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.