2021 could be a boom year for e-commerce business owners who want to sell. With U.S. e-commerce sales up 40% in 2020, according to Digital Commerce 360, buyers are circling.
Gary Huang, a seasoned e-commerce seller on Amazon and eBay and founder of the 7-Figure Seller Summit, a free community event now underway, says one of the biggest trends this year is the desire of well-funded institutional investors such as the unicorn Thrasio in buying and consolidating small e-commerce stores. Buyers in this sector have been raising cash to invest since approximately 2018 but the trend has picked up in recent years, he says.
Many are focused on Amazon businesses, he says. Institutional buyers 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 to online.”
That trend is expected to continue, as new groups of shoppers continue to gravitate toward e-commerce. “Americans over the age of 65 are the fastest-growing group of online shoppers,” notes Huang. And with the pandemic acting as a “growth serum” to businesses on Amazon, which controls close to one-third of online retail sales—buyers recognize that the trend is going to continue.
At the same time, with many brick-and-mortar retail chains filing for bankruptcy protection “online is far outpacing offline retail right now,” says Huang. “Investors are realizing this.”
That’s good news for owners of tiny e-commerce businesses. “For the one-person business, this is their most valuable asset,” says Huang. “It could be worth more than their car or home. By selling their business, this could be the biggest sum of income they ever get.”
If you’re running an e-commerce business, how do you make the most of the trend? Here is some advice, based on my conversation with Huang.
Consider whether you are willing or able invest the capital it would take to grow your business. Many owners of businesses with growth potential find that it will cost them more than they think to take their store to the next level. “To get from the seven-figure to the eight-figure level takes a huge amount of money,” says Huang. “Many entrepreneurs are not willing to make that investment.”
Understand market trends. Among the most popular categories of online retail right now are baby products, health and fitness, and workout gear, says Huang. Less desirable is fashion, which has been on the decline, and electronics, which has thin margins, says Huang.
Go beyond that one killer product. Buyers tend to avoid stores that have a single “hero” product that generates most of their sales, according to Huang. “You’ve got to diversify,” he says.
Make sure you can make a strong financial case for your business. Successful sellers generally will have steady or growing sales above $ 1 million annually and ideally $ 3-5 million, he says. Typically, these sellers are pricing their business based on 12- to 24-months of proven sales. “You have to have really strong performance,” says Huang. “They like solid margins of at least 30% profitability.”
Good record-keeping is essential. The sellers who are finding buyers have a profit & loss statement, balance sheet and other records ready. “You’ve got to have clean books and know your numbers,” says Huang. Sellers with attractive businesses are seeing multiples of 2.5-3.5 of earnings before interest, taxes, depreciation and amortization (EBIDTA), he says.
Determine if your business can be optimized. Many institutional buyers want to roll up similar one-person businesses and combine them into a single larger business, according to Huang. Buyers are looking for small stores that offer some room for improvement. “They want to make them more efficient and take advantage of the economies of scale,” he says.
Their end game, he says, is to increase the businesses’ valuation by doing things such as increasing the size of the average sale and flip them later, he says. If you have not been able to invest in doing that through increased advertising but there is potential there, your business could be attractive to a buyer.
Be candid. Make sure to be forthcoming about any challenges in the business. “Buyers don’t like surprises,” says Huang. Deals can fall through if buyers are not compliant with Amazon’s rules and, for instance, have asked for incentivized reviews or used a lot of rebates to generate sales. “They’re not sustainable from the buyer’s perspective,” Huang says.
That said, if you have all of the pieces in place, it’s a good time to speak with a business broker, he says. “A lot of investors have cash and are ready to buy,” says Huang.