Andrew Youderian
•
December 18, 2012
I typically don’t take on eCommerce consulting, but when reader Andy Depperschmidt offered to let me share details of his purchase of a website generating $500,000 in annual revenue, I agreed to advise him at no charge. In this post I’ll be revealing revenue, profitability, traffic stats and the sale price for Andy’s recently purchased site, as well as an overview of the diligence process I performed and advice I gave prior to buying the eCommerce site.
When Andy initially asked for my help, he’d already signed a letter of intent to purchase the eCommerce business and was trying to close the deal within the coming week, so time was short. The time frame and my schedule didn’t allow me to conduct a thorough diligence process, but I did agree to look at the company and give him a better understanding of how to value the eCommerce business for sale.
With limited time, I was most interested in digging into the four areas I thought were most crucial:
The site’s owner had recently moved out of the country and was having a hard time managing it from his new home in Hong Kong, so he was selling. By the owner’s admission, the business was not in tip-top shape. He’d done a poor job with customer service the previous two years, and revenues were declining. When I tried to call the 800 number to get a feel for their service, it was disconnected!
Also, for the previous three months he’d completely disabled the shopping cart on the site, because he wasn’t able to process and manage the business while abroad. While the site remained online, customers had consistently been turned away when they tried to purchase.
Between the customer service issues and no-sales period, you could say this was a bit of a fixer-upper and it was being offer for sale at $37,500. Despite these problems, there were a few things I really liked about the site:
Niche Selection: Products like concession equipment have the potential to do well online. They’re hard to find locally yet needed by nearly all schools and sports venues. There’s also the opportunity to sell follow-up items (such as popcorn oil, cleaning kits, etc.) that are required to keep the items running. There were some downsides — and it didn’t meet all the criteria for finding your perfect niche market — but it definitely had potential.
Website Design and Content: I was also surprised by the quality of the website and, in particular, the Education Center that had been created and was prominently advertised on the home page. I’m a huge fan of using educational guides and resources to help drive sales, so I liked that some resources had been considered and created. The site wasn’t perfect, and many of the product pages could use some serious work. But for a site in this price range, it wasn’t too bad.
It’s always fun digging into the financials of a private business, as these usually aren’t shared. For MyPopcornMachine, I condensed some rather long-form financials sheets into this easier-to-read chart:
For those interested in a further breakdown of “total expenses” – which are very high for a drop shipping site of this size – you can download the itemized financial statements here. While I didn’t post a revised copy, I’ll be the first to admit that they could use some re-ordering to provide a more accurate financial picture. For example, a number of card processing fees are listed in ‘Total Expenses” when they really should be included with the product costs to reflect an accurate gross margin. There are also a number of large charges for “customer service” & “website expense” that likely won’t be recurring if Andy operates the business going forward.
Everything else from the financial snapshot above is fairly self-explanatory with the exception of “Add-backs.” Add-backs are historical expenses that a new owner likely wouldn’t incur – or that are largely discretionary – and are added back to the business’ profit. An example would be an expensive conference that the owner attended and expensed to reduce the company’s tax burden, but that wasn’t necessary for running the store.
What stood out most was the dramatic decrease in both revenue and the conversion rate from 2010 to 2011 – largely due to the poor customer service, I’m guessing. Apart from this, I had a few questions/points that I thought Andy should understand before purchasing:
My #1 concern with Andy’s purchase was the quality of the backlink profile and the level of organic traffic from the store. Given the very small margins, it would likely be difficult to profitably run the site while paying for advertising. If the free organic traffic dried up, it could mean the end of the business.
Overall, MyPopcornMachine had some pretty decent traffic stats averaging about 16,000 visitors per month:
That was impressive, but I wanted to know where that came from. Anyone can purchase a boatload of traffic with AdWords, but that doesn’t translate into a profitable business. A quick look into the source of the traffic revealed a pleasant surprise:
I also wanted to see how MyPopcornMachine.com was ranking for some of the main keywords in the niche. It turns out it was ranking on the first page for a number of its primary and secondary keywords:
Solid rankings with organic sources making up nearly 80% of the traffic was a great sign. But it was crucial to examine the backlink profile to determine how that traffic was being generated. If the traffic was the result of a spammy, low-quality SEO campaign, it’s likely that the rankings – and the subsequent traffic – would drop in the near future as Google updates and improves its algorithm.
I headed over to Open Site Explorer and spent some time poring over the backlinks to MyPopcornMachine.com. After some digging, I discovered that most of the links came from directories and off-topic websites – likely the result of a low-level SEO campaign. Though not horrible, the backlink profile was by no means squeaky clean. There were, however, a few authentic links from quality sites linking to the store, which was a positive sign.
This spring, Google released the notorious Penguin algorithm update, which was designed to penalize sites with over-optimized or spammy link profiles. It wreaked havoc on a number of sites, so I was curious to see how MyPopCornMachine fared in late April 2012, when the algorithm update took effect:
Based on traffic trends from the previous years, it looks like the store did suffer a hit to traffic, although it wasn’t as severe as other Penguin penalties I’ve seen. Post-Penguin, the site was still receiving 16,000 visitors per month and ranking well for a number of keywords. So while not immune from future updates, the backlink profile wasn’t deserving of an extreme penalty – a good sign.
With only 34 linking root domains, the existing SEO footprint was fairly small. An investment in a quality white-hat SEO campaign would go a long way to improve the quality of the backlink profile, improve traffic and help decrease the chances of future penalties for the site.
With a better understanding of the company’s profitability, I could get an idea of whether the $37,500 being asked was a steal or a rip-off. In the world of business sales, the asking price is most heavily influenced by the company’s profitability, which can be described as “free cash flow,” the “seller’s discretionary earnings” or, for larger businesses, “EBITDA” (Earnings Before Interest and Tax Depreciation and Amortization).
While it has a number of names and variations, the metric represents the cash/profits being generated by the business. A multiple is then usually applied to this figure to come up with a purchase price. Calculating the earnings is the easy part; the difficult part is determining what’s a fair multiple to apply.
The multiple varies significantly based on the size, track record and industry a company is in. Large, publicly traded companies such as Google and Coca-Cola will trade at multiples of 10x or higher, and some high-growth companies like LinkedIn will trade at seemingly crazy multiples of 100x or more.
But for small companies, these multiples will be much, much lower – usually in the 1x to 3x range for small eCommerce stores. Why such a large disparity? Primarily because there’s significantly more risk. While a company like Coke is a pretty sure bet, there are all sorts of risk involved with purchasing a small store like MyPopcornMachine:
… and many more. Also, because the human cost involved in finding, researching and closing a deal is relatively large compared to the purchase price, the multiple is further decreased.
So is buying an eCommerce business for $37,500, when it makes approximately $40,000 a year, a good deal? With a multiple of less than 1x, it’s definitely on the low end of the pricing scale, even as small eCommerce stores go. The business definitely isn’t perfect, but for less than 1x earnings, I think it’s a fairly reasonable price to pay ASSUMING you’re comfortable taking the risks discussed above.
So how did I advise Andy? This was definitely a nuanced case, and not one where I could make a blanket recommendation. Website revenues were declining, the site had been neglected, and it had likely been penalized by the Penguin update. And while $37,500 isn’t an insane amount of money, it’s definitely a sizable investment by any standard. On the other hand, the site was generating a substantial amount of traffic post-Penguin, was ranking well for keywords in an interesting niche, and was very competitively priced. So what to say?
Here’s what I wrote to Andy to conclude my findings:
——————————————————————————————————————————
In summary, I think that with some marketing efforts and improvement to the website, you could likely increase the revenue and profits of the store. Additionally, while the backlink profile isn’t squeaky clean, it does generate an impressive amount of traffic in a quality niche. You do run the risk of that traffic disappearing in the future due to a mediocre linking history but this could be largely mitigated by doing some quality marketing and SEO of your own.
If you’re trying to decide between buying this site for around 1x annual income and starting your own site from scratch, I think this option would likely offer a better ROI (return on investment) when you consider the amount of time you’d need to invest to build something from scratch AS LONG AS you’re comfortable with the risk involved. Additionally, make sure you consider the time required for customer service and the occasional cost/need for technical help if you’re not comfortable with complex website changes.
——————————————————————————————————————————
After considering advice from both me and his business broker, and performing his own diligence, Andy decided to go through with the sale. He’s now the proud owner of MyPopcornMachine.com and has plans to grow and improve the site. Congratulations, Andy! To help him with these efforts, I’ll be writing a follow-up post discussing recommended changes and improvements to make to MyPopcornMachine.com. Stay tuned.
Would you buy an eCommerce business given a similar situation and stats? Or would the red flags have been too much for you to risk the $37,500? Disagree with any of my analysis, or have a question regarding it? Let me know in the comments section below! I do my best to reply to each one.
Finally, a big thank you to Andy for being willing to share this information publicly. If you’re in the market for concessions equipment, I hope you’ll check him out!
Photos by Nich Hum, Stephan Baudy and S Falkow.
116 Comments
Great post Andrew. You mention the backlink profile quite a bit, do you mind breaking down a little bit more what exactly you look for?
” I discovered that most of the links came from directories and off-topic websites – likely the result of a low-level SEO campaign.”
What do you mean by directories and off-topic websites? Is he posting a link in the comments section of a poker webiste, perse, or what is he doing that doesnt make it a good backlink profile?
What do you consider a good profile?
Thanks again for this post, great info Andrew.
Best
Glad you enjoyed it! By directories, I mean link directories online that exist simply as collections of links on certain topics. There are some reputable directories out there (Like ‘Best of the Web’, ‘DMOZ’, and ‘Yahoo! Directory’), but there are also a lot of low-quality directories that exist solely to help create links for other sites.
By ‘off-topic’ websites, I mean some of the links were randomly inserted into a page on, say, a football page of blog – so it obviously wasn’t a natural link being placed because it was earned. More likely, it was placed at the request of someone doing SEO (due to the non-relevance) and would be more likely to be discounted by Google.
A great backlink profile will have most of their links either 1) naturally occurring or 2) coming from on-topic, relevant sites where it makes sense for a link to come from. The idea behind both is that the links are a true vote of confidence for the website, and not just links purchased/acquired by an SEO without adding any real value or creating a quality site that deserved links.
Hope this helps!
Great post Andrew. I would have bought this site. I’m actually now building four brands online and wil intend to sell them next year. So this is very helpful. What is a good place to go market my businesses ?
Excuse my language, but Fuc$$in awesome post! This is one of the best in-depth and transparent reads I have encountered ever about ecommerce. Epic, and four thumbs up for showing folks step by step on what it takes to really analyze the health and potential of an online store.
Thanks James! Glad you enjoyed it!
Why is the gross margin so low?
Great question, Kate. While the gross margin (gross profit / revenue) isn’t too bad at around 18% for a site drop shipping most of their items, the profit margin is definitely on the low end at around 8% for 2011.
Looking through the $90,000 in expenses for 2011 that aren’t added back, there are items like $16,000 in ‘advertising and marketing’ and $14,000 in ‘website expense’. As I didn’t have time to really dig into the line-by-line items, I can’t say for sure exactly what they are. The $16K in advertising could be SEO work, or PPC advertising and the $14K in website expense is likely some custom development work done as the Yahoo! Store platform is fairly inexpensive.
So between that and some other fees, I think the margin was hit by some investments in the website and spending for marketing – so of which may not have been the best use of funds. But with all the organic traffic now coming in, there’s a great opportunity for Andy to tighten the belt a bit on expenses and really increase the profitability of the company. More on that in my next post…
But why is the gross margin so low? 18% is horrible. Were his prices too low or do those product costs include marketing?
An 18% margin is fairly standard for drop shipped products – a lot of drop shipping sites operate on gross margins lower than that. That being said, I definitely think there’s room to increase prices and improve that margin. But in the world of retail – especially drop shipping – it’s not atypical.
To my knowledge, 18% was the raw margin including only the cost of the products – not including marketing expenses.
I wouldn’t sell anything with an 18% gross margin on inventory we stocked or had drop shipped. Maybe its just the space I play in but I’ve never come across drop ship margin that low. What about his shipping costs?
Andrew, I think you offered an excellent advice IMO. I also checked out the site and I think: If the site can pull such traffic Pre and Post Panda and other Google animals, then with better care it can potentially double it’s performance in one year. For example, the product pages are almost blank, some have no description or quality text which can pull in more traffic.
Backlink-wise, you also correct. Quality backlinking methods you recommended in one of your posts (can’t seem to find it now) can be used to further mitigate the poor links.
I think that site is a dirty gold!
Thanks Richard! Definitely room for improvement as mentioned, but I think some quality SEO would do wonders. I think the post you’re referring to is here:
https://www.ecommercefuel.com/ecommerce-marketing-strategies/
Yeah right. That’s it. I was too lazy to scurry around for it 🙂
And for the record, he got a bargain if those low gross margins can be resolved =)
Agreed. With margins that low, there’s a LOT of potential to quickly increase profits with only minor adjustments to the products’ pricing. Between cutting down on some of the unnecessary spending, improving the website and raising prices I think he can easily double the profits of the store – if not more.
Its extremely hard to raise prices drastically on drop ship products. The customer can go onto the next site with the same products and get it for a cheaper price. One has to maintain realistic and competitive prices when it relates to drop ship items.
This site is a great investment for Andy as long as he’s ready to devote time to improve the site. The backlinking can be solved by investing to quality links. This is a great consulting report.
I think so, too! It’s not perfect, but with some work I think it can make a solid business.
Another great post. Question: How can a buyer verify the operating statements for accuracy? Tax returns? Independent Audit? What would you ask for if you were him?
When we sold our store, an LOI was signed and then the attorneys took over. Due diligence was provided by our accountants which the buyer was fine with given that they were a reputable CPA firm.
@Kate – Great info, thanks for sharing!
@Josh – For smaller transactions like this one, the buyer will be given access to the Google Analytics profile to check revenues and traffic stats. Additionally, bank statements and reports from the online store interface (Yahoo! Stores in this case) are a great way to check. Requesting copies of tax returns is also a great way to double-check these figures. While these aren’t impossible to fake, they can usually provide a pretty good idea of the overall picture of a business.
For larger eCommerce transactions, it’s probably a good idea to get an accountant involved or make sure you get an copy of the financials audited / verified from a 3rd party.
Great post! I would like to add that, it might be helpful to also check on the keyword trends to see whether there are on an increasing or declining line. A declining trend might suggest either a shrinking market or a new entrant to the space. It would also help on planning for seasonality spikes, if any.
Absolutely – great points. Google Trends and Google Insights are good tool for this.
Andrew,
As someone who has made a site in the past, and planning to do a drop-shipping one now, I just thank you for your analysis. It is rarely seen, but gives critical insight into the considerations one must make. Excellent.
Paul
Glad you found it useful Paul!
Thanks for the post! It’s heartbreaking to see a $500,000 headline and discover the takehome pay is $25K-$50K.
Yep, unfortunately top-line revenues don’t end up being nearly what you take home. However, I think with some smart changes the take-home for this business could be much closer to $100K – more about that in the next post. 🙂
I see this being higher than 100k.
As you know it is a multiplication equation when improving multiple aspects of the site.
When the site improves to #1 for lets says 2-3 keywords, plus gains more long tail (about 70% of seo traffic) and increases traffic (through seo, social, email, etc, more diversified) by 50-100% and improves design for conversions, improves cart abandonment and recovery, by 20-50% I see within 1 year this being 1.2mil + in sales or more going into year 2.
If he can match the same CR as 09 and just increase traffic by 50% that right there takes him from 500k to 1.12mil.
Of course, this is just my opinion.
Solid analysis / assumptions! I think the potential is definitely there to break 100K, depending on how much work he’s willing to put in. Thanks for penciling out your numbers.
Andrew,
Very informative. I’m in the market to purchase an eCommerce store so this post is very timely for me.
One question: in the Financials and Profitability spreadsheet, for example in 2008, the seller shows around $151.6k total expense – what would these expenses entail? I’m assuming the drop-shipping cost is covered under “purchases”, so it’s not quite clear on where the additional $151.6K come from? Does it include salaries, too? It sounds pretty high to just be operating costs..
You’re right – $151K is a lot of expenses for a drop shipping business! Like I’ve mentioned earlier, I think a lot of the expenses are unnecessary, not needed with an owner-operator or were investments into the website. For example, from the $151K in expenses from 2008:
– $24,000 was for outsourced customer service help
– $40,000 was for “marketing”. Not sure if this is SEO or PPC.
– $29,000 were for merchant and transaction fees, which really should be moved up and taken out of the gross margin. Unfortunately I didn’t have time to do a full financial restatement.
– $20,000 in “website expense”
So many of these fees are incurred as the owner was trying to run it as independently as possible without being the operator. If Andy is planning on running it himself, he’ll likely be able to save on a lot of these expenses.
Hope this helps clear things up! Next time I should probably invest in re-crafting the financial statements to provide a bit more transparency.
Vik – Based on my comments with you and others, I decided to post the line-by-line financials so you can see exactly what makes up all those expenses. I added a link to them in the blog post above – just search for the phrase “itemized financial statements” for the link.
Thanks, Andrew!
Awesome post Andrew! I’m glad Andy let you post this transparent story. I def think he can at least double its profit if he put enough work into it with some SEO and CRO while engaging with social media.
Also, as far as gross margins are concerned, its not uncommon when dealing in this range of price (some items are 5k+) to see them lower than usual. It doesnt really bother me but with a strong UVP it could def be increased, really depends on the market and where Andy wants to position himself!
Waiting for the follow up post 🙂
Thanks Jonathan!
Agreed – I think there’s a lot of upside as well. And margins do really drop down as you get higher-up in price. For example, some of the really high-end trolling motors I sell have a high per-order profit, but a fairly low margin. When you can drop ship expensive item like that, people often just look at the profit-per-order which drives the margins way down.
Hope to be able to do a follow-up post, too. Would be very interesting to see how things have come in 6 to 12 months.
Great post, Andrew! Very informative for those of us interested in buying an e-commerce store. I check Flippa and have been looking for months but haven’t seen anything that really sparked my interest for the right price yet.
Glad you found it helpful! Overall, I think the quality of sites on Flippa is pretty low – there are some good sites listed occasionally, but you really have to dig through a lot of junky stuff to find real, viable, long term businesses. I think a better place to look is on business broker sites online, although I’m not familiar enough with any to be able to recommend one confidently.
The AdSense Flippers had a podcast where they interviewed a website broker: AFP 27: How to Use a Broker to Buy and Sell Websites. They’re the “eCommerceFuel of Adsense niche sites” in terms of transparency and quality content 🙂
Echoing what other said, this was an awesome post. Rare to see this “behind the scenes” look at a real web business.
Thanks for the recommendation, Marcus – I’ll have to check them out. And glad you enjoyed the post!
Really awesome post Andres. Just goes to show you how many unusual niches there are out there. Really have to get a decent sales volume to cover overhead and have a decent net profit.
Curious how he found out about this site for sale as that multiple seems low even for the ecommerce stores on flippa.
Seems the harder the due diligence there is(like if seller didn’t have separate books/bank/company for a ecommerce site, the better the deal that the buyer can get ?
There’s a few reasons the profit is so low despite the large revenue. Primarily, I think there are a lot of unnecessary expenses that could be stripped out. The previous owner was paying to have just about everything done for him (customer service, web development, etc). So with a little sweat equity and so smart cost cutting, I think the bottom line could increase substantially.
I believe Andy found this site for sale on Buysellebiz.com, which is an online business broker. I have no experience with them, so can’t recommend or endorse them.
I’m blown away by this post. and love the transparency, Andrew. I’m also curious how Andy found this deal as based on your analysis and my perspective as well, it looks like a great buy with a lot of opportunity for growth and improvement.
Also, did you also look as his direct competition as a diligence list item?
Hey Kamal! Glad you enjoyed it. 😉
I believe Andy found the deal on Buysellebiz.com, an online broker. And as far as looking at competition, I didn’t in a lot of detail- with my limited time it didn’t make the prioritization cut-off. I figured if I looked at the traffic levels – and they were respectable – the strength of the competition in terms of out-ranking them wasn’t nearly as important if a steady stream of traffic was in place. However, it would have been a good idea to look at the usability and sophistication of the top contenders for a more in-depth analysis.
Hope you’re great and that things are going well with your new site!
Great post. Will you make this a series. Then you have sticky content for your site:-)
I cannot write comment anymore cause it is 12.30 am in Germany now and I need to go to bed. Staying up late just to finish this article.
THX.
Thanks for staying up! Will try to do more like this in the future.
Great post Andrew – really appreciate the open book analysis here – not something frequently seen!
Looks to me like Andy got a solid deal with strong upside potential if he can work through the issues. Will be interesting to see how things progress for him – looking forward to your future followup coverage.
Are you able to share the brokerage that Andy purchased the site through?
Thanks Jeremy! As I just added above, Andy found this deal through buysellebiz.com. But I don’t know them at all, so can’t vouch for their integrity or reputation one way or another.
Great post, it’s always nice to get a look inside another eCommerce business. One thing I noticed is that Amazon is in the space. He must be dealing with some items that have MAP pricing because Amazon is not undercutting him on everything, so that’s positive.
I also noticed that the site is very generic in terms of branding. All the graphics show “stock” photos etc. If I were the one buying this site I would immediately start to put some branding and position in place to try to “one up” Amazon in a way that Amazon currently struggles to compete…which of course is providing information and customer service. For this market I like the idea of creating “buyers guides” that step people through the process of buying the “right” product as well as “how to” marketing guides which could teach business owners how to use the products to attract people into their store etc. Maybe an eBook on marketing growing your business with vending machines or something like that.
This site has a lot of opportunity behind it, but just like any business competing with Amazon Andy’s going to have to put on his marketing hat and get to work.
Joe
Hey Joe! Thanks for the comments, and glad you enjoyed it.
For more expensive items, I’ve found MAP pricing is crucial if you want to have any chance of making any decent profit. Otherwise, people will awful sites and no service will undercut a $2,000 item down to the $15 to $20 profit level. At this point, it’s not worth taking on the risk of a $2,000 order for such a small profit! I think your tips are right-on – some quality product pictures and descriptions would do wonders, as would some white-hat SEO.
Hope all is well in your business!
Hi Andrew,
I took a look at the attached PDF income statements. I’m curious (if you’re able to share) what are the “bank service charges”? Are those also merchant fees? I do see “merchant fees” as a separate line item. The reason I ask is because the bank service charges were added back as discretionary, when on the surface they seem necessary.
Great question, Kamal. I was very curious about those when I saw them as well as they seem pretty excessive for “bank charges”! It turns out those were the equity withdrawals the owner took out of the business. But for some reason they were labeled as a bank charge. It really shouldn’t even appear on the income statement (it’s a balance sheet adjustment). Hopefully that clears up your question.
Hah! I was wondering what sort of added value the bank could be providing for that much scratch. Makes sense now. Thanks for the follow up.
Another great post, what more is there to say? This blog is already one of the best ressources online for e-commerce.
Thanks Kaven! Appreciate it.
Buy it if you have the cash. Don’t get a loan 🙂
There is a lot of room for improvement on the conversion side. And SEO wise it has room to improve.
It has good content. Some good customer service and understanding of the products and someone to answer the phones and take care of the customer problems will improve sales.
Definitely – NOT a recommended business for a loan, it’s too risky. With a deal like this, I think the buyer needs to be willing to take the risk that the business (well, the traffic) could dry up and they could be out the $38,000 purchase price. Andy was comfortable with this risk, so it was a deal that made sense.
Today the only thing worthy of a site is authority and a brand name. If you can buy a site that has those and a back link portfolio on many niche related sites then that is worthy and could help prevent the traffic drying up.
Good luck to Andy on his purchase 🙂
Hey Andrew,
I really value all the information you’re sharing here. I currently have one established ecommerce site & am working on another for dropshipping. I have looked into buying already existing dropshipping sites mainly for the backlinks & established relationships with dropshippers. I noticed you place a lot of value on existing backlinks. Do you have a formula or a solid way to determine how the number or quality of backlinks can effect the value?
Case,
Congratulations on your successful eCommerce businesses! Great to hear.
While the back link profile plays a large role in the value I attribute to a site, there’s no cut-and-dry way to calculate it. To get an idea of it, you really need to manually review the incoming links and see the quality of the sites linking and how natural the link profile is. It’s just as much a science as an art. But it sounds like a great idea for a future post review focusing just on this aspect of the diligence.
That would be a great post to check out. Backlinks in general are an art form so evaluating someone else’s is never easy.
Your articles have really helped me out. As an young entrepreneur I’m trying to learn everything I can from people who have already been in the game a while. Thanks for the replay.
Hi Andrew. Thank you for the power you put in ecommerce development. Good ideas, reviews and suggestions. I read yor guide 5 times and keep reading. Regarding topic site. It is for sale now on http://buysellebizdotcom. What happend? Is it relist or your client going to sell it? Do you have an idea?
P.S. I’m sorry for my spelling.
Not quite sure why the site is still listed – I imagine they just haven’t taken it down yet, but I’m not sure. Thanks for pointing it out and I’ll try to find out.
Working this as a part time job earns $40k a year. You seem pretty confident he can raise that number with work. My concern is how much work it will take and what the upside is. We all know optimization isn’t an overnight process. Is he buying himself a job that doesn’t have large enough upside for the work required?
You say that if it’s a build vs. buy decision he should buy and I’m inclined to agree. But i don’t see any unique aspects to this business, What needs to be given consideration is if there’s a better opportunity for this individual’s time and money.
Thanks for the comment Aaron, and for taking me up on my offer on Twitter! I love a heathy debate, and you can make a case for either side on this purchase.
Before running some numbers, I think it’s important to point out that I offered this evaluation looking at two criteria:
– The risk to reward ratio
– How good of a deal it was (value relative to market value)
On both accounts, I think it was a good deal from an investment perspective. The risk to reward ratio I think is good (as described in the piece) and I think the less than 1.0x multiple on earnings is a value. Again, this is a 1.0x multiple on the current earnings of the store in its depressed state. So from a purely investment position I think it’s compelling.
However, that doesn’t necessarily mean it’s a great for for Andy given his skills, circumstances and goals – that’s something only he can decide. With that being said, here’s why I think there’s a fair amount of upside:
– For a drop shipping business, the expenses are incredibly high. Of the expenses listed, there are $35,000 per year that can likely be eliminated with some prudent planning and work on Andy’s part. (These include expenses for customer support, “website expense” whatever that means, travel, etc). So if you make the conservative estimate that Andy can eliminate half of these, that automatically increases the profitability of the business by nearly 50% to around $55,000. Plus, if he’s able to keep expenses low for a year or two and show a track record of this being a viable operating structure, that increased income will also add $17,500 in equity to the resalable value of the business.
The site also has really suffered from poor customer service and could definitely use some improvements to some product listings and descriptions. So let’s say that by improving service, answering the phones, writing some great copy and optimizing a bit more for SEO he’s able to raise the conversion rate by 25% – which I think is very feasible. On sales of $500,000 that’s an increase of $125,000 in revenue and approximately $20,000 in additional profit. So that gets the business up to $75,000 in profits.
This will obviously take some work, but I think this is a fairly realistic conservative estimate. In the event he plays with prices to maximize profitability, really focuses on quality, high ROI marketing and builds up some repeat business and keeps expenses low I think he could potentially make $100,000 per year. Not only would this be a recurring location independent annual income, but he would have built up at least another $60,000 to $100,000 in business equity depending on the multiple he could get in a sale. If he improved the reputation and quality of the site, he’d likely be able to get more like 1.5x instead of 1.0 for the business.
Is any of this guaranteed? Definitely not. There’s the chance that business could plummet due to outside factors, a major hit to organic rankings or just the inability of Andy to execute on improvement. But for someone who is looking to get into eCommerce and is looking for an attractive way to do it (and can withstand to risk the entire $37,500 and is willing to) I think it’s a very appealing opportunity with turnaround potential.
But again, like you said, it may not be the best use of his time and money – Andy has to decide that for himself. All I can do is offer my opinion on the site from an investment and business standpoint. 🙂
Again, thanks for the comment!
Fantastic post – great insight on what to look for and some pitfalls of purchasing an existing eCommerce site. I’m in day 2 of figuring out what my possible niche markets/products…. perhaps looking into a purchase may be an alternate route for me.
Eddie
Thanks Eddie and good luck with the niche search!
Dude you are awesome. OMG how did you learn all this…….You look young probably younger than me….lol…that’s compliments…Are you available for some consulting? I would really appreciate if you could help me out here…..I am really tired of this freakin corporate jobs and have been looking for alternative option. let me know….
Thanks John! I’m almost 16, so I’m not THAT young. 🙂
Unfortunately, I’m not available for consulting right now due to a number of other projects and obligations I’m juggling. But I may offer it in the future and, if so, I’ll let you know. Thanks for reading!
Great article! One thing that seems to be overlooked a little but was briefly mentioned is sweat equity. How much work is Andy willing to put into this project, how much ability does he have currently, and how much is he willing to learn to help make his business a success?
An online business is just that a business. You have to be willing and able to put in the effort to make it grow…unless you’re simply buying and selling sites. I’ve never known anyone to just step into a profitable business…otherwise why is it for sale?
Lots of talk about SEO but what about getting the word out through some active marketing? All things seem to be talking about the site resting on its own laurels, but what about the level of commitment and passion for the product and the store?
If I were looking at an investment, I would obviously consider the hard numbers as they are, however, the passion to actually see the store succeed could increase profits as well. Good ol’ fashioned hard work.
So could Andy make it better and does he really want to seem like a couple important variables that anyone purchasing an ecommerce site should ask themselves.
Glad to have stumbled across your blog and looking forward to more!
Great points, Riese. I agree – your personal skills, desire and appetite to really invest in a business are crucial to consider when buying a business. However, from this perspective Andy simply wanted me to do a financial, SEO and traffic analysis to really give him a high-level pictures of the business. Additionally, he was one a tight deadline so I tried to focus on these things. If I was doing a more comprehensive analysis for a customer with an extended timeline, these things would have definitely entered more into the discussion. But for the sake of this case, they were issues I had to assume Andy had thought through and considered on his own.
Thanks for your thoughtful comment!
First time I found someone to give financial details of small business in such an interesting way, hope you’ll update soon with great out-comings of the site.
Also nice way to convert low quality back link profile to high-quality back links. 🙂
Regards,
Babul Paul
Yep! One of the benefits I mentioned to Andy was that he would receive a solid link from the eCommerceFuel blog. Hope to do a follow-up in the future to see how everything went, too…
Hi Andrew,
Great Post and Really Good information! I wanted to know if there is a way to do the same thing on some small growth low-end sites. I’m interested in buying a few sites (start with one) and build revenue (adwords, affiliate etc) to build profitable. Do you know or can recommend some good resources for this kind of information? I know there a few “courses” and the “gurus” always say theirs is the best, but I know there some “fluff” in some of those as well. I would like to start and build upon say a few sites generate 300-500 a month and build upon to 1000 then 1500…..then 3000 a month and so on. I don’t expect the “4 hour workweek” and I am willing to put hours even 40 hrs to build and maintain as it would be building a business. I apologize for the long post and appreciate your insight.
Thanks
Steve
Hey Steve! If you haven’t checked out AdSenseFlippers, I’d recommend them – they’re doing a lot with smaller micro niche sites with the AdSense model. As far as smaller eCommerce sites, I’ll do my best to keep cranking out useful articles here at eCommerceFuel. 🙂
Great post indeed! Even working in a niche based business myself I still get surprised by how many markets there are of things you just don’t consider.
2 years ago a close friend and business partner asked if we should sell meat online, I said no way, who the hell is going to buy meet online when they can just grab it from the store? Turns out they sold all their delivery slots for christmas at the end of November and its turning over thousands of dollars a day.
The internet is full of niches to attack and there has never been a better time in history to start a new business! I would have invested in this business but I have a team of staff who could help run it and I would not need to take a salary from the income, so a much less risky move than someone who requires it to be successful off the bat to pay the bills.
Thanks for sharing!
Agreed, Andrew! I don’t think there’s ever been a better time in history to start a business. Thanks for sharing.