With the growing trend of starting Shopify businesses, there is also a big market for Shopify businesses available for sale on the secondary market. These e-commerce businesses come in different categories, locations, business models, and of course at different price levels.
Shopify itself has created an exchange platform for these businesses, which we believe is a great initiative to help buyers & sellers find each other in a safe and trusted environment.
We have explored these listings through a retailer’s eye and in this article we want to lay down a guide for buyers / investors on what information to look for when attempting to buy an established Shopify e-commerce business that is sold by the owner.
Is Buying a Shopify Store Worth It?
There are many reasons you might want to buy an established Shopify business that is offered for sale by its owner, rather than starting from scratch. These reasons could include:
1. Benefiting from existing supplier relationships
Finding good suppliers is not an easy task, and if you get the ability to buy a business with established suppliers and a process that is actually working, this could be very beneficial for your and is actually worth the money
2. Benefiting from established social media presence
Building a social following of people who are actually interested in your products takes time & money. You might think that the price of acquiring the business alone covers such an investment, so in this case it is worth considering.
3. Established domain name
Getting a domain name to be established online and rank in search results takes time and a lot of SEO work. The business you are buying might have all this setup, so this will save you all the time & money that would have gone into this area.
4. Data & Insights
Any established online business that has been selling for customers for a while should also have a lot of data on those customers and their buying preferences. You can use this information to improve the business performance in the future or add new product lines.
Due Diligence Process For a Shopify Business That is Offered For Sale
Let’s start by being realistic and saying that not everything you will find on the marketplace is genuine. Shopify already gives you a head start by verifying the sales and traffic data, so that they can not be misrepresented by the seller.
However; there is still a lot of due diligence work you will need to do, so that you won’t end up buying a losing business that has no chance of survival. After all, this is an investment, and whatever you pay for it you should expect it to pay back in multiples over the years.
As retailers & investors ourselves, we have looked at it purely from a retailer’s perspective and here is what we would look for if we were to buy any of these businesses
It should also be noted that, as investors, we would want to see potential for growth. We would actually want to see something that needs to be fixed. We totally understand that if someone is selling a business, it probably means that there is a pain factor. Something probably needs fixing or something is not going to work going forward.
And that’s what we need to figure out from our due diligence. Can it be fixed and improved or is it done for good?
The most important part of any retail business is the product it sells. This is what the business is all about.
Single Product vs. Product Portfolio
When you look at any Shopify business offered for sale, start by examining the products & product categories. Are there enough products (SKUs) to build a healthy sustainable business, or is it just a one product shop (and we have seen such shops).
If it is a one product shop, is there an opportunity to expand the product line with complimentary offerings to add to the sales transactions? Are there other categories that can serve the same customer demographic buying this product and can be added to the store?
Fad vs. Evergreen
Let’s face it: A lot of Shopify stores that have been created in the past -and continue to be created- are based on some product fads.
Is the store selling fidget spinners?
Is the store selling an outdated gadget?
Is the store selling an accessory for a product that is no longer being produced? (We have seen this store).
This is the sales chart for a store that started by capitalizing on some detox tea trend that was booming in the past few years… a smart business move back then of course! But as you can see from the chart this is no longer the case.
There are different business models for these Shopify stores and Shopify already lets you filter the results by these models.
Dropshipping vs. Inventory Stores
The most common types to compare between are Dropshipping vs. Inventory.
With dropshipping the supplier ships the inventory directly to your customers and your role is purely for marketing the product, while inventory stores are the typical retail stores that carry merchandise on hand.
The reason it is important to look for which business model the store is operating is mainly related to its valuation as well as the viability of the business model itself. If you buy a dropshipping store you don’t get any inventory, and probably also no assets or brand name. You only buy a sales funnel that might or might not still be working based on the cost of paid ads. (See below for customer acquisition costs).
The other problem with buying a dropshipping store is replicability. What makes you sure that the seller will not sell you the system just to turn around and replicate it the next day with the same supplier and products and all the mechanics?
You might want to consult a lawyer to see if some sort of non-compete agreement is applicable here.
Gross margin or gross profit margin is the most important figure to look for while examining a Shopify business that is offered for sale. This is basically the money you get when you sell the product after deducting the cost of the product.
It is important because from this figure you will then deduct all the expenses for running the store and at the end get the net profit that you will keep to yourself.
As you can see in this example the profit margin is very thin (10%). This is typical though for dropshipping stores, and that’s why the business model is not viable.
For inventory stores the profit margins have been higher (30%-40%), but you should know that this depends on the product category and how you source your products.
We have compiled a list of financial ratios benchmarks for different retail segments. You can use it to see how gross profit margins for the product segment you are targeting compare.
You might find that the margin for the store you want to buy is relatively low compared to the segment, and you already have other suppliers for the same product and can source it at better rates.
This would be a good opportunity to explore and you will be able to boost the performance of the store from the beginning.
Customer Acquisition Cost (CAC)
The highest cost when it comes to e-commerce is marketing. What you want to look for here is how much the seller pays to acquire each customer and how much the gross profit for each transaction is.
For example, for this store we have found that the seller pays 33$ to acquire a customer, while he profits only 7$ per transaction. So basically he loses money on every sales transaction he makes.
It is ok to have high customer acquisition cost if the majority of those customers will be returning customers, i.e they buy from you again & again.
Which takes us to the next point…
Returning Customer Rate
Shopify conveniently shows you the returning customer rate, so make sure you ask the seller about it. This will give you an idea about how much you expect to spend in the future to make more sales.
A very low returning customer rate simply means that every time you sell you have to get new customers to buy from you. This will probably be through paid ads, and in many cases you will find that after factoring in the ad fees for every transaction the business just doesn’t produce any profits anymore.
On the other hand, if the store has a high returning customer rate, not only does that mean lower marketing costs in the future, but also it means that the product has recurring sales and not a one time transaction. It also shows that the store has a loyal customer base and a good product quality that keeps people coming back.
It should be noted, however, that for customer return rate to have any meaning it should be seen over an extended period of time and not over a short time span, since customers don’t typically shop the same product again before they have totally consumed it.
This is also another reason why a one-product store might be difficult to sustain, unless maybe it is a consumable product that needs refills (e.g coffee pods or shampoo,..etc). Think about it.
Operating Costs of a Shopify Store
Other costs that will be deducted from your gross profit are the operating costs or operating expenses (OPEX). This will include hosting fees or here Shopify fees, domain fees, employees, warehouse rent, and also the marketing costs we mentioned in details above.
This is why it is hard to see how an e-commerce business with 10% gross profit margin can survive. Gross profit margins of your products have to be healthy enough to carry all the other cost lines on your P&L and leave you with good profit that will be the return on your investment in this store.
Read our article on Gross Margin Types for more information.
Shopify Store P&L
All the revenue and expense lines that we mentioned above can then be entered into the P&L statement of the store to see if it will make net profit at the end of the year.
Request to see the P&L of the business for the past few years and see the profit trends. When you do this you will figure out if there is room for improvement through effective P&L management for this business.
Read our complete guide on P&L management, including red flags to look out for.
Cash Flow Statement
Another statement you want to see is cash flow statement. Is this business cash flow positive? If not, is there a room for improvement? What are the biggest cash traps?
Read our article on how to improve cash flow for a retail business
The above Shopify business listed for sale is showing a sales average of 2333$ per month but an inventory holding (at cost) of 40,000$. This is a huge forward stock cover and very low inventory turnover for a retail business.
It also probably means one or more of the below things:
- Sales were not as expected
- There was a buying mistake (see Open to Buy)
- Most of the inventory will be very old (see Aging Inventory)
- Cash is trapped due to low inventory turnover
- No money to buy new/fresh merchandise
Since inventory is going to be the biggest asset on this business’s balance sheet, you want to look into the real value of this inventory.
The value of any retail inventory is not simply the cost the owner paid to acquire it. There are certain provisions to be applied the more this inventory ages.
To put it in simple, plain english: If you bought this inventory at 100,000$ and expect to sell it at 200,000$ but the inventory has been around for 2 years, you will probably not be able to liquidate this inventory unless you sell it under its cost price (say 60,000$). In this case the real value of this inventory on your books should not be 100K, but rather 60K.
This is important to know because it affects the valuation of the business.
Read Also: Stock Obsolescence
Check the sales trend of the Shopify store and look for 3 main things:
1. Growth Potential
See if the trend is growing or declining and if there is any potential to improve sales over time
Is the business highly seasonal? Is it selling Christmas decorations and no other products can be sold in other seasons?
It is fine if a business is seasonal, just make sure that its costs are seasonal too and that the total revenue over a given year is enough to cover total costs.
It might be a good opportunity if other products can be introduced that cover the rest of the year, but for some reasons this might not be possible. For example if the website is called christmasgifts.xyz it will be hard to sell beach stuff in summer, right?
3. Spikes in Traffic
The above Shopify business for sale is showing low traffic with high spikes in between. This probably tells me that the traffic is highly depended on paid ad campaigns and might not be sustainable without ads.
This could be the case with many e-commerce stores anyways, and the key here is to calculate the customer acquisition cost and see if it is still feasible as we explained above.
Finally what you want to examine closely as we mentioned before is the potential of this business. See if there is a room for improvement that you can capitalize on by buying this business on the cheap and adding value to it and maybe sell it again or keep it for good.
Some areas for potential could include
- Adding new product lines
- Adding new revenue streams (e.g subscriptions, affiliate marketing, services,..etc)
- Partnering with brick & mortar businesses
- Opening Pop-up shops
- Expanding into new markets (international)
Exploring e-commerce businesses that are offered for sale by owners can be a good opportunity for an entrepreneur or an investor. Like any other investment, it needs a thorough due diligence process to ensure that the business model is solid and that the investment will pay off decently in the future.
We hope we could cover the entire due diligence process for a Shopify business that is offered for sale with some useful real examples.