Shopify is a growing market and there are many Shopify businesses for sale on the secondary marketplace. These ecommerce businesses are available in many different locations and business models. They also come at different prices.
Shopify has also created an exchange platform to aid these sellers and buyers.
These listings were viewed through the eyes of a retailer. In this article, we will provide a guideline for investors and buyers on what to look out for when trying to purchase an existing Shopify ecommerce business.
Is it worth buying a Shopify Store?
You might choose to purchase an existing Shopify business, offered by the owner, instead of starting from scratch. You might be interested in:
1. Profit from supplier relationships
It is difficult to find good suppliers. However, if you can buy a business that has been established suppliers and has a working process, it could prove very valuable and well worth the investment.
2. Profit from a strong social media presence
It takes time and money to build a following of people who are interested in your products. It might seem that only the cost of buying the business is enough to justify such an investment. In this instance, it is worth looking into.
3. Established domain name
It takes time to get a domain name online and rank well in search results. This will allow you to save time and money as the business you are buying may already have this setup.
4. Data & Insights
An established online business should have extensive data about customers and their buying habits. This information can be used to improve your business’s performance or create new product lines.
Shopify Business for Sale: Due diligence
Let’s be realistic. Not everything on the marketplace will be genuine. Shopify gives you an advantage by verifying sales and traffic data so sellers can’t misrepresent them.
You will still need to do a lot more research so you don’t buy a failing business. This is an investment and you should expect it will pay off in multiples over time.
We are both investors and retailers so we’ve seen it from the retailer’s point of view. Here is what we would look at if we bought any of these businesses.
Investors want to see growth potential. It would be a good idea to see if there is a problem. We understand that when someone sells a business, there may be a problem. It is likely that something needs to be fixed or it won’t work in the future.
This is what we must do with our diligence. Is it possible to fix it or do we have to let it go?
Product Offering
The product that it sells is the most important aspect of any retail business. This is the heart of the business.
Single Product vs. Product Portfolio
Start by looking at the product categories and products of any Shopify business that is being offered for sale. Is there enough product (SKUs), to create a sustainable, healthy business? Or is it just one product shop? We have seen such shops.
Is there a way to increase sales if the shop is only selling one product? Is there another category that could be used to serve the same customer group as the one selling this product?
Fad vs. Evergreen
Let’s face the facts: Many Shopify stores created and continue to be created are based upon product fads.
Are fidget spinners sold in the shop?
Are they selling an obsolete gadget?
Are they selling accessories for products that are no longer made? (We’ve seen the store).
This is the sales graph for a store that capitalized on the popularity of detox teas in recent years. It was a smart business move! This is not the case anymore, as the chart shows.
Business Model
Shopify offers a variety of business models and Shopify allows you to filter your results by these models.
Dropshipping vs. Inventory Stores
Dropshipping vs. Inventory.
Dropshipping is where the supplier ships inventory directly to customers. Your role is limited to marketing the product. Inventory stores, on the other hand, are typical retail stores that have merchandise in stock.
It is crucial to determine which business model the store operates. This is both related to the store’s valuation and the viability of that model. Dropshipping stores don’t come with inventory and most likely no brand or assets. Based on the cost paid ads, you only get a sales funnel that may or might not be still working. See below for information on customer acquisition costs.
Replicability
Replicability is another problem when you buy a dropshipping shop. How can you be sure that the seller won’t sell you the system to just make another one with the same supplier, products, and all the other mechanics?
It is a good idea to speak to a lawyer about whether he can help you to determine if a non-compete agreement might be applicable.
Gross Margin
Gross profit margin is the most important figure you should look at when looking at Shopify businesses that are up for sale. This is the amount you receive when you sell the product, after subtracting the cost.
This is crucial because you can then subtract all expenses and get the net profit.
This example shows that the profit margin (10%) is very low. This is a common problem for dropshipping businesses, so the business model isn’t viable.
Stockstores make a higher profit margin (30%-40%). However, this is dependent on product category and source of products.
A list of financial benchmarks has been compiled for various retail segments. It can be used to compare gross profit margins of the product segments you’re targeting.
It is possible that you find the margin for the store that you are interested in buying is lower than the segment. However, you may also find other suppliers who can source the product at better prices.
It would be a great opportunity to explore the area and to help improve the store’s performance from the start.
Customer Acquisition Cost (CAC).
Marketing is the most expensive aspect of e-commerce. You should look at the price paid by the seller to acquire each customer, as well as the gross profit per transaction.
We found that this seller spends 33$ to acquire customers, but only 7$ per transaction. He loses money on each sale he makes.
If the majority of your customers are returning customers (i.e. they will buy again from you), it is okay to charge a high customer acquisition fee.
This brings us to the next point…
Returning customer rate
Shopify will show you the return customer rate. Make sure to ask the seller. This will allow you to estimate how much you plan to spend on future sales.
Low returns on customers simply means that you must get new customers to purchase from you every time you sell. You will likely do this through paid ads. In many cases, you will find that the business is no longer profitable after adding in the transaction fees.
A high return customer rate means lower marketing costs for the future. It also indicates that the product is recurring and not just a one-off sale. This also indicates that the store has a loyal customer base, and that they offer a high quality product that keeps customers coming back.
However, it is important to note that customers rarely shop for the same product twice before they are satisfied.
A one-product store may not be sustainable unless it sells consumable products such as shampoo or coffee pods. It’s worth it.
Shopify Store Operating Costs
Operating costs (OPEX) are another cost that will be taken out of your gross profit. These include domain fees, hosting fees, here Shopify fees and employees. Warehouse rent is also included.
It is difficult to imagine how an e-commerce store with a 10% gross profit margin could survive. Your gross profit margins for your products must be strong enough to cover all other costs on your P&L. This will allow you to make a good profit, which will help you return your investment in this store.
Shopify Store P&L
To see if the store will make a profit at the end, all the revenue and expense lines can be added to the P&L statement.
Ask to see the P&L for the last few years. Also, see trends in profit. This will help you determine if you can improve the business’s P&L.
Statement on Cash Flow
Cash flow statements are another statement that you should be looking at. Does the business have positive cash flow? Is there room for improvement if not? What are the most dangerous cash traps?
Sales Trend
Shopify’s sales trends are available. Here are 3 things to look out for:
1. Growth Potential
Check to see if the trend continues or is declining. Also, check if there are any opportunities to increase sales.
2. Seasonality
Is it seasonal? Are you selling Christmas decorations?
You can be seasonal in your business, but make sure you have enough revenue to cover all costs.
While it might be a great opportunity to introduce other products that can cover the rest of year, there are some issues that might make this impossible. If the website is called christmasgifts.xyz, it might be difficult to sell beach stuff during summer.
3. Traffic Spikes
Shopify’s business for sale has low traffic but high spikes between. This suggests that traffic to the Shopify business for sale is heavily dependent on paid ads campaigns, and may not be sustainable without them.
This is possible with many ecommerce stores. The key is to calculate customer acquisition costs and determine if it’s still feasible, as we have explained.
Potential
As we have said, you need to carefully examine the potential of this company. You can find areas of improvement by purchasing the business at a bargain price and adding value, then you might be able to sell it or keep it.
Conclusion
E-commerce businesses offered by their owners for sale can offer investors and entrepreneurs a great opportunity. It is important to do your due diligence and ensure that you are able to prove that the business model works.
We hope to be able to cover all aspects of due diligence for Shopify businesses that are being offered for sale, along with some real examples.
