January 4, 2023
Adam Hoeksema
A Shopify store is an appealing prospect for many looking to take advantage of the rise of one of the most successful eCommerce platforms around.
In this piece, we’ll help mitigate some of the risks involved by going into where to look and how to start the process. If you’re looking to buy a Shopify store, we’ve got a step-by-step guide coming up that will put you ahead of the game. First, though, let’s take a look at where Shopify sits among the big players.
Shopify Growth Trends and Drivers
There are close to one million active Shopify stores worldwide, powering 15% of all physical goods eCommerce sites. The market share is over $382 billion, higher than any of its competitors, and represents 21% of the worldwide eCommerce market and 32% of the eCommerce platform market in the US.
Around 70% of its market is in the US alone, and it’s predicted that it will experience a CAGR of 25% up to 2025. Growth is driven by numerous factors. Between 2020 and 2021 it almost tripled its revenues, benefitting from pandemic restrictions on physical stores and vendor wariness towards Amazon.
Payments have proven to be a significant driver of growth for the platform, with its payment processing service, Shopify Payments, accounting for over 70% of its revenues in the first quarter of 2022.
Rising interest rates and the war in Ukraine have exerted significant pressure on Shopify shares recently, and many investors have been temporarily abandoning tech stocks in general in favor of less volatile options.
There is also the fear that the company is reaching the end of its most rapid growth which is making investors hesitate, but the position still looks good to hit 31% growth for 2022, suggesting, there’s still significant life left in the all-in-one eCommerce platform.
It’s possible to start a Shopify store from scratch, but if you have access to the capital, it’s probably better to buy a Shopify store that already exists. There are quite a few benefits to buying a Shopify store, so before we talk about how, let’s cover some of the reasons why.
Benefits of Buying a Shopify Store
Setting up a store from scratch, even an online one, is an involved process with countless planning and formulation steps. One of the major benefits of buying a pre-formed store is that you get to skip this whole process and get straight into running the company.
This is still easier said than done, of course, but there’s something to be said about avoiding all the decision fatigue and red tape of going at it from zero.
Another key perk is that you don’t have to wait to make money. As soon as you’re legally set up, you can get moving and market or sell products off the bat.
If you’ve done the right research, you’ll be able to select a store that’s already proven itself as a successful enterprise, which will give you a high chance of success. When you buy a pre-existing store, you also get all the clients and networks attached to it, meaning that all you have to do is maintain it to get an ROI.
Still, since the Internet Shop is a concept that is still in its infancy, buying one often involves taking a risk with a handful of primitive systems that aren’t necessarily as secure as the more traditional processes of buying and selling physical property.
A Note on Marketplaces
So far, the points being made have been applicable to buying any existing business but there are some things about the platform that makes buying Shopify stores a little different.
Buying an online business can throw up a lot of challenges relating to the maturity of the businesses and the lack of a clear path as regulations and protections have yet to catch up with those surrounding physical stores.
With this in mind, Shopify had offered the Exchange Marketplace, which was designed to help people feel comfortable in their purchases by providing real, reliable data that Shopify themselves have collected on the performance of the store.
This data covered revenue, traffic, sales, and inventory and because it’s collected by Shopify, sellers didn’t have control over how they’re manipulated. Further, Shopify vetted the sellers on their marketplace and limited access to those with bad customer relations.
Unfortunately, this platform was discontinued in November 2021, due to a number of reasons, and so sellers and buyers now need to look into viable alternatives that provide a similar level of protection. Even with this, there are some downsides to buying, rather than starting from scratch, that are worth considering before you get going.
Drawbacks to Buying Shopify Stores
Before looking to buy a Shopify store, it’s important to consider the cons as well as the pros. Here are a few of the main ways that buying Shopify stores can skip some valuable steps that you might want to consider.
Experience in the market - If you start from scratch, you’ll have to do some deep research into market trends, competitor analyses, and other elements of functioning in the industry that might be tempting to skip if you buy an existing store. Of course, you should be doing this regardless, but setting up a store from scratch makes it a necessary part of getting your business off the ground and gives you valuable experience in the process.
Creative control – Starting from nothing also allows you to build the company up in the manner that best suits you, whereas buying one, especially if it comes with customer lists and leads attached, likely will require you to adjust your approach to the market you’ve already got. This isn’t necessarily a bad thing, but it is a very different skill that involves balancing your style with what’s expected from your current customers.
Cost – A well-established and successful business might be less of a risky endeavor but that security will come at a higher price. Whether that price is higher, in the long run, is up to how well you do, but in general, starting and growing a company is cheaper in the short-term, and often easier to fund.
Backend – The complicated integrations, apps, and plugins involved in an established Shopify store might take some getting used to. This is something that you’ll learn as you go when starting one from the beginning, and you’ll be able to customize the backend to your liking; a privilege that won’t be granted to you when you purchase an established store.
Essentially, when you buy a Shopify store, you’ll be met with the challenge of balancing your creative input with your ability to adjust to what’s already there. Change too much, and you’ll likely lose customers, but tweak things in the right way, and you’ll be able to boost profitability and maintain growth.
If all of this seems manageable, it’s time to take a look at just how you’d go about buying a Shopify business.
How to Buy a Shopify Store: Getting Started
The very first thing you should do is narrow your scope. If you have a specific industry or model in mind, that’s good, but if you’re still browsing your options, you might need to put in some parameters. There are countless thousands of Shopify stores available for sale, and in general, the more successful they are, the more expensive they’ll be.
This means one of your earliest parameters to set will be the budget you’ll have. There are stores for sale for $1k and stores you can get for $6 million, so consider how much you’re likely to be able to afford or generate to give you an easier time of what to look for.
Then, it’s a matter of knowing where to look. With Exchange Marketplace so recently gone, quite a few alternatives are popping up, so shopping around for a decent marketplace is another complication that you’ll have to navigate.
If you choose to go outside of a marketplace, there are private sellers too, and this might be a faster option, but will likely be less secure, as they won’t have been vetted by the 3rd party marketplace. Regardless, you’ll have to put some work in to then value the business and due your due diligence.
Eyeing a Shopify store purchase? A quick QoE Sniff Test could reveal the financial insights you need before making an offer.
Buying Shopify Stores: Considerations Before Getting Too Deep
By now you might have your eye on a few good-looking prospects and be thinking of getting valuations done to see if they’re as good a deal as they seem to be. There are two primary considerations worth mulling over before you do this:
Why do they want to sell it?
Not many people like to give up on a good thing. In a lot of cases, if a business is booming and healthy, they’re happy to hold onto it. In other cases, they maybe took it on from someone else, to fix it up and sell it on for a profit, or they simply might be tired of the work involved and want to retire or move on to other ventures.
There are countless reasons, good and bad, for selling what looks to be a good business, and you need to figure the real reasons out before you spend your money.
If the seller has insights into an upcoming market crash and wants to bail out early, you need to know. If they just removed all their employee benefits to make the last couple of months look extra profitable so they can sell at a higher price before their staff jump ship, you need to know this too.
Your due diligence is an important step to making sure everything is how it looks. Don’t be afraid to back out if you find some shady business going on; you may spot some ‘tactical oversights’ in the seller, but chances are you don’t spot them all until it’s too late.
Why do you want to buy it?
If you’ve gotten to this point without asking yourself this already, this is your last chance. There are just as many bad reasons to buy as there are to sell, so you need to be sure that when you buy a Shopify business, it’s the right decision.
When you identify your motivations behind your purchase, you’ll also figure out what stage of business you want to buy at. How much work are you willing to put in? What kind of profit do you need to be making in the next year?
Once you’ve made sure that your motivation aligns with the work needed to make your target company work for you, you can get a valuation and figure out whether it’s worth paying for.
How to Value a Shopify Store
A valuation is an objective amount based on a relatively simple formula. Typically, eCommerce companies are valued in one of two ways:
1. Seller’s Discretionary Earnings (SDE)
This is a cash flow-based measure of earnings and is made up of the profit before tax, and the interest of the business, before the owner takes their cut and expenditures out. This essentially gives you the raw profit excluding everything that comes out of that profit, to give you an idea of what your baseline profitability will be.
Operating costs will be taken from the revenue, but the discretionary earnings will be those that aren’t essential to the running of the business, and thus will not be counted. The strength of this metric is that it gives you an idea of what you’re starting with, which allows you to see what you’ll be able to take for yourself if you purchase the company.
This valuation method is by far the most common for eCommerce, up to a point. Once they get quite large, they increase in complexity and may need to use another valuation method.
2. EBITDA
Earnings before interest, tax, depreciation, and amortization aims to represent the profit generated by the company’s operations. This metric takes into account more complex features of larger businesses such as financing decisions, tax strategies, and discretionary depreciation schedules.
While this is a common metric for valuation, it’s not without its critics. Some believe that its omission of capital costs renders it worthless and it isn’t accepted under Generally accepted accounting principles (GAAP). Still, it remains one popular way of comparing online stores with different capital investments.
This can get as complicated as you want it to, and it’s often a good idea to get some outside help. Once you’ve got a feel for the value of the company and you’ve decided it’s worth paying for, you can make an offer and (hopefully) have it accepted.
Download: Free Business Valuation Calculator
How to Buy a Shopify Business: The Purchase
If you need to reach out to bring in some funds for this purchase, there are a few options. Despite concerns, many consider Shopify to still be a solid investment, meaning that there should be funding from Angels or Venture Capitalists available if you choose to take this route.
Otherwise, bank loans could be a useful alternative or any number of the financing options at your disposal. Some options to research include:
- Merchant cash advance
- Lines of credit
- Bank Overdraft
- Equity financing
- Crowdfunding
- Grants
Regardless of which financing method you use, it’s important to have your financial documents in order when asking someone for money. ProjectionHub has a template designed specifically for making it easy to generate projections for a potential acquisition. Your projections will help you to value the company with confidence and ease.
This template is entirely customizable and comes with support included, so you can tweak it with or without help, to fit your needs. What you’re left with is a professional-looking financial document that can show investors or lenders that you’re serious.
With your funds in place, you need a secure way to pay for the business. If your broker or marketplace has an escrow service, the money can be securely collected and held by a third party until buyers and sellers agree to all the terms and conditions.
Usually, after transferring the money to escrow, you’ll have time to enter an inspection period, where you get to explore the store and do your due diligence. This is where you should do final checks into the data that you’ve been presented with and make sure it’s all accurate and reflects reality.
When you’re satisfied, you can start the transfer. This can take some days, after which your money will be sent to the seller and you will be the new owner of your Shopify store.
Conclusion
It can be risky when trading in online businesses if you don’t know where to look or how to go about the transition. Thankfully there are reputable brokers, marketplaces, and escrow services available to reduce these risks a little and make the process smoother and more palatable.
The rest is up to you: figure out what you want to buy, why you want to buy it, and do all the relevant checks to make sure the company is what it says it is, and you’ll easily be able to get a head start on your first purchase of a Shopify store.
