Sometimes you think see things other people don’t and sometimes you are looking at a mirage. The consumer adage that says “If something is too good to be true, it probably is” is true when you are a buyer of products and businesses as well.
About 5 months ago I found a dropship Golf Cart Parts business that did $700,000 on eBay. What? Golf cart parts are that huge? How is this even possible. Let me do some research.
Doing some initial diligence, I found out that golf cart parts and accessories are a 500M business. Decent market size, check.
Next stop is the competition. Looking at the significant players measured by online traffic (I used a free account at SEM Rush semrush.com), I checked out who the major players were. There were one or two that looked decently large but they definitely did not have a modern web design and weren’t even mobile optimized.
Why does that matter? My hypothesis in buying an online business is that many incumbent players don’t understand or put the effort in to conduct business on the internet. They may be out there, but if they aren’t prepared for the latest google updates or have a modern, responsive design, they are lacking in the talent needed to succeed. Yes, they can hire the talent but it still doesn’t mean they will get the right people or be able to use them effectively. Being about to put together the right team is a strategic advantage and is not easily copied. I will write more about this in another post.
So far, everything looked great. This was true until I started looking at the numbers. An entrepreneur friend of mine who is mentoring me has a saying “People lie but numbers don’t”. Boy was this true.
When I first got the P&L, besides being a mess (not uncommon), the numbers simply didn’t add up. Simply put the business was not making $700k (“oh, that’s projected”) but around $550k. This in itself isn’t a big deal but was the first red flag I had. I should have walked then and there but being eager to get a deal, I said “no biggie” and moved forward. Everything else passed the smell test so how much more could there be?
The next step in the process is to submit an offer and LOI. Before doing so, I wanted to have the business valued and see if there were any red flags. This being my first rodeo, I didn’t want to screw up badly. One thing I have learned in business is that it is not a big deal to know nothing about a particular topic. What is a big deal is to not get someone in the room that does and pretend you are an expert.
That is a recipe for disaster.