Buying an Established E-Commerce Site - What's the Catch?

[yachi]

I've been browsing online businesses for sale on various listing sites.  I'm interested in something my wife could run from home.  A lot of the ones that interest me use Fulfillment by Amazon or drop shipping.  The selling prices of these businesses are on the order of 20-25x monthly profits, so two years of profits and the business paid for itself.  I get that at times they might require more than the 2-3 hours per week the seller quotes.  At these prices it seems it's better to buy an established business than start your own.  Is there a catch?

[solon]

Be very, very careful. The business might only take 2-3 a week, right now. But that's because of the current macro-environment (other online retailers, offline retailers, who is getting into the market, who is getting out, etc). The macro-environment is largely out of your control, and it is CONSTANTLY shifting. If you're not prepared to be a market leader (that is, creating and changing the macro-environment yourself - very hard to do) your business could evaporate quickly.

Just my 2¢.

[ketchup]

Many of these sites are reliant on Google's particular current algorithms, and if that changes (happens all the time) your sales could drop 90% overnight.

Also, plenty of the time the business metrics are bullshit.  Do your homework.

(Haven't done this, but have researched it in the past.)

[threefive]

IThe selling prices of these businesses are on the order of 20-25x monthly profits, so two years of profits and the business paid for itself.

20-25x monthly earnings is really high. You should only pay closer to 12 months earnings.

What's the catch, and why do websites go for much less price-to-earnings compared to non-online businesses? Because next month Google could change their algorithm and your traffic could be cut in half. Amazon could start selling your product. The previous owner could have been (probably was) lying to you in some way. The dropshipper could disappear. Who's handling the money for you? Paypal will give your money to just about any person that files a claim. Are you sure the website's content isn't violating copyrights? Online security? How are back-ups handled? Is the seller showing you ALL of the books? How much is hosting costing them?

Having run a successful e-commerce site in the past that did over a half a million in revenue per year and that used dropshipping, I can tell you that you will spend WAY more than a few hours a week. Your primary job now is customer service and dealing with disgruntled customers. At least 10% of the products shipped will have problems if you are not handling your own inventory (dropshipping). You will also be constantly finding new suppliers, dealing with payment processor issues and charge-backs, updating content, SEO work, etc. I killed my own e-commerce business a while ago because I make far more per hour in my current career that I actually enjoy.

It's a business. Definitely not all sunshine and rainbows. And any website listing that says "a few hours per week" should send you running away, because they're lying, and if they're lying about that, they're lying about everything else, too.

[yachi]

So my business could suffer because Amazon could stop their FBA program, or charge too much to make it profitable.  Amazon could start using suppliers directly, or selling the exact product(s) for less than I need to be profitable.  Amazon could go away completely for in favor of other stores or retailers.
I doubt I would ever be the market leader with the amount I would be willing to spend, except maybe in a real small niche area.
So one explanation for the willingness of sellers to sell at such low prices compared to the profits is the concern that the market goes away.
I guess there's always the chance the seller is lying with the business metrics.
I'm certainly not better than the next guy at search engine optimization, so I would be up the creek there.

[yachi]

Thanks ThreeFive, I'm only looking at maybe 100K per year in revenue.  I'm looking a lot at empireflippers.com.  They seem to vet sellers more than other websites, but they have higher prices too.  Could Google change their algorithm and double my profit?  There are a lot of things that can go wrong.

[Davids]

Anyone trying to sell you a business where they say you only have to work 2-3 hours per week on it is a big red flag. If it really only required 2-3 hours a week then why bother selling?