A Brick-and-Mortar Business Broker’s Intro to Ecommerce and SAAS
Ecommerce and SaaS businesses are taking up a larger market share every day. A savvy business broker will recognize the trends and learn how exiting these kind of businesses is different from traditional brick and mortar.
Traditionally, there’s been a general bias against eCommerce businesses. They were seen as less serious, even less reputable, than similar sized businesses with a brick-and-mortar presence. Perhaps that’s part of the reason why as recently as 2018, Forbes was reporting that only about 28% of businesses were doing any business online.
Online Sales Are Growing
That’s changing, and at an accelerating click. In recent years, retail sales have grown by about 4% annually, but online sales have increased by about 16% annually. Demand is rising across consumer age groups, with younger people leading the shift, and comfort with products and services ordered online has received a serious boost during the pandemic.
In other words, eCommerce businesses will continue to take up bigger and bigger portions of the small business and retail landscapes. The prevalence and success of those businesses can be linked back to one innovation in particular: SaaS.
SaaS and Small Businesses
SaaS stands for “Software-as-a-Service.” It refers to cloud-based application that a business can use/purchase on a subscription basis. (Not to be confused with software services you download and use internally, like Microsoft Suite). You’re probably already aware of a few of the bigger ones: Salesforce, Slack, Survey Monkey, and Shopify, for example.
According to statistics compiled by 99 Firms, 80% of all businesses already use at least one SaaS application, and 73% of all software providers say all their apps will be SaaS by 2021.
The implications of this are especially important for small businesses, at least 85% of whom now invest in SaaS software. Instead of building a website from scratch or hiring a developer, small business owners might use any one of a dozen providers like SquareSpace.
Instead of relying solely on customers finding their way to their website to make a purchase, small business owners might leverage third party marketplaces like Shopify or Amazon. The former lowers cost, the latter increases the pool of potential customers without huge marketing efforts. (Read also: How to Sell Your Online Business for Maximum Value.)
There are now more than 10,000 SaaS providers offering many more services—for accounting, customer support, businesses analytics, communication, etc.—which have huge impact, helping small businesses run more efficiently and professionally. In short, they’ve allowed these small businesses to do things that would otherwise be cumbersome or prohibitive without SaaS applications.
The result: Lower barrier to entry, lower costs, and higher margins.
Why Brokers Need to Know About SaaS
What does this mean for you as a broker? The success with which small businesses have incorporated SaaS applications into their workflow can play a large role in the company’s continued viability under a new owner, as well as its prospects for growth. In almost all cases these applications are a key part of their business operation, which means it will also play a role in determining a suitable buyer for that business. (Read also: Constructing a Buyer List and Finding the Right Buyer for Your Company.)
Moreover, SaaS companies and eCommerce businesses have become so popular that it is driving a lot of buyers and investors to buy these businesses, regardless of their size. In 2020, eCommerce listings on BuyAndSellABusiness.com represented less than 0.5%. In 2021, it’s gone up almost three times to 1.3% according to BuyAndSellABusiness.com Data Stories. It’s no secret that SaaS and eCommerce businesses have become woven deeply into the fabric of our everyday lives. If you haven’t opened your door to see a waiting box holding your online purchase at some point this week, you’re likely in the minority.
Differences Between Ecommerce and Brick and Mortar Business Exits
With that said, as more and more eCommerce and SaaS companies are developed and more and more buyers search for these opportunities, brokers need to be prepared for a world where they will need to help these kinds of organizations exit. That exit can look a lot different than those of a brick-and-mortar business. (Read also: Traditional Valuation Techniques May Not Apply for an Information Technology Company.)
Here are some differences between selling an eCommerce business versus a brick-and-mortar business:
Most of the time it’s much easier and takes less time. Due diligence is a bit different but usually there are fewer moving parts with quick access to integrated platforms to analyze most aspects of the business including financial performance. Full transparency quickly validates the health of the business.
SaaS businesses (i.e., companies that create and offer SaaS software) often have a recurring business model rather than a transactional business model. This can be great. Recurring revenue companies are valued at a multiple of “revenue” vs. transactional companies being valued at a multiple of EBITDA, creating much more value for the seller.
While eCommerce operating expenses are often significantly lower than brick-and-mortar retail, there are exceptions. Due diligence is important.
Because the barrier to entry for an eCommerce or SaaS business is low and there are more players, it can put downward pressure on valuations. The more inventory, the more selection for buyers.
Learn or partner with professionals who can audit the code that’s important to the functioning of their businesses (for SaaS companies this is known as their “stack”). It’s important to validate the integrity of all integrated APIs, algorithms and data.