Have you been itching to get into ecommerce? Perhaps you’ve watched a bunch of training videos. You’re ready to take the plunge.
Many ecommerce companies sell for around three times the annual profit. A business with $200,000 in annual profit could sell for roughly $600,000, although there are many exceptions.
But what if you have an opportunity to buy a failing ecommerce brand, one with little or no annual profits?
Have you ever tried to catch a falling knife? That’s a saying from Wall Street. It refers to scenarios that are too good to be true. No matter how attractive the price, some deals are just stinkers.
Failing brands — such as Brooks Brothers, J.C. Penney — are being sold this year with hopes of a revival. But the folks snapping up those brands are seasoned operators. They have a grand plan and know how to execute it.
But if you’re an ecommerce newbie, I suggest not trying to catch that falling knife, for several reasons.
First, the entrepreneurs behind these brands rarely admit that they failed and, as such, that their brand is not valuable.
For example, a few years ago a strength and conditioning brand failed. I made an offer to buy the remaining assets. The owner had founded the company. My offer was in the range of $100,000. He countered that anything less than $2.5 million was an insult.
Many failing businesses engage in anti-customer behaviour. I’ve seen failing brands sell their lists to spammers, use substandard inventory, disavow warranty coverage, and engage in poor customer service — all to rescue the company.
Third, the brand might have burned suppliers. And suppliers talk to each other. If a supplier gets stiffed, its representatives usually tell others. Thus you may think he could resume production quickly, but, in reality, he may have to find new suppliers (who demand onerous terms).
In short, think twice before buying a failing ecommerce brand.
Instead, buy a successful brand. Consider hiring a reputable broker. Conduct due diligence. Many successful entrepreneurs routinely strong brands, for valid reasons.
A word from the author:
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