Purchasing an Online Business
The year 2020 saw an astonishing 44% rise of online retail purchases in the United States. The Corona Virus only accelerated a long term secular trend away from a traditional ‘brick and mortar’ business model and toward the virtual one. Consequently, today’s business buyers increasingly seek to acquire online businesses. Let’s explore the advantages to such purchases and how owners of online businesses may benefit from this trend by receiving premium prices when selling their online businesses.
Online Businesses Generally Have Higher Margins Than Brick and Mortar
For brick and mortar businesses, rent constitutes a major portion of operational expenses (typically around 10 percent of overall sales for retail businesses). Moreover, a physical footprint in a retail location often necessitates a costly build-out along with higher employee costs necessary to keep the store open for lengthy hours. Additional brick and mortar costs are from insurance, utility expenses, and equipment costs that an online business does not incur An online business can be run from home or from a much cheaper warehouse-office from which the business may be run and (if necessary) orders may be shipped. This means higher margins for online-based businesses.
Buyers Still Must Examine the Online Business Carefully
When scrutinizing the merits of purchasing an online business, buyers must still examine the overall merits of the business. Simply because a business is ‘online’ does not mean that it makes for a good purchase. Buyers should evaluate, at minimum, the following:
- Whether the business itself is growing.
- To what extent the website’s traffic is growing and how that website traffic growth is being achieved.
- The online reviews of the company and its products.
- What systems and procedures have been implemented to sustain future growth.
- Whether key employees will transfer with the business.
- The overall market for the product or service being sold and the competitive advantage of the company’s product or services.
- How the company’s products are shipped to its customers and the return rate of such products.
The Total Addressable Market (TAM) When Purchasing Online Businesses
The total addressable market (TAM) simply refers to the overall amount of revenue opportunity for a product or service. For example, let’s say an online business sells branded kitchen utensils to customers throughout the United States. Buyers should evaluate the overall sales volume of the kitchen utensil market in the United States to determine the TAM. For a brick and mortar store specializing in selling the same branded kitchen utensils, the TAM is much smaller because only local customers will travel to the store in order to buy kitchen utensils.
The Higher the TAM the Better Value of the Online Business
The higher the TAM, the higher the ‘runway’ available to the business for future growth. Hence, a higher TAM means a higher price that the buyer can and should pay for the business in question.
Online businesses generally have much higher TAMs than brick and mortar companies.
Brick and mortar businesses are inherently limited in their TAM by local geography. Customers will not travel very far to any retail or physical location of a business. Online businesses are not limited by geography and (so long as they can fulfill the customer’s orders) may sell throughout the country or the world. A competent business broker must always point out a high TAM to a buyer as a determining factor in the asking price for the business.
Today’s Virtual World Makes Online Businesses More Valuable
The Corona Virus has made social distancing and mask wearing a facet of life for all of us. It is uncertain when such restrictions will ease, but many people have simply gotten used to doing their shopping and business online. Companies with an online based business model will benefit from this long term trend. The aforementioned lower operational costs in running online businesses combined with the inherently higher TAM of online businesses make them more valuable in the eyes of a typical business buyer.
Sellers of Online Businesses May Wish to Take Advantage of Higher Prices
The best time to sell your business is when you do not have to sell your business. Rather, the best time to sell is when sales or profits are high and the the sales climate for the industry in question is favorable. Without a doubt, the sales climate of online business is extremely favorable for sellers at the current time, and savvy sellers may wish to take advantage of the situation.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your online business.