
It is important to identify all the monetization methods an online business uses to make money. This can be done by making sure all revenue and cost amounts are equal to what’s claimed on Flippa. Once you have identified how the business is monetized, make sure you’re capable of performing those same tasks (such as posting affiliate links or stocking inventory), or can easily learn how.

 

Revenue Transferability

It is important to verify that all revenue can be swapped to a new owner, upon buying an asset. This is to make sure the business is still profitable upon taking ownership. Buyers should look over the terms of any third party accounts that are going to be transferred or created.

Websites:
Make sure that the revenue account can be transferred or that opening a new account is straightforward and easy. For example, AdSense accounts cannot be transferred, while PayPal accounts can easily be transferred.

Apps:
For in-app purchases, Advertising services like AdMob or ChartBoost can easily be swapped by placing your own ad IDs into the app. Many sellers can do this for you upon transfer. For in-app purchases, one just needs to take control of the app and change the payment destination.

FBA:
It is up to the buyer to make sure that the FBA account is transferrable. As a seller, you can make sure the business can be transferred by talking to Seller Central.

 

Tracking

Verifying traffic and analytic information is essential to making sure the business is performing as expected.

Websites:
While Flippa does show Google Analytics stats from the listing itself, we highly recommend getting the full picture by asking for Google Analytics “read-only” access.

Apps:
We recommend getting “read-only” access from the seller’s developer account to verify installs and revenue.

FBA:
We recommend getting “read-only” access to the seller central account to verify product sales and revenue.

Preparing to plan an exit

Preparing to plan an exit

Preparing to plan an exit from your online business? By following these guidelines below, you will have a much easier time selling your business while achieving the highest possible sale price.

Financials

When a buyer looks at your business for sale, the very first things they look at is the numbers driving the business. While keeping track of your financials is good business practice, during the sale process, it could mean significant differences in the final sale price. Going into details here is always better, for example tracking Sales/COGS by product, advertising (FB vs AdSense vs Other), salaries, VA costs, warehousing costs, and refunds to name a few.

A well kept and organized financial statement tells the buyer that the business has been maintained well and inspires confidence that the business can be carried forward successfully.

Analytics

Google Analytics data has always been sought after by Buyers as it gives them direct insight into multiple facets of the site’s performance. It is very common for the buyer to request read-only access to this when reviewing the business. Monitor this on a regular basis to ensure that there are no significant outages in the collection of this data.

Other measures such as keeping track of conversion rates, success rates on email campaigns, Domain Authority ratings, and in-cart upsells, adds to the impression of a well-organized business, likely leading to better offers to buy your business.

Accounts and Bank Details

Review all your accounts (social media accounts included) to ensure that all of them are set up with your companies email address and bank details. All too often they may be set up with personal email and payment details, which may complicate the transfer process to the New Buyer and delay the transfer process. Addressing this before the sale process will give you enough time to deal with any issues before they come up.

Documentation

Support timeframe, where the Buyer can have the Seller available to answer any questions related to running the business. These timeframes typically range from 1 week to 3 months of support (the latter typically for six-figure businesses). To minimize your time commitment in supporting the seller, try to get as much documented upfront before the sale.

Step back from the day to day work you do and start documenting all the processes you follow. This may include, how to add new articles or products onto the site, FAQ’s, how to manage marketing activities, affiliate management, and even how to track and manage Inventory. If you have staff that helps with the business document what they look for to make roles and responsibilities clear.

Make a list of all the important persons related to the business, VA’s, content writers, suppliers, shipping agents, account managers for any of your plugins, and influencers you may have used. This will help the buyer to self-serve most questions when they have a list of names and contact information for these key people.

Depending on the nature of your business, only some of the above may apply or there may be more. This is just a guide to help you think through the thing to expect when you are selling your business.

Keep in mind that the Buyer may not have the same skill set as you and having everything documented up front will widen the appeal of your business.

When is the Right Time to Sell?

Once you have all your ducks in a row, it’s time to start thinking about when you’re going to sell your business.

Before you give yourself an exact date on when you plan on selling your business, it’s extremely important to double down on your operations to try and grow the business as much as possible. A strong 3-month growth trend right before you sell your business creates a positive image that the business is going in the right direction. This is very attractive to potential buyers.

If you’re unable to spend extra time on your business, it is very important to at least maintain current operations and keep the revenue and traffic stable. Too often, sellers will plan to sell their business a few months out and then lose interest in growing the business, so the business starts to decline. When it comes time for them to sell, they realize that their valuations are much lower, compared to the ones they received several months earlier.

As we can see in the two graph, one shows a positive growth trend over the last 3 months while the other hasn’t made any revenue in over 5 months. The poorly timed exit example is extreme, but is an all too common scenario.

Finding the right time to sell your online business can be tricky, and some may have more time than others. Instances like focusing on your health, or selling the business before the introduction of a new family member, may require you to sell when it’s not convenient. While this isn’t ideal (from a valuation perspective), it is always important to sell at the time that is most appropriate for you.

Is There Anyone That Will Help Me Prepare My Business for Sale?

Yes there is. If you have a business generating over $1,000 in monthly profit, it may be worth your while to reach out to a broker. Most online business brokers will provide monthly plans for you to reach your targets and help you maximize your final valuation and sales price.

If this is something that may interest you, we have over a dozen partnered brokerages that specialize in helping online business owners sell their business.

You can read about how to value your business here.  

Transferring an Amazon FBA account

Transferring an Amazon FBA account

It’s no secret that Amazon doesn’t like talking about transferring Amazon FBA accounts. In fact, their terms of service technically do not allow FBA accounts to be transferred, but this hasn’t stopped people from being able to buy and sell their FBA businesses. Our goal at Flippa is to remove the barriers between buying and selling of all online businesses, including Amazon FBA businesses. In one of our more recent sales, we worked alongside Amazon Seller Central representatives and were able to capture the exact steps necessary to transfer an FBA business. Here are the steps to transfer an Amazon FBA business:

Step 1 – Update the Primary Email

The first step is to update the primary email of the account over to the new owner. This can be accomplished by going into your account settings and under the related links section, selecting “Login Settings”. Once you’re on the Login Settings page, you can edit the primary user email ID and password. It is recommended to discuss with the new owner which email they prefer using, and then setting the password (and making sure to write it down!). Now that a new email and password has been set, the new owner should be prompted with an email saying the account has been transferred to them. Now provide the login information to them, as they’ll need to finish out the rest before the transfer is complete. (Note: If you’re also transferring the email account, it is recommended to change the password and then give them the login information.)

Step 2 – Have New Owner Complete Tax Interview

Now that the new owner has control of the account, it is up to them to complete the tax interview. This is standard process when updating the business information of an FBA account. The tax interview can be found by going to account settings page and clicking “Legal Entity” within the Business Information section.

Step 3 – Update Bank & Credit Card Information

Once the tax interview is completed, the new owner will need to update both the “Deposit Methods” and the “Charge Methods” which can be found on the Account Settings page underneath the Payment Information section. Once these three items have been completed, the new owner will now have full control of the seller account! If you’re curious about the original contents of the email from Amazon Seller Central, here it is:

I would like to inform you that the seller of a particular account can provide all the authority over the account to someone else by simply updating the primary email address and re-taking the tax interview and updating the bank and credit card information of the other person to whom you would like to sell.   Kindly know that, to update the primary user email ID, all you have to do is go to account settings> Login settings (under ‘related links’) section. Once the page is opened, you can edit the primary email ID and the password. You can update the primary email ID section with that of the email ID of the person that you wish to sell to.   Secondly, ask the other person to go through the tax interview once again (tax interview is nothing but the initial process that you had to undergo to update the business name.. etc..) in the Legal entity link under the ‘Business information section in the account settings page.   Once the other person completes the tax information, he can go ahead and update the bank details and the credit card details in the ‘Deposit methods’ and the ‘Charge methods’ respectively under ‘Payment information’ section in the account settings page.   Once the other person completes all of this process, the account will be under the other person’s control with the bank, credit and email information all will be under the other person’s name.

It’s important to note that the transfer process may differ depending on the circumstances of each Amazon FBA business. It is always recommended to contact Amazon Seller Central before transferring ownership of an FBA business.

What sellers need to know about valuations

What sellers need to know about valuations

There is no shortage of motivated buyers on the lookout for great online businesses. While the stock market is highly volatile, there is increasing enthusiasm for investment or purchase of online businesses. So, the potential appetite for buying is enormous. However, by far the major brake on buyers committing to a final purchase decision is their uncertainty about pricing. There is little understanding of sound valuation principles and buyers are wary of what they see as pricing based on an arbitrary multiple of net profit. Not to put too fine a point on it, buyers believe that sellers generally over-value their businesses and they find it hard to define a reliable and objective valuation method. The outcome is that too often an enthusiastic and highly motivated buyer fails to follow through with a final purchase because of the understandable anxiety about paying more than the business is worth.

How to value an online business

Typically with an online business, there will be little or no inventory to value and only a very limited if any physical asset base. Accordingly, the business will generally be valued almost entirely on the projected profits, calculated on the basis of current and relatively recent past profits.

While there are various alternative techniques for valuing an online business, including the traffic valuation method for sites with high traffic as a business asset but with no or incomplete monetization, many of these methods are highly technical and yield disputable outcomes. They are often suitable only in highly specific situations, depending on a precise definition of the particular revenue model, current and projected OR you are the next Facebook which is highly unlikely.

For that reason, online businesses are almost always sold on a negotiated value based on an earnings multiple or a price to earnings ratio. While it is very common to define the ratio in terms of a multiple of average net monthly profit, it is simpler for most purposes to quote the ratio as a multiple of annual net profit. Using this basis, average asking price multiples have increased from 2.4 in 2010 to around 3.4 now (sourced from our good friends at Centurica), with final selling prices typically at around a 10% discount to the asking price. This suggests that generally speaking sellers who value their businesses realistically can expect to achieve a sale outcome within reasonable range of the asking price. But putting a realistic value on the business is complex and there is an understandable tendency of business owners to over-value their business.

The average net profit multiple varies markedly from one kind of online business to another and also depends greatly on the specific market niche. However, the absence of highly consistent profit ratios can cause buyers to be both surprised and sceptical about the valuation proposed by a vendor. On objective grounds SaaS and e-commerce businesses sell for a significantly higher profit multiple than content-based or media businesses, because of the higher reliability of recurring income in the former models and the generally much higher operational time demands in the latter cases.

As an example, a currently listed relatively small SaaS business (not on Flippa) with a claimed $55k net annual profit has an asking price of $250k, a hefty earnings multiple of 4.55. You would expect that ratio level to make any buyer hesitate. Let’s assume it doesn’t have rocket ship growth (doubtful because they are selling) a buyer simply will not pay that amount.

Vendors who are seeking to sell at an earnings multiple above the prevailing average need to factor in the understandable buyer nervousness and be sure that the audited income and expenses figures are going to stand up to serious interrogation. While there is never an absolutely guaranteed success in any investment decision very few buyers overall, and virtually none in the six and seven figure range, are interested in taking a wild gamble on getting value for money.

The valuation factors that buyers will weigh up

Because it goes without saying that buyers generally regard sellers’ asking prices as inflated, it’s important that the vendor has realistically priced the business having regard to all the considerations which the prospective buyer will be factoring in.

The income figures must be accurate and cover the duration of the business operation, including only those income streams which will fully transfer to the new owner with the sale. Gross and net income trends will be crucial to the buyer’s assessment. All expenses must be transparently declared in detail, including all payments made to service providers and suppliers of goods and expertise. It is vital to new owners that they will be able to maintain all of the necessary business operations within the same cost structure, or ideally achieve some savings where possible. Any outstanding expenses or other debts transferring with the business obviously must be declared.

Absolutely all operating expenses need to be disclosed, not disguised, by the seller and discoverable by the buyer. Often overlooked, the full value of any unpaid work which has been invested in the operation of the business will be accounted for in the buyer’s own valuation of the business. The predicted cost of the new owner’s time, and any specific technical expertise required, will significantly affect the buyer’s business valuation. It is absolutely essential to the prospective buyer to be able to rely on an honest declaration of the time and expertise required to manage the business, as the new owner will need to put a dollar value on this expense.

The prospective buyer will need to analyse all the financial indicator trends over the longest time frame for which the figures can be produced. Sources of customers and the cost of gaining them will be important factors for the buyer, as will the effects of any changes to attracting traffic such as Google algorithm changes or even penalties which may affect search traffic.

The buyer will need to assess how competitive the niche is and whether there are barriers to the entry of competitors, which raise the business valuation, or the likelihood of increased competition in the absence of any significant barriers to entry, which will lower the valuation. It is crucial to the buyer to ensure that any licences required are fully transferable, or readily obtainable by the new owner, and that any branding, trademarks or other unique advantages will transfer with the sale.

The seller needs to appraise the business through a buyer’s eyes

The seller will be keenly aware of the time, energy, money and vision which has brought the business to its current status and positioned it for a successful sale. Naturally the vendor wants to achieve the highest possible price. However, seller over-valuation is the prospective buyer’s biggest turn-off. It really enables the sale process if the current owner evaluates the business using the same valuation indicators that the buyer will be applying.

It is worth mentioning that some buyers will apply a discounted cash flow (DCF) measure in their valuation. This is a somewhat less relevant consideration in an era of low inflation as at present, but put simply the principle is that a dollar of profit now is worth more than a dollar will be in the future, so a formula is applied to compensate by lowering the notional future profit value, given that the buyer will be paying in advance the equivalent of some years of projected net profit.

The bottom line for the buyer is that the online business acquisition must be fully transferable, it must be sustainable, it must have scalability, and above all it must be purchased at a reasonable earnings multiple. While it is still relatively unusual for an online business to be bought using funds from an institutional lending source, lenders may place a ceiling on the multiple, determined by the actual business model and specific market niche.

Overall, to achieve a reasonable pool of potential buyers interested in undertaking onerous due diligence and finally negotiating a fair sale price, sellers need to keep their initial asking price close to buyer expectations. Avoid ambit claims with the view that eventually you will negotiate down. The process of carefully considering a purchase is time-consuming for the prospective buyer. The factors outlined above will determine where the buyer expectation sits in terms of an earnings multiple. There are so many variations in play that the ratios will vary between around 2 and 4. There would have to be exceptional circumstances taking a selling price outside this already wide range.

Know exactly why you have decided on your own seller valuation, and understand what the buyer will be factoring in. Your initial asking price should not be more than 10% higher than you believe on reasonable grounds the buyer will consider fair after all due diligence and consideration of all the factors covered here.

It is very clear that a reasonable seller valuation is always the key to a successful sale.

 

An earn-out arrangement and what it means

An earn-out arrangement and what it means

Most people get a thrill out of buying a business whether it be to expand their existing empires or as a stand-alone operation. Thrills aside it’s an investment so like any other, whether real estate, shares or traditional business, it is never totally risk-free. That said, our experience says it’s unwise to be tentative and overly risk-averse. Instead, go for the business you want and offer to buy the business on ‘creative terms’.

Deal Structuring

So, you have finally settled on an online business you’re really interested in acquiring. You’ve done your due diligence, meticulously analysed the net profit figures, and thought through the rightness of the ‘fit’. It all seems good and you’re ready to go ahead. Now it’s a matter of negotiating and deal structuring. This is the most critical part. How many times have you seen institutional investments and acquisitions go wrong? Even the most seasoned make mistakes so while it’s a time for excitement it’s not a time to become overly emotionally-invested in the acquisition. Be crystal clear on the value you are placing on the business…this should be on the basis of its analysed profitability and potential.

Get to know the seller

Good negotiation produces a win-win settlement in which both you and the seller come away with what you need. Understanding what the seller wants, including the reasons for selling at the present time, the seller’s valuation and reasons underpinning it, and the payment timeline wanted by the seller, are all critical to your effective negotiation.

Building trust with the seller is vital. Assuming you are acquiring an established business with a record of profitability and on a growth trajectory (and, if not, why are you buying it?), then the seller will have authentic reasons for the sale which are important to understand. Assuming, also, that you are looking at a high six or seven-figure purchase price, then the way the deal is structured is vitally important to its success and you should go to the negotiating table fully understanding what you want to achieve.

For obvious reasons it will almost certainly be in your interests to negotiate only a partial up-front payment. It would be unusual for a seller to agree to a 40% delayed payment, but withholding up to 30% until an agreed final settlement date is common. This is technically a form of balloon payment ‘loan’ as the seller continues their equity investment during an agreed period, characteristically only a few months, during which the seller continues to provide expertise, advice and training. It also enables testing of external relationships and links on which the business depends and which are supposedly being transferred with the business.

The Earn-out Agreement

A more complex form of temporary ‘seller retained equity’ is an Earn-out agreement. For substantial businesses with a high six-figure or higher purchase price, this form of arrangement may be essential to negotiate. (Ongoing seller retained equity arrangements are different altogether and are used to enable a mutually desired continued involvement of the seller in the business over the long term.)

So, what is an Earn-out and how does it work? Essentially it involves a partial upfront payment at the time of transfer to the buyer. The proportion of upfront compared to delayed payment is subject to negotiation, but around 70% is a general guide. The remaining 30% is then paid in instalments according to negotiated performance criteria such as achieving the seller’s predicted milestones, or minimum monthly profit projections.
To illustrate with a simplified example. You have agreed to purchase an online business for $300,000, based on an audited net profit averaging $10,000 per month. In real terms the monthly profit figure could be seasonal rather than regular, and this would be factored in to the agreement. But for simplicity here let’s assume a regular monthly net profit. It has been agreed that the upfront settlement payment will be $210,000. The remaining $90,000 will be settled on the basis that each month $15,000 will be paid, but entirely contingent on achieving the projected $10,000 net profit in that month. There are any number of possible intricacies, such as no payment being made in a ‘shortfall month’ or more commonly payment on a sliding scale reflecting the percentage of the projected profit actually attained. This entails a higher repayment in a higher performance month.

This may sound complex, particularly if we factor in that the total purchase amount in this scenario could be finalised earlier or later than the approximately 6-months timeframe envisaged for the Earn-out period in the situation described above. In a nifty variation on this approach, some Earn-out agreements fix the time frame itself rather than the instalment amounts, with the effect that if the business fails to perform fully to expectations the final price paid is somewhat lower than initially envisaged and conversely if it performs better then the buyer finally pays a little more in total than initially anticipated. Few buyers would be concerned about this as it is a win-win situation all-round.

Given the complexity of the Earn-out detail to be negotiated, why do it? The advantages for the buyer are immense. Firstly, the obvious one of delaying full payment and the interest costs of investing 100% from settlement day. But more important is securing the self-interest of the seller in actively ensuring that all goes to plan, the projections are achieved or exceeded, and there is a smoothing of any potential bumps created in the transition process while migrating service provider accounts and supplier and client relationships.

While a six-figure or higher business acquisition will always involve a legally binding agreement, at the end of the day if there has been a 100% purchase payment made at the time of transfer then it will be close to impossible in practice to achieve compensation for any shortfall in predicted performance or for any unanticipated hurdles in migrating accounts. Retaining a proportion of the final payout figure provides real leverage to engage the interest of the seller in ensuring the smoothest transition. Leverage beats lawyers hands down.

Finally, honest relationships are the key to success. If the seller won’t agree to an Earn-out provision find out why. There may be a compelling reason for the seller’s position. If so, then that loss of leverage at the very least justifies you offering a somewhat lower purchase amount to offset the downside of settling in full at the time of transfer.

Negotiation needn’t be stressful. It’s a matter of understanding the seller, while remaining crystal clear about your own needs as a potential buyer.

Just a toe in the water or dive straight in? Buying an eCommerce business

Just a toe in the water or dive straight in? Buying an eCommerce business

The new favoured investment of many busy professionals is the acquisition of online businesses, because of the generally higher yield than real estate or share portfolios. Additionally, in view of their own demanding time commitments, one of their key selection criteria when deciding on an e-commerce business for purchase is that once the deal is done the website on which the business is founded, along with the revenue stream it produces, can be largely self-managing.

On the other hand, many retired or semi-retired ‘baby boomer’ investors like me achieve a great sense of engagement from acquiring online businesses where they can see a potential for growth and improvement, drawing on their own active involvement in the development of the business.

So, fully understanding the level of ongoing time investment which will be needed over the long-term, whether minimal or fully actively engaged, is a critically important consideration in buying any online business.

We all understand the process of buying real estate for investment, or a conventional goods or services business. We have a good sense of the selection criteria to apply in choosing an investment, and the due diligence needed before making a final decision. However for many investors, e-commerce businesses are unknown territory so there is an understandable tendency to play safe and avoid risk by beginning with only a low-cost entry investment to test the waters.

Yet, an overly cautious entry is not necessarily the wisest strategy. The lowest prices are obviously attached to lower-performing and lower-yield businesses, which may or may not have strong growth potential. If the potential is genuinely there, then a corollary of the very modest financial investment will be the need for a high buyer engagement level and ongoing time commitment.

So let’s look at how it all works

Essentially the success of the online business you are considering purchasing depends on the traction gained by the website itself. Generally it is high quality, engaging content that drives regular and growing traffic to the site. Many highly successful e-commerce businesses largely outsource the content to paid freelance content writers. Good content writers are readily available in virtually any field and constitute a very affordable operating expense if the website is established and running effectively.  Of course, many business owners either write or edit the content themselves, and often find this direct involvement essential to their sense of engagement with the business. This discretionary control over the level of the buyer’s personal time investment is one of the most appealing aspects of online business acquisition.

There are different types of revenue streams which a successful web-based business can produce, assuming that it is not seeking to sell its own unique product inventory. (Inventory-based businesses which develop and sell their own products in an online environment, or hold the rights as a franchise or official reseller, are in a different category and are not considered in this article.)

The balance of content compared to product marketing varies, and it is important to understand how your potential e-commerce acquisition currently profiles itself. Most commonly the niche content area, just for example boating and fishing or health and wellbeing, is the ‘shopfront’ and the interest generated by high value and continually updated content is what draws the potential purchasers to the site. Encouraging visitors to subscribe to a regular email bulletin is a good strategy to build regular follower numbers. In this profile, the marketing of products is presented as a sideline service and it is essential that promoted products are tightly linked to the niche content, which is the drawcard.

At the other end of the spectrum are the e-commerce sites which directly foreground a vast range of products within an identified interest area, for example skin care products. Again, none of the inventory is owned or handled by the seller. Profits come from the margin between the price paid by the customer and the wholesale price charged to the seller. Alternatively, the profit may be in the form of a commission paid by the manufacturer or, more often, the wholesaler. It is important to understand that profit margins are characteristically small and this e-commerce model generally depends on large volumes of sales.

Using Dropshipping, the visitor/customer purchases directly from the website. The business then purchases the product from a third party (wholesaler or manufacturer) and has it shipped to the customer without ever handling the product itself. Customised product labelling, packaging and delivery branding enables the selling of items which are presented as part of an in-house brand with their own SKUs or Stock Keeping Unit numbers unique to the business.

Even in this model it is generally crucial to success that the customer experience is enhanced with substantial blog content, outsourced to freelance content writers, and often with other incentives such as online product advice when a customer submits a query. Commonly in this model the business will be competing with other sites selling the same products and because there is no viability in competing on price, success depends largely on competing on the basis of providing a highly positive customer experience. Search engine optimisation (SEO) is also crucial here for building customer traffic, but this again is a skill set which is outsourced and not particularly expensive to obtain. Cross-promotion is often established, whereby advertising material such as ‘gift cards’ for another business in an unrelated niche is included in your product packaging, on a reciprocal or even paid basis.

If your online business is geared up to sell items with your own branding, even though the same item is marketed by other e-commerce businesses, then each item will carry its own SKU or barcoded stock keeping unit unique to your own site. Often but not always, e-commerce businesses which use this model for branding and delivery still have an interest-based website which is heavily dependent on quality niche content. There are some highly profitable sites with only a small number of SKUs while others, for example in the apparel and accessories niche, may have hundreds of SKUs.

So how do I choose my investment business?

Clearly the current profitability, or the potential profitability you can see, is the Number 1 criterion. Revenue is not the issue. Net profit is. Ensure the seller is fully transparent about all costs, including all outsourced services. Accurately knowing absolutely all of the business costs which are entailed is crucially important. You can buy e-commerce websites even on eBay, but that would leave you completely exposed to unscrupulous sellers, of which there are many.

As a guide, expect to pay around 24-30 times the audited monthly profit (or 2+ times the annual profit) for most e-commerce businesses, although there are many variables affecting this figure. Check what expertise, for example experienced outsourced content writers, are coming with the business. Factor in a ‘passivity premium’. That is, if it’s unnecessary for you to invest an enormous amount of your own time managing the business in an ongoing way, then it’s worth more financially than if your own time and expertise is a major investment cost.

Generally, it is wise to consider only businesses with an established record of consistency and growth. Ideally, be assiduous in trying to understand why the seller is selling. There are many possible reasons for the sale, beyond profit-taking. Knowing the background to this may be important in your final decision. Has the business already ‘peaked’ perhaps? Having a precise task-matrix of the current owner’s involvement is a key to assessing the cost of replacing the owner’s time and expertise. If you don’t want to take this on yourself, is it outsourceable and if so at what cost?

It is vital to know what exactly is being transferred with the purchase. Will existing product supplier agreements and merchant processes transfer with the business or do they remain with the current owner personally? If so, that is a potential deal killer.

Approaching this whole investment evaluation process in a positive way, it’s actually pretty engaging and energising. It’s been kind of fun for me. In my case I’m looking for active involvement in a niche content-based e-commerce website where I can personally do much of the writing and editing, while outsourcing the website optimisation to others. Looking at the some of the offerings on Flippa and imagining their potential and their ‘fit’ with my personal interests is exciting. 

Survey the surroundings, but finally it’s best to dive straight in

Invest just a small amount too over-cautiously and the outcome isn’t likely to be all that spectacular. I’m going to be responsible with the investment amount I’ve set aside – but no toes in the water for me. I’m ready to jump in now. Good luck with your own investment journey!