You may already be familiar with how you can start an online business with as little as $100, but the ecommerce business model has a few more moving parts for which you should be prepared.

Depending on the cost of goods, manufacturing location, and logistics of your products, you have other expenses that start to add up before you see any type of return. Many entrepreneurs decide to buy a business instead of building one from scratch to skip the dreaded start-up phase, but everyone’s decision varies depending on where they are in their entrepreneurial journey.

That’s where Empire Flippers has helped many entrepreneurs find the right ecommerce business based on their business and personal goals. As the largest curated ecommerce store marketplace, we’ve helped thousands of entrepreneurs buy and sell their ecommerce companies. We know how hard it is to find the right deal, and we want to share with you everything you should know about buying an online business before committing to a purchase.

With over $81 million worth of online businesses sold on our marketplace in 2020, there is no shortage of potential acquisitions just around the corner. Once you have finished this article, our goal is that you will know exactly how ecommerce businesses are valued, how to determine what makes a great deal, and where to buy an ecommerce business for a great price.

Before we dive straight into the due diligence process, we should cover the benefits of buying an ecommerce business that already generates steady cash flow.

To Buy or Not to Buy: That Is the Question

Almost every entrepreneur in the digital space has asked this question at least once in their lifetime. After all, why should you pay such a large amount of money upfront when you can start something from the very beginning with less money?

Making this decision is often based on what your business and personal goals consist of. Everyone will have a different side they lean toward, but it will often depend on the number of hours you’re willing to put toward working on the business.

Let’s break down the pros and cons of both to give you a better idea of what is right for you.

Pros of Building an Ecommerce Business

• Less upfront investment to get started
• Longer relationship history with your manufacturer and suppliers
• Establishing relationships with others in your niche
• A better understanding of what is trending in your industry

Cons of Building an Ecommerce Business

• Much longer time to see any type of return
• Risk of investing in a product that loses demand
• Building a social following from the ground up is hard work
• Pay per click (PPC) will be new data that has not yet been tested

Bootstrapping a startup can be tough. If you don’t already have consistent sales, the process to get to this stage can be long and expensive. Depending on your audience feedback, you may need to make updates to your product(s) to stand out in the niche. You might also run into an issue where your inventory runs out of stock—or even worse, you have inventory collecting storage fees since none of the products are moving off the shelves. These all have the potential to be unexpected expenses for any ecommerce startup that many newcomers will often overlook.

As a comparison, here are the pros and cons of buying an ecommerce business that already generates cash flow that you might want to consider.

Pros of Buying an Ecommerce Business

• Save time by skipping the start-up phase
• Immediate cash flow
• Traffic and PPC data
• Scaling becomes much easier

Cons of Buying an Ecommerce Business

• Large up-front investment
• Not being familiar with the operations of the business
• Difficulty finding the perfect deal

Buying a business already producing profits and showing real market demand is a huge reason so many online investors are looking to acquire established businesses. This takes away the worry of whether a product you think is a great idea has a large enough audience and market demand (no matter how much research you have done). To help you find the right ecommerce business at the right price, we first need to understand how ecommerce business valuations work.

How Valuations Work for Ecommerce Businesses

How businesses are valued is a question we get often, which is why we developed our own app and automated valuation tool for a free estimate of your business’s value, which our audience uses all the time.

At the heart of any valuation is a basic formula:

Valuation = Avg. Monthly Net Profit x Multiple

We use the average monthly net profit to calculate your basic valuation, as we feel this is more indicative of where the business stands profit-wise.

Once you factor out additional costs and calculate your net profits (using a three-, six-, or 12-month window—more on this later), you then factor in your multiple. Your multiple can be between 20 and 50, though we have seen some larger multiples break the 60x mark now that these types of assets have gained such a large demand from large and small investors alike in the space.

Notably, the multiple we used in the formula above is monthly. You might see some brokers using a 2x or 3x EBITDA, which stands for earnings before interest, tax, depreciation, and amortization, but you can tell they are using an annual multiple in this case.

We like to use a monthly multiple since it shows a more granular picture of the business and where it’s trending. Many factors go into an ecommerce listing multiple, such as the age of the business, the number of traffic sources, and other aspects of the business, such as any trademarks or patents it includes.

When looking for an ecommerce business to buy for a price that fits your budget, you must research five major details in a potential business acquisition.

Initial 5-Step Check

This checklist will provide a roadmap for you to locate the right ecommerce business at a price that fits your needs.

When you outline the details of each potential acquisition, you make the buying process much easier for yourself. This also helps to avoid wasting your time researching those that are not properly aligned with your business and personal goals.

1. Pricing Windows

The pricing window for any ecommerce business will help increase or decrease its valuation multiple, depending on which amount of time is used.

As mentioned above, most sellers will list their business with a three-, six-, or 12-month pricing window. All this means is how much data from the business’ sales history will be used to calculate the business multiple.

This check will give you an idea of how sustainable the business is and whether there have been any sudden upticks or drops in revenue, which would lead to the use of a lower pricing window.

A 12-month pricing window has become the gold standard for most ecommerce businesses, as it gives the most accurate breakdown during every season of the year. Not only will the pricing window help determine the business’ multiple, but the age of the business itself also plays a large role in moving the multiple needle.

2. Age of the Ecommerce Business

Many online business buyers will favor a business that has been established for several years over something still brand new. The reason is that an existing business will have built a record of sales and data—a huge advantage when it comes to buying an ecommerce business.

Making a product is straightforward, but creating a product and brand with longevity is the challenge. The longer a business has been around generating consistent revenue, the likelier it is that the products are not just another trend that will die out when the next peak season comes around, where a different in-demand product is all the rage.

3. Traffic Diversity

It is also important to note how diversified the traffic sources are for an ecommerce business. The more spread out these sources are, the more they mitigate the risk from any sudden drop in traffic and sales. The three most common sources of traffic for an ecommerce business include:

• Search engine optimization (SEO)
• Paid traffic
• Social traffic

One of the best parts of buying an established business is the marketing data you receive from these sources (if the previous owner set them up). It may not be necessary to use all three of these marketing channels—as many ecommerce owners may have only focused on one—however, it is important to diversify your traffic when possible. Spreading risk across multiple sources is a great strategy for mitigating risk; if one channel suddenly dies out, another source could have the potential to keep the business profitable.

When browsing through potential businesses, you should also find out where the traffic comes from. The main marketplace that generates the most traffic should always be the brand’s main market for sales.

• SEO: An ecommerce website might include a blog to generate Google search traffic. This is becoming more and more common, as once your content begins to rank, it requires little effort or cost to maintain. If a business relies heavily on SEO traffic, it is helpful to analyze which pages generate the most traffic and which sources make up the backlink profile. This ensures that the traffic is legitimate and that no type of blackhat technique has been used to grow the business.
• Paid Advertising: Google Ads and Facebook Ads are the most widely used forms of paid advertising in the world of PPC today. These traffic sources might be lucrative when optimized, but they can also dig into your profit margins if done incorrectly. Buying a business that already does paid advertising successfully can save you a ton of time and money, however, if a business isn’t using paid ads, then implementing them can bring almost instantaneous results. Gaining data insights into things like ad spend, cost-per-click, and conversion rates will help you scale the business further, already having a foundation to work with. This will show you how much room for improvement there might be and what has and has not been working so far.
• Social Media: We see ecommerce brands with a huge social media following sell in our marketplace all the time. Social media is a great way to diversify your traffic sources and gives you the ability to establish an addressable audience and set up retargeting ad campaigns. Social media can be added to an ecommerce business after the purchase, so it shouldn’t really make or break the deal ultimately, but it is a great extra asset to have if the right deal has built a large following on one or several social media platforms.

4. Customer Reviews and Ratings

When shopping for an ecommerce business, you want to make sure there are plenty of positive reviews for the products you are about to acquire. This is your social proof and product-to-market fit that will aid your decision in whether your newly acquired business will continue on this same track once you have taken over full ownership.

These reviews and ratings for products are important, as they help build the brand’s reputation and give new customers social proof of the quality your company provides. The more positive ratings and reviews a product line has, the higher the multiple for that business will be.

5. Email List

The untapped value for many ecommerce businesses on the market today is the email list.

Many ecommerce and Amazon FBA sellers alike have yet to utilize this excellent opportunity to monetize an email list. When done correctly, it can bring additional revenue to the business, with little effort required to set up.

If you take notice of a particular business that includes an email list, be sure to uncover the value in the list by checking to see if the current owner still sends out regular emails. You will definitely want to use any contact list or email campaigns a seller may already have set up, as they can be a large value-add to any business gaining this addressable audience already gathered for you.

Another component you may want to research is what the open rates and click-through rates are for this email list, as that may uncover hidden growth opportunities to optimize sales campaigns even further.

What to Look for in a Great Deal

Finding the right ecommerce business for you will be much easier when you have a proper due diligence checklist to help keep you focused on what you’re looking to acquire.

There are many factors to consider when performing your own due diligence on a potential acquisition—and it is also important to remember that due diligence is different from vetting.

Vetting is used to determine whether a business is priced correctly, while due diligence is based on the buyer’s personal needs for the business, based on a set of criteria they have already determined. Whether that happens to be a business with an email list including over 10,000 subscribers or most of the product traffic being produced organically in Google, every buyer will have their own criteria to follow.

There are many other details you need to look at during your due diligence, such as the following:

• How competitive is this niche’s industry?
• What is the business doing in terms of marketing?
• How many products does the brand include?
• What platform is the storefront built on?
• How much support will the seller offer?
• Have there been any stockout issues recently?

These are all great questions you should ask yourself while performing due diligence on a potential business opportunity. Not only will you uncover hidden growth avenues in doing so, but you will also eliminate businesses that don’t have your investment needs.

Which Ecommerce Business to Buy?

The specific ecommerce business you acquire will depend on your strategy in scaling the business once you take over full ownership. Are you looking for something passive and fairly hands-off? Or is a business where you roll up your sleeves and get your hands dirty during daily operations more your style?

The short answer to these questions will again be based on your business and personal goals. We often use our buyer personas as an example of all the types of online business buyers we meet in our marketplace:

• For some first-time buyers just starting out, they might fall under our category of being a Newbie Norm, who considers buying an online business to get them out of their current employment situation and escape the 9–5 grind.
• Another buyer persona we have is a Strategic Sally, who is a veteran in the online business space and is looking for a strategic acquisition to help boost their current product portfolio.

In these two examples alone, you can see obvious differences in the type of ecommerce business that each individual might be seeking. This goes to show why having a clear understanding of what you’re looking to achieve with your acquisition is important to render your success.

Where to Find Suitable Ecommerce Businesses

So now that you have a clear understanding of what initial checks are needed to speed up your due diligence process, where do we find these ecommerce businesses for sale in the first place?

When it comes to locating an ecommerce business for sale, you have one of two options. Your first option is to go with a broker who will present all the businesses currently live on the market in one easy-to-use platform (like the one Empire Flippers provides), or going with a private deal.

There are pros and cons to both of these options, so why don’t we detail these differences for you to help you better gauge which option is right for you?

How to Buy an Online Business Through a Private Deal

When looking for a private ecommerce acquisition, there are many things you need to keep in mind. For starters, performing a private deal is much riskier than, say, going with a broker to help you facilitate the deal from start to finish.

The biggest cons to performing this type of acquisition, however, is that you have no protection should the deal fall through. In some cases, you might send the funds for the business only to find out that the seller had forged all their income and expenses, and you realize the business is generating only a fraction of what you had originally been told.

There are only a select few reasons why buyers choose to perform a private deal, and this usually revolves around the fact that a broker charges a fee. A common misconception is that paying a broker fee means losing money in the deal, but paying more than a business is worth compared to similar assets live on the market can also end with the same results. What most people don’t realize is that this fee will often mitigate the risk of losing your entire investment completely.

How to Buy an Online Business Through Brokers

As mentioned above, most buyers new to the industry will talk down a broker’s fee before they have ever had a bad experience with a private deal. What most people don’t realize is that the broker is protecting both the buyer and seller should their agreement not align at any point during the acquisition process.

Leveraging a broker helps ensure the deal goes as smoothly as possible and that you, as the buyer, are not investing in some mocked-up scam. Brokers protect sellers by ensuring that they are not giving out all the inner workings of their two-year-old-plus project to someone who will go and copy your brand—or even worse, products—knowing who your suppliers are now.

Conclusion

If you are ready to take the next step in your entrepreneurial journey in securing a profitable ecommerce business already generating consistent cash flow, head over to our marketplace to create your free account. Once you have set up your account, you will have access to our marketplace with new ecommerce businesses listed for sale every Monday.

After reading this post, if you are still unsure where you should begin your search in locating the best ecommerce business for the right price, schedule a criteria call with one of our business advisors. They can walk you through the entire buying process to make sure you are properly prepared to find the perfect ecommerce business that suits your business and personal goals at the same time.

The post How to Buy an Ecommerce Business for the Right Price appeared first on A Better Lemonade Stand.

In business, there are 3 main ways you can maximize your earning potential:

• Get more customers
• Compel your previous customers to make more purchases from you
• Reduce your operating/overhead costs

In this article, we’ll be focusing on the last point: How you can reduce your operating costs so you can earn more from your current margins and make your business leaner overall. Operating a lean business that runs on a core set of essential apps, tools, and services ensures that you’re being as efficient as you can be and prioritizing your business’ cash flow over superfluous resources you don’t really need.

By operating our own business by these 9 tactics, we’ve been able to use some of the best apps, tools, and services in the ecommerce industry without having to actually pay the true costs associated with them.

If you’ve poked around on our blog before, you can likely tell that we’re crazy about all things apps and we love a good resource that helps us do our job better. In fact, every app, tool, and service that we feature on our blog has been personally used, tried, and tested by us which, as you can imagine, would have been a costly endeavor if we had purchased everything at full-price. Great apps and services aren’t cheap, and we recognize that no matter how worth-it they might be, the average entrepreneur just can’t fork over the cash to pay for all the apps and services they want to use for their store—no matter how useful they may be.

So if you’ve read our articles like 10 Essential Productivity Apps for Entrepreneurs, How to Cheat at Ecommerce: 50+ Powerful Tools, Apps & Resources for Your Online Business, 20 Smartphone Apps to Manage Your Online Business on the Go, or The Ultimate Ecommerce Business Toolbox and wonder how on earth we use all these apps while still maintaining a thriving profit margin earning potential, then read on to learn all our secrets.

9 Business Cost Reduction Tips

Business Cost Reduction Tip #1: Invest Early in Apps/Tools

Our first business cost reduction tip is to constantly be on the lookout for apps, tools, and services you can invest in early on in their lifetime. When startups are new, their founders are likely keen for funding from a small number of eager customers who don’t mind using a tool that’s still under construction in order to get a useful service for a lower price than other, more established, tools in the marketplace.

By investing in services early on, you’ll likely be getting access to that tool for the lowest price it’s ever going to be listed on the market for in its lifetime, and although there may be some bugs in the beginning stages, you get the opportunity to provide the founders with feedback on how to make the tool better for the general public, which ultimately helps create a better tool for you, too.

The biggest advantage, however, when you invest in apps, tools, and services early on is that you’ll likely be grandfathered into their pricing plans as they grow over time, meaning that you’ll still be paying the low price originally listed when the startup was first available on the market, while new customers will be paying a more premium price once the product is more premium, too.

For example, when we first invested in the Mangools tools, they were relatively new to the market but we could see the potential in what they were creating for the industry. Fast forward to today and we’re paying about 90% less than what new users are paying for the same plan now! This means we get to use their awesome tools which we supported from the early stages and we’ve been able to keep our costs low while doing it. This way, it’s a win-win situation for everyone!

We highly suggest, however, that you’re very selective about the startups you invest in early on in their lifetime. Do your research on the company, the founders, and their vision for the future and take the time to evaluate the tool to ensure that it’s something you’ll actually use and don’t already have available somewhere in your toolkit. You might not get it right every time, but try not to invest in apps, tools, and services that you won’t truly have a use for in the long-term.

Business Cost Reduction Tip #2: Always Ask for More

This is perhaps one of the simplest business cost reduction tips we can offer, however, we find that it’s often under-utilized by entrepreneurs because so many people don’t even consider it as an option. The advice here is simple: Ask for free or discounted access to apps, tools, or services that you want to use.

Sometimes, it won’t work. You might email the company to ask for free or discounted access to their service and they’ll simply say no. That’s fine — at least you asked. But sometimes, and probably more often than you’d actually expect, they’ll say yes.

Entrepreneurs appreciate other entrepreneur’s hustle so if you’re asking for free or discounted access to another entrepreneur’s tool because you simply can’t afford it right now, or it would take too big of a chunk out of your budgeted operating costs then let that company know! Entrepreneurs recognize hustle when they see it, and they’re typically more than likely to help a fellow entrepreneur out even if it means they’ll earn a little bit less on their product in the meantime. It’s generosity like that which keeps our industry thriving and keeps entrepreneurs in business.

So, if there’s an app, tool or resource that you desperately want to use for your business but can’t justify the cost right now then ask for a discount, ask for an upgraded plan, ask for more credits, ask for an increased limit — just ask for more. Because if you don’t ask, you definitely won’t get it so you might as well just ask.

One tool almost every business uses that can be particularly advantageous to negotiate on is your cell phone bill. Almost every ecommerce business owner uses their cell phone day-to-day not only for personal communication but for business as well, but some cell phone plans can take a large chunk out of your operating budget. Most cell phone providers will lower your monthly or yearly rates if you ask, so it might be worth reaching out to yours to see what they can do.

If there’s also an app, service, or tool you’re interested in using but don’t think it’s worth the price, ask the company for free or discounted access as well and let them know that you’re asking for it because you’re not entirely convinced the current price point is worth it. Don’t be harsh, but be honest that you’re just not sure and let them know why. If you’re constructive, they’ll generally appreciate your feedback and they either may be able to help you use their tool to its fullest potential or you might be able to trial the tool until you decide for sure whether it’s a good fit for you or not. Again, you simply just have to ask.

Business Cost Reduction Tip #3: Capitalize on Lifetime Deals

Lifetime deals are a business owner’s best friend and if you aren’t already making use of them you’re missing a trick. If you haven’t already heard of lifetime deals and aren’t sure what they are, essentially, it’s a process where businesses offer their app, tool, or service to consumers for an extremely discounted one-time purchase, referred to as a “lifetime” deal because the purchaser of the deal gets access to the tool for life. This is important because most of these apps, tools, and services would typically be offered on the market via monthly or yearly subscription fees, which quickly adds up and can become a costly part of a business’ operating costs.

To find lifetime deals related to the ecommerce industry, check out AppSumo. They’re the leading marketplace currently curating worthwhile lifetime deals for entrepreneurs, and we’ve been able to score some amazing tools from their site that have helped us reduce our overall operating costs.

The main advantage of lifetime deals stems from the fact that you’ll never have to pay a recurring monthly or yearly fee in order to access the tool, which is a major business cost reduction achievement especially for tools that are essential to operating your business. For most businesses, this could mean tools used for inventory management, customer service communication, SEO optimization, and social media management, all of which are types of tools that you’ll find on AppSumo and StackSocial throughout the year. AppSumo, for example, roles out about 3 deals per week, many of which are lifetime deals.

Again, we caution entrepreneurs to ensure that any lifetime deals you plan on purchasing you consider thoughtfully before you do. There’s no use investing in a lifetime deal if it’s not actually going to be valuable for your business, so keep that in mind. AppSumo, however, does offer a 60-day refund window so if it does turn out that any lifetime deals you purchase don’t actually work out for your business, then you can return them for a refund. We appreciate this option as it ensures entrepreneurs can fully try out the tools and integrate them into their business practices first without having to completely commit to them if they don’t work out for whatever reason.

Business Cost Reduction Tip #4: Wait for Black Friday

This business cost reduction tip is one of our particular favorites and one that we consistently exercise year after year. Since Black Friday is a major consumer shopping holiday, there are plenty of digital apps, tools, and resources that offer their services at a discounted rate around this time of year, meaning they can be scooped up at a steal-of-a-deal price year after year.

We highly recommend that you sign up for any services you need or want to use for your online business around the Black Friday/Cyber Monday weekend because it’s likely that whatever tool you’re coveting will be offered at some kind of discount. If you purchase yearly subscriptions at this time as well, they’ll auto-renew around the next year’s Black Friday/Cyber Monday weekend too, which means you’ll be on a cycle of renewing the service every year at that same time where it’s likely going to be offered at its most discounted rate.

This is a hugely advantageous position to be put in and one that can save you some serious cash in the long run. Plus, it’s one of the few times per year when you know the app, tool or resource will be offered at a discount so there are no guessing games to play. If you’re looking for great tools to invest in this Black Friday/Cyber Monday, be sure to check out our annual roundup of the best deals by signing up to our email newsletter. We love curating the best tools that are holding great deals every year, and we certainly will be doing the same this year, too.

Business Cost Reduction Tip #5: Pay Yearly

We briefly mentioned this business cost reduction tip in the previous section, however, it’s important to reiterate every time you think about purchasing an app, tool, or resource for your online business. Often, the tools are offered at a discounted price point if you pay for an entire year of access to the tool up front, as opposed to paying for the tool monthly, which can drastically reduce your operating costs overall.

It may be a hefty fee to pay upfront rather than in smaller, more bite-sized chunks every month, but it’s important to look at the larger picture rather than the immediate short-term gain. By paying yearly for any apps, tools, and services you use regularly for your business you’ll likely be reducing your business’ operating costs by a fair amount which can quickly add up.

Business Cost Reduction Tip #6: Join Affiliate Programs for Your Favourite Apps

Many apps, tools, and services now offer affiliate programs which, if you’re not familiar with the term, enable you to earn a commission from every referral you direct to the service who signs up. Many affiliate programs are available for the average person to sign up to, so check out your favorite apps, tools, and services to see if they offer anything of the sort.

Some affiliates award referrals by paying out a commission of the sale, but other affiliate programs offer the referrer a credit to their own account on the service, which can enable the tool to be provided to them at a free or discounted rate depending on how many users they refer to the tool.

This can be a completely worthwhile tactic to try out if you have some way of referring others to the tools you use, such as through social media, forums, online groups, or peers in your industry, so take into consideration how you might be able to promote affiliate referrals within your industry to make this tactic worthwhile for you. Since this tactic could result in completely free or discounted use of a tool you already use and love, it might be worth the added effort of promoting it.

Business Cost Reduction Tip #7: Consolidate Apps/Tools

It’s common to get caught up in the excitement of new apps and emerging tools on the market to the point of actually investing in too many of them. With each new app release on the market or new tool that you discover, remind yourself a few months after purchasing it to reflect on whether it’s actually become a key player in your ecommerce toolkit, or if it’s something you can live without.

As a business owner, what you don’t want is to be paying for two apps when one can do the job, so review all the tools and services you pay for to find areas where that might exist. There’s likely to be apps you aren’t using to their full potential or tools where there have been new features and functionalities added, so remember to review your toolkit every so often to find the apps you can ax from your roster. This will save you both money and unnecessary clutter for services you don’t even need anyway.

Business Cost Reduction Tip #8: Find & Replace Outdated Apps

As part of the aforementioned consolidation process, another business cost reduction tip is to regularly be evaluating the apps, tools, and services you’re using and comparing them to new ones on the market. When it comes to software, there’s new content and tools being developed on a daily basis, so there’s likely going to be new services emerging that can do exactly what your current services provide you but for a lot less. A great place to keep an eye out for new apps and tools is on Product Hunt.

Many established software programs on the market come with more premium price tags because they’re the leading tool in their industry, so you may be paying more for the brand name than the actual software’s functionality. Keep this in mind when you review the suite of tools that you use to operate your business and try to find other tools on the market that do exactly what your current tools do but for less. This way, you’ll reduce your operating costs without actually losing any kind of functionality. While doing this, you might also find tools that are a better fit for your business overall or ones that offer the exact features you need so you’re not overpaying for additional ones you don’t use.

Business Cost Reduction Tip #9: Barter

If you have any kind of leverage to offer, this is the time to use it. Since the costs of the apps, tools, and services you use to operate your ecommerce business can begin to add up quickly, if there’s any way to get access to a tool for free or upgraded features for a lower pricing plan option, it can relieve some strain off your operating budget and help you reduce it overall. One of our final business cost reduction tips to achieve this is to barter with companies to get free or discounted access to their service.

To achieve this successfully, you’ll have to be able to provide some value in return. Oftentimes, the only value that companies will deem worthwhile from their side is if you’re able to drive new leads or sales to their service, which likely means you need to have some sort of access to consumer groups you can promote the tool to.

For example, you could provide value to the company by blasting it to your social media followers, reviewing their tool on your blog, sharing the tool with forums and groups you’re a part of, offering a testimonial or review, being a guinea pig to try out their new features on, offer to be a case study for a more favorable rate, etc.

Take into consideration the apps, tools, and services you’d like free or discounted access to and think about what kind of leverage you can offer those companies in order to barter with them. When you reach out to them, it also might be worth asking them if there’s anything they need in particular that you can offer them just to see what they say. The key point here: Find your leverage and use it to your advantage to reduce your business’ operating costs.

Conclusion

There you have our roundup of the top 9 business cost reduction tips we use to keep our operations lean and efficient. We hope you’ve learned something from these tactics and that you’ll use some or all of them to reduce costs within your own business! In particular, don’t forget to invest early in startups, ask for discounts, wait for Black Friday, and constantly be editing and curating your suite of tools so you’re never overpaying for any services you’re underusing. Using even a few of these tips can have a substantial impact on your bottom line and an overall positive effect on your profit margin earning potential.

The post 9 Ways to Smash Operating Costs in Your Online Business appeared first on A Better Lemonade Stand.

Tax Records & Receipts You Need to Keep

Every small business owner or self-employed person is required by the IRS to keep documentation that supports items of income, deductions, or credits appearing on their tax return. This documentation is how you prove that you earned what you said you earned and purchased what you said you purchased.

The tax records and supporting documentation you need to hold on to include:

• Receipts
• Bank and credit card statements
• Bills
• Canceled checks
• Invoices
• Proof of payments, like transaction records from PayPal
• Financial statements from Bench or your bookkeeper
• Previous tax returns
• W2 and 1099 forms
• Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return

Keep in mind that this list is not one hundred percent comprehensive. The types of records you need to keep for tax purposes will vary according to the nature of your business.

The burden of proof to prove your business transactions is on you, the taxpayer. Since it’s up to you to back up every item on your tax return with supporting documentation, our advice is simple: Keep everything.

During a tax audit, your first line of defense is your tax records. Your best bet is to store everything digitally, so it’s easily on-hand in case of scrutiny from the IRS. This will also help you avoid losing receipts so you can support every possible tax deduction that applies to your business.

Since it’s up to you to back up every item on your tax return with supporting documentation, our advice is simple: Keep everything.

The $75 Rule: Receipts You Could Toss (But Shouldn’t)

In general, you’re expected to hold on to documentary evidence — receipts, canceled checks, bills — to track your expenses.

We’re going to stick to our “keep everything” advice here and say you should get into the habit of filing receipts for all of your business expenses. But it will help you to understand the exceptions to the recordkeeping rules.

You don’t need to keep documentary evidence for expenditure if any of the following apply:

• The expense comes to less than $75 (Note: this rule does not apply to lodging expenses.)
• It’s a transportation expense and a receipt is not readily available
• You’re reporting expenses while traveling for business, which you account to an employer under an accountable plan, and for which you receive a per diem allowance

Remember, however, that any expense — even one under $75 — can be challenged during an IRS audit. If you lack a receipt for any expenses under $75, the IRS will only uphold the deduction if you present certain information upon request.

Here’s the expense information you’ll need to document and present during an audit:

• The amount of the expense
• The date the transaction took place
• The place the transaction took place
• The essential character or purpose of the expense

For meals and entertainment deductions, you also need to specify who was involved with the expense — for example, the name of the client you took out for lunch. Write these details down on the backs of paper receipts, or in a diary or calendar. You can also use a mobile app like Expensify to keep digital records.

You can learn more about IRS guidelines for expenses under $75 on the IRS website.

When Can You Shred Tax Records?

The Three Year Limit

Generally, you need to keep tax records for the three years following the date the expense was filed, or from the due date of your tax return — whichever comes later. Even if you file your tax return early, it’s treated as though it was filed on the due date.

An Example of the Three Year Limit

Let’s say that a few years ago, you were well-organized and you filed your tax return for the 2013 financial year on April 10, 2014. However, the deadline that year was April 15, 2014.

This means you would have to keep the tax records, receipts, and other supporting documentation connected to your 2013 tax return until April 15, 2017 — three years after the date your return was due.

You can thank the period of limitations for this rule. The period of limitations is the period during which a taxpayer — that’s you — can amend their tax return. It’s also the period during which the IRS can perform an audit on your return.

When the period of limitations on your tax return expires, you’re no longer required to keep a copy of the tax return or any of its supporting documentation.

However, this is tax law we’re discussing — which means that there are exceptions to every rule.

Exceptions to the Three Year Rule

There are certain instances that demand you hold onto a tax return for longer than three years after filing. Here’s a summary of exceptions to the three-year rule, and a basic explanation for how long you should keep the records in each category:

Bad Debts & Worthless Securities

You’re able to deduct the value of bad debt or worthless securities on your tax return. But if you do, you have to keep records of these debts and securities for seven years.

Omitted Income

If you failed to report income that you should have reported, and it was more than 25% of the gross income listed on your return, keep records for six years after the date you filed, or the deadline for filing — whichever came later.

Employee Records

If you have employees, you must keep employment records at least four years after the date that payroll taxes were due or were paid — whichever is later.

Fraudulent Return or No Return

Just in case you were planning to commit tax fraud, or skip filing a return: There is no statute of limitations on breaking the law. The IRS can come after you forever.

Property Records

Generally, you should keep records of property for at least three years — the period of time in which you may be audited, or in which you can amend your return.

You need to keep those records so that you can calculate any depreciation, amortization, or depletion deduction, and to factor in gain or loss if you eventually sell the property.

Here’s an example: Say you got rid of a piece of property during the 2015 tax year. On your tax return for 2015, you report the money you made. You file right on the deadline — April 18, 2016. You would need to keep records related to this piece of property for three years, until April 18, 2016.

The type of property records you should hold on to include deeds, titles, and cost basis records — for instance, receipts for computers or vehicles.

How to Store Receipts and Tax Records

Now you know how long to keep your tax records, the next step is to develop an efficient and secure method for storing them.

Chances are, your order history and transaction records already live in the cloud. But in the case of hard copies of receipts — for example, from one of your many trips to mail goods at the post office — it’s better that you go completely paperless.

The IRS will accept digital copies of documents so long as they’re identical to and contain the same accurate information as the original copies. You need to be able to produce a legible printed copy of the document upon request.

Use cloud storage services like Sync, Dropbox, Evernote, or Google Drive to keep copies of your paper documents online. If you have a large number of documents to upload, consider investing in a high-speed scanner. It’s also wise to keep a backup of every document in a separate location, such as an encrypted solid state drive, or a different cloud storage service.

Keeping Records for Non-Tax Purposes

Your creditors, business lawyer, or insurance company may also want to see copies of your tax records, and they may need you to hold on to them longer than the IRS does. Once you’re past the period of limitations on your records, double-check that you won’t need them for another purpose before you shred them.

If you’re using digital storage, you can simply archive records you no longer need — rather than permanently deleting them.

Conclusion

It can be tough to keep up with all the rules small businesses are expected to follow. Although it’s important to make sure which records you need to keep and the period of limitations for each, remember: The best approach to small business recordkeeping is to hold onto everything. Life is easier when you’re not scrambling for missing receipts and records during tax season. And, so long as you keep everything, you’ll know you always have what you need in case of an IRS audit.

The post Small Business Recordkeeping 101: A Guide for Ecommerce Entrepreneurs appeared first on A Better Lemonade Stand.