When I first started buying eCommerce businesses, the terminology seemed overwhelming. But once I got the hang of it, I realized how crucial understanding key terms is to making sound investment decisions. If you’re looking to buy an online business, it’s essential to grasp these key eCommerce terms that have shaped my approach to acquisitions.
Let me walk you through 10 crucial terms you need to know before you make your move.
1. Due Diligence
When I first began acquiring eCommerce businesses, due diligence was one of the first lessons I learned the hard way. Due diligence is the process of thoroughly evaluating a business before purchasing it. It’s more than just reviewing financial statements; it involves scrutinizing operations, customer base, supplier relationships, and market potential. I once acquired a business based on its strong revenue reports, only to find that its supplier agreements were shaky and its customer satisfaction was low. Doing the proper due diligence beforehand could have saved me headaches later.
2. Revenue Multiple
One of the most important things I learned early on was how to assess a business’s value through the revenue multiple. In simple terms, the revenue multiple is a way of valuing a business based on its current and projected revenues. I’ve led several deals where a business with a solid track record of steady sales commanded a higher multiple, which reflected its proven potential for growth. In my case, I acquired CloudSharks, a brand that had a strong customer base and consistent revenue, which justified the higher multiple and made the acquisition worthwhile.
3. EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is one of the key metrics I always focus on when evaluating a business. EBITDA gives a clear picture of a business’s operating profitability without the noise of taxes or non-cash expenses like depreciation. I remember one deal where the business had an impressive revenue number, but when I dug into the EBITDA, I saw that its expenses were eroding profits. Understanding EBITDA helped me make smarter decisions by focusing on the true profitability of the business.
4. Traffic and Conversion Rate
If you’re looking at an online business, it’s not just about how many people visit the site — it’s about how well that traffic converts into sales. I always evaluate both traffic and conversion rates carefully. For example, I once acquired a business that had high traffic but low conversion rates. After tweaking the site’s user experience and refining its sales funnel, we saw a dramatic increase in revenue. It’s a powerful reminder that traffic alone isn’t the holy grail; how you convert that traffic is what truly matters.
5. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is something I pay close attention to when assessing the long-term sustainability of a business. CAC refers to the total cost of acquiring a new customer, including marketing and sales efforts. In one of my earlier acquisitions, I realized the business had a high CAC because it was heavily reliant on paid advertising. We restructured the marketing strategy, focusing more on organic content and partnerships, which lowered the CAC and improved profitability in the long run.
6. Churn Rate
Churn rate, or customer attrition, measures how many customers stop buying from your business over a given period. When acquiring subscription-based eCommerce businesses, I always check the churn rate closely. A high churn rate indicates that a business might struggle to retain customers, which can limit growth. For instance, when I acquired a SaaS company, its churn rate was too high. We introduced a customer loyalty program and refined the product offering, which significantly lowered the churn rate and helped boost retention.
7. Net Profit Margin
Net profit margin is a critical measure of profitability — it’s the percentage of revenue that remains after all expenses, taxes, and costs are deducted. I’ve seen many businesses with strong revenue but low-profit margins due to inefficient operations. By focusing on optimizing expenses and eliminating wasteful spending, I’ve been able to turn around struggling businesses with great sales potential but poor margins. It’s all about refining the operational side to maximize profit.
8. Inventory Turnover
In eCommerce, especially in physical goods, inventory turnover refers to how quickly products are sold and replaced. A high inventory turnover rate indicates that the business is efficient at moving its stock and maintaining healthy cash flow. I once acquired a retail brand that had stagnant inventory, tying up valuable cash. By analyzing the inventory turnover, I was able to optimize the product assortment, which improved sales velocity and freed up cash for reinvestment.
9. Lifetime Value (LTV)
Lifetime Value (LTV) is one of the most powerful metrics for assessing the potential profitability of an eCommerce business. It refers to the total revenue a customer is expected to generate throughout their relationship with the brand. I always look at LTV to gauge customer loyalty. In one acquisition, we identified that increasing the LTV through targeted email marketing and loyalty programs could significantly boost overall revenue. After implementing these strategies, the business saw a notable increase in repeat customers, which drove growth.
10. Exit Strategy
An exit strategy is your plan for selling or exiting a business after you’ve built it up. Whether you’re looking to sell to a competitor, merge with another company, or go public, having a clear exit strategy is essential. I’ve built several businesses with the goal of eventually exiting at a significant profit. In my experience, understanding how to grow a business for sale, like improving profitability and customer retention, can significantly impact the return you get from your exit.
Final Thoughts
The key to success in buying eCommerce businesses is not just identifying a business to buy but understanding the key terms that drive its success. These terms, like EBITDA, CAC, and revenue multiples, have shaped my approach to making informed, strategic investments. By learning to navigate this terminology and using it as a guide, you can build a profitable and sustainable eCommerce business that thrives.
As you move forward, keep these terms in mind. They’ll empower you to make smarter decisions and ultimately lead to the success you’re striving for.
About the Author
Jayden Scott is an experienced eCommerce entrepreneur and fund manager with a passion for transforming undervalued businesses into profitable assets. With a track record of leading multi-million-dollar acquisitions and guiding others to financial success, Search Fund manager Jayden Scott’s insights have helped countless entrepreneurs and investors grow their online ventures. His focus on strategic acquisitions and long-term growth continues to set new standards in the eCommerce industry. Get in touch with him for a quick chat.