You’re seriously considering purchasing an online business. And why wouldn’t you? After all, according to Shopify ,19.5% of sales will likely come from online purchases in 2021, up from 2019’s 13.6%. That’s a 45.8% increase in market share that shows no signs of slowing. In 2024, a projected 21.8% of sales will come from online sales. They’ll come from businesses like yours—if, of course, you choose to buy the right kind of business.
That’s what this post is all about. What should you look for when you’re buying an online business? If you want to be part of this mounting wave of retail transformation, what’s a good point of entry?
As a fractional CFO for ecommerce brands and agencies in the US, Canada, and the UK, I’ve considered these questions far more than most. In fact, I’ve considered them from the vantage point of a buyer; I acquired an ecommerce business in May 2021. Since then, I’ve turned down three more potential purchases because they didn’t fit the criteria I’ve put together.
That criteria is what I want to share with you now.
Criteria For Buying An Online Business
If an online business doesn’t meet these criteria, don’t pull the trigger.
1) High Gross Margins
Ideally gross margins should be 60% or above. Of course, acceptable profit margins vary across industries. But in ecommerce, they should be quite high—perhaps higher than you think. Margins under 50% will make it much harder to break even, especially taking into account the rising costs of customer acquisition.
2) A Large Email and SMS Customer Database
If the business relies exclusively on social media to drive sales, don’t bite. In the long run, social media followings are “owned” by the platforms on which they exist. Email and SMS are different; they’re the only way to cultivate a secure long-term relationship with your customers. And they quite simply work better for driving sales. Did you know that the click-through-rate for emails is 6x higher than for tweets?
3) Opportunities to Scale Up
You should see a few ways you can fulfill the potential of this business. For example, consider:
- Do they sell heavily in one region, and you think you can expand to others?
- Are they focused on one demographic, and you think you can expand to others?
- Do they sell one type of product (e.g., tops) and you think you can add others (e.g., bottoms, outerwear, shoes)?
- Could you improve the payment terms they have with key suppliers (instantly unlocking more cashflow)?
- Can you unlock new sales channels?
4) High Customer Retention Rates
The average retention rate for an ecommerce business is around 30%. And a 5% increase in your retention rate can boost profits by 25% to 95%. So, 20% over the industry standard clearly positions you for success.
5) A Social Community
Social media alone can’t sustain an online business, but the importance of an engaged community can’t be disputed. After all, according to Refersion (and many other sources), “74% of consumers identify word of mouth as a key influence in the purchasing process.” So, does the community around this brand freely post about their purchases, complete online reviews, or give direct feedback to the company? Do they have a VIP group on Facebook? Or on an owned app?
The other great thing about an engaged community is that it provides a platform for product research. For example, one brand I work with puts a poll out to their community before every new drop to see which products will be most popular.
6) Good Customer Lifetime Value
The Customer Lifetime Value to Customer Acquisition Ratio (CLV:CAC) is a handy metric indicating the lifetime value of a customer versus the cost of acquiring said customer. 3:1 is the sweet spot. That’s because if you spend too much to acquire customers, you obviously won’t turn a good profit. But if you spend too little, it means you’re missing valuable customers whose lifetime value exceeds what you’re willing to invest.
Purchase The Online Business Based On Gut Instinct
Ecommerce is a fun and fast-growing industry. It’s easy (and appropriate) to get fired up about the possibilities. Following your gut and acquiring a business that solves the type of problems you want to solve will ensure your commitment and enjoyment. But securing one that meets the criteria I laid out will ensure overall sustainability and success.
I can say that with no small measure of confidence because I’m experiencing it firsthand. As I mentioned up top, in Q1 2021, I took the plunge and purchased an ecommerce apparel business along with a few partners. This business had all the “must haves” and one of the “nice to haves”.
In my direct experience, this is the right score for a prospective online business to have. It’s going exceptionally well, and I regularly feel grateful we made the purchase.
You deserve to feel the same way. Participating in an industry with such staggering momentum is a thrill. And it should stay fun. What’s more fun than sustained success?
So if you've taken the leap and committed to buying an online business, get in touch with us about a partnership with us here at Blend so that we can help you scale and grow your online store.
