If you're considering buying an online business, these three steps (and a little research) can help you make a smart investment.
Highly successful entrepreneurs derive part of their income from running several businesses simultaneously. If you're looking to e-commerce to generate more income, you'd be smart to buy an existing store rather than start your own from scratch. However, buying an existing online store isn't automatic money. Like any business investment, it requires effort to maintain it.
Why e-commerce? It's a growing industry
Although e-commerce makes up just 9 percent of total retail sales in the U.S., global e-commerce is expected to hit $414 billion by 2018. Despite the majority of sales occurring in person, online retail continues to grow, making e-commerce a viable business investment.
Where to find existing e-commerce stores for sale
As we saw in the 2000s with website flippers, there are people who build e-commerce stores until they generate consistent revenue and then sell them for a profit on platforms like Shopify Exchange.
Although it's a good opportunity, buying an online business isn't a sure bet. In fact, 90 percent of new internet businesses fail within the first three months, because people think an online business is going to run itself. The truth, however, is that even an existing business takes ongoing work.
Before you commit to taking over a store, here are three factors to consider that will help you make a worthwhile investment.
1. Compare the sale price of the business with its monthly revenue.
Always compare the sale price of a business with its reported monthly revenue and verify all claims. For instance, if someone lists their business for $1,000 and claims their monthly revenue is $8,000, that's a potential red flag.
If the same business were being sold in the physical world, it would potentially be worth much more than $1,000. A business being sold for less than what it appears to be worth is a sign of high expenses, or it isn't actually generating $8,000 per month.
If the seller is asking for a price that seems too low, ask why they're selling. Remember, people sell online businesses for a reason. To be fair, some online businesses generate revenue that barely reaches several hundred dollars per month, and although they're sold cheaply, they’re legitimate.
2. Research everything about the domain name.
When you buy an online store, you're buying the domain name as well. Here's what you should research:
- The store's domain namehistory. When looking for a business, consider subscribing to the paid services of Domain Tools. It's not cheap, but it will give you important insight into a domain's history that you can't get elsewhere. This information can protect you from unintentionally buying a domain that has been severely penalized by Google. To avoid buying a blacklisted domain, Matt Cutts, former head of the web spam team at Google, suggests going to Archive.org and looking at previous versions of the website. If a website has been penalized in the past, Cutts says, you can submit a reconsideration request to Google.
- The seller's name. Do a reverse lookup and find out what other domains the seller owns. Get the history for those domains.
3. Be clear that your intentions match the business you're buying.
No business runs on autopilot, even after the groundwork has been laid. Any business advertised as a "business in a box" that "runs while you sleep" comes with a catch. That catch is the work you'll need to do to keep it running.
If your goal is to add a relatively low-maintenance stream of income to your portfolio, you need to know exactly what it's going to take to keep the business running so you can decide if it's worth the investment or not. To make this decision, you need to know
- Where does the traffic come from? An online business that generates organic traffic is going to be less work than one that relies on direct marketing. Direct marketing is highly effective, but it's not a match for someone who doesn't have the time (or team) to keep it going.
- Is the drop shipper reliable? Presuming there's a dropshipper, you want to make sure they're reliable. Don't buy a business without knowing who supplies the goods.
Don't hesitate to pay more for a great store.
A higher price doesn't guarantee a better deal, but it can be an indication of a store's true value. Do your due diligence and be willing to pay a premium for a store that will generate the passive income you desire.