An observation of a buyer’s behavior is that they sometimes they want to buy the best site with the price tag of the worst site. Many buyers says something like, “But I saw something listed at 1.5x somewhere else!”
There is no doubt that you saw that price somewhere else. What people do doubt is if that listing you had seen was in any way similar to the one you are looking at right at this moment. If you think about it someone is willing sell a business for what they would probably be make in about a year and a half(with an implied rate of return of 67%/year), do you think something might not be right? Usually the fishy or strange things fall into one of the following categories:
They have based the price on a bottom line figure that is not the real bottom line figure. Maybe they forgot to include some expenses, for example contractor labor, merchant account fees, or marketing!
The site you want to buy could have made $100k in profit the past year. It is now for sale for $150k. However, have you noticed recently that the sites profits have dropped dramatically in the last month after the most recent Google algo update.
Everything might be legitimate in regards to the trend and the multiples however the site making its money by deceiving consumers into automatic reorders of some products that were initially offered for free? (And this could lead to the site losing its merchant account privileges!) Or is it redirecting users to a porn site? Is it attacking them with pop ups, malware, unintended downloads, etc.? There is a great deal of money to be made doing these things however they are illegal and it is something that you should avoid at all costs.
What You Should Ask Yourself
Generally instead of only focusing on the multiple of earnings you should be thinking about some of the questions below:
- Do I believe this business will still exist in three years?
- Do I have a tendency toward running this business better than the current owner and can I increase sales and or profits?
- What are the horrible events that could wipe me out, and how likely are they?
So the next time you are faced with a deal that you think might seem too good to be true, make sure to ask yourself if you would ever consider selling a good business at the same price these people are asking you to buy it for? If your answer is no then you need to proceed with caution.