By John Murphy, founder of Dropship Journal and eBike Generation.
I recently read a book called Buy Then Build by Walker Deibel. It gives all the valid reasons why buying an existing business is a better way to become an entrepreneur compared to the classic tradition of building a company from scratch and growing it over time.
I want to share why I like both strategies when it comes to e-commerce business and some of the benefits and challenges with both. I have done both so I can share what I think is the best option overall.
First off, let’s take a look at the conventional method: building an e-commerce business from the ground up.
The Benefits Of Building Your Business From Zero
Valuable Skillset: When you are in the trenches in the beginning, you learn a lot of new skills. Skills like creating a website, copywriting, sales funnels and strategies to acquire website traffic, whether that’s organic traffic or paid ads. It’s very important that you know how to do everything in the business even if you plan to hire staff or outsource some aspects. Once you know how to do the job, you’ll know if the people you rely on to do a good job are actually delivering quality work or not.
Product Knowledge: If you, like me, are selling other people’s products, you may start off not knowing very much about the products you sell. By rolling up your sleeves and writing the copy and maybe even handling some of the customer service roles, you will gain vital insight into the product and, more importantly, the product-market fit, identifying the ideal customer’s need or desire for the products you’re offering.
The Challenges Of Building Your Business From Zero
High Failure Rate: Most startups fail. According to data from the U.S. Bureau of Labor Statistics, around 20% of U.S. small businesses fail within the first two years. By year five, roughly 50% have failed. After 10 years, only around a third of businesses have survived.
You Have To Grind: It sounds obvious, but it’s a tall task to start a new e-commerce business from scratch. If you, like me, chose e-commerce (for me it was high-ticket dropshipping) to become your own boss and quit the corporate world, you probably don’t initially have the skills to run an e-commerce business. There are a lot of skills to learn and, especially in the beginning, you will be wearing a lot of hats. The learning curve is very steep. It is absolutely worth it, but it can feel overwhelming at times.
No Ready Income: In the beginning, when you’re building and growing the business, it costs you money while the sales have not started coming in. People don’t know your business, so it will take some time before you can start seeing a return on your hard work. Starting an e-commerce business can be done with just a few hundred dollars if you choose to sell other people’s products, but if you want to create your own product and bring it to market, the cash investment is far greater.
The Benefits Of Buying An Existing Business
Skip The Startup Phase: As I’ve already mentioned, there’s a high probability that your business will fail when building from the ground up. To potentially avoid the pitfalls of a startup, you can buy a business that has already beaten the odds.
Instant Profits: Buy acquiring a business that is already operating and getting sales, when you take over, you get those sales so you get a return on your investment from day one. And since you are making sales immediately, you don’t necessarily have to keep your day job like you would if you were building a business.
Hands-Off: When you buy an existing business, it usually has team members already in the roles you would have needed to fill yourself or hire for. So you are also buying your way to a more hands-off, somewhat passive income.
The Challenges Of Buying An Existing Business
Upfront Investment: Profitable businesses are not cheap. E-commerce businesses are valued by their yearly profits, usually a multiple of 2-5 times yearly profit, so the initial investment can be up in the hundreds of thousands.
Lack Of Skillset: When you buy an existing business, you should know the business model well. If you skipped the learning skills phase of e-commerce, there’s no guarantee you can keep the business profitable. Just because it’s profitable under the current owner does not mean it will continue to be profitable with you at the wheel.
Here’s What I Think
My recommendation is to start your own e-commerce business first. Learn all the necessary skills you need to know in order to operate an e-commerce business and after a year — or even better, two to three years later — the profits from your startup business could even finance the acquisition of another existing business.
By acquiring a profitable business after you had added all the skills needed to operate and potentially grow the business, you are far more likely to be successful. I would also suggest looking for a business that doesn’t already apply some of the skills you’ve learned so you can add to it and grow it further.
Whether you choose to buy or build, enjoy the rollercoaster. It gets bumpy at times, but it’s well worth it.