E-commerce is it right for you?
There is a lot of interest to purchase e-commerce or web based businesses. I have been getting more than a normal amount of calls from buyers who are very interested in this area. After reviewing hundreds of financials, I can see where this area looks very attractive. It is only because I have done due diligence and appraisals on e-commerce and youtube.com based businesses, that I understand why even though the buyers want to buy and the sellers want to sell that no deal is struck. The two sides do not understand each other. Let me try and shed some light on the problem.
The Business Books Tell A Lot
Sellers have sales reports and product purchase reports by the dozens. Because they are computer based they can tell you by product, time period, price range or color what the statistics are. They think Sales is what the business is all about. They all report to the man that, “Expenses are minimal” and expect the buyer to accept that as “The Truth” and write a check for $500,000.
Part of the reason for this is because the computer savvy sellers do not think like accountants and business buyers. Understandably they do not want to spend their hard earned money on accounting records. They know how much money they pull out of their e-commerce based checking account. They know how to run their business based on sales reports, why can’t the buyers understand that.
The e-commerce seller or their broker offer these reports to buyers instead of financials and expect the buyers to open their checkbooks. If the expense does not come out of the business bank account it does not enter any conversations with buyers.
Making Sure You get the Proper Financials
The vast majority of business buyers have been looking at Main Street Businesses-Those businesses located on the main street of the town. The Hair Salon, Restaurant, Liquor Store, Repair Shop, Fast Food, Bar, etc. These businesses all have physical locations and a wide range of expenses. These expenses eat up 40% of the gross sales of the business. Now they are looking at a home based business that they are being told does not have the 40% operating expenses. This is hard to believe, even if it were true, after looking at all these businesses losing money because of the 40% operating expenses. Rent alone on these main street businesses is usually 15-20% of the gross income/sales.
Buyers need to see standard financials with all the operating expenses shown on them. They want the bank account reconciled so that they know all income and expenses of the company are properly recorded on a set of accounting records. $500,000 is a lot of money, to most people.
I am being hired to try and validate the profit from these seller reports, which I cannot do without a lot more financial information. It takes 25 hours, plus or minus to build a set of books from scratch. This is a lot of time to get this information, not readily provided by the seller.
Time costs money and the buyers want to pay for a financial review, not the cost of creating a set of accounting records. When they are told that all the financials information is not quickly and easily available, they usually walk away in frustration and anger. They just spent money to get information that I cannot be provided at an affordable cost.
Summary: If sellers would just provide buyers wih what any small business provides a buyer, they would make a sale
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