2021 could be a booming year for e-commerce entrepreneurs looking to sell. According to Digital Commerce 360, US sales will increase 40% in 2020, according to Digital Commerce 360.
Gary Huang, a veteran e-commerce seller on Amazon and eBay and founder of the 7-Figure Seller Summit, a free community event, says one of the biggest trends this year is the desire of well-funded institutional investors like the unicorn Thrasio at Buying and Consolidating Small Ecommerce Stores. Buyers in this sector have been raising money to invest since around 2018, but the trend has accelerated in recent years, he says.
Ecommerce retailer Gary Huang, founder of the 7-digit Seller Summit
Many are focused on Amazon businesses, he says. Institutional shoppers like Amazon stores because they tend to generate steady cash, he says. “Every two weeks you get a payment from Amazon,” he says.
Why is there so much interest now? “Because e-commerce is booming,” says Huang. “In the pandemic, many shoppers are shifting their spending online.”
This trend is expected to continue as new groups of buyers continue to take an interest in e-commerce. “Americans over 65 are the fastest growing group of online shoppers,” Huang notes. And with the pandemic acting as a “growth serum” for businesses at Amazon, which controls nearly a third of online retail sales, shoppers are realizing the trend will continue.
At the same time, with many brick-and-mortar retail chains filing for bankruptcy protection, “online retailing is currently far ahead of offline retailing,” says Huang. “Investors recognize this.”
This is good news for small ecommerce owners. “For the one-person business, this is the most valuable asset,” says Huang. “It could be worth more than your car or apartment. By selling your business, it could be the biggest sum you will ever make.”
How can you get the most out of the trend when running an ecommerce business? Here is some advice based on my conversation with Huang.
Think about whether you are willing or able to invest the capital it will take to grow your business. Many business owners with growth potential find it cost them more than they think it takes to take their business to the next level. “Going from the seven-digit to the eight-digit level takes a lot of money,” says Huang. “Many entrepreneurs are not ready to make this investment.”
Understand market trends. The most popular online retail categories right now include baby products, health and fitness, and exercise equipment, Huang says. Less desirable are fashion, which has been in decline, and electronics, which have thin margins, says Huang.
Go beyond that one killer product. According to Huang, shoppers avoid stores that have a single “hero” product that generates most of their sales. “You have to diversify,” he says.
Make sure you can make a strong financial case for your business. In general, successful sellers will have constant or growing sales in excess of $ 1 million per year and ideally between $ 3 million and $ 5 million, he says. Typically, these sellers rate their business based on proven sales of 12 to 24 months. “You have to be really strong,” says Huang. “They like solid margins of at least 30% profitability.”
Good records are essential. The sellers who find buyers have an income statement, balance sheet and other documents ready. “You need to have clean books and know your numbers,” says Huang. Sellers with attractive businesses see earnings before interest, taxes, depreciation and amortization (EBIDTA) multiples of 2.5 to 3.5 (EBIDTA).
Determine if your business can be optimized. According to Huang, many institutional buyers want to merge similar one-person businesses and merge them into a single larger company. Shoppers look for small stores that have room for improvement. “They want to make them more efficient and use the economies of scale,” he says.
Your endgame, he says, is to increase the valuation of companies by, for example, increasing the size of the average sale and turning them around later, he says. If you haven’t been able to invest in this through increased advertising, but there is potential, your business could be attractive to a buyer.
Be open Make sure you are aware of any business challenges. “Buyers don’t like surprises,” says Huang. Offers can fail if buyers do not adhere to Amazon’s rules and, for example, have asked for incentives for reviews or used many discounts to generate sales. “They are not sustainable from a buyer’s point of view,” says Huang.
That said, when you have all of the parts in place, it’s a good time to speak to a business broker, he says. “A lot of investors have cash and are ready to buy,” says Huang.