Practical Ecommerce

Types of eCommerce Business Buyers

Different buyers pay different Prices. Buyers can be categorized into four broad groups. It is very important to understand the differences between them, how they think and how to identify them to have a successful Exit Strategy. If you carefully study these buyer types, you will find out which type of buyers will be interested in your eCommerce business, how much are they willing to pay and their purchase criteria:

Public Companies or Large Private Corporations ( The Strategic Acquirer ):

  • Who are they?: Public Companies or Large Private Corporations
  • Characteristics of this buyer Type: mostly cash or cash equivalents , decision makers are not buying from their personal funds
  • How much are they willing to pay?: Traditionally pay very high prices
  • Criteria for purchase: 5-10 years of track record, 1 million or more in profitability per year, economies of scale, new channels of distribution, proprietary product lines, new technology, market share or presence

Sophisticated or Corporate Acquirer:

  • Who are they?: Wall Street groups who once used to get highly leveraged deals, high net worth executives and Investor Groups whose prime purpose is to acquire existing companies. Many have “on the shelf CEOs” with which they will do a joint venture acquisition, Investment or Holding Company is typically an organization formed to acquire private companies
  • Characteristics of this buyer Type: Prefer management remain or stay for significant transition period, decision makers are buying from their personal funds or their investors funds
  • How much are they willing to pay?: This group brings a schooled approach to the acquisition process. They are accustomed to Public Company PE ratios, they tend to pay very fine prices (but not as much as the first type) that will take future profits into account.
  • Criteria for purchase: 3-5 years of track record, 150K- 1 million annual net, focus is on opportunity for growth (as opposed to potential), investment criteria are very similar to previous category, and size is important but not as important as the opportunity itself.

Financial or Lifestyle Buyer

  • Who are they?: Buyers in this category are the most plentiful as compared to the previous two types.
  • Characteristics of this buyer Type: this group will not pay all cash and will expect owner carry back, expectations on ROI is modest, in many cases they depend on business to feed their family and they are investing their life savings to purchase business, they value the business mainly based on the present, they look at the past only to project future growth (if past is higher than a present), and never pay based on future projections.
  • How much are they willing to pay?: Rules of thumbs apply – PE ratios generally follow 2-3 times “SDE”, most discussions under Valuing your ecommerce business apply here
  • Criteria for purchase: 3-5 years of track record, 30K- 500K annual net, Primarily interested in purchasing a job. Businesses that are priced based on reasonable PE ratios that has consistent track record of their minimum monthly take home need and that has high potential to grow the business by investing in their “sweat equity”.

Industry Buyers

  • Who are they?: Industry buyers are owners of businesses very similar to yours. You would be an Industry Buyer if you were considering the purchase of another firm similar to your own.
  • Characteristics of this buyer Type: Industry Buyers can be either the “best” or the “worst” buyers. Many times they are the buyers of last resort. If you have to sell, usually only industry buyers will buy. They are the best buyers when they have a strategic reason(s) to buy and know that you know the reason(s).
  • How much are they willing to pay?: Most industry buyers look only to selected assets to determine value. They do not want to pay for goodwill.
  • Criteria for purchase: They usually have a strategic reason(s) to buy. They are interested in certain aspect of your company that will benefit their product or service offering. That is why it is likely that benefit they see in your company is limited to only those component that interest them and their valuation can be significantly lower than value perceived by non-industrial buyer.

A firm’s value is comprised of several factors:

  • Value of company assets
  • Prospects for future profitability and growth
  • Rights and knowledge

Without proper preparation and positioning most internet businesses will attract only Financial buyers. This need not be the case. Every business can be developed and prepared so as to be attractive to first two types of buyers.

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