How to Buy an

ECOMMERCE
BUSINESS
EXCHANGE
Table of Contents
How to Buy an Ecommerce Business.............................................. 1

Chapter 1: Why buy an ecommerce business?................................... 2

For Beginners........................................................................................................ 2
For Experienced Entrepreneurs....................................................................... 3
For Business Portfolio Owners......................................................................... 3

Chapter 2: How to find an ecommerce business to buy.................... 3

What do you want to achieve?......................................................................... 3
What do you enjoy doing?................................................................................. 4
What are your strong skills and knowledge?............................................... 4
What resources do you have?.......................................................................... 5
Determining your business buying parameters......................................... 5

Chapter 3: How to evaluate an ecommerce business?...................... 6

Seller interview questions and answers........................................................ 7
1. Tell me a bit about yourself................................................................ 7
2. Tell me about the history of this business..................................... 7
3. Why are you selling it?......................................................................... 8
4. What other businesses do you own?.............................................. 8
5. How do you operate the business?................................................. 8

Google Analytics Access................................................................................... 9

1. Are the traffic stats authentic?.......................................................... 9
2. What’s the traffic trend and what’s the reason behind the
trend?...................................................................................................... 11
3. Is the traffic organically sustained or does it require paid
acquisition?........................................................................................... 13
Paid Search........................................................................................... 13
Organic Search.................................................................................... 14
 Referral................................................................................................... 15
Social Media......................................................................................... 15
Direct...................................................................................................... 16
Summary............................................................................................... 16

Profit and Loss Statement (P&L).................................................................... 18

Revenue......................................................................................................... 18
Cost of Goods Sold............................................................................. 18
Gross Profit............................................................................................ 18
Operating Expenses........................................................................... 19
Add-Backs.............................................................................................20
Net Income............................................................................................21

Chapter 4: How much to pay for an ecommerce business?.............21

History................................................................................................................... 22
Customer Acquisition.......................................................................................23
Traffic Profile................................................................................................23
Current Marketing and Advertising.......................................................23
Cost of Acquisition.....................................................................................24

Market Trends and Competition....................................................................24

Chapter 5: How to finalize the sale?................................................. 25

Communication and Negotiation..................................................................25
Steps to Finalize the Sale.................................................................................25
Confirmatory Due Diligence....................................................................25
Asset Purchase Agreement.....................................................................26
Transferring the Business................................................................................ 27

Chapter 6: Conclusion.......................................................................27
1
Chapter 1

Why buy an ecommerce

business?

For many, starting a business is a gratifying experience.

Those early mornings, that daily grind, it all pays off as the
business gradually takes off. For others, and most likely the
readers of this guide, the challenge lies in other aspects of the
business: the turnaround effort, the scaling strategy, and so on.
This guide is designed for those seeking to buy a business and
continue building it. Here you’ll find the guidance and tools you
need to acquire a business that aligns with your goals.

Every business can be improved, every business needs refinement.

As a potential buyer, you need to ensure that the business
you’re buying complements the skills you bring to the table. An
incredible product that needs marketing expertise; a high-revenue
operation that needs to source better products. With this guide,
you’ll develop a strategy to buy the right company for you and
one that you’ll be able to take to the next level.

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For Beginners
For those who have never run an ecommerce
business before, buying an established
ecommerce business could be the fastest
way to get a foot in the door and start
learning by doing. Compared to starting an
ecommerce business from scratch, buying an
established business gives you the following
advantages:

1. An established business usually has

a proven business model and a set of
operational procedures. You can take
that right away from the current business
owners without risking a lot of time and
money trying to build everything from
scratch.

2. Buying from an experienced ecommerce business owner

also means that you can learn from him/her and get yourself
a “teacher.”

3. An established ecommerce business usually has a certain

amount of traffic to the website and existing clients. That
means the business can be cash flow positive at day one
after you take over it. You don’t need to worry about where
to find customers or whether you can find customers.

4. An established Shopify ecommerce business also has a

website that has already been built, so no need to worry
about your upfront investment in the technology. All you
need to do is to learn how to manage the store.

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For Experienced Entrepreneurs
If you have worked in online businesses for many years and think
of yourself as an expert in one specific area, such as marketing
and branding, SEO, growth strategy, user experience, or if you
have a ton of social media followers or blog readers, buying
an ecommerce business means you can apply your skills and
resources to help a business grow. And best of all, it’s your own
business.

For Business Portfolio Owners

If you already have a portfolio of businesses, buying an ecommerce
business can help you gain access to new products and new
clients, which could help you effectively grow your current
business portfolio.

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2
Chapter 2:

How to find an ecommerce

business to buy

In order to understand what type of ecommerce business you

should buy, the first step is to evaluate your current situation. Ask
yourself the following questions:

What do you want to achieve?

Specify your goals at the beginning and ask yourself “is this
ecommerce business buying opportunity going to help me
achieve my goals?” Keep asking yourself this question throughout
your search. Otherwise, you might end up looking at so many
different business buying opportunities and lose sight of your
initial goals.

If you are buying a business to learn as a beginner in online

business, think of the money you spend on the acquisition as
your “tuition fees.” Buy an ecommerce business that doesn’t cost
you too much money, but has a fairly established process and
an experienced and helpful current owner you can learn from.
Each listing on Shopify Exchange has a “bio” of the seller that
can help you learn about the sellers and how much experience
they have.

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If you are buying a business with the goal to help it grow with your
skills and resources, make sure the business has the potential to
be further optimized with the type of skills or resources you have.

If you are buying an online business so that you can be location

independent and have the freedom to travel more, make sure
you already have the skills and knowledge needed to run the
business as it is, and that the business doesn’t take 80 hours a
week for the current owner to operate.

What do you enjoy doing?

Make sure you will have fun working
on the business you buy. Ask yourself
“what do I enjoy working on based on
my previous experience?”

If you are passionate about a certain

topic or a group of people, for example,
health and fitness, newborn babies
and moms, robotics and drones, you
will be more likely to enjoy working on
the business as it brings you a purpose
of helping others who have the same
interest as you.

Same thing applies to your skillset.

For example, if you enjoy optimizing
website landing pages, look for an
ecommerce business that is fairly
strong in all other aspects but still has
an opportunity to be further optimized
in its user experience.

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What are your strong skills and
knowledge?
When buying an established ecommerce business, the bottom
line is that you will be able to run the business as it is with your
current skills and knowledge. It doesn’t mean you have to know
everything about running an ecommerce business before you buy
it, but it does mean that you need to at least have the knowledge
base strong enough to support your necessary learning to take
over the business.

For example, it is ok if you have never run a Pay-Per-Click (PPC)

campaign with Google AdWords, but you need to at least understand
how it works before you acquire the business. Otherwise you will have
a hard time when you start evaluating the business opportunities.

If you have a strong skillset that can help you pursue obvious
improvement opportunities in the business you buy, it’s even better.
List all the skills you have, such as online sales, SEO, content marketing,
social media marketing, user experience design, conversion rate
optimization, business process automation, etc. Keep that in mind
and find businesses that can be further optimized with your skillset.

Some ecommerce businesses do require special knowledge to

run. It’s both a bad thing and a good thing. It’s a bad thing because
it limits the types of ecommerce businesses you can effectively
run, but it’s also a good thing, because if you do have specialized
knowledge in a certain space, it’s going to be your competitive
advantage. Think about what specialized knowledge you have. For
example, with specialized knowledge in electronic engineering,
you will be able to handle a Robotics ecommerce shop’s product
inquiries and create related content marketing materials much
easier than others who don’t have that knowledge.

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What resources do you have?
Besides your skills and knowledge, your current resources can
also form your competitive advantages. Think about how you can
utilize your resources to maximize the business opportunities you
are looking to acquire.

For example, do you own a social media account with a large number
of followers? Think about buying an ecommerce business that sells
products they might like.

Do you have a previous product supplier you have worked with

that can dramatically improve the product quality or profit margin
of an established ecommerce business buying opportunity you
are looking at?

Do you have a large amount of cash flow that can be used to

put into an ecommerce shop’s paid marketing campaign, if the
business’s current cost of user acquisition is dramatically lower
than its revenue per user?

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Determining your business
buying parameters
Once you answered the above questions, you’ll have a much better
understanding of what kind of ecommerce businesses would be a
“good fit” for you. You can specify your business buying parameters
such as the niche, the type of obvious improvement opportunities
within the ecommerce business, the time and skills required to run
the business, etc.

The majority of the ecommerce businesses are either dropshipping,

inventory-holding, or Fulfillment by Amazon. Different types of
ecommerce business models will have different requirements
on time, skills, and cash flow. Understanding the advantages and
disadvantages of each model and determine which type you want
to buy is another important buying parameter. You can read more
about the comparison of dropshipping and inventory-holding
ecommerce through this article: https://www.shopify.com/guides/
dropshipping/understanding-dropshipping

One of the most important business buying parameter is how much

you want to invest and what you can get with that price. Most
ecommerce businesses in the low-end market are valued at 10x -
24x monthly earnings (we will talk about valuations in details later in
this guide). That means if a Shopify business is making $1,000 per
month in profit, it is likely going to cost you $10,000 - $24,000 to
buy. If you have a specific budget you want to invest, you are likely
able to specify the revenue range of the business you’re looking for
with this formula.

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If you are a beginner who wants to spend the least amount of money
to buy an established ecommerce business which you can learn
everything about how to run it, my recommendation is that you
look for an ecommerce business with a monthly earnings in the
$500 - $1,500 range with a good amount of monthly traffic (above
1,000 unique visits/mo). You’re likely able to buy those businesses
with a budget of $6,000 - $36,000. Only invest the amount you
can afford to lose if you are a beginner.

If the business is making less than $500:

1. You might not be too motivated to work on the business since

the financial reward is too low.

2. The business itself might not be established enough so that

you might not be able to learn all the aspects of running an
established ecommerce business.

3. The business is risky because the cash flow is too low.

Why $1,500/mo in profit in the upper range?

Based on my general observation of the lower end ecommerce
business market, an ecommerce business with $1,500 earnings per
month could have a well-established business procedure just like a
business that’s making $3,000 per month. That means your learning
experience could be the same with a lot less initial investment.

Once you’ve started your search on Shopify Exchange and have a

couple of business buying opportunities in mind, you can use your
business buying parameters to guide you through your search.

Keep in mind that you might not be able to find as many eCommerce
business buying opportunities that fit your criteria as you would
want to. In that case, you’ll need to drop or broaden some of your
criteria so that more buying opportunities could fall into your range.

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3
Chapter 3:

How to evaluate an
ecommerce business?

Once you have located a couple of interested business buying

opportunities, it’s time to do a full-on analysis on the business.
When you are directly approaching the sellers, you will need to
get a list of questions answered by the sellers in order to do a
thorough initial analysis on the business.

Either way, make sure you get the following information:

1. Seller interview questions and answers

2. Google Analytics read-only access

3. Profit and loss statement with monthly stats.

Seller interview questions and

answers
You will want to know some basic information about the sellers
before you seriously consider buying a business from them.
After all, a trustworthy seller is one of the most important and
the most ignored metric in online business buying.

My suggestion is to always validate the information you get from

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the seller and ask follow-up questions when you get answers.
You’re more likely to uncover hidden details and potential
opportunities in the business.

The list of questions you should ask sellers are:

1. Tell me a bit about yourself.

When you you are working directly with a seller, it is important

that you do a background check yourself. Search their name on
Google, ask for their LinkedIn profile and social media profile.
Make sure the seller is not using a fake identity. If you are working
with a seller from overseas and it’s very hard to find his or her
identity information online, stay away from such opportunity,
especially when the opportunity looks exceptionally appealing.

2. Tell me about the history of this business.

When was the business founded and why? Is the current business
owner the original owner of the business? Who are the business
partners and what are their roles?

In general, ecommerce businesses with a longer history are more

attractive than younger businesses. Most ecommerce businesses
are affected by seasonality. In order to do a proper analysis on
the impact of seasonality on a business, the business has to
have at least 12 months of history. The longer history it has, the
better you can analyze its historical data and trends.

An ecommerce business with shorter than 6 months history could

be too risky to take over. It won’t have enough information on
the seasonality of the business, and it has much less predictable
metrics for you to base your valuation on.

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If you find an ecommerce business buying opportunity with less
than 6 month’s history, a very high growth rate during the first
6 months, and a relatively low purchase price, you would want
to question why the seller is selling it. Be aware of the type of
ecommerce businesses that were created for the purpose of
selling.

3. Why are you selling it?

Why the business owner wants to sell the business? If the reason
for selling is that the business has encountered adversity, the
owner might not want to tell you the real reason. You need to
dig into the business data and ask follow-up questions during
your conversation with the seller. Other reasons for selling could
be certain life or career changes, other time commitments, new
startup opportunities, or lost of interest in the businesses.

4. What other businesses do you own?

If the business owner owns multiple businesses and he or she

is only selling one of them, you need to evaluate how much this
business is related to the other businesses.

For example, if the business owner owns multiple websites or

ecommerce stores in a competing niche, be aware of the potential
competition from the seller’s other businesses after you acquire
it. If the owner cross-promotes products from the business for
sale with other businesses he or she still operates, you need to
evaluate the potential loss of customers after you take over the
business and they stop the cross-promotion effort. It’s better to
buy the entire portfolio of web businesses from the same seller
if the businesses are highly associated and the operations are
inseparable.

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5. How do you operate the business?

What types of tasks do the current owners do to operate the

business? How many hours does it take the current owner each
week to perform those tasks? Are there any expenses related
to the operations?

Depending on the business model, major operational tasks in

an ecommerce business could include marketing, advertising,
customer support, supply management, inventory management
and logistics (if it’s inventory-holding ecommerce). Some
businesses have more established and automated processes
than the others. Make sure you ask how the business is currently
operated and how many hours it takes for the owner to do each
task. Also ask the owner if there are any expenses associated
with the tasks. You can find out more about common ecommerce
business expense items in the Operating Expenses section of
the guide.

When you evaluate the operations of the business, think of the

following 3 questions:

1. Are there Standard Operating Procedures (SOPs) already

documented and ready to be taken over? If not, this is
something you should consider working with the business
owner on post-closing to ensure a smooth take over.

2. Are there any special resources required to accomplish the

tasks? Will you be able to perform the tasks as well as the
current business owner? For example, if the current business
owner has a special marketing channel (free or below-the-
market cost of access to social media influencer networks,
ad networks, etc.) that is not transferrable with the sale of
the business, taking over the business means losing that
marketing channel.

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3. If some tasks are outsourced, will those contractors stay
onboard after you take over the business? Will you be able
to take over the business’ current contracts with its main
partners, suppliers, etc. with the same contract terms?

Those questions can help you evaluate whether you will be able
to run the business as well as the current owner. If some part of
the operations are not transferrable to you, you need to think
about how to replace it with other resources and how much
more or less it will cost, and take that cost into account when
you do the valuation of the business.

Google Analytics Access

Ask the seller to grant you Google Analytics access so that you
can evaluate the website’s traffic.

When evaluating the traffic stats, you want to find out:

1. Are the traffic stats authentic?

2. What’s the traffic trend and what’s the reason behind

that?

3. Is the traffic organically sustained or does it require

paid acquisition?

1. Are the traffic stats authentic?

Keep in mind that some traffic stats can be manipulated. Fake

traffic is generated by bots or softwares and can be bought from
3rd party providers. They will inflate the traffic stats before the
sellers put the sites up for sale.

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The best way to identify fake traffic is to check the Audience
Overview in Google Analytics.

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Google Analytics Audience Overview gives you a nice overview
of the site’s key performance metrics. Sites with very high or
very low Bounce Rate (>90% or < 30%), very short Avg. Session
Duration (<40 secs), low Pages/Session (<2 pages / session) are
skeptical to fake traffic or traffic from untrustworthy sources.
You can learn more about Google Analytics metrics through
Google Analytics Academy if you are not familiar with some of
the metrics I mentioned above.

Installing Google Analytics tracking code twice on a webpage

can also result in very high or very low bounce rate. You can
check that by viewing the webpage source code search for
Google Analytics tracking code, usually starts with “UA-”. If the
code appears twice on the same page, double check with the
seller to see if this is an error. Once the duplicated tracking code
is removed from the site, after 3 - 5 days you should be able to
see the bounce rate stats going back to normal.

From the Audience Overview, you can also check the Language,
Country, City as well as Browser to help you identify fake traffic.
If the top language of the traffic doesn’t match with the top
country, or if the site is mainly selling product to US customers
while it’s Top Country is India, you should double check with the
seller to figure out why. Top Browser is usually Chrome, unless
the site is targeting a specific demographic group that prefers
other browser such as Internet Explorer. Always ask yourself
“does this make sense?” when you look at the traffic stats. This
will help you uncover traffic from untrustworthy sources.

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2. What’s the traffic trend and what’s the reason
behind the trend?

In the Audience Overview, change the metric to “Users” where

the default is “Sessions”. Users is a better indicator of how many
unique customers visited the site.

Change the Date Range to view the traffic trend for the past 3
months, past 6 months, past 12 months and since the beginning
of the traffic history.

You can also adjust the granularity of the traffic data to see the
trend. First look at the graphic by month, then by week, by day.
If there is a traffic spike during a certain time period, you might
want to inspect that closely by narrowing down your Date Range
to that specific time period, then look at the key performance
metrics and traffic sources in Acquisition. We’ll discuss traffic
sources in more detail later on.

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Notice that when you adjust the Date Range to show traffic data
from different time period, the key performance metrics like
Pages / Session, Avg. Session duration, Bounce Rate, % of New
Users could change accordingly. If you notice one of the metrics
changes dramatically during certain time period, you might want
to figure out why. For example, if Avg. Session Duration doubled
when you adjust the Date Range from past 12 months to past
3 months, it probably means during the past 3 months, users
spent a lot more time on the site on average during each visit
session. This could be due to changes of site content and design,
or due to changes of the traffic quality (perhaps more targeted
traffic). You will want to ask the seller for possible explanations.

Some ecommerce businesses are strongly impacted by

seasonality. For example, an ecommerce business selling gifts
might have much a higher traffic and sales during the holiday
seasons. If the site has over 12 months history, you can also
spot the traffic seasonality trends by comparing the same time
period across different years.

3. Is the traffic organically sustained or does it require

paid acquisition?

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You can go to Acquisition -> Overview to see the top customer
acquisition channels.

Paid Search

This type of traffic comes from Google Pay-Per-Click (PPC)

campaigns. If a big portion of traffic to the site is through Paid
Search, make sure that all the details of the PPC campaigns are
transferred to you after the sale, so that you can analyze the
current ad campaigns and continue to manage them effectively.
If you do not know how to manage ad campaigns, you might
need to hire someone to do it for you. This should be counted
as a part of your future operating expenses.

Ask the seller to share his PPC campaign data with you if possible
so that you can analyze the ad expenses and match it with the
Profit and Loss Statement you get from the seller. Analyze the cost
per click as well as the goal conversion rate and conversion value
from Paid Search (if the seller has set up Google Analytics Goal
Tracking for checkout). If the cost per user acquisition is lower
than the earnings from that user, the ad campaign is effective.

Paid traffic is more controllable compared to other traffic sources

such as organic search traffic, because you can increase or
decrease the paid search traffic by adjusting your ad spending.
However, make sure you do proper due diligence to uncover
how much ad spending has actually occurred. Internal factors
like how you design and run your ad campaigns can influence
the paid search user acquisition cost. That’s one of the reasons
you should always get the PPC campaign data from the current
owner as a part of the asset transfer if that’s an important part
of the traffic acquisition. External factors such as competitions,
market trends, can also influence the paid search cost in the
longer term, that’s why you should also do some industry research
and PPC cost research.

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Organic Search

Organic search traffic comes from search results that aren’t paid
for. You can use tools such as SEMRush to evaluate the website’s
organic search traffic quality. It gives you an overview of what
keywords the site is ranked for, and how much estimated organic
traffic is going to the site because of which keywords.

Organic traffic is free, hard to fake, and it’s relatively stable and
predictable (exceptions are mentioned below). Thus, organic
traffic is usually considered as a favorable traffic source. The best
type of organic traffic is when the site ranks for many relevant
keywords and the traffic from different keywords are evenly
distributed. Imagine if a site ranks well for only one keyword that
brings in 90% of the site’s organic traffic, when a competitor
beat that ranking one day, the organic traffic to that site could
drop dramatically overnight.

Although organic traffic is relatively stable, keep in mind that

organic traffic could change suddenly when there are search
engine algorithm changes or penalties. A general rule of thumb

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is that search engines will always prioritize high quality original
contents. If a site has consistent organic traffic history over a
long period of time, it means the site’s content is relatively risk-
free from algorithm changes. If a site uses a lot of black hat SEO,
it could be vulnerable from algorithm changes and penalties.
You should use tools such as ahrefs.com to look up the site’s
backlinks and do proper due diligence on the site’s SEO methods
when organic traffic is the main traffic source

Referral

Referral traffic comes from other websites that link to the current
website. Click on Referral from the Acquisition Overview to
inspect the referral traffic details. Add Hostname as the Second
Dimension to inspect referral spam traffic. If the hostname
doesn’t match the website’s domain or any services relevant
to the site that has Google Analytics tracking code installed
(such as Youtube, email service provider, etc.), it’s likely referral
spam traffic. Sites with less traffic usually have a relatively
higher portion of referral spam traffic (unless the seller already
filtered out those traffic on GA). Keep in mind that it’s common
for websites to attract referral spam traffic. What you need to
do is to filter them out when you are evaluating the site’s referral
traffic, if the referral spam is a relatively large portion of the
current traffic volume.

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If the site has legitimate referral traffic from article mentioning
and backlinks, make sure to check out the referral sources, read
the articles where the referral links appear and see if the content
is legitimate, and find out whether there is any expense related to
the referral traffic in case the store owner paid to get featured/
mentioned in those articles or did something in exchange. You
can do a thorough backlink check using Ahrefs.com if the sites
has a large amount of referral traffic. You can also ask the seller
to elaborate on their referral partnerships when you spot a large
amount of referral traffic coming from certain websites.

Social Media

If the site has a large chunk of traffic from social media sites such
as Facebook, Twitter or Instagram, you will want to do proper
due diligence on how the site’s current social media accounts
are operated and how much it costs to maintain the current
social media marketing strategy.

First, you want to assess the existing social media account

followers. Find the social media accounts related to the site, the
number of followers for each account, and assess how engaged
the followers are with the posts. The more engaged the followers
are, the better. Keep in mind that fake social media followers and
likes can be bought from 3rd party providers. You can usually
spot the fake followers or likes by checking the profiles of the
people who liked or commented on the posts.

Second, you want to understand how much money is being spent

on social media marketing. There are two types of social media
costs. The most common one is sponsored posts where you pay
the social media networks directly to gain targeted impressions.
You should ask the sellers whether they have done paid social
media marketing, and if so, ask them to share the advertising
reports with you so that you can check the performance. Same

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with PPC campaigns; you will want to keep the ad copies, creatives
and all other settings when the seller transfers the social media
accounts to you.

The second type of paid social media advertising is when the site
owners pay social media influencers or 3rd party social media
ad networks to promote their products. In that case, they’re not
directly paying the social media networks to sponsor their posts
so it might be harder to discover. You can usually find it out by
doing a search of the site’s domain or brand name on the social
media network website to see if there are posts promoting their
products from other social media accounts. If the posts don’t look
organic, ask the seller to disclose the costs associated with the
promotion, and provide relevant invoices to prove the expenses
amount for your confirmatory due diligence.

In rare cases where the site owners have access to large social
media influencer accounts where they can promote their own
products for free, you will want to assess how much that will
cost you once you take over the business without access to
those accounts. Add the cost to the current business’s Profit
and Loss statement to evaluate the actual profit you can earn
without those non-transferrable resources.

Direct

Direct traffic usually comes from users directly typing the URL
of the site into their browser. There are other cases where the
traffic is also counted as direct traffic. This is the least controllable
traffic source and the easiest to fake. Ecommerce sites with an
established brand, great PR and word-of-mouth can get a lot of
direct traffic. If direct traffic is the main source of traffic to the
site, make sure you ask the seller enough questions to figure
out if that makes sense.

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Summary

A couple of points to keep in mind when you are evaluating

the traffic profile:

1. Focus on the traffic sources that have the most impact

on the business’s bottom line. Don’t spend too much
time digging into a small volume of traffic you couldn’t
explain that has minimal impact on the business.

You can check Acquisition -> Overview to see the % of each

traffic source:

In this chart, Organic Search traffic appears to have the most volume.

When you go to Acquisition -> All Traffic -> Channels, you might
see something like this:

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 If the current Google Analytics setting tracks eCommerce
revenue, you can see some revenue numbers attached to
each channel. As you can see, although Organic Search
has the most volume, Direct traffic source actually
generates the most revenue.

2. If an ecommerce business has evenly distributed traffic

through multiple acquisition channels, it’s usually a good
sign, as the traffic is less risky compared to a site only has
traffic coming from a few channels. Whether the current
traffic mix makes sense depends on the business model.
For example, an ecommerce business has an unique brand
with lots of press coverage could have a large amount of
direct and referral traffic, an ecommerce business selling
less unique goods in a relatively competitive niche focusing
on buying and monetizing traffic could have a large amount
of paid traffic.

Profit and Loss Statement (P&L)

Ask the seller to provide you with a Trailing Twelve Months (TTM)
profit and loss statement that shows you the revenue, operating
expenses and net income per month for the past 12 months (or
more if available).

A typical P&L for small businesses have 6 sections: Revenue,

Cost of Goods Sold, Gross Profit, Operating Expenses, Add-
Backs, Net Income

Revenue

The revenue stats can either be a sum of all revenue generated

from the business, or can a breakdown by different revenue
sources, distinct product categories, by customer segments,

27 EXCHANGE
etc., depending on how the business owner record and analyze
the revenue stats.

Cost of Goods Sold

Cost of Goods Sold section includes

variable costs associated with the
products or services sold through
the site.

If the business has a high Refunds

and Returns rate (Returns / Product
Sales), you should be alarmed and inspect the reasons. Some
causes are easier to be fixed than the others. Low product quality,
poor product shipping and handling, misleading or wrong product
descriptions on the websites could all lead to high refunds and
returns rate.

Gross Profit

Gross Profit =
Revenue - Total Cost
of Goods Sold

With the Gross Profit

number, you should
be able to calculate
the Gross Margin.

Gross Margin = Gross

Profit / Revenue

Having a healthy
g ros s m a rg i n i s
important for small to
medium ecommerce
businesses. A high gross margin generally indicates that the
business has a good brand value, unique products or other

28 EXCHANGE
competitive advantages that it can operate on a higher gross
margin without losing to competitors.

Operating Expenses

Operating expenses includes

expenses that occur during a certain
accounting period. Depending on
the business, the expense items
could vary. Most small ecommerce
businesses are run by the owners
and they do not take salary from the
business.

Marketing and Advertising expenses

are typically a large portion of
the total operating expenses for
ecommerce businesses. Make sure
you double check the Advertising expenses in the P&L and match
it with the advertising network reports such as Google AdWords
report and Facebook advertising report.

Some marketing and advertising expenses might be harder

to track down. For example, if the business owner has direct
advertising partnership, sponsorship or referral partnership with
other websites, there might not be an expense report you can
track down or match. In this case, you should closely inspect
the Google Analytics user acquisition sources, and ask the seller
whether they have paid for any of them. Sellers hiding certain
marketing and advertising expenses and leaving them out of
the P&L is one of the most common reason of dispute in online
business buying and selling.

There could also be hidden cost in marketing and advertising,

where the business owner also owns other resources they can

29 EXCHANGE
utilize to promote their products for free. If you do not have
similar resources, you will likely have to pay for those types of
user acquisition. One example is that the business owner also
owns a social media influencer account with 1m+ followers, where
he or she can promote products without paying for the traffic.

Higher marketing and advertising expenses can also drive up the

sales. Some sellers might deliberately increase their marketing
and advertising expenses before they put up the site for sale
to generate more interest from buyers. You can calculate the
expense ratio to avoid being misled by the absolute numbers.
Calculate the Marketing and Advertising expenses to Product
Sales ratio and inspect how that changes month over month.
The ratio could increase due to decreased market demand (such
as during slow seasons), increased competition, penalties or
policy changes from advertising networks. If you noticed a big
change in the advertising to revenue ratio, you should ask the
seller about the reasons behind it.

When you’re buying a Shopify eCommerce business, one of the

most common operating expenses is the monthly recurring
subscription fees paid to Shopify apps installed in the eCommerce
store. Make sure to double check it with the seller if that’s not
in the P&L.

Add-Backs

Since most small ecommerce

businesses are operated by the
business owners, their reported
earnings could be kept low for tax
purposes. We will want to see an
adjusted P&L which tells you how
much Seller Discretionary Earnings
the business is making in order to
fairly judge the available cash flow

30 EXCHANGE
and returns on investment of the business. We can do that by
adding back some one-time expenses or expenses that are not
likely to occur after the change of ownerships.

Net Income

After the Add-Backs, we can get to the Net Income using Seller
Discretionary Earnings (SDE) method. This will be the number you
use to base your valuation on. We will talk more about valuation
in the following section.

The Net Income could go up and down for many different

reasons. Besides looking at the Net Income numbers and trends,
you should also look up the reasons for the trends from the
P&L - whether it’s due to the increase/decrease in revenue, or
increase/decrease in cost. External factors such as seasonalities,
competitions, changes in market trends as well as internal factors
such as changes of product suppliers or changes of operating
processes, can all contribute to the changes of Net Income.

A thorough analysis of the P&L can help you discover a lot of

information about the business, choose the right questions to
ask the sellers, and find opportunities for improvements in the
business.

31 EXCHANGE
4
Chapter 4:

Website Valuation: How

Much to Pay for an
Ecommerce Business?

In the previous chapter, we talked about what questions to ask

to the seller during the seller interview, how to analyze Google
Analytics data and financial data. The goal is to collect as much
information as needed to get a thorough understanding of the
business and to uncover information that could be important
to you as a buyer. With the information you collected, we can
now go through the valuation method for ecommerce business.

Ecommerce business are generally sold for 10x - 24x monthly

earnings. This is a relatively large range, and there are exceptions
that were sold above or below this range, because each business
is unique and each buyer is different. Ultimately, the business
will be sold for how much the buyer is willing to pay. However,
there are some general guidelines that could help us determine
how much the business is worth to us.

As a buyer, the principle is to achieve the highest return on

investment (ROI) when we decide to spend money on a business
buying opportunity. Depending on your different goals, your
ROI could be a monetary value that is measured by how much
money you can earn in the future from the business, or it could
be non-monetary value such as the amount of learning or joy

33 EXCHANGE
you can gain from operating the business post acquisition. In
this chapter, we are only discussing the measurable part of
the acquisition, which is the monetary value of your return on
investment.

Keep in mind that although historical data is a good indicator to

help you value the business, you only want to pay a purchase
price that can justify how much the business can make in the
future. Since each buyer is different, their ability to generate profit
from the business after the acquisition is different too. Thus,
the same business could be valued very differently by different
buyers. The most valuable type of business buying and selling
transaction is when the buyer has better resources and ability
to bring the business to a more profitable level than the current
owner. That means the business worths more to the buyer than
it is to the seller, and that’s when a buyer and a seller can get
to an agreement on the purchase price where both parties are
going to win.

When you look at how much to pay for a business, you want to
use the historical data to reasonably predict its future earnings
as much as possible. You can look at the previous business
performance from the following aspects:

History
How old is the ecommerce business? Businesses with longer
history are usually sold for a higher multiple compared to a
similar performing business with shorter history.

As I mentioned in the previous chapter, a lot of ecommerce

businesses are impacted by seasonality, and you can only spot
the pattern if you have a longer history of operations. Businesses

34 EXCHANGE
with longer history usually have more data available for us to
analyze, and more previous learnings we can take away from to
help us operate in the future.

If the type of ecommerce businesses you are looking to acquire

are largely dependent on brand and word-of-mouth, a longer
operating history also means more returning loyal customers who
could potentially refer new customers to the brand in the future.

Customer Acquisition
How does the ecommerce business acquire customers? Does the
business requires a lot marketing effort and a large advertising
budget to acquire customers, or does it have more organic traffic
and word-of-mouth growth effect?

Usually a business with more organic traffic and word-of-mouth

growth is more predictable in the short term and less risky
post-acquisition when the buyer takes over the business. The
reason being that if a business requires constant marketing
and advertising effort, it is uncertain whether the new business
owner can put in as much high quality marketing and advertising
work as the previous owner did with the business. Compared
to other online business models, most ecommerce businesses
requires a decent amount of marketing and advertising effort to
keep up the customer acquisition. Since customer acquisition
is such an important part of running an eCommerce business,
how easy it is to acquire customers, either organically or through
paid marketing, should be taken into consideration during your
valuation process.

Focus on three things when you evaluate the business’s customer

acquisition: the website’s traffic profile, the business’s current

35 EXCHANGE
marketing and advertising practice, and the cost of customer
acquisition compared to the average profit from each customer

Traffic Profile

Check the customer acquisition channels on Google Analytics and

ask yourself whether the current traffic level is likely to sustain
overtime. I have explained different traffic sources in details
in the previous chapter. An example of a sustainable type of
traffic source is when the ecommerce site has lots of keywords
ranking well on Google, and the organic traffic coming to the
site are relatively evenly distributed over different keywords
instead of concentrated on one or two. An unsustainable type
of traffic source would be a significant percentage of traffic
coming from one or two articles that have recently featured the
ecommerce business you want to acquire. The press coverage
could generates huge spike in the website’s traffic profile during
a short period of time, but over time less and less people will read
the article and visit the ecommerce site through the referral links.

Current Marketing and Advertising

During your seller interview, you have gathered quite a bit of

information on how the current business has been marketed and
advertised. Does the current marketing and advertising practice
require a lot of specialized knowledge or skills? For example, if
the majority of the current business’s marketing effort is focused
on constantly writing new creative content to get a lot of press
coverage and social media sharing, it might be hard for the new
owner to achieve the same level of success if the new owner is
not a marketing and PR wizard. However, if the current marketing
effort is more focused on scheduling specific social media posts
that have predictable content, putting in a certain amount of
advertising budget into a couple of simple AdWords or Facebook
Ad campaigns that have already been optimized, it will be easier

36 EXCHANGE
to take over and maintain the same level of customer acquisition
in the short term (although in the long term you might still need
to continue to optimize the marketing and advertising in order
to keep up with the competitions and changing market trends).

Cost of Acquisition

If paid advertising brings in the majority of the new customers,

look at how much it costs to acquire new customers by drilling
down to the ecommerce business’s advertising performance
report. If the ecommerce business has tracking pixels set up
on their ad campaigns and through their Google Analytics, the
report should be able to show you how much they have paid for
the campaign and how much order value they have generated
through the campaign. If the customer acquisition cost is too high,
an ad campaign might not be very profitable because the profit
earned from the new customers could be very close to how much
they have paid for the ads. However, if there is a large profitability
in the ad campaigns, there might be an opportunity for you to
scale up the profit by putting more money into the ad campaign.

37 EXCHANGE
Market Trends and Competition
The market trends and the level of competition are external
factors that impact the business’s future performance. Thus,
it plays a role in the valuation of a business. Chapter 4 in The
Ultimate Guide to Dropshipping has discussed how to measure
the market trends and competition in details. If the ecommerce
business you’re looking at is in a highly competitive niche and
a stagnant market, it should be valued less than if it’s in a fast
growing market with less competition.

One internal factor you should evaluate is the competitive

advantage of the ecommerce business in it’s niche. Is there
a high barrier of entry in the niche the business is operating
in that can protect the business from competition? Is there
already quite a lot of brand awareness and brand value that can
effectively differentiate this business from its competitors? Does
the business have unique products or designs that are hard to
replicate? How about patents and trademarks? If the answers
are yes to some of those questions, the business is likely to be
able to protect itself from competition at least in the short term.

One last thing you need to consider in your valuation is how

much value you can add to the business and how much “lift”
you bring to the business’s current profit level. Although this
could be hard to predict, if you do see some low-hanging-fruits
for you to pick up based on your current resources and skills,
this could effectively justify a higher valuation for you, and this
might be your chance to win the business buying opportunity
over other potential buyers.

38 EXCHANGE
5
Chapter 5:

How to Finalize the Sale

and Transfer Business
Ownership

After finding a great business buying opportunity and

understanding how much you want to pay for it, it’s time to
communicate that with the seller to finalize the sale.

Communication and Negotiation

Communication and negotiation plays an important role in
achieving a successful acquisition. Spending money to buy a
business online from someone you’ve never met before is both
risky and a bit scary, same for the person on the other side who
is selling the business. You should aim to build trust with the
seller starting from the beginning of your communication.

Here are a couple of tips for communication and negotiation:

1. Tell the seller who you are, what you do and why you want to
buy the business. Providing more background information
about yourself is always helpful in building trust.

40 EXCHANGE
2. Show the seller you are serious about the opportunity by
asking well-thought-out questions. Carefully review the
information provided by the seller and do enough research
before you ask questions. Do not ask questions where you
can easily get the answers yourself. It’s both about respecting
the seller’s time and about showing the seller that you are
capable of taking care of the business they have spent years
building.

3. Tell the seller more about what you are planning to do with
the business and what value you can add to it after you
acquire it if possible. If this is a serious business the seller
has spent years working on, he or she will want to know the
business is going to be well taken care of.

4. When you negotiate with the seller on the price of the

business, be transparent and show them your valuation
process. Use facts and numbers to back up your valuation
and the price you want to pay during the negotiation.

5. When it comes to an important discussion or negotiation,

try to communicate with the seller over the phone instead
of going back and forth via emails.

41 EXCHANGE
Steps to Finalize the Sale
When finalizing the sale, conducting due diligence and drafting
the related legal documents, both buyer and seller should consult
their own lawyers to ensure that their interests are protected
when the deal involves a large amount of money.

Confirmatory Due Diligence

After you have agreed to buy the business and mapped out the timeline
for closing, it’s time to conduct your confirmatory due diligence.

You should verify the revenue statistics with the seller either by
getting access to the seller’s ecommerce store dashboard or
through a live video walk-through. Since Exchange automatically
verifies revenues on Shopify store listings, it makes thing easier.
It’s recommended to ask for a full Profit and Loss Statement with
historical stats tracing back to the beginning of the ecommerce store
from the seller during the Due Diligence process. Check the revenue
report, operating expenses, customer order details, and bank payout
records to see if the numbers are matching. Carefully inspect the
traffic data to see if the traffic trend matches the revenue trends,
and if there are any hidden expenses that haven’t been disclosed.

42 EXCHANGE
With the help of your lawyer, research the legal aspects of the seller’s
ecommerce business. For example, is there any legal restrictions
or issues with the type of products the business is selling? If the
business is current operating outside of your home country, you
should consider whether there are applicable rules and regulations
in your jurisdiction that could potentially impact the business. Are
there any trademark infringement issues? Are there any current or
previous unresolved lawsuits related to the business?

Most online business transactions are structured as an asset

purchase, which means there is no transfer of business ownerships.
In an asset purchase, you’re essentially buying the Shopify store as
an asset from the seller. You will not take over most the business’s
previous liabilities through the acquisition, which means you’re not
responsible for the business’s previous debts or obligations. This
is good because it frees you from most of the legal due diligence
work, but any legal disputes attached to the assets should still be
under your concerns, such as patent/trademark infringements.

If there is current employment or contractor relationship, supplier

relationship or advertising partnership in the current business, do
your due diligence on the contracts and see if those relationships
could be carried over with little risk.

Ask the seller to send you a list of assets included in the sale, and
carefully inspect each asset (domain ownership, social media
account follower authenticity, etc.) during the asset transfer.

Asset Purchase Agreement

The next step is to draft an Asset Purchase Agreement with the

seller with the help of your lawyer. You will need to work with
your lawyer to customize the agreement and add terms relevant
to your specific deal. To start you off, here are some things you
could consider:

43 EXCHANGE
• Timeframe and logistics on closing. When should the buyer
transfer money into Escrow? How long is the inspection
period? Under what conditions can the buyer or seller withdraw
from the binding agreement? What are the responsibilities
of each parties during the closing period?

• How long is the post-transaction support period? How will

the seller assist the buyer in post-acquisition integration?

• Terms on holdbacks, earn-out, milestones, or any other types

of delayed payments, if any.

• Is there a non-compete period? How long is the non-compete

period and what kind of restrictions the non-compete will
have on the seller?

• The list of assets included in the sale as an attachment to

the Asset Purchase Agreement. Examples are:
◦◦ Social media accounts
◦◦ Customer email lists
◦◦ Shopify store and apps, design files, product image files,
marketing materials, etc.
◦◦ Other subscription or tool accounts, Zapier, internal
processing like Trello, etc.
◦◦ Advertising accounts like Google Adwords if transferrable.
If the advertising accounts are not included in the sale,
make sure you can replicate the ad campaigns by get
the ad campaign details from the seller.

• Standard Operating Procedures document (if any)

• How do your local tax laws apply? Is there any applicable

withholding tax that may arise as a result of a sale of your business?

• Whether and how you will transfer intellectual property

44 EXCHANGE
• Other special terms, including whether the buyer and seller
will give representations and warranties or any indemnities.

Transferring the Business

After the asset purchase agreement has been signed, a typical
business transfer looks like this:

1. The buyer transfers money into Shopify Exchange partner:

Escrow.com.

2. After the Escrow service confirms the deposit of money,

the seller will be notified and he/she starts transferring the
business and the relevant assets to the buyer.

3. After all the assets have been transferred, the buyer has a
period of time to inspect the assets to make sure everything is
as described and agreed on in the Asset Purchase Agreement.
Depending on the complexity and the size of the transaction,
the inspection period could be anywhere between 24 to 72
hours.

4. By the end of the inspection period, if no discrepancy has

been found, the buyer should release money from Escrow
to the seller’s account.

5. Seller receives money from Escrow. The transaction is

officially closed.

6. Seller provides training and support as agreed in the Asset

Purchase Agreement.

45 EXCHANGE
6
Chapter 6:

Conclusion

Whether you’re just getting started, an experienced entrepreneur

or building a portfolio of companies, the process to acquisition
is similar. The variable instead, is you, and what your goals are.
You may be looking for a low-cost operation where you can
start experimenting and learning about sales and marketing.
Or perhaps you’re willing to invest a substantial amount into a
proven ecommerce machine. Ultimately, buying an ecommerce
business comes down to what you’re looking to get out of it.

With Shopify Exchange, you can find ecommerce stores ready to

purchase. You can find established stores with steady revenue or
trending stores with increasing revenue over the last 3 months.
Shopify Exchange a great starting point to acquire a business.
Since all the shops listed on Exchange are built on Shopify, all
the data presented by the shop owner comes from whitelisted
sources and can not be edited by the seller. Learn more about
Exchange and start browsing businesses for sale today.

47 EXCHANGE
Author Bio:
Genie is the founder of IntVentures,
where she helps investors, tech
companies, and private equity
firms acquire awesome Internet
businesses from around the globe.
Genie has landed hundreds of
Internet business sales, ranging
from 4-7 figures throughout her
experience. She travels often
and enjoys meeting inspiring
entrepreneurs around the world.

48 EXCHANGE