Should I Buy a Business? Is it Cheating?

[racyred09]

I started selling on Amazon a few months ago, in the US and now in Europe and soon in Canada. I have sold 1000 units and counting of my first product, and my second product just hit the market a couple days ago so I've only sold 5, but I imagine that'll pick up too. I've got a few others on their way to the warehouse, one that's already in Amazon but available for sale in a couple days, and I have a pretty solid plan for expanding my niche (I think). I am just breaking even on my first product, but that's because with the packaging my product is oversized and I pay $3.50 extra per unit to Amazon, but soon that will be remedied and that will be profit.

I've also got a website and hope to move away from Amazon, and I haven't sold anything outside Amazon yet but I've been blogging and building my social media presence so here's hoping eventually I will! My products aren't unique by any means (well a couple of the ones in progress are), but the things I've done on my website that I thought were pretty obvious no competitor has: helpful blog posts, a shop with a cart, products all in the same niche, and a way to reach me.

Anyway, now that you know where my business stands, I want to tell you about my idea and would really appreciate if you could tell me if it's supremely stupid. I want to buy another eCommerce business that's already established. I've been looking into the ones for sale a lot and it's amazing to me that they sell for sometimes just double their annual cash flow. I could purchase one that would pay the purchase price off within two years, hopefully grow the business (for example, now that I'm already operating in Europe there a lot of US-based ones I could easily expand there), and possibly merge it with my current business at some point. I would be doing the same thing I'm already doing and could reinvest the cash flow into expanding my business more, while paying off the financing I would need to buy it.

I've held off on doing this not only because I haven't yet found a business where I'm totally happy with the numbers once I dig into the businesses for sale, but also because something feels like it's a bit of a shortcut. I didn't do the work to set up the business, so I feel like I'm skipping over the "process" part. It feels like cheating. However, my gut instinct is often wrong (there are plenty of products I thought would be a big hit, and there turned out to be negligible demand). And then I think about the fact that like many people I have rental properties where the rent is paying for the mortgage, and how is that any different, really? Except that I wouldn't call that entrepreneurship, and maybe this isn't either.

If you read all that, thank you! Please share with me your thoughts, and if you've bought a business, I would LOVE to hear your feedback on how that went for you and if you recommend it.

 

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[MJ DeMarco]

but also because something feels like it's a bit of a shortcut.

Not cheating at all.

It's almost like buying a house that needs updating and you remodel it. Now it's worth 25% more.

Maybe @DaveC can chime in, he does this all day long.

 

[Y.B.]

Assuming you're buying a good business, I think it's a great way to go.
I've been looking into this recently as well. I can get an SBA loan and buy it for 10% down, then use the revenue to pay back the loan and still make a profit.

 

[DaveC]

Not cheating at all.

It's almost like buying a house that needs updating and you remodel it. Now it's worth 25% more.

Maybe @DaveC can chime in, he does this all day long.

Its a risk profile. You need to do your due diligence. You can buy a house that will appreciate or you can buy a house with a cracked foundation. E-commerce especially with Amazon can be risky especially when you don't have a unique product. If I was looking to launch a product though, the first thing I would do would be to see who else is selling and see if they are looking to sell their business. Or if I wanted to expand, who is selling a complementary product? Empire Flippers is a decent source for Amazon FBA businesses.

Also regarding SBA, they are dropping down payment minimums as of Jan 1, 2018. I'll try to find a link but they are now as low as 5% down according to the bankers I talked to this week.

 

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[racyred09]

Its a risk profile. You need to do your due diligence. You can buy a house that will appreciate or you can buy a house with a cracked foundation. E-commerce especially with Amazon can be risky especially when you don't have a unique product. If I was looking to launch a product though, the first thing I would do would be to see who else is selling and see if they are looking to sell their business. Or if I wanted to expand, who is selling a complementary product? Empire Flippers is a decent source for Amazon FBA businesses.

Also regarding SBA, they are dropping down payment minimums as of Jan 1, 2018. I'll try to find a link but they are now as low as 5% down according to the bankers I talked to this week.

Thanks DaveC, I've been trying to go the complementary product route, but so far due diligence has indeed revealed some cracked business foundations. Thanks for the tip about Empire Flippers. Have been looking only on BizBuySell so far.

Did you use SBA when you started buying businesses? I am getting a line of credit on my house (it's paid off) which is what I was probably going to use, but I need to compare the rates.

Do you "flip" businesses that are struggling, or choose ones that are already doing well and just try to make a marginal improvement? Has it usually gone pretty well for you or have you had some disasters that you would't mind sharing a bit about? I'll search the forums to see if you've already talked about it.

 

[jimmeboy]

Thanks DaveC, I've been trying to go the complementary product route, but so far due diligence has indeed revealed some cracked business foundations.

You can buy a house that will appreciate or you can buy a house with a cracked foundation.

Very interesting discussion. I recently sold my business and am now looking at finding a new project. Tossing up between starting from scratch again (which I absolutely loved), or buying an existing business and getting a jump-start.

What are some typical checks you do during due diligence when looking at buying an ecommerce business?

I'm sure your answers will be very helpful to alot of people!

 

[Anon1351z]

I was reading an article published by Business Development Canada a couple weeks ago that talks about the opportunities coming up in the next few years regarding buying businesses. I'm sure it translates to the U.S. as well:

"The baby-boom generation of entrepreneurs is heading toward retirement and an increasing number of businesses are coming up for sale.

A BDC survey found that roughly 40% of small business owners are planning to exit their businesses in the next five years. About half of those businesses will be available to outside buyers (the remainder will be either wound down or transferred to family members). This translates into about $150 billion worth of economic value coming to market."

"With an increase in businesses for sale over the next few years, valuations are likely to be driven down. This presents an opportunity for entrepreneurs to scale up their businesses by making acquisitions."

Wave of business sales is coming

 

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[Patrickg]

I was reading an article published by Business Development Canada a couple weeks ago that talks about the opportunities coming up in the next few years regarding buying businesses. I'm sure it translates to the U.S. as well:

"The baby-boom generation of entrepreneurs is heading toward retirement and an increasing number of businesses are coming up for sale.

A BDC survey found that roughly 40% of small business owners are planning to exit their businesses in the next five years. About half of those businesses will be available to outside buyers (the remainder will be either wound down or transferred to family members). This translates into about $150 billion worth of economic value coming to market."

"With an increase in businesses for sale over the next few years, valuations are likely to be driven down. This presents an opportunity for entrepreneurs to scale up their businesses by making acquisitions."

Wave of business sales is coming

Great topic.

My business is pending currently waiting for wire transfer. I used empire flippers. Great experience, they do all the heavy lifting when your selling.

My only caution is being on the seller side for the first time is. If somebody was trying to cheat the system they could. So just be careful and make sure you do your due diligence.

Not saying don't do it. I think most people are legit and just want a fair transaction.

 

[Y.B.]

I've requested a number of prospectuses for various types of online businesses. I'd say about close to 50% of the ones I looked at were complete garbage - really bad deals for the buyers...and the sad part is, they're going to get sold.

 

[WJK]

Please share with me your thoughts, and if you've bought a business, I would LOVE to hear your feedback on how that went for you and if you recommend it.

I love you idea. It's not cheating. It's being smart. Yes, sometimes you'll make a mistake and not make a good buy -- BUT a good buy will put you instantly be down the road, without going through the start-up phase. Your watch word should be CAREFUL. Do you homework and then do some more. Why are they selling? Can you identify the mistakes they are making and correct them without breaking your own piggy bank? You are taking a calculated risk, so make sure that your odds are good. Set yourself some standards and don't stray from those bench marks.

Yes, I do buy additional assets on a regular basis. One of things I buy is owner-will-carry trust deeds (mortgages), secured by real estate. Yes, I do have to vet them to make sure the terms of the note and the real estate property are good security for my investment dollars. Past understanding the paperwork and the real estate market for different types and classes of properties, I have to negotiate the price and terms of the assignment of each trust deeds with the beneficiary (property seller) that owns the note. My purchase price determines my yield and my investment risk exposure. In other words, it's balance between the yearly interest rate return, the loan-to-value-ratio (LTV -- the percentage of the amount of the note verses the property value), and my risk of loss for that particular property. I have different standard yields that I have set for each types and classes of properties. I can sell, or have my bank finance (hypothecate), some of my trust deeds in a heart beat. Others are more difficult and they have to be held in my portfolio for the life of the trust deed. I can afford to make less return on the former due to them being more "liquid" and less risky. I have to make more return on the ones that I have to hold. Each one that I buy is another calculated risk analysis exercise.

I'm probably telling you more than you wanna know, but you should do the same type and depth of analysis on any business that you purchase.

 

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[Oztrepreneur]

I'd say about close to 50% of the ones I looked at were complete garbage

What sort of specific things would you say led you to identify them as garbage? Sure there will be obvious areas but interested in what leads you to this determination.

 

[Y.B.]

What sort of specific things would you say led you to identify them as garbage? Sure there will be obvious areas but interested in what leads you to this determination

I've been involved in the online world for a very long time so I can usually spot things pretty quickly.

Here are a few

- Sometimes I can tell they're faking the numbers
- Sites that can only work if you're pumping a ton of traffic into them constantly. For example, all these dropship sites you see now have been mostly built through FB ads. So you have to keep paying 20-30k/month in buying traffic to maintain the sales levels of the site (depending on the revenue)
- Crappy site built purely through PBN's

 

[racyred09]

I'm probably telling you more than you wanna know, but you should do the same type and depth of analysis on any business that you purchase.

Not at all! That was very helpful, thanks.

Very interesting discussion. I recently sold my business and am now looking at finding a new project. Tossing up between starting from scratch again (which I absolutely loved), or buying an existing business and getting a jump-start.

What are some typical checks you do during due diligence when looking at buying an ecommerce business?

I'm sure your answers will be very helpful to alot of people!

Someone like DaveC who's actually bought a business would probably have a better answer than me, but here are the things I've been looking for so far. I think if I found one that seemed like a winner, I would dig even further into the financial stuff, asking for actual tax returns and/or bank statements. I would also talk to the suppliers, make sure they would work with me, and give me the same prices.

-Are the month-to-month sales consistent, or better yet, growing? Some sellers will quote annual growth patterns then you look at the monthly statistics and they've been going down, so I worry that maybe the demand is waning and they're trying to get rid of it quickly.
-Are the products well-rated? I would rather buy a company with one good product, than one with 20 3.5-star products (I'm not really interested in improving the actual product, because in that case I'd just launch my own).
-How much organic traffic does their non-Amazon website get? I would love to get one with a crappy website that gets a ton of organic traffic and redirects to Amazon (because I want to become independent of Amazon and that's easy room for improvement). The dream!!
-Do they have employees or outsource part of the job and why? I don't really want to mess with a business where the owner can't handle everything him or herself. Sounds like I'm getting myself into a mess.
-Do they depend on a lot of advertising, discount sites, etc. for sales? Something about that raises red flags for me, because these are established businesses, so I feel like they shouldn't be so dependent on that.

Anyway that's all I can really think of. Most of the businesses I've looked at are Amazon-based but maybe I won't even go for those. I hope that's helpful insight into a potential buyer's mind!

 

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[biophase]

How are you going to integrate it into your current Amazon seller account? Are you just going to list under it? You won't have control of the listing then.

 

[racyred09]

How are you going to integrate it into your current Amazon seller account? Are you just going to list under it? You won't have control of the listing then.

I imagine I would have to start from scratch with my current listings and move them to the new account. Maybe put them on both accounts until the new listing catches up a little bit. That part is definitely not ideal! If you've got a better idea, I'd love to hear it. Another reason to consider a business that isn't Amazon-based!

 

[biophase]

I imagine I would have to start from scratch with my current listings and move them to the new account. Maybe put them on both accounts until the new listing catches up a little bit. That part is definitely not ideal! If you've got a better idea, I'd love to hear it. Another reason to consider a business that isn't Amazon-based!

If you are going to start from scratch, why buy the business then? Why not just start your own product, you don't get anything from buying a business and then restarting all the listings.

 

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[racyred09]

If you are going to start from scratch, why buy the business then? Why not just start your own product, you don't get anything from buying a business and then restarting all the listings.

You misunderstood me- I would restart my CURRENT listings under THEIR brand.

 

[biophase]

You misunderstood me- I would restart my CURRENT listings under THEIR brand.

Oh I see. I guess that depends on whether your current business or their business was doing better. But if they were 50/50, it would be a tough call. I don't think you can run both products under both brands at the same time. Amazon would frown upon that.

 

[racyred09]

Oh I see. I guess that depends on whether your current business or their business was doing better. But if they were 50/50, it would be a tough call. I don't think you can run both products under both brands at the same time. Amazon would frown upon that.

Well, what I meant was the same product, but with their brand on it. I imagine they would be doing better than I am, or it wouldn't be worth buying - I've only been selling for a few months! That's why it would be best for me to buy now, if I do at all, while I'm still a fledgling seller.

 

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[biophase]

Well, what I meant was the same product, but with their brand on it. I imagine they would be doing better than I am, or it wouldn't be worth buying - I've only been selling for a few months! That's why it would be best for me to buy now, if I do at all, while I'm still a fledgling seller.

Well i would calculate how much it would take to get your listing to that level because it would probably be cheaper than buying the company.

Can you give an idea of the price point you are thinking about?

 

[WJK]

Well, what I meant was the same product, but with their brand on it. I imagine they would be doing better than I am, or it wouldn't be worth buying - I've only been selling for a few months! That's why it would be best for me to buy now, if I do at all, while I'm still a fledgling seller.

Seasoned business buy other businesses all the time.

Many times it's purpose is to get market share advantages by absorbing their competition, obtaining the rights to an on-going purchase contracts (both the purchase and sale of materials and finished goods), and/or consolidating a client base. By buying going concerns, they can scale their overhead, thereby reducing their cost percentages -- while at the same time making them a bigger fish in their target market, which makes it easier to set their product price points with a lot less discounting. The combination of the two can really positive effect on the profit margins.

Other times, the reason to buy a business is that it is related to buyer's core business. Many times they are buying a leg-up on different or new technology; an existing business system or process that compliments, or can be added to their core business; a product/patent that they want to add; and/or they are obtaining new expertise (or limiting competition) by absorbing the purchased company's staff and staffing contracts. The staffing issues get interesting since many current key people in a company, and past employees, have employment contracts to lock them into very specific agreements. Many contracts also include non-competition clauses.

All these are issues that can negotiated within the purchase of a business. When I'm shopping, I'm always looking for good deals. They're always out there IF you look for them.

 

[racyred09]

Well i would calculate how much it would take to get your listing to that level because it would probably be cheaper than buying the company.

Can you give an idea of the price point you are thinking about?

My original listing is on the front page already. The other ones I have faith with get there as well with some time (positive thinking! haha). Time is the biggest limiting factor for me...time to get things I want to list manufactured, time to accumulate reviews, etc. So you can see the appeal of buying something that's already a few years ahead! Which costs were you referring to calculating- advertising, giveaways,...? (I never did a giveaway and I don't know if I ever want to)

Price point- in the 6 to 7-figure range. Obviously at a certain price, I would need more than my HELOC to finance, but it may very well be worth it.

 

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[BrooklynHustle]

I started selling on Amazon a few months ago, in the US and now in Europe and soon in Canada. I have sold 1000 units and counting of my first product, and my second product just hit the market a couple days ago so I've only sold 5, but I imagine that'll pick up too. I've got a few others on their way to the warehouse, one that's already in Amazon but available for sale in a couple days, and I have a pretty solid plan for expanding my niche (I think). I am just breaking even on my first product, but that's because with the packaging my product is oversized and I pay $3.50 extra per unit to Amazon, but soon that will be remedied and that will be profit.

I've also got a website and hope to move away from Amazon, and I haven't sold anything outside Amazon yet but I've been blogging and building my social media presence so here's hoping eventually I will! My products aren't unique by any means (well a couple of the ones in progress are), but the things I've done on my website that I thought were pretty obvious no competitor has: helpful blog posts, a shop with a cart, products all in the same niche, and a way to reach me.

Anyway, now that you know where my business stands, I want to tell you about my idea and would really appreciate if you could tell me if it's supremely stupid. I want to buy another eCommerce business that's already established. I've been looking into the ones for sale a lot and it's amazing to me that they sell for sometimes just double their annual cash flow. I could purchase one that would pay the purchase price off within two years, hopefully grow the business (for example, now that I'm already operating in Europe there a lot of US-based ones I could easily expand there), and possibly merge it with my current business at some point. I would be doing the same thing I'm already doing and could reinvest the cash flow into expanding my business more, while paying off the financing I would need to buy it.

I've held off on doing this not only because I haven't yet found a business where I'm totally happy with the numbers once I dig into the businesses for sale, but also because something feels like it's a bit of a shortcut. I didn't do the work to set up the business, so I feel like I'm skipping over the "process" part. It feels like cheating. However, my gut instinct is often wrong (there are plenty of products I thought would be a big hit, and there turned out to be negligible demand). And then I think about the fact that like many people I have rental properties where the rent is paying for the mortgage, and how is that any different, really? Except that I wouldn't call that entrepreneurship, and maybe this isn't either.

If you read all that, thank you! Please share with me your thoughts, and if you've bought a business, I would LOVE to hear your feedback on how that went for you and if you recommend it.

I don't see it as cheating by any means. You still need to apply your process to grow, scale, and make it successful. And then there is the matter of due diligence. It's just an alternate route that is available to you. You may want to check out the "Freedom Fastlane" podcast, as the host is starting to apply this model a lot with physical products businesses.

 

[racyred09]

I don't see it as cheating by any means. You still need to apply your process to grow, scale, and make it successful. And then there is the matter of due diligence. It's just an alternate route that is available to you. You may want to check out the "Freedom Fastlane" podcast, as the host is starting to apply this model a lot with physical products businesses.

Thanks for the recommendation! I will check it out.

 

[racyred09]

It took us (my husband and I) some time to find the right one but...we made an offer on a fantastic company, and now in the process of due diligence! If anyone, like @jimmeboy wants to know what things we are checking I would be happy to keep updating this thread with things we check as we check them.

Currently checking: all the seller's contacts. I asked for the emails and contact person for every supplier and the price for the items he sources from them, as well as the go-to photographer, logistics person, and anyone else he does business with regularly so I can contact them and ensure they'd work with me too. Also want to make sure the unit cost he tells me is accurate.

 

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[Oztrepreneur]

It took us (my husband and I) some time to find the right one but...we made an offer on a fantastic company, and now in the process of due diligence! If anyone, like @jimmeboy wants to know what things we are checking I would be happy to keep updating this thread with things we check as we check them.

Currently checking: all the seller's contacts. I asked for the emails and contact person for every supplier and the price for the items he sources from them, as well as the go-to photographer, logistics person, and anyone else he does business with regularly so I can contact them and ensure they'd work with me too. Also want to make sure the unit cost he tells me is accurate.

I would be interested in what things you are checking and anything you learn through the process. I am also constantly on the lookout. Most I see though are not very 'defensible'. Meaning there are not many barriers to someone else potentially competing quite easily and stealing market share. Basically most are selling re-branded 'me too' products.

The ones in the 7 figure+ range seem to be different, but right now I don't have the experience to take that sort of risk!

So please share whatever you learn.

 

[racyred09]

I would be interested in what things you are checking and anything you learn through the process. I am also constantly on the lookout. Most I see though are not very 'defensible'. Meaning there are not many barriers to someone else potentially competing quite easily and stealing market share. Basically most are selling re-branded 'me too' products.

The ones in the 7 figure+ range seem to be different, but right now I don't have the experience to take that sort of risk!

So please share whatever you learn.

I agree with you, it's really hard to find ones that have something special, like a patent or something else that isn't easy to copy. This one isn't necessarily something revolutionary, but the seller has a HUGE fan base due to his excellent branding and social media marketing so I think it'll be just fine. And yes, the 7 figure+ ones are very intimidating! There was one we looked at in that range that had 20 full-time employees!

Anyway, here is a list of things I'm currently requesting (or checking myself) and why:

• Google analytics: checking acquisition/behavior/conversions data. I also used something called SEMrush to look at traffic, sources, search terms, competitors, backlinks. Want to make sure the backlinks are good (not spammy etc.) and traffic is mostly organic (it is). Asking him if spikes in traffic corresponded to something in particular, and if they increased revenue.
• Amazon reports: advertising, returns, payments, to check against the reported numbers, also making sure returns not too high
• Reports for the same things from all other sales sources (especially the website)
• Paypal statements
• Bank statements
• Tax returns (this and the four above mostly just to make sure all figures add up)
• Customer query log and response times to see volume, if it matches time requirements stated
• Time breakdown for all tasks performed for the same reason
• Email list report: subscriber growth, open and click-through rates, bounce rates, broadcast frequency (he doesn't use his list much though)- to see quality of email list as this is one of the first things I plan to do, is to set up an email sequence and start an opt-in offer
• Trademark certificate- just to make sure

 

[Maxboost]

I don't have much to offer but back in the day I met a retired businessman who made a FORTUNE buying and selling businesses. He explained a lot of businesses are mis-managed and are inefficient.

 

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[Oztrepreneur]

I agree with you, it's really hard to find ones that have something special, like a patent or something else that isn't easy to copy. This one isn't necessarily something revolutionary, but the seller has a HUGE fan base due to his excellent branding and social media marketing so I think it'll be just fine. And yes, the 7 figure+ ones are very intimidating! There was one we looked at in that range that had 20 full-time employees!

Anyway, here is a list of things I'm currently requesting (or checking myself) and why:

• Google analytics: checking acquisition/behavior/conversions data. I also used something called SEMrush to look at traffic, sources, search terms, competitors, backlinks. Want to make sure the backlinks are good (not spammy etc.) and traffic is mostly organic (it is). Asking him if spikes in traffic corresponded to something in particular, and if they increased revenue.
• Amazon reports: advertising, returns, payments, to check against the reported numbers, also making sure returns not too high
• Reports for the same things from all other sales sources (especially the website)
• Paypal statements
• Bank statements
• Tax returns (this and the four above mostly just to make sure all figures add up)
• Customer query log and response times to see volume, if it matches time requirements stated
• Time breakdown for all tasks performed for the same reason
• Email list report: subscriber growth, open and click-through rates, bounce rates, broadcast frequency (he doesn't use his list much though)- to see quality of email list as this is one of the first things I plan to do, is to set up an email sequence and start an opt-in offer
• Trademark certificate- just to make sure

Great list thanks for that. Did you look specifically for a business that in your opinion wasn't being run effectively or there were obvious opportunities for growth? Two me there are a few options. Buy one that produces steady cash-flow with no intent other than keeping it a stable asset or buy one where you see problems to fix that allow me to grow cash flow and sell for profit.

 

[racyred09]

Great list thanks for that. Did you look specifically for a business that in your opinion wasn't being run effectively or there were obvious opportunities for growth? Two me there are a few options. Buy one that produces steady cash-flow with no intent other than keeping it a stable asset or buy one where you see problems to fix that allow me to grow cash flow and sell for profit.

Definitely looked for one where there were obvious opportunities for growth- but by no means a "fixer-upper".

The two biggest things I looked for in terms of opportunities for growth I would say, were built-in growth opportunities (recently-launched SKUs or recent expansion to new markets- ours has the latter) and untapped potential that's just sitting there (in this case not using the huge mailing list nor having an opt-in offer are biggies). I think if you buy the right company you can hope for a lot better than it staying stable. Guess I'll find out for myself, soon!

To contrast that, another business we looked into at the same time as this one, the seller had sort of mentally moved on, so he had hardly looked at it for 9 months and the numbers reflected that. But how do you verify it's actually because of neglect or whatever excuses, and not because the market got too saturated?