Section 1.1: Traffic Sources

Consider a business claiming to attract significant monthly traffic without any advertising expenditure. Sounds promising, right? However, the value of this traffic depends on a few factors:

• Who comprises this traffic? If it consists mainly of international visitors while your offerings are tailored for a specific country, this traffic may not be beneficial. Additionally, if the demographics of the traffic don't align with your target audience — whether by age, income, interests, or other factors — it should give you pause, as you will still need to attract the appropriate visitors to the site.
• Where does this traffic originate? If it's exclusively from one social platform and you don’t want to depend on that particular channel, that could be problematic. If it’s all from paid advertisements, carefully examine the financials to understand the actual costs associated with attracting those visitors.

Subsection 1.1.1: Industry Insights

Section 1.2: Evaluating Profitability

I once considered acquiring an e-commerce brand that seemed financially sound and boasted years of claimed success alongside a strong multi-platform marketing strategy. However, a deeper dive revealed a different story:

• They were profitable, but they omitted that 75% of their expenses were tied to ads on a single platform.
• They were selling because, despite profitability, they found their advertising efforts yielded much higher returns in a different sector.

In total, they spent $167,000 to generate just $45 in profit, and with the trends in their industry and the advertising platform, that return was likely on a downward trajectory.

Yes, if they had a loyal customer base returning regularly to their established brand, it might still hold promise for a new owner skilled in marketing. However, their sales were primarily one-offs, brand loyalty was minimal, and there was a lack of social proof or reviews to sustain momentum.

If you’re not acquiring brand equity, a loyal customer base, proprietary products, or years of established social proof, what exactly are you paying for? An e-commerce site lacking these elements that demands a marketing overhaul may not be worth the perceived value.

Section 2.1: Return Rates

Let’s examine another key element: the return rate. Many sellers may shy away from discussing this, but it’s crucial. A company with a 30% return rate can significantly impact your financial forecasts. You’ll need to set aside 30% of sales for potential refunds, which can skew any valuation based on total sales or profitability before refunds.

And no, a 30% return rate isn’t outlandish — it varies by industry and platform. Entrepreneurs across various sectors, from physical products to digital sales, often maintain a surprising level of return reserves. If a seller claims their business generates $100,000 monthly with $20,000 in ad spend, inquire whether a third of those customers are returning products or disputing purchases, inflating their customer acquisition costs and return on investment.

Section 2.2: Recognizing Restrictions

I once launched a company that experienced immediate sales success with minimal marketing. It was promising — until industry scrutiny and new advertising guidelines emerged. Almost overnight, we faced:

• Required disclaimers
• Ads being rejected
• Platform bans

By the way, this was not a controversial product; it was an educational B2C offering. Fortunately, we managed to pivot away from the problematic platform after incurring significant losses.

If you believe this is an isolated incident, think again; many industries are grappling with new advertising regulations. Here are a few more affected sectors:

• Cryptocurrency
• Supplements
• Weight loss
• Finance
• Real estate
• Infotainment

The takeaway is clear: some businesses may appear viable until unforeseen challenges arise. Always assess how the company markets and any potential roadblocks that could derail its future.

Section 3.1: Assessing Seasonality

Seasonality can significantly impact your business evaluation. Consider a company that has been thriving for six months with impressive profits. It seems like a solid investment, but what if the seventh month signals the start of a long, dormant season for that highly seasonal business?

If you base your valuation solely on one flourishing season or an outlier year (such as those influenced by the pandemic), you might end up overpaying for a business that only delivers a fraction of its projected performance.

Section 3.2: Competitive Landscape

Most industries have their share of competition, but if the venture you’re considering lacks a distinct advantage or unique selling proposition, you may find yourself in a challenging market. If your marketing budget can't compete with larger rivals, you could be facing an uphill battle.

Section 3.3: Hidden Truths

Unfortunately, there are often unspoken truths about products or services that sellers may not disclose. These include:

• Dependence on Suppliers: If a business relies solely on one manufacturer or supplier without alternatives, it presents a risk. What happens if that supplier runs out of stock or is shut down?
• Delivery Times: If a seller fails to mention that shipping takes three weeks due to overseas providers, it could result in unhappy customers and cancelled orders.
• Quality of Service: If you’re acquiring an e-commerce service business that is fully outsourced to a low-cost provider, you might just be purchasing a website and access to freelancers, which begs the question: is buying this business worthwhile compared to starting your own?

Section 3.4: Future Expansion Opportunities

Consider whether the business has reached its maximum potential. If it successfully sells a one-time product through a couple of channels, what comes next? Are there opportunities to expand into new markets, channels, or additional products?

If the venture appears to be at its peak with limited room for growth, you may find yourself buying a stagnant project.

Section 3.5: Evaluating Alternatives

Before investing your limited resources into a business, carefully weigh your alternatives. Could another opportunity provide a better return on investment? Would it be wiser to build your own business from the ground up?

Finally, consider the seller’s motivation for selling.

The Unfortunate Reality

Establishing an e-commerce, dropshipping, or print-on-demand business isn’t particularly difficult; it’s actually quite accessible. This ease of entry is precisely why succeeding can be so challenging.

This means two things:

1. If you possess the tenacity, resilience, and unique insights to stand out in the crowded e-commerce landscape, go ahead and build your business from the ground up.
2. If you discover a business that has already navigated the challenges of visibility and traction to establish a recognizable brand and loyal customer base, it may be worth acquiring.

However, whether you decide to build from scratch or purchase an established entity, the hurdles of lead generation and customer acquisition are unlikely to disappear. If creating a successful business were easy, everyone would do it — and many are. If achieving a multi-million-dollar profitable enterprise with lasting stability were simple, more people would succeed. The reality is that it’s not easy, but with determination and preparation, you can be among those who do.