Buying an existing online business or starting from scratch?

PanAmPanAm Posts: 1subscriber
edited January 2008 in Business Planning
Just wondering what the smartest thing to do is... Buy existing or start from scratch?
Business details...
Sales price of online business  = $185K
I`ve offered $125K with a promissary note for the remaining $60K. Collateral for this $60K is my condo which i currently own free and clear.
It would take me 1.5 years to break even. The business has been profitable since its existence.  It has a customer base of 9,000 and sales have been steadily growing. Profit margin is 45%
The dilemma i have is what is the advantage of acquiring an existing online business when i have enough funds to start one on my own?  I mean why expend this large amount of cash upfront when i can use far less of this cash to create my own "baby"
Is there a better way to finance it?
 Thanks

Comments

  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    Whether you should buy an existing business or start your own depends upon your personal "comfort". If you can start and build a business (to the same point of development)  for less than the purchase price (and you are comfortable with that approach) then that is the way I would go.
     
    Is there a "better" way to finance the purchase?  Possibly -  depending upon several factors.
     
    For openers, is the $185K the "right" price for the business? That is a question which might be answered by exploring some alternative financing methods.
     
  • crazydiamondcrazydiamond Posts: 1subscriber

    Just wondering what the smartest thing to do is... Buy existing or start from scratch?. . . It would take me 1.5 years to break even.
    . . . Is there a better way to finance it? Thanks Hey Panam - I am a bit unclear on what you mean by break-even is 1.5 years. Do you mean that after 1.5 years you have returned the $185 out of free cash flow? Is that on an after tax basis?If your question is build or buy, the acquisition depends on determining which provides a superior risk discounted free cash flow. Risk factors here include market and penetration, but also the time to that market. If there are salvageable assets in the acquisition, this would reduce the buy alternative`s risk. Given that it is an online operation, I suspect that there are no such assets. KJC`s points are on target.Can you reproduce the operation? Can you do it in competition with the existing site? Have you entered into a confidentiality agreement with the target? You mention 9,000 customers - is there something that you bring to the table that can significantly expand the operation? If so, then the price might be cheap for YOU.As to your other question on financing. I have seen buyers entering into deals that saw the business providing buy-outs from cash-flows generated. In every case, the vendor demanded and got defaulting clauses that were onerous for the buyer. In effect, in the event of any default on the buy-out schedule, the vendor was entitled to walk back in. Serious problem with this if you lack the personal resources to block this with alternative sources of cash. Be very careful. You can get into trouble with a walk-back vendor over operating decisions that are as big a problem as any other lender. Or take steps to plan for your cash flow management reserves scrupulously.MikeMike
  • nevadasculnevadascul Posts: 3subscriber Member
    Hi all,
     

    Buying an existing business has certain advantages over starting one.  For instance, You already have an established product and customer base. 
     
    However, you can also get burned easily on such a venture.  Take a lot of time looking into every aspect of the company.  I`m just wondering for instance, if the business has been making a profit since its inception, why is it up for sale?  My question is based on experience.  The owners of a company I worked for tried to sell off the business.  But, the general information the owners made available to prospective buyers was far from accurate. 
     
    One the issues the owners did not mention was the negative cash flow over the last eight years.  This negative cash flow was generated by a lax collection policy.  Many of the old time customers were still being allowed to charge thousands of dollars a month in goods and services to their accounts even tough these accounts were a year or more in the arrears.  By allowing these purchases, the owners made the company look more viable than it really was. 
     
    You also don`t state where the business profile came from you are quoting.  Was the profile based on company records you reviewed and verified? 

     
     
     
    nevadascul1/10/2008 4:49 AM
  • PanAmPanAm Posts: 1subscriber
    The profile has been verified by me through my due diligence. those numbers are true and correct.
    I just cant seen to find a "big devil" in this business. the only thing that i keep thinking about is whether i am paying too much for the site. does anyone know how to value websites? annual gross sales are approx $350K, profit margin is between 40-45%  I hope to make the products private label product and replace the current supplier with a cheaper offshore supplier. Can anyone suggest ways to successfully market herbal medicines to boost sales?
  • crazydiamondcrazydiamond Posts: 1subscriber
    Interesting, Panam
    You mention herbal medicines, and by that I assume that your products go beyond structure/function claims. Such products (drugs) are governed by the FDA. Schiff nutraceuticals, for instance is in the midst of implementing a laboratory management system to facilitate its dealings with the FDA approval process. As you are aware, the advertising of medicinals (drugs) are very highly regulated, and so, marketing needs to be very disciplined.
    If your products are instead herbal dietary supplements, then they would fall under DSHEA, and the more recent regulatory changes(Aug-Sep 2007) governing manufacturing practices, including labeling, need to be considered.
    1. The Industry
    Nutraceuticals Inc.operates a vertically integrated manufacturing and distribution operation ( a biggie - publicly traded so see EDGAR), including bricks and mortar stores. They have been in the midst of patent infringement litigation. There are also  fairly recent changes to DHEA regulations as mentioned above. There is a marked trend to both tighter regulatory oversight, and increased litigation (liability, business practice - false claims, and IP). If the operation`s current source of supply is threatened, there may be a bigger problem than you know. For certain, there must be thorough investigation of potential claims against the operation for advertising, or supply. In that event, having a warranty/indemnification in the purchase agreement that is backed by the promissory note/progressive retirement structure is probably a good move. I have had recourse to such mechanisms in the past.
    2. Valuation
    Taking the numbers you`ve indicated as being net earnings after interest and taxes, the operation is throwing cash flows of about $150k p.a. If so, $185 is a very low price. I have seen references to multiples of 7.5 times in various litigation documents in this sector - that suggests the price might run to $1M!. On a discounted cashflow, assuming fairly conservative discount rates, and a 3 year window, suggests more like $400k. Now, the lower barriers to entry because it is  on-line would reduce the valuation, but still - awful nice price. Unless there is a problem . . .
    3.New Private Label, offshore . . .
    Despite the competitive labour advantages of suppliers in India and China (neither of which subscribe to WIPO), there are barriers put up by the FDA. The FDA is loathe to accept many foreign jurisdiction approvals, and will insist that the manufacturer go through FDA approval (if medicinals). All foreign manufacturers of foods and dietary supplements must still register. there is likely to be localization issues with respect to packaging and labeling under the FTC and/or the FDA. Be aware that this might take some time. And as I mentioned, there is the risk of adverse legal action by domestic manufacturers for patent infringement . . . unless you are well up the research hill on this issue, do not base your acquisition on this strategy.
    4. With respect to marketing, you may well be in luck. There is a very large and vibrant community of alternative medicine and herbal supplements/medicinals boards, blogs, lists, associations and even publications. Since many of these are on-line, you should find no shortage of venues to promote to. However, unless you have broad geographic reach, it may be challenging to get the focus down to your specific area. Does the operation use a fulfillment house? Can it accommodate the shipping costs in its margin, trading cost increases for greatly expanded sales? You would need to consider becoming a very active community participant in some of the associations, perhaps supplemented by content rich blogging . . . You could engage a blogger, you don`t have to write it all yourself. Difficult to advise further on the information at hand.
    For examplesan online alternative journal siteMcMaster University reviewed link list
    be sure to check the US Office of Altenative...
    and see yahoo, msn, about, and google - all have groups and lists for alternative medicine
    Don`t blame you in the least for not giving more details in such a visible public venue, but it does make it challenging to assist!
    Mikecrazydiamond1/10/2008 2:17 PM
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