Buying an e-commerce business may sound easy. However, you will need to do you diligence before purchasing one.
Summary
- Understand how the business works.
- Be careful of buying liabilities.
- Get a Lawyer
Understanding the E-commerce Business
It is important to understand how the target company works. There are a lot of variations of business types in e-commerce, including dropshipping, OEM, and ODM businesses. Each business has different expenses and you may end up spending more money buying OEM businesses over dropshipping. For example, in the OEM business, you should be prepared to purchase stock of the product. Dropshipping, you do not need to purchase stock.
Potential Liabilities in the E-commerce Business
Due diligence is one of the most important parts of purchasing a business. As e-commerce becomes more competitive, there will be increased risks in selling certain products. Below are a few things you should ask questions about:
- How much is the target company making in profit v revenue?
- How much inventory comes with purchasing the target company?
- Does the products sold by the target company violate others intellectual property?
- Are there any lawsuits against the target company?
These questions are important because it can affect the purchase price. You do not want to purchase a lawsuit or buy a business selling an infringing product as you may end up buying yourself more issues than running a business. Without negotiating the purchase price based on these issues, you may end up overpaying for the target company. For example, the target company sells infringing products. Once you purchase the business, another business can sue you for infringing their products and force you to stop selling the products. In this case, you just spent a large amount of money just to shut down the target company.
Get a Lawyer That Understands The E-commerce Business
No one ever wants to spend money on a lawyer. However, this is important if you plan to spend a large sum of money to purchase a business. A lawyer can help in the following ways:
- Providing advice on what is standard in the industry.
- Draft a purchase agreement to purchase the target company, including the best structure for acquisition.
- Include a list of representations and warranties by the seller about the target company.
- Include indemnity provisions to cover for any potential losses after taking over the target company.
- Perform proper due diligence and advise on risks once you take over the target company.
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