Starting an e-commerce business from scratch is very challenging due to market saturation. This is why many investors nowadays opt to buy already existing e-commerce stores. Just like buying other kinds of businesses, purchasing e-commerce businesses, particularly up-and-coming brands, has its fair share of inherent risks and factors to consider.
Here are five key areas you should evaluate before buying an up-and-coming e-commerce brand.
1. Market Outlook
An up-and-coming e-commerce brand with a positive market outlook and a loyal customer base has better prospects of success than a brand without a profitable niche or active customers. A loyal customer base is a direct reflection of the brand’s perceived quality and a good indicator of repeat purchases.
Some factors you should consider when evaluating the brand’s market outlook include:
- The uniqueness of its customer base
- Customer base growth rate
- Costs of gaining new customers
- The level of competition within the niche
2. Digital Intelligence
Since the bulk of an e-commerce store’s activities occur online, it pays to analyze the outlook of your prospective brand’s digital presence since it will have a considerable bearing on your success. Is the brand successful online? Do they have an e-commerce content strategy in place? If so, has it been effective?
What about social media? Which platforms do they see the most successful in, and where should they improve? Don’t forget to look into their conversion rates – how much of their website‘s traffic do they convert to customers?
Analyze their ROI (Return on Investment) on advertising and the genuineness of their traffic. Most marketplaces where investors can buy e-commerce brands provide verified data on the respective businesses’ revenues and traffic to give the investors a better perspective of each store’s current position.
Dig into the SEO analytics of your prospective brand. If their approach to search engine optimization seems fine, then you will have ample time to channel your efforts towards other areas of business growth. However, if their SEO isn’t impressive, then you may reconsider buying it.
3. Operating Costs
The costs of a new e-commerce store do not end with the purchase price. Like other kinds of businesses, e-commerce stores incur overhead costs to stay operational. When evaluating an e-commerce brand, you need to consider the costs of keeping it running and the potential for profit after meeting the overhead costs.
Arguably, the most crucial factors and operational costs you should consider are:
Underlying Cost Structure
This refers to the costs associated with normal business processes, as predicted in the budget cycle. It would be best if you considered how the brand’s underlying costs will be transferred to you and whether you can reduce them.
Consider whether the current suppliers will work with you after buying the brand. Also, dig into any special agreements you need to know beforehand and ask for full disclosure if necessary.
Is the business capable of growing to match market demand? Is it possible to expand into untapped markets?
4. The Legalities
While the legalities may not be the most exciting element of your evaluation, they are among the most important. You need to have the legal right to acquire and run the brand. This includes obtaining the necessary intellectual property rights to operate the store legally after purchase.
5. Financial history
Verifying accounting figures such as revenues and debts can give you peace of mind down the road. It is your duty as an investor to request more than 12 months’ worth of financial reports, and crosscheck them against bank statements.
Also, request every expense report possible from advertising costs to inventory purchases, employee wages, subscriptions, and payment processor charges. Be very thorough and look out for any hidden costs and contracts.