Pros, Cons of an Ecommerce Acquisition
In “7 Strategies to Grow Ecommerce Revenue,” my previous article, I explored basic, low risk strategies to grow ecommerce revenue. There is another strategy, however, if you are willing to assume more risk: an acquisition.
Let’s face it, ecommerce is very competitive. In virtually every market and product niche, there are many viable alternatives for buyers. Margins are tight. Pricing is volatile and aggressive. Advertising costs are rising. Shipping costs are rising. Amazon is ready to steal your best sellers.
There are likely merchants reading this that are considering selling their businesses. Because of that, there are opportunities for companies to expand their customer base and revenues by acquiring competitors. There are also opportunities to vertically integrate by acquiring suppliers or manufacturers.
In this article, I’ll explore both of these alternatives.
Buying a Competitor
This is the more common situation and it may take many different forms in the next few years. The cost of borrowing money is very low and banks are actually lending money to established businesses for acquisitions again. At the same time, there are many ecommerce owners who have been running their businesses for 10 to 15 years and are ready to exit.
The benefits of an acquiring a competitor include:
- Adding its revenue stream to yours;
- Expanding your customer base;
- Adding new products;
- Adding new suppliers with more flexibility or lower margins;
- Gaining economies of scale and buying power with suppliers;
- Adding personnel with new expertise;
- Reduce costs by consolidating functions like finance and marketing;
- Lowering risk for entering a new market, as you are familiar with the products and pricing.
There are risks that you will need to consider as well.
- Difficult integration. Merging operations may be more difficult than expected. If you are not located in the same region, you may need to relocate the operations or manage multiple locations.
- Multiple stores. You will have at least two separate online stores to manage, merge, or operate. They may be different platforms and require different skills.
- Different systems. Financial systems, customer relationship platforms, and order management systems may be very different and will eventually need to be consolidated.
- Personnel changes. You will likely lose staff from the company you are acquiring. They may be the reason the company was successful, so you’ll need to develop strategies to keep them in place.
- Different customers. Your customer base may be quite different. You will need to use caution as you add products, change pricing, or merchandize and promote your products.
When companies buy competitors, the end result is oftentimes simply the purchase of inventory and suppliers. Most of the rest of the acquired company probably has little value in the long run. You’ll want to factor that into the price that you negotiate. Since you are likely already in a position to buy the inventory at roughly the same price, you need to ask yourself if you would not just be better off continuing your operations as is.
If you are truly in a position to buy significant market share by adding new customers or selling many new products, making a competitive acquisition could make sense. You could also consider a merger, though that is often more complicated, with different issues.
Another strategy to consider is a vertical acquisition. This usually involves buying a wholesale supplier or a manufacturer. Companies typically pursue this strategy when they are seeking to increase their margins or they want to expand their customer base by becoming wholesalers.
Benefits to a vertical acquisition include:
- Decrease in cost of goods sold;
- Acquire new wholesale customers;
- Dominate a market by selling the products only through your own channels;
- Increase the number of products you sell;
- Sell in new channels — like Amazon or eBay — because your margins are much lower.
Once again, there are many risks. A wholesale or manufacturing business is different than retail. If you continue to operate acquired businesses as they are run currently, you will need to retain their employees. Customers may seek other suppliers if you are their competitor.
In my previous online jewelry business, we acquired a wholesale supplier of a niche product. It had a catalog business and a good supply chain for its products. It also sold to worldwide buyers at trade shows.
Our primary motivation was to gain better margins on some fast growing and popular products we were selling. We felt we could shift the wholesale catalog business to online. We decided to phase out the catalog and skip the trade shows, assuming those buyers would be happy to buy online.
That was a bad assumption. The existing customers wanted to buy in person. They loved the catalog. Even after five years, we had customers who insisted on faxing in their orders with old catalog numbers. They simply did not want to buy online. We also learned that our inventory requirements were much higher for wholesale than retail. More diversity was necessary, and the stocking requirements were high for wholesale buyers.
So, if you are going to acquire a supplier, be sure to think it through. There will be instances where it makes sense. But tread carefully.
You may be tempted to acquire a competitor to take it off the market or gain access to its products and revenue. In most cases it will be risky. If you are not familiar with the process, bring in an adviser to help. Due diligence is tricky. Valuations are even harder. Discount the current revenue stream in your valuation. It will likely go down.
On the other hand, you may be able to increase the size of your business by 50 percent or more overnight. It could be a good long-term strategy, as ecommerce consolidates.