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Looking at e-commerce businesses for sale.

While my background is in brick & mortar retail I have been looking seriously at buying an exsisting e-commerce website biz. Why do so many of the listings of such businesses tout the "fact" that the owner only works 4, 5, 6, etc hours per week and yet is selling because of "other interests?" Why would someone sell such an allegedly nice cash-flowing ($100,000 +) business?
What am I missing? What unique questions should I be asking the sellers of websites?

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The BAF Group LLC

A lot of the e-commerce businesses - a lot of ALL businesses, for that matter - are advertised on the basis of "potential", rather than real profit. Be wary! Most of the e-commerce businesses we have looked at are not worth the prices they demand. That is not the case for all of them; however, you will kiss a lot of get the idea. The more they say they are working only a couple of hours, getting rich and still selling, the more skeptical we are.

Before you do anything else, make certain how they are measuring their success: Is it profit, borne out by signed Tax Returns? Or, it the Seller's idea of a "great idea" from which he/she has never earned a sizeable profit, even after years of effort, and the numbers you see are from pro forma financial projections? (In these cases, some Brokers will go along with the Seller's pricing demands, even if he/she knows the price is unrealistic and no one will ever buy at that price; but that Broker will often assume that if they throw a worthwhile business concept out there, someone will offer a realistic price, and the Broker can then try to convince the Seller that this is all the market will bear.) And even if the profit looks promising, based on Tax Returns, you should look at several years of earnings to determine the trend: Is the business gaining, declining or experiencing very stable sales? Many of them will do well in the first year, then plummet like mad! (I love it when some of the entrepeneurial magazines talk about businesses that have grown 1,000% in the past year. That could mean that it did a whopping $1 in the prior year, and this year it has grown all the way up to $1,000! Wooowww!!!) gotta love it!

We look at a lot of e-commerce businesses that we are asked to represent, but we rarely take them on, for the very reasons discussed here.

May 4, 2011

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