Just like physical real estate, online real estate is bought and sold every day.
Whether you have a store you're thinking about selling, or are looking to adopt an established business, this episode of Shopify Masters is for you.
In this episode, you'll hear from Justin Cooke, the co-founder of Empire Flippers, a marketplace and a brokerage that helps people buy and sell online businesses.
He'll explain the how, what and why of buying and selling ecommerce businesses—including how to calculate what your business is worth.
Listen to Shopify Masters below…
...now generally that multiple is somewhere between 20x and 30x—so if it’s doing $10,000 a month in profit, it’s going to fall somewhere between $200,000 and $320,000 in value.
Tune in to learn
- Why go through a marketplace like Empire Flippers instead of directly reaching out to a business you want to buy.
- How to prepare a business for sale.
- How to evaluate the worth of an ecommerce store.
Show NotesStore: Empire Flippers
Social Profiles: Facebook, Twitter, Instagram
Recommendations: SweetProcess, CampusExplorer, Quin Street, Empire Flippers Podcast, Web Equity Show
Felix: Today I’m joined by Justin Cook from Empireflippers.com. Empire Flippers helps people buy and sell online businesses, including online stores. Welcome Justin.
Justin: Thanks Felix. Thanks for having me on man.
Felix: Yeah. Excited to have you on. We were just talking a little bit off air about the growth of this demand for a marketplace, especially for online stores, and you guys of course specialize this. Tell us a little bit more about what is Empire Flippers and what you guys do over there.
Justin: Yeah. Empire Flippers is kind of a hybrid between a broker and a marketplace and we help people buy, sell, and invest in websites and online businesses. We actually do, not only ecommerce businesses, but also FBA, also adsense and affiliate type sites. We’ve done a lot more ecommerce businesses in the last maybe 12 to 18 months.
Felix: Very cool. The question that comes up then is if you are able to find a store that is for sale or you’re looking to buy a store, you know of a store that you’re targeting or an online business that you’re targeting, what’s the benefit of going through your marketplace? Going through Empire Flippers than just to kind of blindly reach out to a online business?
Justin: If you’re looking very strategically at a particular business you want to buy, whether it’s a competitor, something like that, then it honestly doesn’t hurt to reach out to them and you probably should do that. If you’re looking to buy a business and you’re not exactly sure what business to work with, it’s a really long slog to try to reach out to people because you know figuring out which site is in your budget and then vetting the business, doing your due diligence if they even say yes or even are interested is really, really challenging.
What we do is we just provide a marketplace that brings all of those people together. We do all of that outreach. We’ve got an audience of people that know that we sell these businesses and so we’re kind of a hub for that. They know to bring their business to us to sell, so then the buyers know they can go to one place that where all these businesses have been checked, we’ve verified their earnings, and they can go line by line and look at the businesses we have listed.
Felix: Very cool. What was the idea behind starting Empire Flippers? What’s your background? How did you guys get into starting a business and marketplace like this?
Justin: My business partner and I ran an outsourcing company out of the Philippines. We had staff there working for other people. That business never really took off. It paid the bills and, you know, it was a business for us but it never really took off. We ended up with quite a few agents that worked for us for a couple of years that were unemployed. One of our major clients left. We tested, there were a bunch of different things. One of the things we tested out was building website, profitable websites, and then six months, nine months, twelve months down the road selling those off and seeing if there was an interest in that. What we realized is that there’s a really hungry market for people out there looking to buy cash flowing, profitable, online businesses.
We’re not talking doing two million in sales a month. I’m talking about maybe doing $20,000 a month in sales. Maybe profiting $3,000, $4,000 a month. Even $1,500, $2,000 a month in profit. There are people out there that are absolutely hungry for those types of websites and online businesses. I think a lot of entrepreneurs, a lot of site owners, store owners don’t know that. They think, “Well I’ve got this kind of little store. It’s plugging along and I’m making you know 2, 3, $4,000 a month and it’s great,” but they don’t realize that it’s a sellable asset and that there are lots of people willing and interested in buying those.
Felix: Do you have to start a business differently if your goal is to ultimately exit or sell the business?
Justin: Not necessarily. That’s a good question though. I think if you start with the end in mind it’s helpful. For example, when you go to sell your business there’s a lot of documentation you’re going to need, right? You’re going to need to make sure that you have your profit and loss in place. You’re going to need to make sure that you’ve documented all of your processes that you have everything kind of together. If you start the business with that in mind, with the intention of selling later, it makes it easier. Now, if you’ve owned your store for two and a half, three years let’s say, and you’re getting ready to sell and you don’t have that together, you can put it together but it’s much more of pain than if you started with that initially.
It’s not a requirement that you started with a sale in mind, but it’s helpful in terms of making it easier for you when you go to actually sell the business.
Felix: For people that are in this position where they are starting a business and they’re wanting to position in a way where you could sell it later, or they have an existing business and they want to get their kind of ducks in order to sell. What are some of these pieces of documentation or what do they need to have in place legally or on paperwork to make sure that his process is much smoother?
Justin: The first thing we should mention is that almost all of our sales, 99.9% of the sales we do are asset sales, not sock sales. In terms of your legal set up of whatever LLC or corporation you set up, it’s not really important. You’re actually just selling off the asset to that website or that online business. It’s mostly goodwill as what you’re selling because there’s not hard assets generally except for, obviously, inventory, but aside from that you’re not selling, there’s no real estate involved in the transaction. In terms of what you need to prepare or what you need to get ready, there’s a whole bunch of things.
For one, you should start making sure that you’re tracking your total revenue, your cost of goods, all the expenses that add up over time and make sure you’re tracking that on a month to month basis in a profit and loss. You can use something like QuickBooks online, or you can literally have a spreadsheet. In due diligence, a buyer’s going to want to take that spreadsheet and match to your bank account so you’re going to need those two, but just as kind of a head check, just to make sure that you know what’s going on in the business month to month, having that profit and loss in a spreadsheet is helpful and it’s an easy check when you go to sell it that that information is there.
In terms of other things you’re going to want to document, things that you do on a daily, weekly, or monthly basis. You as an entrepreneur, what are you doing in terms of shopping for new products? How are you marketing those new products? What do you do on a daily or weekly basis? You can use something like a Google doc where you lay out kind of the processes. Here’s what I do daily. Step one, step two, step three. Here’s what I do weekly. Step one, step two, step three or you can use something like we use in our company called Sweet Process. It’s a nice little piece of software that allows you to create these processes.
Step one through ten you can use video or audio for some of the steps. It’s a good way for your team across the board, whether you’re two people or 30 people, where everyone can see those standard operating procedures or those processes and you can update them regularly. That’s really important when you go to sell your business so that you can turn that over to a potential buyer and they’re comfortable knowing they can buy that business and run it from you after they’ve purchased it. A buyer has options, right? Yes they’re hungry for business, but if you’re going to list your business they’re going to look at yours, they’re going to look at another, they’re going to look at another.
If you don’t have your documentation in place in terms of your profit and loss, in terms of having all of your daily/weekly tasks like outlined, they’re going to go with the person, they’re going to buy the business that’s much clearer. That’s well laid out because it’s less of a risk for them. You’re going to want to get your documentation in order. That’s one of the things we can help you put together when you’re moving toward the sale.
Felix: Once a transaction is complete and the business has been sold, does the buyer need to hang around or they’ve kind of washed their hands clean and move on? How are they involved after that sale?
Justin: It depends, sometimes it’s a straight cash transaction. This is normally the case when the buyer is very, very familiar with how the business works. Maybe they’ve run other ecommerce business and there’s all different kinds of buyers. Sometimes it’s their first purchase of a ecommerce business. They have shopped store front. Sometimes they have 15 already and a whole team of people that run them. It’s going to depend on their experience. A lot of times you’ll have, for a new buyer, they may do something where it’s like 70% cash upfront, 30% after the 30 days of training. That gives them kind of an opportunity to continue to work with the seller and make sure they’re comfortable so that they can walk away and be able to continue to run and grow the business. Sometimes, if there’s some question as to what’s going to happen over the next six or twelve months they’ll actually do an earn out.
That just means that some portion of the deal, maybe somewhere between 50 and 80% will be cash upfront, and the rest may be contingent on the business hitting its goals over the next six months or twelve months. It may be contingent on doing over a certain amount per month or per quarter. You can put other contingencies on the earn out, and that sometimes happens if there’s some questions as to where the market’s at or how stable that business is going to be.
Felix: With any business transaction even large public companies, a sale like this still can be risky. Are there any kinds of protections available or anything that a seller should be doing to safeguard themselves to make sure that they are getting exactly what they expect to receive?
Justin: It’s generally less risky for the seller than it is for the buyer. Normally what will happen, definitely on the smaller transactions, let’s say it’s a five figure, maybe in the low six figure deal, a lot of times when you’re working with a broker they’re going to be able to handle the transaction for you. They’ll make sure that the money’s been received, they’ll help transfer the business to the buyer. Once that’s done, complete, and verified then you get the money. Not a problem. In larger deals, let’s say mid six figure to seven figure deals, a lot of times you’re going to use an escrow service and a good escrow service to use is any attorney.
Most attorneys are bonded for this and so can handle that two million dollar, four million dollar sale and so you can actually give them the requirements to make sure that deal’s able to go through and that they understand what the requirements are. From the seller’s perspective, the only thing you really have to worry about is to make sure that you’re not transferring over the business before the money has been paid. We actually had a situation where it was a Chinese national in the Netherlands selling to an American in the US. She was selling on our platform. She wanted to get the, we had received the money from the buyer, we had control of the money.
We said, “Look it’s time to transfer the business to the buyer.” She said, “No,” she said, “No I’m not going to do it. You need to wire the money to my Chinese bank account.” We’re like, “Look. We can’t do that. No one can ever own or have control of both the business and the money. That’s a really bad idea. We’re not going to do that.” She refused. The buyer was like, “I really want this site. Is there anything she can do?” We ultimately told the buyer, “Look we can’t do this deal because she refuses to budge on that.” There are some things you need to worry about. Generally, never, ever, ever have one party that had access to both the business and the money. Try to keep that balance. Whether you’re using escrow or some other third party, make sure that no one has access to both.
Felix: Makes a lot of sense. When you are evaluating your store to determine how much it should be worth for sale, what’s the process that goes behind that. What are some things that you should consider to figure out how much your store is worth in a sale?
Justin: Generally, sometimes we’re the bearer of bad news here, where we have a seller that comes and says, “Look I want to sell my ecommerce business. It’s worth $750,000.” We take a look and we take it through our evaluation process. We say, “Actually it’s worth about 350 to $400,000,” and they’re like, “What. No it should be worth a lot more.” A seller may thing, or an entrepreneur may thing their businesses is worth whatever it is, but that’s not necessarily true. Ultimately, it’s worth what a buyer’s willing to pay for it. We’ve got plenty of experiences selling these businesses. we’ve sold quite a few and we work with buyers on a regular basis so we have a pretty good idea where the market’s at.
Where it’s at generally, is buyer’s are looking at some multiple of the profit in the business. We look at it on a monthly basis so net monthly profit. Let’s say, for example, in 2016 January through December your business on average did $40,000 in sales and your net profit was $10,000. You’re taking home $10,000. Not paying yourself a salary or anything like that. Just straight up $10,000 in profit for the year. $120,000 for the year. At $10,000 you’re going to multiply that by some multiple. Generally that multiple is somewhere between 20X and 30X. If it’s doing $10,000 a month in profit, it’s going to fall somewhere between 200 and maybe 3, $320,000 in value. What we do is to kind of cap that off, with any business that has inventory or physical goods, we add on the wholesale value. If you’ve got, let’s say for that business, $30,000 in wholesale value of inventory, you add on an additional $30,000.
Maybe 330 to $350,000 at the high end. You may ask Felix, how do you determine whether it’s worth 200 or 300? That’s a huge difference, right? That’s a big difference. A lot of things come into play. The older the business is, the longer it’s been around, the bigger multiple you’re going to be able to use. You’re going to be closer to the 30X. Depending on how many different traffic channels you have and how you’re acquiring your customers, more is better. If all of your traffic is coming just organic traffic, then you’re pretty dependent on Google organic. Which is a little more risky than if 40% of your traffic’s organic and 30% is paid traffic. You know what I mean? That can adjust the multiple at bet.
Your trajectory. Has it been growing or has it been declining. If it’s been declining you’re going to get a lower multiple, if it’s been increasing month over month or quarter after quarter, you’re going to get a higher multiple. That’s one of the things we look at when we’re going to actually value your business or list it for sale is things like how old it is, what does the traffic look like, what’s the trajectory it’s on. That kind of thing.
Felix: Have you seen businesses that are being sold multiple times where a buyer buys a business, builds it up, and then sells it again? Is that a common practice?
Justin: Absolutely. In fact, we’ve seen one, it’s a small one. It’s like mid to high five figures, and we’ve seen it three times. It’s sold three times in our marketplace in the last three, three and a half years. They start off in the 20, 30,000 and recently sold for 70, 80. Yes, we definitely see these businesses again and again. From the people, because there’s a whole bunch of different type of people that buy. You have the, the one hand you’ll have the buy and hold crowd. These are the people that they may have anything from a one side, or two sides, to dozens of businesses with teams of people that run them. They’re looking to buy, and they hold them and grow them out as a package. The package deal.
Their business is all of these acquisitions they’ve made. You have other people that are the tinkerers. They’ll buy them and work with them. I can increase conversions here, I can add social traffic or paid traffic at an ROY and grow them to here. Maybe, down the road either they keep them or they sell them. They may look to sell them. One of the other impacts of a multiple is how big the business is. A business that’s making $10,000 a month in profit is generally going to have a lower multiple than a business making $40,000 a month in profit. The larger the business gets, the larger the multiple gets as well.
Not only, if you but a business that makes $10,000 a month in profit, and you get it to 20, right? Not only have you doubled the value, you may have added a little bit more too because you get a better multiple. Instead of selling, maybe you buy it at let’s say 24X, you bought for 240,000 on a $10,000 a month profitable business. You double it and you’re selling it for 550, 600,000.
Felix: I see. Makes sense. The larger the business, the better the multiple so as you grow the business, it’s almost growing exponentially in terms of its value.
Justin: That’s right.
Felix: One of the most common questions I see, whether people are selling through your marketplace, selling directly, selling anywhere, is the skeptical question where someone asks, “Why would they sell the business if it’s already doing well?” What are some of the most common reasons you see a seller selling a store?
Justin: We get that a lot. From people that are, maybe they’re building their first store, and they’re thinking to themselves. This is a question from them often. They’re thinking to themselves, “What are you doing? Why would anyone sell their business? There’s got to be something wrong with it because no one would ever sell their golden goose.” If you’ve got a profitable business, it’s kicking out six, eight, $10,000 a month in profit, they’re thinking to themselves, “I would never sell that business. If I ever had that business I would never sell it.” What they don’t realize is the business itself, the store isn’t the golden goose, that’s an egg that the golden goose is laying. The real golden goose are their skillsets and their ability to create those types of websites or those types of stores again, and again, and again.
Once you’ve learned how to do it, repeating that process and getting another store off the ground and profitable isn’t that hard. Maybe you got a little lucky with your niche selection and maybe you had some help or some benefits along the way, but if you were able to do it once, it’s very likely you’ll be able to do it again. There are other reasons people sell too. A good one, or an interesting one is someone has, let’s say if they’re good at organic SEO. They’ve built up this store to the $10,000 a month profit level. They’ve kind of maxed our every keyword in their niche.
They’ve added all the products they can that are valuable. From their perspective, they have completely maxed out this business. They said, “It’ll never make more than $10,000 a month in profit. This is as big as it’ll ever get. I’m going to sell out at the top. I’m at the very top of the market. I’m going to get out while the getting’s good, and get my cash, and cash out of this deal.” You have a buyer that comes along and says, “I actually don’t buy businesses until they’re at least $10,000 a month in profit. I’m actually a paid traffic guy. I’m good with paid Facebook traffic and this business is a great opportunity for me because it meshes well with another business I own in a parallel space. Parallel niche.”
They’re thinking in their heads, the buyer’s like, “Well you finally built this up to a level that’s interesting to me. I’ll buy it off you for $260,000 because I know within 12 to 18 months I can double the business with paid traffic.” The seller walks away going, “I got one over on this guy. This is as big as it’s going to get,” and then a year later they realize, “Oh man. Wow. They grew it out. They made it even bigger. I missed something there.”
Felix: There’s this funny scene in the “Social Network” where I think Justin Timberlake’s character is talking to the Mark Zuckerberg about how Victoria’s Secret sold out too early and then the original owner of it was obviously very upset about it. Do you see that happening where if you have that kind of seller’s remorse where they sell a business and this happens where they apply their paid traffic skills to a business that was mostly getting organic SEO takes off? They’re like, “Oh man. That sucks. I should have kept that business.” How do you deal with, do you ever have to manage those expectations?
Justin: I’ve seen both sides of that. I’ve seen the sellers that are like, “I sold too early,” or like, “I didn’t know that it was going to do so well later on or whatever.” I’ve seen that and I’ve seen the other side where they sold and the industry tanked. The business didn’t do well. There wasn’t managed well. Lots of different reasons and they’re like, “I’m glad I got out.” I definitely see both sides of that. One of the way you can hedge that a bit is to keep some equity stake in the business and maybe you stay on as a consultant or advisor. This is normally done when the seller is being forced to sell.
Let’s say that you’ve had a wedding or you’ve had a, God forbid, a death in the family. You’ve got some major thing coming up that you definitely need the money for and you’re being forced to sell but you know that the business is not in the best position to sell. You know that if you had 12 more months you could build it up even bigger. Maybe you sell 80% ownership in the business, so a controlling stake, and you keep you retain 20% equity. That’s kind of your hedge.
If the buyer does really well with it, you can stay on and advise them and tell them kind of your path that you would’ve taken. Maybe you talk a monthly or quarterly basis. They do grow it out over the next year or two years, and they do turn around and sell it you still have an equity stake. That happens sometimes, but generally only if the seller really trusts the buyer or has built some kind of a relationship. Just has a good feel for them in terms of what they want to do with the business. I’ve seen that work.
Felix: The case where you do sell the business completely and you move on as the seller, one attribute that I hear as sellers looking at, not just the monetary side is making sure they’re selling it to the right person. How do you, as a seller, evaluate if you are selling your business to the right person? What kind of attributes are you looking for typically?
Justin: Ultimately, I mean, this is more for a seller. Maybe it’s their first exit on the business. Their business is their baby. They don’t think of it as an asset at this point. They think of all the blood, sweat, and tears they put into their business. They’re selling it for let’s say, 3, $400,000 and they put a lot of work into it and they’re thinking, “I don’t want to give this over to someone who’s going to kill my baby or who’s going to not do well.” People that have done it a few times treat it more as a business transaction. It’s an asset. They’re selling off one of their assets. For the people that are selling off their baby and they feel that way about it, get an idea on the buyer’s looking to do with the business. Get a feel for what their plan is and make sure that you’re comfortable with the plan. Ultimately it’s going to be their decision.
Whatever they tell you, they may go into a completely different direction, and it’s going to be theirs to do with what they will. If that’s uncomfortable for you, you’re probably not really ready to sell. You’re probably not in that position. If you’re having that kind of question on what direction are they going to take and you’re wondering, you’re kind of thinking maybe you shouldn’t sell it then you probably just shouldn’t sell it.
Felix: Right. You don’t want to have that lingering in the back of your mind once you are supposed to move on to something next.
Justin: Yeah. You’re just not quite there yet if you’re still worried about kind of like what they’re going to do with it. It’s a sign that there’s something else holding you back from really being ready to sell.
Felix: Right. Makes sense. From the other side, from the buyer’s side. The common question I see is that people are deciding to maybe start their business for the first time or maybe just exited a business and are looking to get into another one. The question is should I build it from scratch with the funds that it would cost me to buy or should I take those funds and just buy a business outright? How do you recommend buyers work through this decision?
Justin: It’s interesting. Let’s say you’re out looking at businesses, right? I see a business, I make an estimate that’s going to take about two years of my time to get it there. One of the things you can do is you can measure, you can get an estimate on how much you’re going to have to spend and how much of your time you’re going to have to spend over the next two years to get up to speed. What that time could be spent on otherwise. You have to take, I think, time into account, not just costs. You get a lot of people that maybe have never exited their business yet or they’re still kind of building their first one. They go, “Why would someone spend $300,000 on an ecommerce business. That’s crazy.” What we find is a lot of our sellers, people that sell with Empire Flippers, once they’ve had a couple of exits they actually become buyers.
Because they realize they don’t want to spend the next two years getting a store off the ground. There’s a lot of blood, sweat, and tears that goes into that. From a buyer’s perspective they’re like, “Look. I’ve got money. I’d rather buy a pass that worked.” Have you seen, are you familiar with Seth Godin’s “The Dip”?
Felix: It sounds familiar but yeah can you explain it?
Justin: Yeah. Yeah. On an entrepreneurial path, you’re constantly kind of like ups, downs, ups, downs. At some point, inevitably, there’s going to be a dip. There’s going to be kind of a sagging point where it gets tough. Maybe, possibly, if you pull out of the dip, it goes up and to the right. Your business takes off. From a buyer, in a perfect world, a buyer wants to buy when you’re in that dip. You as the site owner in that dip. You put all this hard work, sweat and tears into this business. You’re thinking, “I don’t know if it’s going to turn up or I don’t know if it’s going to go to zero. I’m just out of it.” They see the opportunity. They see it’s close to just taking off so they buy it from you. Put in all this blood, sweat, and tears and they don’t have to put in that blood, sweat, and tears. They get all the benefits with none of the hard work and downside of two years of slog.
From their perspective, they’re like, “Look. This is fantastic for me. This is why I want to buy it right now.” There’s a real advantage, I think, to buying a business that’s already proven itself in the market. That’s already selling products that people want. That already has customers, or hopefully already has repeat customers. You get to buy all that goodwill. In addition to that, that’s for someone who doesn’t own any business at all. Owns no stores and is looking to just get started. Has skipped the kind of like blood, sweat, tears process. If someone already has a business, so let’s say I have a business that sells cat furniture. I have a store that sells cat furniture and you’ve got a store that sells something that’s related to cats. I don’t know. Cat snugly’s or whatever, right? We’ve got a similar audience.
If I buy your cat’s snugly business that’s selling you know, I’m making $5,000 a month in profit. I buy that business, I have immediately added to my customer base. They’re probably interested in cat furniture. I’ve immediately added products I can sell to my customer base, which is the cat furniture peeps. There’s real strategic advantage for me as a buyer. Maybe that seller didn’t have that strategic advantage. They didn’t have a much larger parallel niche. The buyer does. They’re going to take advantage of that and 2X, 3X the business just on that alone.
Felix: Should you only buy if you have some kind of different skillset or in the example you just gave, some kind of strategic or competitive advantage that you can apply? In the example you gave earlier about how someone might be running a business and they’re great at organic SEO, but you have all this background and a proven track record in paid traffic, then you buy the business and apply that kind of skillset to it. Do you recommend that people come in with that kind of set up, or can you just come in and not have any kind of special sauce and just continue running the business?
Justin: You don’t have to have a strategic advantage in that you already have a business in the same niche or [inaudible 00:28:59]. You don’t have to have that. You don’t have to have an alternative skillset to what the seller already has, but you do have to have a plan. If you see a business for sale, and let’s say that you’re going through and there’s a bunch of listings. There’s some in your price range and you’re looking at them and you see a business that looks great, but like if you actually came down to putting together a strategic and a tactical plan on what steps you’re going to take over the next three months, six months, nine months, 12 months to grow it out and you can’t come up with anything. Then no, you shouldn’t but that business.
You do have to do some planning and be willing to take some steps to continue the business and drive it forward. If you have no thought to that, then you shouldn’t buy.
Felix: In terms of having this plan, is the seller available for these kinds of discussions or what kind of due diligence should a buyer do to determine if it’s the right business for them?
Justin: A ton of due diligence. That’s like a whole nother episode or several. The due diligence is one piece. I’m going to answer that in a second. In terms of whether the seller is going to stay on board, that’s generally a part of the negotiations. Some sellers are, let’s say that I’m taking the cash in this business. I’m selling my drop shipping business to fuel my FBA business in a different niche. Because I need inventory. I’m selling this $80,000 drop shipping business because I want to buy a bunch of inventory for the other business and I’m growing that one like crazy so I don’t have time to deal with walking someone through this business over the next two, three, four months. That seller is not going to have the time to kind of work with you whereas another person might.
They’re selling it for other reasons and they do have the time. That could be negotiated in the final contract, right? What exactly is the seller going to do for you and with you post sale needs to be discussed, it needs to be clarified before the deal actually goes through. We generally, because we work with both buyers and sellers, we tell them, “Look this seller’s not in that position,” because they’ve told us that. They said, “Look I just don’t have the time,” or they do have more time. We help steer people that are going to need a little more support from the seller towards businesses that are a good fit for them and that will work for them.
In terms of what kind of due diligence a buyer should do, heavy due diligence. For example, all of the businesses we list on our platform, we vet them. By vetting I mean we look at the earnings, we look at their back end, we look at their traffic, and we will only accept a certain amount of businesses that pass our criteria. We’re looking for quality businesses that we know our audiences are interested in buying, but even though we do that vetting, that’s vetting to protect the integrity of our marketplace. That does not replace due diligence for a buyer. Ultimately, due diligence is always on the buyer. You can’t trust the broker. You can’t trust the seller. You can’t trust a third party to do due diligence for you. That’s always on you.
That’s the real trick to buying businesses, is to make sure you’ve done … Not only do you have to look for scams or fraud, but you also have to look for things like is the niche going to last? Recently there was a push to sell, I don’t know if you know about this, but a lot of vaping products in the US. Those have been really, really popular and some of them have done really well. There’s a question as to which direction it’s going to go. Is it going to blow up and be super popular and really valuable, or is it going to blow up the other way and be seriously regulated and serious problems?
It requires a high risk tolerance because it could go either way. If you’re buying that you have to know that and you have to be in the risk tolerance level to where that purchase makes sense for you. First you have to know it and then you have to have a higher tolerance for the deal. That’s just one example of many of the things you need to check in due diligence.
Felix: Now, this due diligence, it sounds like it can take a ton of time. How much time do you have between when a listing goes up that you really want and how much time do you really have before it could close? I guess of course it varies, but on average how much time do you have to do your research before putting in a bid?
Justin: Some of our buyers will look at maybe three to five listings before they actually make a purchase. Others will look at a dozen, two dozen. They spend a lot of time looking at them. You want to spend time, but you don’t want to get stuck in the cycle of always shopping and never buying. Unless you enjoy it too, which if it’s like a hobby and fun for you, have at it. That’s fine too, but if you’re actually looking to purchase and you kind of get stuck in that cycle maybe you need to change your criteria.
One thing I’ll say is looking at a lot of deals early on I think is helpful because it’s going to give you a better kind of just view of the market, view of what’s out there, view of what’s in your price range so that’s really helpful. I recommend looking at more, not less. I think as a buyer due diligence is extremely important. It’s something that you’re going to get better at as you look at more businesses, as you talk to more people, and talk to more sellers, and get a feel for what would be a good fit for you, and your skillsets.
Felix: How much detail can you see about a business to do this due diligence? What kind of reports or data can you typically get from a seller?
Justin: With us, what we do is we actually protect the information behind a deposit process. We’re different in that way. Not all brokers do this. Some will require what’s called a letter of intent or just non disclosure paperwork. Some like Flippa will let you see the information publicly. We don’t show all the details, like we don’t put the URL out there, we don’t put the niche the exact product without paying a deposit. Our reason for that is we’re not protecting the seller so much, we’re protecting the buyer because most of the listings we have are going to sell. If we put a listing up, there’s a very good chance it’s going to sell. Whoever that buyer is is going to have to run it and grow it after that.
If we have hundreds or even thousands of people reviewing their business, how much it makes, how it gets its traffic, all this information there’s more likely they’re going to have a dozen copycats or more pop up in the next couple of months. We don’t want that to happen, we want to protect our buyers, so we protect the information. To see the information you have to pay a deposit. Once you pay the deposit we’re going to send you the URL, we’re going to send you all the earning screenshots, we’ll be able to put you on a call with the seller and give you all the information you need to make an informed, due diligence decision. We hide that behind a deposit kind of a pay wall to make sure it’s not out there publicly for anyone to see.
Felix: This deposit, is it refundable like if you’re shopping for multiple stores? Is it like a percentage of the sale price? Give us some more details about how the deposit works.
Justin: Yup. It’s a 5%, fully refundable deposit up to $9,900. If it’s over, a little over $200,000, the max deposit would be $9,900. It’s fully refundable, any time, for any reason. If you actually go to buy the business, we’re still going to refund the deposit and you’re going to be sending a wire in for the full amount. We refund all the deposits, all the time. You can pay with a credit card, you can actually pay with a wire. That will give you all the information you need for due diligence. In terms of taking that deposit and transferring it to another business in a similar class, that’s fine. If you’re looking at a $30,000 drop shipping site, or a $50,000 drop shipping site, and you want to transfer it to a 1.2 million dollar ecommerce business know that’s not okay, but if you want to transfer is to another 40, $50,000 site that’s not a problem.
Yes you can transfer between businesses, but we generally handle that post deposit.
Felix: Maybe to close this out, what are some of the biggest opportunities or trends that you’re seeing in the buying and selling space, particularly maybe in the ecommerce space.
Justin: The first one that comes to mind isn’t in ecommerce, it’s actually in Leadgen, but maybe there’s an opportunity for ecommerce. I see it in the, there’s a company called Quinstreet and there’s another one called Campus Explorer and they have all these relationships set up with for profit institutions. There’s a lot of for profit schools that are out there. Tech schools, vocational schools that are hungry for students and the students pay a lot of money to attend those.
If you’re doing content in that space, let’s say the medical education space for example, Quinstreet has all these relationships and so does Campus Explorer with all these educational institutions, and they’ll pay you for a lead anywhere from 20 to $50 per lead. A lead may be their name, their email and a phone number to contact them. If you have a content based site in some kind of medical education niche, I’m not going to say anything specific, but in that general niche. It is specific and it’s locational so it’s like in Portland, if I wanted to look for a medical school in this area and I fill out my information, then I can sell that lead to Quinstreet. Quinstreet has code you can put on your site.
I’ve seen these sites do really, really well. I think there’s a ton of opportunity. I think that industry is really growing. We’ve sold quite a few sites similar to that or in that kind of space, which i think are pretty interesting. We’ve seen lately some drone ecommerce businesses in the drone space that have done really well. Same thing for the vape space, but again that’s a big question as to where that’ll be in the next couple of years. It could do really, really well or it could do very badly depending on legislation.
Felix: All right cool. Awesome, thanks so much for your time Justin. Empireflippers.com. EMPIREFLIPPERS.COM, again it’s a website. Anywhere else you recommend listeners check out if they want to learn more about buying and selling businesses.
Justin: Yeah Felix. We have a podcast called the Empire Flippers podcast. You can take a listen to that. We also have another show called the Web Equity show where I’m on with another broker. A guy named Ace Chapman and we kind of hash out a lot of the details between buying and selling.
Felix: Awesome. Thank you so much for your time.
Justin: Thanks man.
Felix: Here’s a sneak peek for what’s in store for the next Shopify Masters episode.
Speaker 3: I look at my blog and I see how I’ve tried to streamline it. You know things like always having the same size image. I used to write much longer blog posts than I do now, whereas now I try to keep them short and to the point and then once a week I like to get something kind of meaty that you can sit down and read.
Felix: Thanks for listening to Shopify Masters, the ecommerce marketing podcast for ambitious entrepreneurs. To start your store today, visit Shopify.com/Masters to claim your extended 30 day free trial.
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