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Pros, Cons of an Ecommerce Acquisition

In “7 Strategies to Boost Ecommerce Revenue,” my previous post, I researched fundamental, low risk strategies to grow ecommerce revenue. There’s another strategy, but if you’re prepared to assume more risk: an acquisition.

Let’s face it, ecommerce is quite competitive. In virtually every sector and product market, there are lots of viable choices for buyers. Margins are tight. Pricing is volatile and competitive. Marketing costs are rising. Shipping costs are climbing. Amazon is ready to steal your best vendors.

There are probably merchants reading this that are contemplating selling their businesses. Due to that, there are opportunities for businesses to expand their client base and revenues by acquiring competitors. Additionally, there are chances to vertically integrate by obtaining manufacturers or suppliers.

In this guide, I will explore both these alternatives.

Purchasing a Competitor

This is the more common situation and it could take many diverse forms in the upcoming few years. The cost of borrowing money is extremely low and banks are now lending money to based companies for acquisitions again. At exactly the exact same time, there are lots of ecommerce owners that have been running their businesses for 10 to 15 years and are ready to exit.

The Advantages of an acquiring a competitor include:

  • Adding its earnings stream to yours;
  • Increasing your customer base;
  • Adding new products;
  • Adding new providers with more flexibility or reduced margins;
  • Gaining economies of scale and purchasing power with suppliers;
  • Adding employees with new experience;
  • Reduce costs by consolidating functions like finance and marketing;
  • Lowering risk for entering a new market, as you’re knowledgeable about the products and pricing.

There are risks you will have to think about as well.

  • Difficult integration. Merging operations might be more challenging than anticipated. If you’re not located in exactly the exact same region, you might want to relocate the operations or handle several locations.
  • Multiple shops. You’ll have at least two different online shops to manage, merge, or function. They might be different platforms and require different skills.
  • Different systems. Financial systems, customer relationship platforms, and order management systems might be quite different and will eventually have to be consolidated.
  • Personnel changes. You will probably drop staff from the company you’re acquiring. They might be the reason the business was successful, so you will need to create strategies to keep them in place.
  • Different Clients. Your customer base might be quite different. You’ll have to use caution as you add products, change pricing, or merchandize and market your products.
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When companies buy competitions, the final result is simply the purchase of stock and providers. The majority of the remainder of the acquired business likely has little value in the long term. You will want to factor that into the price that you negotiate. Because you’re probably already in a position to obtain the stock at roughly the same price, you want to ask yourself whether you wouldn’t only be better off continuing your operations as is.

If you’re genuinely in a position to purchase considerable market share by adding new clients or selling lots of new products, creating a competitive purchase could make sense. You could also look at a merger, though that’s often more complex, with unique issues.

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Vertical Acquisition

Another strategy to consider is a vertical acquisition. This typically involves purchasing a wholesale supplier or a producer. Companies typically pursue this strategy when they’re seeking to improve their margins or they would like to expand their client base by getting wholesalers.

Benefits to a vertical purchase include:

  • Drop in cost of products sold;
  • Acquire new wholesale clients;
  • Dominate a marketplace by selling the goods only through your own channels;
  • Increase the amount of products you sell;
  • market in new stations — such as Amazon or eBay — as your margins are much lower.

Once more, there are lots of risks. A wholesale or manufacturing company is different than retail. Should you continue to operate acquired businesses since they’re run currently, you’ll have to retain their workers. Customers may find other suppliers if you’re their competitor.

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In my past online jewelry industry, we acquired a wholesale provider of a market product. It had a catalog business and a fantastic supply chain for its own products. Additionally, it sold to global buyers at trade shows.

Our main motivation was to obtain improved margins on a few fast growing and popular products we’re selling. We believed we could change the wholesale catalog business to internet. We made a decision to phase out the catalogue and bypass the trade shows, assuming those buyers will be happy to purchase online.

That was a bad premise. The present customers wanted to purchase in person. They adored the catalog. Even after five decades, we had clients who insisted on faxing in their orders with older catalogue numbers. They simply didn’t want to purchase online. We also learned that our stock requirements were higher for wholesale than retailstores. More diversity was necessary, and the stocking requirements were high for wholesale buyers.

So, if you will acquire a supplier, make sure you think it through. There’ll be instances where it is reasonable. But tread carefully.

Conclusion

You might be tempted to get a competitor to take it off the market or gain access to its goods and earnings. Generally it’ll be risky. If you’re not knowledgeable about this process, bring in an adviser to assist. Due diligence is catchy. Valuations are even tougher. Ignore the current revenue stream on your valuation. It will probably go down.

On the other hand, you could have the ability to increase the size of your company by 50 per cent or more overnight. It could be a excellent long-term strategy, as ecommerce consolidates.

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