When ecommerce business owners think about acquiring new customers, they usually consider new ads, affiliates, partnerships, and content creation. In other words, organic and paid marketing strategies.
Which is understandable. It’s what everyone is doing, the metrics are easy to calculate and track, and when done right, it works well. But it’s not the only way to grow.
If you look at other industries – like real estate or oil and gas – many successful brands opt for inorganic growth through acquisitions, i.e., buying other businesses.
Is it different for ecommerce businesses? We don’t think so. Several of our clients at ECOM CFO are actively seeking acquisitions or have successfully purchased new companies.
If your balance sheet is healthy and you have ambitious growth goals, you’ll want to consider whether you can achieve those goals faster by buying a business.
Of course, an acquisition isn’t just about the dollars. We’ve compiled this guide on approaching a purchase for the first time. We’ll take a look at the following:
- How to think about acquisitions as a growth strategy for your ecommerce business
- How to maximize your chances of acquiring the company you want at the price you want
- How to integrate your acquisition the right way so you achieve the growth goals you’ve set
And we will divide this into two sections – the pre-deal and post-deal phases.
Let’s dive in.
The pre-deal phase.
The pre-deal is the part before you’ve signed anything.
You’re talking to the seller, doing homework on the business you want to buy, negotiating a price.
You want to make your offer attractive to the seller at this stage. But you also want to set your priorities so you keep sight of the forest for the trees. Here’s what to keep in mind.
Put things in perspective.
It’s natural to be excited about acquiring a new business. But an acquisition isn’t like buying something from the store – it takes a lot of planning, effort, and research from you and your team.
It would be best to consider what the acquisition will add to your revenue and profit margins and whether that’s worth the effort.
So, for instance, if your company’s revenue is $10 million, and the target company’s revenue is $500,000, that’s only 5% of your revenue. Align your time and effort accordingly.
Takeaway: Always align effort with impact. The reason you’re acquiring is to grow the business you already have. Don’t compromise on what your current business needs for the sake of a shiny new object.
Being likable can be an asset.
Being a nice person is usually a point in your favor. Niceness won’t make up for a lowball offer. But the seller trusts someone new with their business – they need to know it’s going to someone who cares.
Recently, one of our clients was negotiating with a seller. He didn’t have the highest offer – he was one of the five top contenders, within $20,000. He got the deal because the seller liked how he cared about the business and planned to grow it as its original brand. The seller cared more about the company’s future than the $20k.
Takeaway: Some sellers want to get the best deal – with others, though, you need to demonstrate you’re about more than the dollars. Take the time to build a connection with the seller and see how well you align on brand goals.
Don’t trip over dollars to pick up pennies.
No one wants to pay more than something’s worth. With acquisitions, though, there are better strategies than penny-pinching.
If you’re too fixated on saving a few thousand dollars now, you may risk losing out on higher returns later.
Coming back to our client – before negotiating, he’d put in a lot of work to understand the seller and ensure the brand would fit in with his own. He and I had moved on to talking about the projections of the financial impact the acquisition would have.
At one point, our client was thinking about offering $20,000 less. But as we kept talking, we realized that paying 2% or even 5% more right now would be fine.
Because based on our projections, the new business would be a game-changer over the next two to five years – making at least $200,000 and potentially even a million dollars in five years if things went well.
With ROI numbers like that, holding back for an extra $10,000 or $20,000 wouldn’t make sense.
Also – and this is critical – there was the opportunity cost of starting the search for another acquisition. In this case, our client also had the carrying cost of debt to consider, so there was legitimate urgency.
But apart from that, the time it would take to identify, do homework, and negotiate with another seller would cost much more than raising the bid on the current deal.
Our client ended up increasing his offer – and coupled with the fact that the seller already liked his approach, it helped him win the deal. And since then, he’s already been stocked out of inventory.
Takeaway: Your time as a business owner bears a cost. Before you step back from a deal that’s a few grand more than you expected, consider the trade-off between paying more now and making more later versus saving now and having to start the search again.
But be prepared to leave if you have to.
Despite the previous point, avoid getting too attached to any one deal.
You will have to live with this business at the price you paid. So even if you’ve already spent a lot of time negotiating, know when to walk away.
If you can’t agree on a price, if the projections don’t hold up, or if it just doesn’t feel right, you should walk away.
Takeaway: There will always be other deals and other opportunities. Have a “walk price” for every sale you negotiate – your balance sheet will thank you later.
You’ve signed the papers and taken ownership of the new business. It’s an exciting time – but it’s just the beginning. You must integrate the new business with the old so they work how you want them to. Here’s what you’ll want to focus on.
Sync – or separate – resources.
Think about how you want your acquisition to operate. Do you want to run it separately? Do you want to integrate it with your existing business? Will you keep separate books? How do you plan to allocate team members between the two? What about tech resources?
We’ll talk about accounting more in the next point. But you need a clear plan for running both businesses and the resources you’ll need to make that happen.
For instance, you could distribute your current team members across both, hire extra hands, or keep things simple by getting an outsourced team. You also want to consider your tech stack, whether you can sync the new business with the tools you already use or whether it needs any new software.
Takeaway: Think about your vision for this acquisition in the long term and make these critical decisions early.
Get your accounting right.
Many business owners continue to trip over this part.
You need transparent processes for how the new business will reflect in your books – and you need those processes upfront so your readers don’t get tangled up later. To keep things simple, here’s a checklist of ten must-dos that you can work through with your accounting team:
- Decide on an accounting structure (separate or combined).
- Choose suitable accounting tech.
- Agree on accounting policies, such as ad spends and COGS.
- Let your accounting team know as soon as the deal is closed before you start operating on it.
- Mention the exact date when accounts change hands – the accounting team needs to know when to start recognizing revenue as your business’ own.
- Get a proper inventory account, including any goods in transit.
- Update existing accounts and budget.
- Update your KPIs to include ROIs on the new business.
- Update your cash flow statements.
- Accrue the earnout – if you agree to pay the seller through future sales, that liability must be on your balance sheet.
Takeaway: An acquisition is a significant change to your business structure, so ensure your accounting team knows what to do and when. It’s also an excellent time to consider outsourcing your accounting to experts who can help you run both businesses.
Acquisitions can be a great way to expand your ecommerce business beyond what you can achieve with organic and paid marketing. It’s a significant financial outlay, so you must ensure it fits your overall growth strategy well.
Consider your goals, how the acquisition can take you closer to those goals, and what resources you’ll need to see those results. Get these right, and the ROI will follow.