With eCommerce booming there has never been a better time to own an online business. If you’re thinking of adding to your portfolio or taking the entrepreneurial leap for the first time, consider buying an existing business.
It seems a strange concept that you can sit at home and scour Gumtree for a business to buy, in the same way you might look for a new table, but if you’re considering buying a business, the internet is actually a great place to conduct your research.
While a Google search will throw up marketplaces designated to the sale of online businesses and yes, even Gumtree has local businesses up for grabs, one of the most comprehensive and safest places to buy an online business is through business broker websites.
“Almost all of the broker websites will have lists of businesses for sale,” says Garry Stephensen, Managing Director at Lloyd’s Business Brokers. “The advantage of going through a broker is they will do the work for you, vetting the business and also vetting the buyer, making sure you would really be capable of buying the business.”
The process of buying a business
If you find a business online you are interested in, the process would generally involve signing a confidentiality agreement and then the broker – or business owner if you’re buying privately – would ideally have a good mandate or information memorandum that they can send you. You are entitled to see information such as Tax returns, Trading figures, Analytics, Page Views, Users, Proof of Traffic, Asset Lists, Cash flow documentation, debtors and overheads and ask why the owner is selling the business. Such transparency should help you to gauge the viability of the business, though it is important to have your broker, lawyer and/or accountant helping you make this call.
“Once you’ve looked at the current climate of the industry, you need to think about the profit line of the business you’re considering,” says Stephensen. “In eCommerce you’re going to have to buy the products in, store them and despatch them out. You may also have costs such as stamp duty, legals and accountancy. The working capital requirements on any type of import/distribution business can be quite high. So the business you think you’re buying for a million might actually cost $1.5 million once it’s in your hands.”
How much do online businesses cost?
Sale prices can range from under $1000 to millions. As a rule of thumb, a business will generally cost about three to four times its annual net profit (EBITDA – Earnings before Interest, Tax, Depreciation, Amortization) so if it makes, say, $500,000 a year, you could expect it to cost about $1.5 to $2 million, though the cost can also be impacted by the longevity of the business, brand, industry segmentation, niche products, and scalability.
So is it risky buying a cheap business? “You can find cheap businesses that have great potential but of course the fact that they’re cheap means they’re not bringing in much money yet,” says Stephensen.
“Buying an established business certainly removes many of the risks associated with starting a business. The fact that about two out of three new businesses fail means that taking over the business after the first five years will save you from the tough and risky beginnings and chances are you’re getting a viable business.”
Stephensen adds that while research is vital, you must also ensure you have the means before considering a purchase. “Most online businesses don’t have a lot of stock or assets, so this can make it tricky when you go to borrow money. The banks want to know how they could recoup their money if needed, as the business wouldn’t have assets to seize. eCommerce can be very different to bricks and mortar businesses in that way. The bank wants to know that you also own hard assets such as a block of flats, to cover their loan if the business fails,” explains Stephensen.
“Most people get carried away researching and negotiating the business but really they need to sit down with their financier and see what money they feasibly could borrow, first.”
Case study: “How I bought an online business!”
For Amelia McLean, needing flexible work after becoming a mum was the impetus for buying an online business. “I had been thinking about starting my own business for a while, but it seemed like the wrong time to do this given that there would be so much work and lead time involved in getting it up and running. But suddenly the idea of buying an existing business made a lot of sense. In particular, an online business which allows me to work from anywhere and is not dependent on sitting at a desk during pre-determined hours. Something I can do at the hours that suit me,” explains McLean.
“I started keeping my eye out for the right business. One with an existing platform, a small but established customer base and with decent potential for growth with a bit of effort.”
McLean found a tea distribution business though an online marketplace and was provided with information after signing a confidentiality agreement. “The previous owner had not put together very comprehensive material about the company finances and operations, so I had to ask lots of questions and piece together all the information I wanted. In hindsight, I didn’t know all the potential risk areas and didn’t ask all the right questions but I did the best I could with the knowledge I had at the time. Once we had conducted what we thought was enough due diligence, we put together a contract, signed and negotiated a price, then had a handover and suddenly I had a new business in my lap!”
McLean says the journey since has certainly been an adventure. One of the biggest advantages has been the flexibility, especially as she is currently living overseas. Drawbacks have been the competitive environment of the internet and not being able to rely on foot traffic to find the store. McLean also says it can be difficult to fully switch off from the business, and she has found the process of working from home a bit isolating.
“From a learning perspective, though, is has been amazing. I have learned so much about eCommerce, social media and marketing, IT and logistics and I’m keen to learn more about website development and programming. While I can do the basics when it comes to managing the website, it is limiting to always have to engage an external IT consultant to make the bigger changes and fix the bigger problems that arise from time to time.”
As to whether buying a business has been a good move, McLean says the jury is still out but she’s going to stick with it for now. “I’d like to grow the business enough to be able to employ a co-worker!”