Author Topic: Buying an Ecommerce Business - Our Journey  (Read 9942 times)

Michael in ABQ

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Buying an Ecommerce Business - Our Journey
« on: April 09, 2021, 08:44:57 AM »
My wife and I are in the process of buying an ecommerce business and I thought this would be a good way to document the process and hopefully get some insight from others.

The business was listed with a broker and after signing and NDA and reviewing the information we setup a call with the seller. That went well and my wife and I decided this business was a perfect fit in a niche we were passionate about that had a lot of opportunity (religious niche). The purchase price is in the mid 6 figures and we'll be using an SBA loan through a local bank I have an relationship with. With some of the recent stimulus packages the SBA guarantee has gone up to 90% so we only need to come up with 10% of the purchase price in cash (plus money for the transaction costs and post-closing liquidity for working capital). In addition, the SBA has temporarily removed the normal 3.5% funding fee (that would have been over $10k) and offered a sweetener of paying the first 3 months of your loan payments - which will also be worth another $10k+.

The plan is to run the business from our home as many of the products are relatively small and so we'll be handling the pick, pack, and ship. Most of the larger items are drop-shipped from various suppliers. Initially I'll keep my day job but once we get things up and running for a few months (hopefully with some growth) I'll switch to full time so I can implement some of the ideas we have for growth: targeting new B2B customers, coming up with our own private label products, increased email marketing, reducing the number of total products, raising prices, and changing the platform the website/store is running on. Eventually we want to grow to the point where we can hire an employee to handle the pick, pack, and ship and probably rent a small warehouse to operate out of. Or buy a house with a large garage or shop building we could operate out of.

I've found a lot of information about how to look for a business to buy and evaluate if it's a good deal and fits your goals. I've also found a lot of information on due diligence. However, one area I find that is overlooked is the actual mechanics of acquiring a business. What takes places from the seller accepting an offer to the buyer closing the deal and being completely up and running.

I've put together some of the items that I'm working through now:
  • Setup a new business entity (LLC/S-Corp election) and get it registered with federal, state, local governments for taxes and permits.
  • Setup bank accounts and business credit cards.
  • Prepare to transfer the hosting and domain name.
  • Prepare to transfer the various software tools and accounts.
  • Get the asset purchase agreement drafted including a breakdown of the asset valuation.
  • Put together the stack of documents for the SBA loan (pro-forma financials, business plan, signed tax returns, application docs, etc.) - This is the big one I'm focused on now
  • Reach out to all the suppliers and introduce myself and verify they will offer us the same terms/pricing as the seller (preferably try to negotiate better terms as well).
  • Prepare new agreements for any employees/contractors (in this case just one part-time contractor).
  • Take physical possession of the inventory on hand as well as all the equipment/supplies associated with the business (shelves, computer, postal scale, label printers, packing supplies, etc.)
  • Training from the seller on their processes and make sure things are documented so we get what's in their head onto paper.
The main transaction costs are:
Packaging Fee from the bank (basically a fee for them to process the loan application) - cost currently unknown will probably be a couple thousand
Due diligence service - $5k (they'll verify the financials back to bank statements and the ecommerce platform, verify cost of goods sold, verify operations information, verify website traffic and ad spending, etc.)
Attorney - $2k (draft the asset purchase agreement and general advice)
Accountant - $1-2k (determine the asset valuation and advise on how to set things up for best tax treatment)
Escrow $500 ($1k split between buyer and seller)

I'm posting this today as I'm taking a personal day from work to focus on writing the business plan and creating the three years of pro-forma financial statements the bank will require for the SBA loan.


If anyone else has bought a business, online or brick-and-mortar, I'd appreciate any insights you have about the actual closing process and when you first started running things yourself. 

bwall

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Re: Buying an Ecommerce Business - Our Journey
« Reply #1 on: April 09, 2021, 09:14:23 AM »
I've seen a few of your prior posts over the years here in "Entrepreneurship" and they've generally been very well thought out such that I've thought 'yep, this guys knows what he's doing'.

Do you mind if I ask you some questions about the sale or make some pointers? Perhaps play the devils' advocate--meaning, the questions might come across harsh but my intent is perhaps bring some blind spots into focus.

First question, I guess, is rather easy: Price and terms: Mid 6 figures (+/- $500k). How many years of work/ownership will it take you to recoup your purchase price? Also; who currently owns the ecommerce site now? An individual? Or a corporation that is looking to make changes?

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #2 on: April 09, 2021, 10:25:54 AM »
I've seen a few of your prior posts over the years here in "Entrepreneurship" and they've generally been very well thought out such that I've thought 'yep, this guys knows what he's doing'.

Do you mind if I ask you some questions about the sale or make some pointers? Perhaps play the devils' advocate--meaning, the questions might come across harsh but my intent is perhaps bring some blind spots into focus.

First question, I guess, is rather easy: Price and terms: Mid 6 figures (+/- $500k). How many years of work/ownership will it take you to recoup your purchase price? Also; who currently owns the ecommerce site now? An individual? Or a corporation that is looking to make changes?

Most ecommerce businesses in this size range are priced at around a 3X multiple of seller's discretionary earnings aka net income. That doesn't include inventory which would raise the effective multiple to around 3.5X or the equivalent of a 28% return. So if we run the business with no changes in income or expenses it would take approximately 3.5 years to recoup the purchase price. The goal is to grow the revenue (and ultimately the profit) to the point where we recoup the purchase price in 2-3 years.

From a cash-on-cash return perspective, we'll recoup our initial down payment and transaction costs within the first year, as well as build up equity from paying down the SBA loan which has a 10-year term. We're generally very adverse to debt (completely debt free for several years except some minor revolving credit card balances) so we plan to pay down the loan more quickly as the business grows beyond replacing my current income.

The seller is an individual, though they purchased it about a decade ago from a small but growing corporation. This was one of the attractive points, it's very old for an online business where many may have only been in operation for a couple of years. The seller has another business and has run this on the side with some family and a friend. There's some health problems involved and that prompted them to look at a sale.

bwall

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Re: Buying an Ecommerce Business - Our Journey
« Reply #3 on: April 09, 2021, 11:03:23 AM »
Nice!

It sounds like the basic numbers work out. Just need to verify that the revenue and income is there, but I saw that on your first to-do list.

Health concerns...... hmmm...... well, I'm glad that the advertisement didn't say 'business runs by itself' b/c it never does; or, if it does, then you can still keep a great money spinner even with health problems.

Not to sounds too cynical, but can you confirm the health problems? I know it sounds stupid and paranoid, but one time I was looking to selling a business and I felt health problems coming on. The business didn't sell (had to close it), and the health problems magically disappeared the day the business was closed.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #4 on: April 09, 2021, 11:17:51 AM »
Nice!

It sounds like the basic numbers work out. Just need to verify that the revenue and income is there, but I saw that on your first to-do list.

Health concerns...... hmmm...... well, I'm glad that the advertisement didn't say 'business runs by itself' b/c it never does; or, if it does, then you can still keep a great money spinner even with health problems.

Not to sounds too cynical, but can you confirm the health problems? I know it sounds stupid and paranoid, but one time I was looking to selling a business and I felt health problems coming on. The business didn't sell (had to close it), and the health problems magically disappeared the day the business was closed.

The seller has a friend that does a lot of the pick, pack, and ship and customer service (probably 20 hours a week). It's that friend that has the health problems so the seller doesn't want to take all that on themselves going forward. My wife are going into this with eyes open. We understand it's going to take us several hours a day at first and until I go full time a lot of the growth ideas will probably have to wait. The margins are good though, so every dollar in new sales results in a healthy profit. We've also got the benefit of cheap child labor to help out :)

bwall

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Re: Buying an Ecommerce Business - Our Journey
« Reply #5 on: April 11, 2021, 07:28:45 AM »
Nice. Sounds like all the options are being considered, as I expected when I read the original post. :)

When I do the back of the envelope type of calculation, it seems like as it is now the business should throw off around $150k a year in net income. I guess that the cost of labor for the part timer has already been subtracted from this? It seems like the seller has plenty of space to hire a replacement, keep the business and still be rather profitable if he wanted to?

I'm not criticizing, i'm just curious myself as to why a person would sell if the numbers are this good. One thing in life that it's taken me a long time to learn is that people do all kinds of things for all kinds of reasons.

Do you have any insight as to why the seller chose to sell rather than to replace the part-timer? 

P.S. I just wanted to also give a thumbs-up to niche markets; it's where the easy money is made in Ecommerce.

travel2020

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Re: Buying an Ecommerce Business - Our Journey
« Reply #6 on: April 12, 2021, 11:19:52 PM »
Quote
If anyone else has bought a business, online or brick-and-mortar, I'd appreciate any insights you have about the actual closing process and when you first started running things yourself.



It’s been a few years but your list covers things that I recall we did. If the business has any registered trademarks or service marks, or phone lines, you should add transferring them to the list. Since you are doing an asset purchase, you will also need to secure “Doing Business As” filing with the state and cities licenses as the case may be. Since you don’t have employees, this probably won’t come in the picture for you but I remember needing to setup or transfer accounts with state agencies for unemployment insurance, and other such things.


As for taking control, generally the recommendation is to plan to have the seller out of the picture sooner rather than later but have them in available for consulting via phone/in-person over the first couple of months. When DW and I acquired the business, we spent a lot of time with the seller (over a couple of weeks before close) to ramp up on the nuts and bolts so we were ready to take on things day 1. We did have some employees at acquisition and that was helpful in the transition.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #7 on: April 13, 2021, 06:24:14 AM »
Quote
If anyone else has bought a business, online or brick-and-mortar, I'd appreciate any insights you have about the actual closing process and when you first started running things yourself.



It’s been a few years but your list covers things that I recall we did. If the business has any registered trademarks or service marks, or phone lines, you should add transferring them to the list. Since you are doing an asset purchase, you will also need to secure “Doing Business As” filing with the state and cities licenses as the case may be. Since you don’t have employees, this probably won’t come in the picture for you but I remember needing to setup or transfer accounts with state agencies for unemployment insurance, and other such things.


As for taking control, generally the recommendation is to plan to have the seller out of the picture sooner rather than later but have them in available for consulting via phone/in-person over the first couple of months. When DW and I acquired the business, we spent a lot of time with the seller (over a couple of weeks before close) to ramp up on the nuts and bolts so we were ready to take on things day 1. We did have some employees at acquisition and that was helpful in the transition.

We're trying to close shortly before I have to leave for about 3 weeks of training out of state with the National Guard. We're working out an arrangement with the seller now where she would continue handling the pick, pack, and ship and retain the inventory for about a month or so. Then when I get back we'd drive to her and bring all the inventory back in a U-Haul (lots of small items, already arranged on shelves). My wife will be taking over a lot of that responsibility as first since I'll need to maintain my full-time job for at least a few months. But she's still got our six kids to take care of and isn't as savvy on the tech side if something comes up. So buying the business and having her take over everything immediately before I leave is not ideal.

Is the DBA really necessary? We're in a different state and the name of the business isn't taken in our state. Though we won't call the business "BusinessName.com LLC" just, "Business Name LLC"

The only person who will transfer is a woman here in the US who works to help update the product listings. Looks like she's been paid a few hundred dollars per month as a contractor. Not sure what the unemployment insurance implications of that are. 

travel2020

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Re: Buying an Ecommerce Business - Our Journey
« Reply #8 on: April 13, 2021, 10:14:10 AM »
Why not close after you come back from your training? I think the approach where the seller continues to operate after close can work but needs to be written out carefully, since once the business deal has closed, technically the seller has no liability or responsibility to keep delivering. You could handle it via escrow and hold back some payment to ensure satisfactory performance in the weeks you are out, or some other such approach.

In our case, the DBA was necessary since the acquiring company was in the same state and had a totally different name. DBA doesn’t cost much and is typically just a line on the license form. In our case, we have multiple DBAs, one with the full name of the old business, one with an abbreviated name people refer to us by.

For contractors, generally there shouldn’t be any UI but you should check to confirm the contractor meets the definition of contractor for your state. Some states are pretty lax about it while others think contracting is just a way to bypass paying employer taxes and benefits and can get picky about things.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #9 on: April 19, 2021, 07:37:23 AM »
I'm taking another day off work to write the business plan and work on pro-forma financials. Running into a bit of analysis paralysis with trying to setup the chart of accounts I'm going to use for the financials. The seller has close to 100 expense categories - albeit many of which haven't been used in a while. I plan to handle the bookkeeping and accounting differently so I don't want to just copy and paste to make my projections. However, I'm finding that there's not a lot of standards for charts of accounts, especially in a relatively new industry like ecommerce. I'm looking at multiple sources and have a basic framework but as soon as I add Amazon as a sales channel I've got another 10+ accounts to worry about (Amazon income, Amazon selling fees, inventory storage fees, refunds, promotions, ads, etc.). Expanding to Amazon is one growth area I definitely plan to pursue, but I'm not sure how I can realistically forecast how much that will drive in revenue a year or two from now. If I take the 5-10 best-selling products maybe not much. If I take the 50 best-selling products probably a lot more. But obviously that takes more time and effort

Yesterday I went down a rabbit hole of looking at credit card processing fees. Fairly complex and opaque industry with dozens of different players, most of of whom are not very transparent about pricing and will gladly take your money if you don't know what you're doing. The seller's fees have averaged about 3.5% but I think I can probably get that to 2.5-3% which is a direct impact on the bottom line for every sale and could add up to thousands a year in net profit.

I was going to setup the EIN today but I was questioning whether or not I needed to include the DBA in that filing. Also, if I should use my personal cell phone number in the EIN filing or if it doesn't make any difference latter on if the business phone number is different (seller has a 1-800 number for customer service that will transfer over). One thing I've looked into a lot with my existing business is how much information companies like Dun & Bradstreet, LexisNexis, Equifax collect on a business. If you go to a bank and apply for credit and all of your information doesn't match up (exact business name, address, phone number, website, etc.) to what is recorded in all these databases and other public records you are likely to get denied.

Joel

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Re: Buying an Ecommerce Business - Our Journey
« Reply #10 on: April 19, 2021, 08:15:12 AM »
One note on fees, your 2.5-3% seems possible, but Amazon will charge you 15% fees to use their marketplace.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #11 on: April 19, 2021, 09:01:02 AM »
One note on fees, your 2.5-3% seems possible, but Amazon will charge you 15% fees to use their marketplace.

Yes, I'm familiar with Amazon and all their fees as I have an existing Amazon FBA business. Though I picked a category with a lower fee (8% for groceries under $15). This business would pay the full 15% but now that I'm looking at the cost of acquiring a customer with Google PPC, credit card processing, hosting and maintaining a site and all the other fees, Amazon's 15% isn't looking as bad.

travel2020

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Re: Buying an Ecommerce Business - Our Journey
« Reply #12 on: April 19, 2021, 08:46:19 PM »

Quote
Yesterday I went down a rabbit hole of looking at credit card processing fees. Fairly complex and opaque industry with dozens of different players, most of of whom are not very transparent about pricing and will gladly take your money if you don't know what you're doing. The seller's fees have averaged about 3.5% but I think I can probably get that to 2.5-3% which is a direct impact on the bottom line for every sale and could add up to thousands a year in net profit.

Definitely a complex area. I’ve looked at a few different vendors over the years, some that were referred and others that had a relationship with the bank I had business with. They usually ask you to share past transaction summary as baseline and come back with a quote based on your customer patterns (swipe vs online, cards vs debit cards, etc.) and total transaction volume. I think 2.5-3% is doable depending on volume. Elavon seems to be a large one though I don’t have direct experience with them. We use a niche end to end solution for the industry so they handle the card processor details and use Stripe and PayPal for some payments that need to be made outside of the solution.

Quote
I was going to setup the EIN today but I was questioning whether or not I needed to include the DBA in that filing. Also, if I should use my personal cell phone number in the EIN filing or if it doesn't make any difference latter on if the business phone number is different (seller has a 1-800 number for customer service that will transfer over). One thing I've looked into a lot with my existing business is how much information companies like Dun & Bradstreet, LexisNexis, Equifax collect on a business. If you go to a bank and apply for credit and all of your information doesn't match up (exact business name, address, phone number, website, etc.) to what is recorded in all these databases and other public records you are likely to get denied.

I setup the EIN before the business acquisition and used my personal cell. No issues with that. As for D&B and others, the banks I work with have never brought them up during account opening, setup of business line of credit, etc. They mostly asked for the incorporation details, EIN, and copies of business tax returns. D&B does send letters to me every few months wanting to talk to “update information” but so far Ive not seen a need for it and have been ignoring them. It might be different if you are dealing with some remote bank but I’m not sure.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #13 on: April 20, 2021, 06:42:55 AM »

Quote
Yesterday I went down a rabbit hole of looking at credit card processing fees. Fairly complex and opaque industry with dozens of different players, most of of whom are not very transparent about pricing and will gladly take your money if you don't know what you're doing. The seller's fees have averaged about 3.5% but I think I can probably get that to 2.5-3% which is a direct impact on the bottom line for every sale and could add up to thousands a year in net profit.

Definitely a complex area. I’ve looked at a few different vendors over the years, some that were referred and others that had a relationship with the bank I had business with. They usually ask you to share past transaction summary as baseline and come back with a quote based on your customer patterns (swipe vs online, cards vs debit cards, etc.) and total transaction volume. I think 2.5-3% is doable depending on volume. Elavon seems to be a large one though I don’t have direct experience with them. We use a niche end to end solution for the industry so they handle the card processor details and use Stripe and PayPal for some payments that need to be made outside of the solution.

I got a quote for interchange fees + 0.25% and $0.10 per transaction. There's also some monthly fees that add up to maybe $15/month. Those interchange fees are fixed depending on the card and type (and completely non-negotiable) and range from 1.5%-2.5%. So with an average order value around $40 I should be looking at an effective rate of 2-3%, or just 1% if it's a debit card transaction. There might also be a way to get the interchange fees lower, especially on larger orders, if I can get the payment gateway to provide additional information for level 3 processing. Basically that gives Visa/Mastercard more information on the sale and they reduce the fees since it's a lower risk to process it.

Quote
Quote
I was going to setup the EIN today but I was questioning whether or not I needed to include the DBA in that filing. Also, if I should use my personal cell phone number in the EIN filing or if it doesn't make any difference latter on if the business phone number is different (seller has a 1-800 number for customer service that will transfer over). One thing I've looked into a lot with my existing business is how much information companies like Dun & Bradstreet, LexisNexis, Equifax collect on a business. If you go to a bank and apply for credit and all of your information doesn't match up (exact business name, address, phone number, website, etc.) to what is recorded in all these databases and other public records you are likely to get denied.

I setup the EIN before the business acquisition and used my personal cell. No issues with that. As for D&B and others, the banks I work with have never brought them up during account opening, setup of business line of credit, etc. They mostly asked for the incorporation details, EIN, and copies of business tax returns. D&B does send letters to me every few months wanting to talk to “update information” but so far I've not seen a need for it and have been ignoring them. It might be different if you are dealing with some remote bank but I’m not sure.

The concern isn't really with the bank I'm working with for the SBA loan, it's any other future lenders or creditors - i.e. business credit cards, suppliers offering terms, etc. The business I'm acquiring was purchased almost a decade ago by the current owner and when I looked it up on D&B it still showed the previous location. Hopefully once I purchase it I can get that transferred over so it shows some business credit history as I'll have a new entity.

Archipelago

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Re: Buying an Ecommerce Business - Our Journey
« Reply #14 on: April 27, 2021, 05:40:37 PM »
Posting to follow.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #15 on: April 27, 2021, 07:02:06 PM »
I took a couple of days off from my full-time job to work on the business plan and proforma financials. Made some progress but not as much as I'd hoped for. Projecting revenue is hard. At least I've got about three years of monthly data so I could figure out the seasonal trends and apply that to the last few months of actual data. At least for years 2 and 3 I can just provide annual numbers instead of a monthly breakdown.

I did have a call today with a bookkeeping company that specializes in ecommerce businesses. Their quote to take over all the bookkeeping was higher than I hoped at almost $2,000/month. One of the sellers handles the bookkeeping now, but she also has a full-time bookkeeping business so plenty of experience there. She said it takes 2-3 hours a week to pay and reconcile everything. I figure it will probably take me 4-5 hours at first, or about 20 hours a month. So that means I'd be effectively paying $100/hour for bookkeeping if I outsource it to this company. I don't necessarily want to spend one day a week (probably Saturday) handling bookkeeping, but that may be necessary at first until I can grow things a bit more. There's probably cheaper options out there, but accrual accounting for an inventory-based business with 1,000 +/- transactions and dozens of bills each month isn't going to be $500/month as I was originally hoping. The couple other companies I looked at were all $1,000+/month. Also, I'm not sure if they'll be familiar with the older ecommerce platform this website is on. Definitely want to migrate to Shopify but that's going to be a major project.

robartsd

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Re: Buying an Ecommerce Business - Our Journey
« Reply #16 on: April 28, 2021, 09:05:56 AM »
The couple other companies I looked at were all $1,000+/month.
$1000 for what you estimate is 20 hours of your time doesn't sound too unreasonable. More than that sounds like go away pricing.

Lamancha

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Re: Buying an Ecommerce Business - Our Journey
« Reply #17 on: April 28, 2021, 07:13:11 PM »
You may actually like the bookkeeping part of owning a business.  I work 30-35 hours/week at the physical business location and 5-10 hours/week doing the quickbooks, banking, inventory, advertising, scheduling, etc.

I really enjoy the bookwork.  I get my number crunching 'fix', and it makes me feel like I know exactly what is happening with the biz.  It's my time to notice any under/overcharges, anything that the staff is not doing correctly with regards to charging customers, and any trends that maybe I would not have noticed if the bookkeeping had been outsourced. 

What an exciting time for you.  Congrats.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #18 on: April 30, 2021, 09:29:15 AM »
You may actually like the bookkeeping part of owning a business.  I work 30-35 hours/week at the physical business location and 5-10 hours/week doing the quickbooks, banking, inventory, advertising, scheduling, etc.

I really enjoy the bookwork.  I get my number crunching 'fix', and it makes me feel like I know exactly what is happening with the biz.  It's my time to notice any under/overcharges, anything that the staff is not doing correctly with regards to charging customers, and any trends that maybe I would not have noticed if the bookkeeping had been outsourced. 

What an exciting time for you.  Congrats.

Thanks, this is a good point. I don't actually mind doing the bookkeeping and I'm definitely a number cruncher. My only hesitancy is that initially after buying the business I'll still be working full time and 4-5 hours a week means I may spend every Saturday doing that initially. However, with every passing day my desire to leave my job grows stronger. Getting very tired of dealing with all the political BS that gets in the way of just doing the work. My excellent boss is leaving for another job in a week so I'll be picking up some of the slack from that in addition to already doing the work of two people and I'm not confident they're going to hire someone good to replace her - but probably pick one of the two internal candidates - one of which would be terrible and the other which would be ok at best.

Also, I want to use accrual accounting and I'm not totally confident in doing all of those transactions and journal entries to account for when a sale is made April 30th but the credit card processor doesn't deposit those funds until two days later on May 2nd.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #19 on: April 30, 2021, 09:48:53 AM »
The LLC is officially registered with the state and I just got an EIN from the IRS. There were a couple of areas in the EIN application I had to stop and do some quick research. I suppose I could have hired a CPA to guide me through that but I feel fairly confident in my abilities. Now to fill out the IRS Form 2553 - Election by a Small Business Corporation. This will classify our LLC as an S-Corporation which means after paying ourselves a reasonable salary as W-2 employees, any additional profits can be taken without paying payroll taxes (aka 6.2% for Social Security and 1.45% for Medicare). However, this also means having to do payroll and issue W-2s for my wife and I. On the plus side since she hasn't worked since college (except for taking care of six children) this means she'll accrue credit in Social Security towards retirement.

I'm taking a couple more days off work to try and finish the business plan and pro forma financials so we can submit the loan package to the bank by next week sometime. The broker is getting a bit nervous as we don't have a firm answer on if this deal can close and the bank will actually loan us hundreds of thousands of dollar until the underwriters go through all these documents. If they reject is we can try to find another lender, but that could add months and the seller might back out leaving us out thousands in fees for due diligence, attorney, etc. 

Archipelago

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Re: Buying an Ecommerce Business - Our Journey
« Reply #20 on: May 01, 2021, 06:49:40 AM »
The LLC is officially registered with the state and I just got an EIN from the IRS. There were a couple of areas in the EIN application I had to stop and do some quick research. I suppose I could have hired a CPA to guide me through that but I feel fairly confident in my abilities. Now to fill out the IRS Form 2553 - Election by a Small Business Corporation. This will classify our LLC as an S-Corporation which means after paying ourselves a reasonable salary as W-2 employees, any additional profits can be taken without paying payroll taxes (aka 6.2% for Social Security and 1.45% for Medicare). However, this also means having to do payroll and issue W-2s for my wife and I. On the plus side since she hasn't worked since college (except for taking care of six children) this means she'll accrue credit in Social Security towards retirement.

I'm taking a couple more days off work to try and finish the business plan and pro forma financials so we can submit the loan package to the bank by next week sometime. The broker is getting a bit nervous as we don't have a firm answer on if this deal can close and the bank will actually loan us hundreds of thousands of dollar until the underwriters go through all these documents. If they reject is we can try to find another lender, but that could add months and the seller might back out leaving us out thousands in fees for due diligence, attorney, etc.

I'd say just keep pressing forward, and continue updating the broker/seller with full transparency just like you've been posting on this forum. They need to know that you're working hard to make this happen, not dragging your feet.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #21 on: May 02, 2021, 08:02:39 PM »
I have a dilemma in how I'm putting together the pro forma financial projections. I have several years of historic data and since one of the sellers is a full-time bookkeeper it's well organized. The problem is there are probably 70+ line items with many of them containing minor or irrelevant expenses that won't apply going forward.

Should I just loosely follow the previous chart of accounts and format and add/delete line items as needed for how I will run the business? Or should I try to stick to their format as closely as possible with a lot of lines just estimated at $0? The latter approach should make it easier for the underwriters at the bank to compare pro forma to actual historical information. On the other hand, I'm not going to incur all those same expenses as I won't be paying for an outsourced social media manager or interest on a line of credit, etc. I'll also have additional expenses like fees for selling on Amazon.

The other dilemma is that I have actual income/expenses for the first three months of 2021 and will probably be able to get March and April soon. I don't want to do a 12-month projection starting in June or July and then have three years of financials crossing over calendar years. I have good seasonal data on revenue and I'm pretty confident about projections month-to-month based on that. So, should I do 2021 with the first several months using actual income/expenses and the rest of the year pro forma estimates? If so, should I zero out that expenses that won't carry over like paying rent, or just show that they'll go to zero starting in June?

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #22 on: May 17, 2021, 08:31:20 PM »
So after almost two months of working to get an SBA loan package together, my banker just dropped a bombshell that it might take 60-90 days to even get an answer if it will be approved - let alone actually closing. I spent all weekend until 1AM finishing up the business plan and pro forma financials after getting the last required document from the seller. I didn't want to be the reason it was taking any longer to make sure the financing was going to come through. When he called me at the end of the day to provide an update about how long it would take for the underwriters to give a firm thumbs up on the deal I was expecting to hear a timeline of days, maybe a week or two. He said they're just overwhelmed with PPP loans and some people are planning to take time off in the summer after a crazy busy year so far.

So that was a punch in the gut because I can see the seller walking away now. My impression was that once the bank underwriters had the complete package it would only take a few days or a week or so to be able to give the deal a thumbs up. 60+ days is just not going to work.

Fortunately my banker spoke to a colleague at a big national bank over the weekend and gave him a heads up. I spoke to the banker at the national bank and told him I had the whole loan package ready to go and he said he could get an answer in a matter of days because their SBA department isn't completely overwhelmed with PPP loans like my local banker. So I sent him the business plan, pro forma financials, and a few other documents. Now I'm just crossing my fingers that the seller or broker don't ask me about the status in the next day or two. I don't want to ignore them and I certainly don't want to lie that everything is fine. I'm going to be dialing for dollars tomorrow and try to line up some other lenders in case this one doesn't work out either. I had talked with a few before and identified one potential backup but I didn't want to be working with two bankers at once as that feels dishonest so I put my faith in the local bank I had a relationship and that was obviously not the correct choice in retrospect.

This process has definitely been very stressful with a lot of ups and downs already. I really hope it works out, not just because I've already spent thousands of dollars and probably close to 100 hours - though that's a good enough reason. I've looked at a dozen or so businesses in depth and seen dozens more come through my inbox. This was about the only one that checked all our boxes and once we dug into it, just seemed like the perfect fit for my wife and I.

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Re: Buying an Ecommerce Business - Our Journey
« Reply #23 on: May 18, 2021, 08:00:11 AM »
The seller is not willing to finance, even for a year or two to give you time to find better terms in the meantime?

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Re: Buying an Ecommerce Business - Our Journey
« Reply #24 on: May 18, 2021, 08:56:28 AM »
The seller is not willing to finance, even for a year or two to give you time to find better terms in the meantime?

Earlier in the process we broached the idea of seller financing for a portion. But at this price point there are other all cash buyers so asking for 85-90% seller financing is going to be very tough. Typical terms are maybe 5-20% seller financing but that wouldn't cut it without some other significant source of financing. Even at 50% we just don't have the cash to fund the remainder. I'm looking at other options to piece together something, maybe with friends and family. The SBA loan is by far the best and cheapest option if we can get it. Just need to start dialing for dollars until I find a lender that can move quickly.

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Re: Buying an Ecommerce Business - Our Journey
« Reply #25 on: May 18, 2021, 08:09:11 PM »
Try Live Oak Bank.  They were/are awesome.  I had never even heard of them before trying to get an SBA loan (I think they are mostly east coast but we are in the PNW.)  Very helpful and knowledgeable.  I'm not sure if they do loans for this type of business though.  SBA loans are insanely stressful to get through, but once it's done it's done.  Ours almost fell through at the last minute too, but everything ended up working out.  Try not to get discouraged.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #26 on: May 18, 2021, 08:41:45 PM »
Try Live Oak Bank.  They were/are awesome.  I had never even heard of them before trying to get an SBA loan (I think they are mostly east coast but we are in the PNW.)  Very helpful and knowledgeable.  I'm not sure if they do loans for this type of business though.  SBA loans are insanely stressful to get through, but once it's done it's done.  Ours almost fell through at the last minute too, but everything ended up working out.  Try not to get discouraged.

I did reach out to them early on as I'm familiar with them. I did several appraisal for them for breweries and veterinary clinics when I was a commercial real estate appraiser. They work with specific business types that include generally include real property or other assets. Ecommerce is very light on assets - 80% of the purchase price will be goodwill/intangibles with the rest inventory and minimal FF&E.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #27 on: May 19, 2021, 05:53:28 PM »
I reached out through my network and got a few referrals for other SBA lenders. I've got a few irons in the fire now and it sounds like 60 days or so from now is the typical to close. Not great as that's a few weeks after the established closing date, but better than my original lender saying 60 days to even look at the deal and render a decision.


I called the seller to give them an update in the interest of being upfront and honest that it was going to take longer than expected to close. I offered $10k as a non-refundable deposit to show that we're confident this deal will close. My wife is also going to start helping out/training for the transition. I'm glad we called the seller direct as I think it would have been a very different (and less productive) conversation with the broker. And ultimately, we're doing this deal with the seller, not the broker.


Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #28 on: May 25, 2021, 06:44:03 AM »
The broker is playing hardball and basically threatening to walk if we can't get financing nailed down immediately. I'm really not sure why since they're not going to find another buyer who can go through due diligence and close any faster than we can - or at best it would be a difference of a week or two. We're already paying the asking price too, so it's not like they're going to get multiple other offers over that. I can't tell if it's just a tactic to keep us putting pressure on the lender to move this quickly, or if he's telling his client that we can't close the deal and to walk away now before another month or two is wasted.

I've got the whole loan application resubmitted to one bank, working on a second. Both national lenders so hopefully they can move faster with more experience and resources - also, better terms. They're offering fixed financing versus variable from the community bank I was originally working with. The second lender wants a larger down payment, preferably through some seller financing. I threw that out but I know it's going to be a hard ask on top of pushing the closing out further. The alternative might be a concurrent line of credit to provide some working capital and post-closing liquidity as the additional down payment would be most of our remaining liquid cash.

The whole thing is very stressful knowing that all this time and money invested so far could be for nothing.

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Re: Buying an Ecommerce Business - Our Journey
« Reply #29 on: May 25, 2021, 09:49:00 AM »
The broker is playing hardball and basically threatening to walk if we can't get financing nailed down immediately. I'm really not sure why since they're not going to find another buyer who can go through due diligence and close any faster than we can - or at best it would be a difference of a week or two. We're already paying the asking price too, so it's not like they're going to get multiple other offers over that. I can't tell if it's just a tactic to keep us putting pressure on the lender to move this quickly, or if he's telling his client that we can't close the deal and to walk away now before another month or two is wasted.

I've got the whole loan application resubmitted to one bank, working on a second. Both national lenders so hopefully they can move faster with more experience and resources - also, better terms. They're offering fixed financing versus variable from the community bank I was originally working with. The second lender wants a larger down payment, preferably through some seller financing. I threw that out but I know it's going to be a hard ask on top of pushing the closing out further. The alternative might be a concurrent line of credit to provide some working capital and post-closing liquidity as the additional down payment would be most of our remaining liquid cash.

The whole thing is very stressful knowing that all this time and money invested so far could be for nothing.

The broker is in no position to be playing hardball IMO. You've already offered the $10k non-refundable deposit and had that conversation with the seller. So get an extension in writing, hand over the $10k and keep moving along. You're clearly not horsing anyone around. What else is the issue?

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Re: Buying an Ecommerce Business - Our Journey
« Reply #30 on: May 25, 2021, 09:54:40 AM »
The broker is playing hardball and basically threatening to walk if we can't get financing nailed down immediately. I'm really not sure why since they're not going to find another buyer who can go through due diligence and close any faster than we can - or at best it would be a difference of a week or two. We're already paying the asking price too, so it's not like they're going to get multiple other offers over that. I can't tell if it's just a tactic to keep us putting pressure on the lender to move this quickly, or if he's telling his client that we can't close the deal and to walk away now before another month or two is wasted.

I've got the whole loan application resubmitted to one bank, working on a second. Both national lenders so hopefully they can move faster with more experience and resources - also, better terms. They're offering fixed financing versus variable from the community bank I was originally working with. The second lender wants a larger down payment, preferably through some seller financing. I threw that out but I know it's going to be a hard ask on top of pushing the closing out further. The alternative might be a concurrent line of credit to provide some working capital and post-closing liquidity as the additional down payment would be most of our remaining liquid cash.

The whole thing is very stressful knowing that all this time and money invested so far could be for nothing.

The broker is in no position to be playing hardball IMO. You've already offered the $10k non-refundable deposit and had that conversation with the seller. So get an extension in writing, hand over the $10k and keep moving along. You're clearly not horsing anyone around. What else is the issue?
I think the broker is probably just trying to scare you into getting the deal to close at any cost to avoid losing out on his commission. I've had this happen when buying real estate and needed to delay for one reason or another and sometimes the selling agent will try to act all tough and threaten to cancel the contract or force performance. Later when talking to the seller they had no idea and were fine with the few days delay.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #31 on: May 27, 2021, 11:03:41 PM »
I had a video call this morning with one of the bankers, the seller, and the broker. The seller gave every indication that she still wanted to get the deal done and while the broker was still pushing for some reassurance, was not nearly as insistent as in his emails. The banker said that after the holiday weekend he could get everything submitted to the underwriters in about a day and we would have an answer about two weeks later. Also, the seller agreed to financing 5% at the same terms as the SBA loan (probably 5-6% interest and a 10-year term with no pre-payment penalty). The goal will be to pay that off sooner but at the end of the day it doesn't change our cash flow, just reduces the bank's risk by only financing 85% vs. 90%.

I've got my attorney working on the revised agreement with the seller financing and non-refundable earnest money. Hopefully we can get that signed early next week.


The second banker sent me an email last night indicating that we potentially didn't have enough cash on hand to make them comfortable. I let him know today about the seller agreeing to finance 5% and that I could pull together a bit more cash from some other accounts including my existing business which doesn't need a lot of cash at the moment. He responded an hour ago saying it still might get push back from the underwriters as they're getting more cautious about under-capitalized businesses after their experience with COVID. I pointed out that the cash flow projections show steady growth in the cash position and that the cash conversion cycle for this business is fairly quick with all sales occurring via credit/debit card and depositing 1-2 days later with lead times for suppliers measured in days or maybe a couple weeks at most. Hopefully he'll get back to me with a firm number I need to have for post-closing liquidity. I don't want to tap Roth IRA contributions but that may be my last source.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #32 on: June 11, 2021, 02:01:22 PM »
Update, we are officially under contract. The seller signed the asset purchase agreement today and we just wired the non-refundable earnest money.

The two banks are both in underwriting. I ended up pulling money from my other business and some additional Roth IRA contributions to strengthen our cash position to at least 10% of the purchase price for post closing liquidity/working capital. One lender came back last week and said that during their pre-underwriting they thought there would be an issue with the collateral since we don't have any real estate to pledge and the business has minimal collateral. I explained that lack of collateral is the whole point of the SBA loan guaranty and we're willing to take the minimal hit to our credit score to push the application through to the underwriters. So at this point our hopes are mostly on the other bank. I've reached out to a few other local lenders as well to potentially get a third application going but most of them are not SBA Preferred Lenders which means they will take 3-4 months as everything has to go through the SBA (which is overwhelmed at the moment) instead of being handled in-house.

At this point all we can do is pray.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #33 on: June 29, 2021, 06:49:11 PM »
We received the SBA loan financing commitment letter today. Basically this is the official document that says "we will loan you money at these terms as long as you meet these requirements". The interest rate was a bit better than I had projected, 5.5% vs. 6.0%. It's only fixed for the first 5 years of the loan, but frankly we hope to have it paid off by then anyways. We can also try to refinance and lock in a fixed rate in 3-4 years as otherwise the rate will adjust quarterly. We'll see what kind of rate is available if it's fixed for the full 10-year term or just a 3-year term. But probably just stick with this 5-year fixed term.

The only real hurdle at this point is the business appraisal. If it comes back at less than the purchase price we'll have to put more cash in the deal and/or the seller will have to agree to carry more of the financing. We had a long meeting with the seller to discuss the transition and training and she was fine with carrying more of the loan if necessary (within reason). So that will be a minor issue unless the appraisal comes back way low.

The rest of the requirements are pretty simple: doing another credit check before closing, verifying our tax returns directly from the IRS, the seller signing tax returns and financial statements (already complete), showing proof of funds in our account for at least two months, and some other minor things.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #34 on: July 18, 2021, 08:19:06 PM »
Closing is less than two weeks away, but the last couple of weeks have had some more ups and downs. We were gathering all the documents and one of the requirements is for the bank to order tax return transcripts from the IRS. Basically going straight to the source to make sure nobody tries to submit a fake copy of their tax returns. I came to find out the seller never filed their 2020 taxes - even though I'd had a copy for months. So they filed them the next day but luckily my banker was able to work around it with three years of historic tax returns. The business didn't quite cash flow enough in 2019, but between that and our income it was enough.

A separate issues is that we have been planning on running this out of our home which is a rental. We had previously requested permission from the landlord and they said no. We offered to pay extra rent and addressed the issues they brought up but it didn't make a difference. So a few days ago we get an automated message that our lease is expiring soon and if we want to renew it we need to reach out. I again inquired about the possibility of running an ecommerce business from the home and briefly addressed the concerns again (delivery trucks, fire hazard, wear and tear on the home). Apparently that set off some alarm bells because now they want to inspect the property prior to agreeing to renew our lease. Luckily the inspection is a week before we close so our garage will just have our stuff in it. However, it now feels like we'd be living in fear of eviction once our garage is full of shelves of inventory. We're starting to look at renting a small warehouse space but a huge appeal of this has been working from home and not having to drive to work. Now we'd have to at least drive to another location every day to pick, pack, and ship. It would also make it much harder to just walk out to our garage to check something if a customer had a question.

On top of all of this, I made the decision to put in my two weeks notice at my full time job on Friday. I realized that I couldn't really focus on growing this new business if I was still working 40 hours a week (plus commute). I had originally planned to work until the Christmas season, then had scaled that back to working another month or two. After talking with my wife we realized how amazing it would be to just cut the cord and jump in with both feet on day 1. After all, I'm out of PTO so I would be taking a week or two off to go close on the business and bring back the inventory then get things setup at our house. So it would really only be about three weeks worth of pay I'd be giving up. Now I can get my pension contributions and outstanding sick leave paid out that much sooner.

The downside is that we're basically closing the door on trying to buy a house for another two years since no bank is going to offer a mortgage to someone who's income is from a brand new business entity with no tax returns. So we have potentially two years of living in fear of being evicted for violating our lease - or paying an extra $1,000/month +/- to rent commercial space we'd only use a few hours per day.

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Re: Buying an Ecommerce Business - Our Journey
« Reply #35 on: July 18, 2021, 09:26:11 PM »
Moving sucks but you'd probably be better off moving to a different rental, one where the business is not a problem for the landlord.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #36 on: July 19, 2021, 08:52:12 AM »
Moving sucks but you'd probably be better off moving to a different rental, one where the business is not a problem for the landlord.

It's a very tight rental market at the moment. We're in a 5-bedroom house located a mile from our in-laws (very helpful for child care). There's very few 5-bedroom rental houses to begin with and anything that comes on the market is typically rented in a day or two. The property management company our landlord uses is reporting an average of 17 applications per single family home.

We are starting to look for small warehouse spaces. We only need 500 SF or so but most spaces start at 1,000 - 1,200 SF. So that would be around $1,000/month which is a pretty significant expense to absorb - plus the cost of commuting every day.
« Last Edit: July 19, 2021, 09:30:05 PM by Michael in ABQ »

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #37 on: July 25, 2021, 01:34:18 PM »
Closing is only a few days away. Still a lot of stuff to do. I wish I'd setup a business credit card a couple months ago. Now my banker keeps saying wait until after closing. This means I can't setup new accounts with the couple dozen vendors because I don't want to give them a personal credit card and then resubmit different payment information a week or two later. I just got business bank accounts setup but despite it being the year 2021 we still haven't figured out how to move money from one bank to another in less than 3-4 business days (unless you pay for a wire transfer and go to your bank in person).

We looked at a commercial space on Friday. It's a small office/warehouse building that's mostly vacant. We'd just rent out the back half of the 1st floor office and get the landlord to put up a wall in the hallway to separate it. It's mostly open space which is great for our needs. No need for a large overhead door or high ceilings as our products are all fairly small and light. With utilities and other expenses it will probably be around $800/month - maybe more since we'll also need to get internet service there and possibly an alarm. That's a significant additional expense we hadn't budgeted for but we'll still be generating enough profit to pay the loan and pay ourselves. Ideally we can get a lease for just a year and the ability to move-in in the next week so we can just unload all our inventory there as soon as we return with it. Otherwise we'll have to unload it at my in-laws house spread throughout a couple of rooms and potentially have to pack it all up and move it again a week or two later.

It would have been nice to just run everything from our home. But we just can't take the risk of getting evicted for violating our lease. As much as it feels like the property owner is being unreasonable, it would also be a constant cloud over our heads knowing we were violating a contract we agreed to. On the other hand, if we lease this space it would give us a real business address and something more substantial than operating out of our garage. It also makes it much easier to hire someone in the near future to take over the pick, pack, and ship operations which will never be our strong suite. Better to hire that out at $12-14/hour and focus on the $40-50/hour work of marketing, etc. The location is basically halfway between our house and our kid's school so we can drop off the kids at school in the morning, take our youngest into the office and get the previous day's orders packed for shipment. Then be home by lunch and keep working from our home office while one of us goes to pickup the kids.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #38 on: August 02, 2021, 06:34:27 AM »
We closed on the sale last week. It's been kind of a blur since then. We didn't get all the various accounts transferred over yet as we were also getting trained by the seller and packing up all the inventory and FF&E (furniture, fixtures, and equipment) to move. The domain name was transferred along with getting the new payment accounts setup so that's the important thing. We shipped out the first 20 orders or so that came in during the 24 hours or so after closing. Then we started getting everything moved out of the seller's basement. Luckily they recruited some teenagers to help out so my wife and I could keep focusing on the training and transition. After a few hours of Tetris we got the moving truck filled the the brim with a couple feet at the back to spare.

This morning we're heading over to meet the broker and landlord for a small office space of about 800 SF. We'll sign a 1-year lease and then start immediately unloading the truck and getting set up to ship the  100 or so orders that have come in while we drove 1,000 miles in the last two days.


I wish we'd had several more days with the seller before/after closing. But it was always going to be somewhat chaotic. Now we just have to make it work and hopefully not drop too many balls in the transition. Hopefully our customers and vendors will all give us a little grace on any delays or hiccups in the next few days. Overall, it's very exciting knowing that we're in control of our future now. We get to work together instead of me going off to a job I don't really care that much about where ultimately all I'm building up is a paycheck and a few days of vacation time. Now, we're building equity and a business that is our greatest single asset.

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Re: Buying an Ecommerce Business - Our Journey
« Reply #39 on: August 02, 2021, 09:08:19 AM »
Congrats on finalizing the deal and getting set up! I hope you'll post a few updates to see how it goes. I'm sure you'll settle into some routines and processes soon enough and things will calm down and you can start earning profit!

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Re: Buying an Ecommerce Business - Our Journey
« Reply #40 on: August 02, 2021, 01:55:30 PM »
Great job closing out the sale! Testament to you and your wife's resolve and industriousness. Definitely give us a 1 month update when you're a bit more settled in. Congrats!

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #41 on: August 02, 2021, 08:21:27 PM »
Unloading didn't take too long, and most of the inventory was on shelves with wheels so we were able to roll it on to the truck and roll it back off still organized. That being said, we only got about 15 orders processed over 3-4 hours as it took so long to find things, the printer didn't want to work, kids pestering us with questions, etc.

The landlord seems great, he's a retired guy who bought the property to tinker in a warehouse in the back and he's leasing out the office/warehouse in the front where we are occupying about 800 SF. We were able to just connect to the business internet he's sharing with another tenant so now we'll split the cost three ways. That's one less thing to have to worry about. Still have a bunch of shelves to assemble, boxes to unpack, and dozens of customers emails and voicemails piling up. However, we've also received some great responses to our emails and a lot of personal heartfelt messages. The alarm guy who stopped by with the landlord will probably become a customer :)

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Re: Buying an Ecommerce Business - Our Journey
« Reply #42 on: August 12, 2021, 07:45:10 AM »
PTF - Congrats on the completed sale.

Have a bunch of questions...

Why did you choose e-commerce instead of other online business models (FBA/Affiliate/etc.) and why this product niche?
Is it something you are familiar with, interested in as a hobby, just a numbers game?
How did you know this was the business for you to purchase?
Why did you decide to buy something with physical products vs. digital products?
How confident were you / are you in the sales / profitability which were advertised?
At what point in the purchasing process are you presented with account statements / tax returns to verify all the numbers?
How was all of the FF&E appraised? How are you able to confirm the quantity and value before contracts are signed?
Why was the seller getting out of the business in the first place?

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #43 on: August 12, 2021, 09:33:16 PM »
PTF - Congrats on the completed sale.

Have a bunch of questions...

Why did you choose e-commerce instead of other online business models (FBA/Affiliate/etc.) and why this product niche? - I'm comfortable with a physical products business. I wanted something tangible. This niche was attractive because it's something I can be passionate about (as opposed to some random household item) and it's a very deep and wide niche with numerous possibilities as far as products and customer.

Is it something you are familiar with, interested in as a hobby, just a numbers game? - Interested in the niche. It's not a requirement to be passionate about a product/niche, but it certainly helps as opposed to say selling pet products if I didn't own a pet.

How did you know this was the business for you to purchase? - My criteria were fair simple: US-based suppliers (I have a security clearance so wiring tens of thousands to a Chinese factory or going to visit it was a hard no - also, fuck communism and the CCP), significant presence off-Amazon (a lot of risk of Amazon shutting you down or some competitor sabotaging you), a niche I was interested in - even if not exactly passionate.

Why did you decide to buy something with physical products vs. digital products? - Ultimately I would like to manufacture products in the US as I see a long-term trend shifting production away from China and back to the US with a focus on higher quality at a higher price point. Digital products have some obvious benefits ($0 COGS, no cash flow issues with inventory, etc.) but just seem too ephemeral for my liking.

How confident were you / are you in the sales / profitability which were advertised? - Very confident, I had full access to Google Analytics from early in the process as well as read-only access to the actual ecommerce platform. The financial statements were very clean as the owners were a mother and daughter who had full-time jobs as a fractional CFO and bookkeeper respectively.

At what point in the purchasing process are you presented with account statements / tax returns to verify all the numbers? - Fairly early in the process. The seller actually hadn't filed their 2020 taxes (even though their accountant had completed them) which cause a brief panic shortly before closing. Just one of many issues that we had to overcome during the ~6-month process. I hired a specialist due diligence firm to verify and reconstruct all the financials. It was fairly expensive ($5K) and in retrospect was not all that necessary. However, it was good to get a detailed report back that everything came back within 1%.

How was all of the FF&E appraised? How are you able to confirm the quantity and value before contracts are signed? - FF&E was about 2% of the purchase price, so not a significant issue. The seller put together a detailed spreadsheet of each item (mostly shelves, a few other pieces of furniture and equipment) indicated the condition and price new. I calculated a somewhat arbitrary discount based on condition and rounded it to the nearest $1,000. The inventory was a lot more complicated and the seller and I spent several hours going back and forth with a massive spreadsheet of the 1,500+ products and classifying them as good, saleable inventory at 100% of COGS, vs. slow-moving at 50%, vs. stale inventory that might take years to sell at 25%.

Why was the seller getting out of the business in the first place? - The seller's best friend was the sole employee and could no longer work in the business due to her husband getting sick. The seller didn't want to keep running it without her friend and it was always something part-time for her. She decided almost immediately that we were the buyers she wanted.

Steeze

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Re: Buying an Ecommerce Business - Our Journey
« Reply #44 on: August 13, 2021, 05:56:38 AM »
Wow, thank you for the detailed responses!

ginjaninja

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Re: Buying an Ecommerce Business - Our Journey
« Reply #45 on: August 13, 2021, 08:08:56 AM »
I am very interested in following your journey.  I have been looking into potentially starting an Ecommerce company or buying one.  From what you described AliExpress is not the supplier you are using, and that seems like the easiest way to get started.

I have been doing some research on how to start and manage an Ecommerce company and nothing has been as detailed as what you have described here, thank you for sharing.

A few questions that I have:
What has been the best part of this process for you?
What advice would you give someone who is just starting the research phase of the process?
What has been your biggest learning opportunity or surprise about the process?

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #46 on: September 02, 2021, 07:57:39 PM »
I am very interested in following your journey.  I have been looking into potentially starting an Ecommerce company or buying one.  From what you described AliExpress is not the supplier you are using, and that seems like the easiest way to get started.

I have been doing some research on how to start and manage an Ecommerce company and nothing has been as detailed as what you have described here, thank you for sharing.

A few questions that I have:
What has been the best part of this process for you?
What advice would you give someone who is just starting the research phase of the process?
What has been your biggest learning opportunity or surprise about the process?

What has been the best part of this process for you? I spent almost 10 years working for a Fortune 500 company and then a few years for the federal government. It's really nice just being able to do what I want without worrying about getting "buy-in" or have to go through a whole process and deal with a bunch of other people and bureaucracy. I can make a decision and implement it immediately. If it's a good decision then I see the fruits of my efforts almost immediately (i.e. cash in the bank).

What advice would you give someone who is just starting the research phase of the process? Identify a niche that you know. A lot of people will till you to be passionate about it, and that certainly helps. But if you are trying to sell sewing supplies and have no interest in sewing and no prior knowledge you're going to have a lot harder time than if you have been in that niche for years. Anyone can access data showing keyword volumes and competition but you may have knowledge or passion of a niche that relatively few people do. Use that as your competitive advantage instead of trying to copy some saturated market like yoga mats.

What has been your biggest learning opportunity or surprise about the process? Everything takes more time than I planned/expected. Customer service calls and emails are a fairly significant amount of my time each day. The seller had someone else handling most of those and I feel like the amount of time to handle those was definitely underrepresented. On the other hand a lot of the stuff I'm dealing with is still the initial setup things. Filling out credit applications with vendors, getting accounting setup with an outside firm, learning the inventory reordering process between different suppliers, etc.

Wolfpack Mustachian

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Re: Buying an Ecommerce Business - Our Journey
« Reply #47 on: September 02, 2021, 08:12:52 PM »
I am very interested in following your journey.  I have been looking into potentially starting an Ecommerce company or buying one.  From what you described AliExpress is not the supplier you are using, and that seems like the easiest way to get started.

I have been doing some research on how to start and manage an Ecommerce company and nothing has been as detailed as what you have described here, thank you for sharing.

A few questions that I have:
What has been the best part of this process for you?
What advice would you give someone who is just starting the research phase of the process?
What has been your biggest learning opportunity or surprise about the process?

What has been the best part of this process for you? I spent almost 10 years working for a Fortune 500 company and then a few years for the federal government. It's really nice just being able to do what I want without worrying about getting "buy-in" or have to go through a whole process and deal with a bunch of other people and bureaucracy. I can make a decision and implement it immediately. If it's a good decision then I see the fruits of my efforts almost immediately (i.e. cash in the bank).

What advice would you give someone who is just starting the research phase of the process? Identify a niche that you know. A lot of people will till you to be passionate about it, and that certainly helps. But if you are trying to sell sewing supplies and have no interest in sewing and no prior knowledge you're going to have a lot harder time than if you have been in that niche for years. Anyone can access data showing keyword volumes and competition but you may have knowledge or passion of a niche that relatively few people do. Use that as your competitive advantage instead of trying to copy some saturated market like yoga mats.

What has been your biggest learning opportunity or surprise about the process? Everything takes more time than I planned/expected. Customer service calls and emails are a fairly significant amount of my time each day. The seller had someone else handling most of those and I feel like the amount of time to handle those was definitely underrepresented. On the other hand a lot of the stuff I'm dealing with is still the initial setup things. Filling out credit applications with vendors, getting accounting setup with an outside firm, learning the inventory reordering process between different suppliers, etc.

I have extremely low knowledge of most of what you're referring to :-), but it sounds interesting. Can you give me an example of what finding a niche looks like. For example, you mention as an example a niche in sewing. Are we talking about selling a particular product but branded with someone's brand - sewing kits branded by me that include things every hard core sewing expert would need, for example? I'm guessing it's not some sort of novel product with a patent, because the patent would be more of the important point then, I guess? I've heard this kind of thing mentioned a lot, and I understand what you're doing and competition can be a problem. I've always been curious, though, as to what any sort of example of it would look like in general.

Michael in ABQ

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Re: Buying an Ecommerce Business - Our Journey
« Reply #48 on: September 03, 2021, 10:11:16 AM »

I have extremely low knowledge of most of what you're referring to :-), but it sounds interesting. Can you give me an example of what finding a niche looks like. For example, you mention as an example a niche in sewing. Are we talking about selling a particular product but branded with someone's brand - sewing kits branded by me that include things every hard core sewing expert would need, for example? I'm guessing it's not some sort of novel product with a patent, because the patent would be more of the important point then, I guess? I've heard this kind of thing mentioned a lot, and I understand what you're doing and competition can be a problem. I've always been curious, though, as to what any sort of example of it would look like in general.

So the niche I'm in is religious products. That's fairly broad from bibles to crosses to hang on a wall to jewelry and a million other things. You could decide your niche is very specific like hand-made wooden crosses using wood reclaimed from old church pews. Or you could go more broad and say you're going to sell all Christian items - but only those made in the USA. Trying to sell all things to everyone means you will struggle to find a focus - and have to carry an enormous amount of inventory and try to attract multiple different types of customers.

A few examples of ecommerce businesses I've heard of:

Boat anchors (and the rope, etc. that goes with them)
Adult coloring books as well as colored pencils, gel pens, markers, etc.
Wallets made of recycled firehose
Engraved liquor bottles for gifts
Paper for origami and similar crafting

The key thing is you can't be Walmart or Amazon. But if you can find something fairly narrow there are still potentially tens of thousands or millions of customers out there. There's probably not enough customers to support a quilting shop in a small city. But on the internet you can serve customers all over the country or all over the world. That 0.1% of people interested in your niche/product now moves from being 30 people in your city to 300,000 people across the country

Wolfpack Mustachian

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Re: Buying an Ecommerce Business - Our Journey
« Reply #49 on: September 03, 2021, 03:04:47 PM »
Thanks for the information! I'd always wondered how it worked.