Acquisition Playbook: How to Analyze an E-commerce Business for Sale?

Mac
16 hours ago
6 min read

I regularly come across individuals who are keen to acquire an e-commerce business. Often time, they have no idea on how to analyse it, aside from looking at the revenue and profit trend, plus the product review. In this guide, I will share with you some helpful tips to objectively evaluate E-commerce business for sale, before you get your fingers burned!

Most E-commerce can be broadly categorized into 2 segments: Marketplace E-commerce brand or DTC (Direct to Consumer) brand

So what is a marketplace E-commerce brand? They are one of the numerous brands commonly found on Shopee, Lazada and Amazon. They tend to have the following characteristics:

1. Lack of brand equity

2. Most of their revenue (>70%) comes from online marketplaces.

3. Their products tend to be white-labelled and lacked uniqueness.

4. They rarely sell at a premium price. Most compete at low to mid-range.

5. Seldom found in supermarkets and well-known retail chain.

6. Lack of brand loyalty among consumers

7. Reliant on online marketplace ranking and reviews to drive sales

8. Very dependent on paid advertisement in the online marketplace

As for DTC (Direct to Consumer) brands, some of the prominent ones in Singapore include Castlery, Hook Coffee and Hegen. They tend to have the following characteristics:

1. Possess strong brand equity

2. Generate significant amount of revenue (>30%) from their own website.

3. Unique product offering and design

4. Product pricing depends on brand positioning. Can be sold at different level.

5. May have a significant offline presence. (Supermarket, hypermarket, chain-store, showroom or boutique shop)

6. Consumers tend to display brand loyalty

7. Online marketplace tend to be part of their marketing strategy, not main distribution channel

8. Utilise a mix of marketing channels to build awareness e.g. influencer marketing, brand sponsorship, content marketing

Generally speaking, a DTC (Direct to Consumer) business will cost more than a marketplace ecommerce business to acquire. Hence it will not be an apple to apple comparison. It’s akin to comparing HDB flat to Condominium, both have different price point even though both are essentially residential units.

Evaluation of E-commerce business:

Aside from looking at the revenue and profit, there are key aspects to look out for. As there is a saying that goes: The devil is in the details. These are the following elements to check out:

Products

1. Is the overall revenue largely driven by 1 or 2 hero product?

Ans: If it is, this increases your risk exposure. The risk exposure increases exponentially if the brand derive the bulk of their revenue from online marketplaces. E.g. Shopee or Amazon. In the event of any complaint or issues, there is always a possibility of the product listing getting delisted by the marketplace operator. If it does happen, a significant bulk of the revenue can get wiped out.

2. How unique is the product? Are there any standout features?

Ans: If the product does not have any differentiating features from competition brands and a lack of brand equity, then there is a good chance that this brand is only competing at pricing and marketplace ranking. If you see many brands offering exactly the same product in the marketplace, you need to be prepared for a red sea competition.

3. Are there any product development effort?

Ans: Most products have a limited shelf life, especially if the main distribution channel is the online marketplace. Competitors will simply duplicate any top selling products and use pricing as a way to gain ranking &/ reviews. New product development is an indicator of business sustainability. You should check how many new products has been launched in the last 2 years, and the sales progress of these newly launched products.

Marketing

4. Is the brand primarily dependent on paid advertisement?

Ans: If it relies mainly on paid advertisement to drive traffic or sales, then this likely indicates a lack of brand equity. It’s important to have at least 2 cost-effective customer acquisition channels for long term business sustainability.

5. Does the business website have any organic web traffic?

Ans: If there isn’t, this is another tell-tale sign of weak brand positioning. You can use tools like Semrush and Ahref to check out the business web traffic. In most cases, businesses with weak organic web traffic tend to poor website sales. (Which implies that this is an online marketplace E-commerce brand.)

6. Does the business collect their customer contact and run email campaign?

Ans: If it doesn’t, this shows that the business is more of an online marketplace e-commerce brand. Rather than a DTC brand. For email marketing campaign, it should have a minimum of 30% open rate and 5% click through rate to reflect on proper brand engagement (In my opinion).

Finance

7. Does the business have at least 20% net profit margin?

Ans: If it does not, you are likely to face cashflow issue especially during peak season. E.g. Year-end holiday season, Mother’s day, etc. Moreover when the business is experiencing significant growth, you might not have the cashflow to pay for inventory. E-commerce is a cashflow intensive business with a relatively long cash conversion cycle, especially for a small operator.

8. Is the business been stagnating or growing?

Ans: If it’s stagnating, it’s likely to be decline even further. Most e-commerce businesses are relatively small scale. A 15% - 20% drop in revenue can have a big impact on the profitability, especially for businesses with low margin products. While declining businesses may be priced lower, it typically takes a lot of effort to address the decline. I don’t recommend first time entrepreneur to take on a turnaround deal. The odds of failure is > 70%.

9. Do you have the financial resources to grow the business post-acquisition?

Ans: There is a saying that goes “It takes money to make money”. This is especially true for e-commerce business. You need money to hire people, run marketing campaign, develop new products, open up new markets and buy more goods. If you don’t have at least 30% of the total consideration (enterprise value) as part of your post-acquisition growth fund, the lack of financial resource will stick out like a sore thumb. It will affect your confidence in growing the business and taking bold actions.

Supply Chain

10. How many inventory turn does the business has per year?

Ans: If there is only 1 – 2 inventory turn, this means the bulk of the money is stuck with the inventory which is not a good sign. A likely indicator of cashflow issue and inventory obsolesce. Ideally there should be 4 – 6 inventory turn per year.

11. Does the business have an acceptable refund rate?

Ans: A high refund rate can affect the user experience, branding, profitability and an indicator of product issue. Different markets and different product segment can have a very wide range of acceptable refund rate. You can use the below graph as a guide.

Category	Acceptable Rate	Red Flag Threshold	Primary Driver
Apparel & Fashion	20% – 30%	>40%	Fit, sizing, and "bracketing"
Home & Kitchen	8% – 12%	>15%	Damage in transit / Expectation gap
Electronics	5% – 10%	>12%	Defects / Compatibility issues
Beauty & Skincare	1% – 5%	>8%	Allergic reactions / Wrong shade
Supplements / Food	< 2%	>4%	Taste / Packaging damage

12. How many suppliers does the brand have?

Ans: If the business only have 1 supplier for the main product, then there will be risk in terms of supply disruption and pricing surge. By having 2 – 3 suppliers, this will mitigate supply related risk. However for smaller / new e-commerce business, this might not be cost effective as suppliers tend to have MOQ. (Minimum Order Quantity)

The above factors will give you an idea on the quality of the business itself and if you are acquiring a marketplace e-commerce business or DTC brand.

How Much To Pay For An E-commerce Business?

Depending on the quality and scale of the business, 2x – 4.5x of the SDE (Seller Discretionary Earning) is what I considered as an acceptable range. Anything more than 5x of the SDE, you may face challenges in achieving a positive ROI.

If you are an investor looking to build your own e-commerce roll up, you can research on some of the prominent ones: Thrasio, Razor Group, Berlin Brands Group (BBG).

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Fey Day is a M&A firm in Singapore that provides business brokerage service for SMEs in Singapore and Malaysia. We are predominantly a sell-side representative that focus on M&A and fundraising.