How to Buy an Ecommerce Business

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

In the previous chapter, we talked about what questions to ask to the seller during the seller interview, 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 ecommerce business.

Ecommerce business 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 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 ability to bring the business to a more profitable level than the current owner. That means the business worths 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 the historical data to reasonably predict its future earnings as much as possible. You can look at the previous business performance from the following aspects:


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

As I mentioned in the previous chapter, a lot of ecommerce 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 ecommerce 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 ecommerce business acquire customers? Does the business requires a lot 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 ecommerce businesses requires 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 overtime. I have explained different traffic sources in details in the previous chapter. An example of a sustainable type of traffic source is when the ecommerce 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 ecommerce business you want to acquire. The press coverage could generates huge spike in the website’s traffic profile during a short period of time, but over time less and less people will read the article and visit the ecommerce site through the referral links.

Current Marketing and Advertising

During your seller interview, you have gathered quite a bit of information on how the current business has been marketed and advertised. Does 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 in 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 ecommerce business’s advertising performance report. If the ecommerce 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 a 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

The 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 the market trends and competition in details. If the ecommerce 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 ecommerce business in it’s niche. Is there a high barrier of entry in the niche the business is operating in that can protect the business from 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.

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