If you’re considering acquiring a business you will likely be thinking about what business model is right you, which industry you want to invest in and what you want to get out of the experience personally. It can be difficult to align these priorities with the opportunities available and often buyers end months of searching without success. The advent of the internet and proliferation of new e-businesses has only expanded your options but if you take the time to familiarize yourself with whats out there, you might find that the online versus offline business decision could be easier than you think.
Tap in to the Explosive Growth of the Internet
The explosion in growth of internet users and usage in the last decade is remarkable. It is estimated there were 2.7bn internet users globally in 2013 (39% of global population), up more than 6 times on 10 years ago. The demographic has switched significantly too, in 1996, 66% of internet users were from the US and now that figure is just 13% with Asia and Europe accounting for nearly 70% of all internet users (Source: ComScore).
Source: ComScore
Increased penetration of smartphones and tablets has been a major driver of both internet adoption and average usage time. Multi-device ownership is increasingly becoming commonplace in developed markets with 1 in 4 smartphone owners in the US and EU5 also owning a tablet. Early signs from these markets indicate that multi-device has not served to cannibalise desktop browsing but instead complement it with overall usage time rising.
Source: ComScore
But what does all of this really mean for online businesses and for you if you’re looking to acquire one? Well, it points to a number of things. Firstly, the number of consumers online is growing significantly each year and as the internet becomes an increasingly popular purchasing channel, eCommerce businesses will continue to experience explosive growth. According to eMarketer’s latest forecasts, worldwide business-to-consumer eCommerce sales will increase by 20.1% this year to reach $1.5 trillion, up a staggering $400bn from 2012. That growth is coming primarily from the rapidly expanding online and mobile user bases in emerging markets, increases in mobile commerce as well as improved shipping and payment options for customers. Interestingly, the latest research indicates online consumers are more valuable than offline ones. In a recent comprehensive study of European consumers, the consultancy firm McKinsey found that 38% of online buyers had household income of >€40,000 versus just 25% for offline channel buyers.
Source: eMarketer
Secondly, the attractiveness of the internet as an advertising medium for major brands continues to rise with the growth in internet adoption and value of the eCommerce market. Digital advertising revenue is now worth $37bn in the US alone, second only to TV, and rising at 15% per annum (5x faster than any other medium). Don’t think that it is just search engines benefiting from increases in advertising spend though, $7.7bn was spent on banner advertisements alone in the US in 2012 . Website owners with authoritative content in the right niches and of course the right traffic can command a good price for onscreen real estate.
Source: ComScore
You Can Make Much Better Margins
An often cited benefit of the online business model are the potential cost savings. There are typically much lower start-up costs to creating and running a website. Without physical assets there is no large capital outlay and instead the focus is on creating relevant content and outreach.
With so many e-business models and unique monetisation methods, accurate studies on the differences in cost structures between on and offline businesses are somewhat sparse. One good comparison though is an analysis of profit margins between retailers, e-tailers (click-and-brick operations) and pure eCommerce stores. Matt Carroll at FailHarder has written extensively on the economics of each. His analysis of the average profit margin achieved in the apparel niche (he models the sale of shoes) shows retailers on average achieve 51% gross margins whilst eCommerce achieve 65% through charging for shipping and 45% for free. Note, gross margin doesn’t then take into account the savings in operating expenditure for the online model (rent, utilities etc) which take the typical net margins of eCommerce stores to ~30% versus ~10% for offline equivalents. Asides from eCommerce, there are a number of e-business models that offer very attractive profit margins to business owners. Using data from the sale of over 150 online businesses over the last four years at FE, we have compiled the below net margin comparison table for the most common business models:
Source: FE International
Note: these margins are before owner salary drawings and some businesses may incorporate multiple business models.
Online Provides More Marketing Insights
The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself – Peter Drucker
Good marketing is at the heart of many successful businesses and the online space is no different. What is interesting about internet marketing is that whilst it requires a slightly different skillset to traditional businesses it offers a number of major benefits versus marketing in the offline world. The tools and strategies for marketing to consumers online provide much more data to the marketer in terms of customer engagement, relationship building and fine tuning of the conversion funnel. There are at least 4 major advantages to marketing online:
#1 – You can make changes on the fly – marketing online allows you to instantly split test new landing pages, site layouts, order forms, email sequences, newsletters, all within the click of a button.
#2 – You can track real-time results – with internet traffic you often have enough of a customer sample to observe the impacts of your changes in just a few days or a week allowing you to tweak, analyse and decide on what works best within a comparatively short time period and with low operational impact on the business. Using traffic-tracking tools like Google Analytics you can create goals to observe changes in precise detail.
#3 – You can target specific demographics in your advertising – the rise in social media as a platform for marketing has enabled internet business owners to target specific demographics and customer profiles (e.g. age, gender, ethnicity and location). Paid-traffic campaigns can be run on specific locations to expand awareness in particular areas (local and national) as well as drive the right traffic to your business.
#4 – A wide variety of methods in marketing online including email, audio, video, blog, social media and newsletters – marketing strategies online are increasingly adopting a multimedia approach to create and develop relationships with consumers. E-mail marketing has been shown to be a powerful tool to help raise brand awareness, build relationships and bring in sales.
Online Gives You More Freedom
One of the major draws of the online business model is the ability to operate from home and in fact anywhere in the world. With more people looking to supplement income from their main jobs, the attraction of an online business as a means of passive income is on the rise. Latest figures show 1 in 6 people in the UK alone (8m people) are operating an online business from home as a way to do this. Without employees and infrastructure to manage, the owner time commitment on a well-established online business can be very low. Using the same transaction data, we have compiled an estimate of the average owner time commitments for the most common online business models:
Source: FE International
More Liquid and Lower Risk Than You Might Think
Any prudent investor should be mindful about the liquidity profile of their investments and buying an online business is no exception. The good news is that a website is typically a much more liquid asset than an offline business. Given online businesses are geography-independent and quite often operationally simpler, there is both a lot of buyer demand for them and shorter due diligence periods during the transaction. At FE, depending on the size and complexity of the asset, we typically see websites sell from 24 hours of listing to 3 months with the average being somewhere in the middle. Many offline businesses can take 12 or more months to sell with 3 of those in due diligence alone.
Businesses That Help The Environment
Whilst probably not a deciding factor in your decision to make an online vs offline business acquisition, being environmentally conscious is becoming increasingly important in this day and age. An online business offers significant carbon footprint savings with fewer employees, remote working (thereby no transportation costs) and no requirement for utilities like water and heating. Information is processed electronically and stored online too which helps to save paper. Research shows that approximately 65% of total emissions generated by the traditional retail model stemmed from customer transport. Accordingly, online retailers use 30% less energy than traditional retail operations. Clearly though the internet does present more demand for power consumption but research conducted by the ACI found that eCommerce will still achieve a net reduction of 1 billion tons of greenhouse gas emissions per annum, constituting 11% of US annual oil imports.
Online versus Offline: The Key is Finding Something Right For You
So with major growth potential, improved margins and often a reduced time commitment, an online venture can be a very attractive alternative to a traditional offline business. That’s not to say there aren’t other considerations though. Some businesses will require more work than others and that may be of a technical or bespoke nature. It’s important if you’re approaching any business acquisition that it’s something that fits your background, skill set and acquisition goals. It could well be the case though that with a little bit of research, an online business will get you there much faster than a traditional offline investment.
If you’re interested in learning more about buying an online business, please contact FE directly.
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