Evaluating an E-Commerce Business w/ Declining Financials

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February 07, 2023

by a searcher from University of South Carolina in Charlotte, NC, USA

I have been working on purchasing a E-commerce business over the last 5 months. I had an LOI accepted in September and have been negotiating the contract since. Now, the contract is ready to sign, but the Q4 financials came back very weak. In 2021 they finished the calendar year doing $3.4MM in revenue doing $1.2MM in Q4###-###-#### finished at $2.1MM with Q4 pulling $540K. I am working on receiving a better answer from the seller on why this has happened. In general, I would like to ask, is it worth me proceeding with this business with my EBITA $120k less? Assuming I can drop my purchase price, do I want to take over a declining business?

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Reply by a searcher
from University of South Carolina in Charlotte, NC, USA
Thank you everyone for your responses and DD material. To give more insight. I do believe my business plan will work even with this business declining. I have asked many of the same questions listed above of the seller, mainly surrounding conversion rates, traffic, supply chain issues, etc. I really want to hear from him exactly why he thinks there is this decline. One of the key flaws in his current business management is that he has his employees doing all the marketing, advertising, email campaigns, etc. From what I can see is they are never consistent and lack the expertise to do it correctly. There are other aspects to improve the business, but I believe this is a bigger factor in the declining revenue.

In my mind, his answer does not change much for me. I will change my offer accordingly to account this decline or I will walk. I put this business under contact at a x2.2 multiple so I do already have a good deal. I will change my offer to include a lower price with more seller financing and/or a holdback amount.

Luckily, we have yet to sign the contract on this business. I am waiting for the seller to respond to me with answers to all my questions. Once, I have that I will present to him my two different offers. I will update this post with more answers when I can.

Thank you everyone.
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Reply by a searcher
in Lehighton, PA 18235, USA
As others have said, you need to dig into WHY that decline happened. Their analytics should reveal traffic sources and might help you pinpoint which funnel primarily contributed to the decline.
If you can't get a clear understanding of WHY business is declining, then you should be very cautious and adjust your price down accordingly. If you can figure it out, then it all boils down to whether or not you feel you can reverse the trend once you purchase the business. If you can fix it after purchasing, then you still have a golden opportunity to buy lower and immediately turn things around.
I have some experience here. We bought an ecommerce business that had been abruptly closed (literally, no one responding to frantic emails from customers, no voicemail, etc) for 4 months before we bought it. Once we acquired the business and reopened it, sales came roaring back. Prior customers still wanted to work with a company they had purchased from in the past. We paid about 12% of annual topline revenue for the business as we had no idea what the bottom line even was. In hindsight, I could have paid 100% or more of annual revenue and still gotten a great deal. But it all really boils down to understanding the business, what's behind the trends, and knowing what you can do to turn things around.
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