According to RJMetrics.com, there are now over 110,000 e-commerce sites online generating significant revenue, and this stat could be both encouraging and concerning to would-be webpreneurs thinking of breaking into the space. The fact that so many are doing well lends to the hope that one doesn’t have to be a Silicon Valley genius with a one-of-a-kind product in order to find success online. But then a budding entrepreneur must also consider what barriers exist in starting from scratch, including how to compete with well-established competitors who are currently splashed all over Page 1 of Google.
Let’s take a look at just a few of the considerations for both buying an internet business, and building one from scratch.
Build - The Innovator
Being “first to market” with a new product, a new idea, or even with an old one repackaged for a different demographic can obviously put a startup in a good position to capture a particular market. The first downfall to this is that often your “market” doesn’t know it is the market. You may be stuck with having to define the need for people or businesses that they never knew they had before, and this comes with its own set of objections to overcome.
So you’re going to have to spend time and budget on education and awareness first. If you then get as far as making your target audience aware that they do in fact need what you’re selling, then you have the task of convincing them that they need it from you.
It certainly can be done, and gets done, by many. The size of investment needed and your time horizon will be major determinants in seeing if this is the right route to go. It’s important to do some testing of your ideas before you get too far into the process though, and that’s why so many Lean Startup people advocate producing just a minimum viable product (MVP) that can be tweaked and redirected as you learn what your customer base is willing to pay for.
Build - Filling a Void
Another option when starting from zero is jumping into an already established marketplace and finding your niche. Here you are not inventing anything new per se, and may not even be selling your own version of a product – many in ecommerce solely exist by drop-shipping, or otherwise selling other companies’ goods. This type of startup will be heavily focused on developing a competitive advantage like being cheaper/better/faster than others, or by providing an exceptional customer experience that’s hard to rival.
But then you have a few other competitor-related questions to address. If you’re relying on Google AdWords for driving customers to your brand-spanking-new-and-otherwise-unknown site, how much are those clicks going to cost you? If there is already a fairly saturated pool of competitors with account age and quality score on their sides, it may be expensive, and you may need to find a less-trodden path of advertising in your space.
On the organic front, your new site may look beautiful and function better than those of the big boys, but with no inbound links, no site authority, and no buzz yet it’s going to be a long climb to get to the top of search rankings for terms valuable to your business. Are you going to design and execute the strategy yourself, or hire the pros?
Forget all that, I’m going to Buy instead!
Many find that buying an established internet business makes more sense for their situation. Indeed there are even flippers of business websites that routinely pick up new acquisitions, make them better, and then sell them for a nice multiple of cash flow. If you find yourself not ready to leave that day job yet, and therefore having less time to dedicate to building/running an online business, the decision to buy might be a better fit.
If you’ve at least narrowed it down to buying instead of building, that’s good, and now you have another set of questions to wrangle with.
- What does a “good” business website look like?
- How much does past performance predict future outcomes?
- What is the real potential of this website?
- How much will my experience play into the business’s success?
- What’s a good price?
- Are current employees an asset or a liability?
When it comes to exploring the technical particulars and designing a post-acquisition marketing plan for a website you want to buy, or just bought, of course we’re happy to help in that regard!
Obviously the up-front investment is going to be greater in a “buy” situation since you’re purchasing an asset that’s already generating revenue. However, you may be able to work out some financing from the seller. Without going to deeply into the subject now, here’s a little on pricing and valuation. There’s no set of rules on how to value a business, and many brokers/sellers will use a multiple of the cash flows to the owner, and that will range from 1.25 x OCF to 3.5 x OCF in many cases.
If you see a business selling for less than the annual cash flow to owner, run. Or at least dig a lot deeper. You may find that the entire business is not being sold, or that equipment and inventory are being held back. Not deal killers per se, but worth scrutinizing.
As a buyer you likely won’t need a broker, but instead enlist the services of a good CPA and lawyer to guide you through the process, and for insights into the website itself get a real analysis from qualified experts – not your nephew in college who’s “a whiz with all this inter-stuffs”.
So who is planning on either building or buying in 2015? We’d love to get your thoughts in the comments!