Article by Gene Marks | Columnist, For The Inquirer
More people are working from home now than ever. Many are looking to supplement their income with side gigs, and selling products online is a great way to accomplish this. Sure, you can start up a store on Amazon or Etsy. Or you could do what many other entrepreneurs have been doing over the last few years: Buy an existing site.
According to BizBuySell, a site that tracks and facilitates the purchase and sale of businesses, mergers and acquisitions activity increased 14% over the last year.
Experts project that e-commerce sales will account for more than a fifth of overall retail shopping purchases and will surpass $7 trillion by 2025. Which is why buying an existing site with a track record of selling products online has created a significant opportunity for entrepreneurs looking to be their own boss.
“Think about all of the buyers and sellers that are on Amazon and all of the business owners that use Shopify, BigCommerce, WooCommerce, WordPress, the list goes on,” said Blake Hutchison, the CEO of online marketplace Flippa. “You’ve got this massive network of small-business owners all over the world. Small profitable businesses, from sub $500K to $10M annual revenue that are still hot property. Savvy digital acquirers taking a long-term view, see the obvious. Digital isn’t going anywhere.”
One such savvy acquirer is Josey Orr, a Berks County entrepreneur who recently bought two online businesses — Body for Golf and Easier Golfing. Orr, with a partner, bought the two sites because he was “bored” and looking for opportunities. Orr loves golf but that wasn’t his prime motivation. He was looking to sell online products and leverage the growing trend of paid newsletter subscription services. Both acquisitions served those needs.
“We formed a little holding company and looked to acquire some small businesses that are complementary to one another,” he said. “I had no experience buying a business before this.”
Phoenixville’s Martin Bispels tells a similar story. After running small businesses and a stint in consulting, Bispels, during the summer of 2020, found himself ready to launch into a new online career. So he set off to “find” that new venture.
“The opportunity to buy a company and operate it myself was really exciting,” he said. He and a partner “looked at all kinds of different businesses until we found the one that we loved.” That business was Upper Park Disc Golf, a disc golf backpack e-commerce retailer. “I’ve loved the sport for a long time,” he said. “And so when we had the opportunity to buy a disc golf company, I jumped on it.”
Orr and Bispels researched a number of online marketplaces, such as Empire Flippers and Shopify’s Exchange Marketplace, where entrepreneurs can buy and sell websites. Ultimately, they both settled on the Flippa platform. Regardless of the marketplace, online transactions usually work the same way.
You first want to think about the type of online business you want to buy — it could be an e-commerce store, an auction site, a digital marketing or blogging site or even just an app or software-as-a-service platform provider. You should evaluate what’s available on an online marketplace such as the ones I’ve mentioned above.
Once you find a target, you’ll want to understand its competitors, the market trends, and the cost of operations. You can do this by reading industry reports and discussing the business with others that do the same, and, of course, your financial and legal advisers.
Once you contact the seller (Flippa and other sites provide messaging boards and internal assistants to help facilitate the conversations) you’ll want to — with your advisers — review the site’s business financials and tax returns, its customer base, and its website traffic statistics. You’ll want to interview the company’s employees and look at all key contracts and intellectual property agreements. You can use online tools to get a valuation and then discuss a purchase price with the owner.
All of this is important. But for Bispels, there was something else that was even more important: branding and online presence.
“I could have started my own online company selling similar products,” he said. “But if people were to search for my products they wouldn’t have found this, whereas Upper Park already had a presence and was optimized for search engine optimization. The seller had been around since 2011 and didn’t have the time or money to really keep building the brand. I decided to take my resources and experience to build it and he was thrilled, because the site was his baby and he really wanted to see it continue and be successful.”
As part of the deal, Bispels kept on the previous owner as an equity partner for his consulting value.
What can you expect to pay for an existing business?
Flippa’s Top 100 Index suggests that annually, on average, an online business is valued at more than two times its net profit and 1.7 times more than its revenue. But the transactions can go even higher.
“During the first half of 2022 we had a small business utility app sell for 5.45 times their annual net profit, an education platform sell for 5.81 times their annual revenue, and a personalized jewelry e-commerce business sell for 4.62 times their annual net profit,” Hutchison said. “Year to date we added $561 million in deal value, which is up 106% over the same period prior year.” Flippa currently has 109,000 active buyers.
Buying an online business through an online marketplace is a relatively new model. But the basics remain the same. Getting to know the seller, understanding the numbers, reviewing the contracts, getting a valuation, and then having a legally reviewed purchase agreement are all necessary steps. Good online marketplace platforms will also verify sellers and provide templates and tools to help make the transaction easier. But in the end, it’s still one person selling a business to another.
“Having a good relationship with the seller and understanding why they did what they did is very important,” Orr said. “Acquiring a business is a different kind of experience from starting one from scratch. It’s important not to break what’s already working.”
Published : Aug. 23, 2022