How to Evaluate a Business with no sales

There are a few ways to evaluate a business. There are several factors that impact the value of a business depending on the type  of business. So there is no perfect way to evaluate a business, especially considering that some businesses are more important to some than others. It all depends on what you are looking for.

So what about the cost of a business that is not making any sales? The price of a business without income will depend on only one thing, does the business have any equipment or intangible assets? In that case you should just buy the equipment and/or intangible assets.

What is the price of a business with no income? To me it’s zero! It’s worthless. My mentor helped me understand this a little better. And recently I’ve ran into this issue on two seperate occssions but very both happened within the past month.

The first time I reached out to a seller that had an ecommerce store in the fishing niche. I was following up with him regarding an unlisted ecommerce store I had heard he had for sale. The fishing online store was  doing about $45,000 in sales a year, and he claimed he was profiting about $15,000.00/year. He had some products that he sourced locally and some dropshipping. Now the site was about 15 years old and the seller explained that it used to do about $300,000 or more in sales each year, but he had lost interest in it. He was selling it for $30,000. I didn’t buy it at the time as the sales were trending down and he wouldn’t negotiate a better price.

I checked back a year later and inquired about the business just to see where it was. The seller explained that he had shut down the cart on the website to stop all sales, but the website was still active (I checked and it was). I forgot to mention earlier that this seller was local and only about 45 minutes from where I do my business. He explained that he didn’t have time to run the site and had stopped selling and holding it for his teenage son to take over soon. He stated that his son was no longer interested in it and he would be willing to sell the site today for $10,000.00 and he would include about $1500 of product he had left over.

We went back and forth a few times with texts and emails. He was either too busy or didn’t really want to sell it as he was not communicating well. I discussed the details of the ecommerce store with my mentor. I thought the business was worth something, maybe even $10,000.00 if the deal structure was good. But my mentor told me something that I now understand completely….. He asked how much the business was making monthly? I explained that it wasn’t making a dime as the owner had shut off the ability to purchase on the store. My mentor then explained that the business was worth …. ZERO! Why? Because it’s not making any money. After thinking about this I fully agree with him. How can a “business” be worth anything if it’s not making money? I know some people are going to disagree and that’s fine. But just think about it. To an investor or deal maker, why do you want a business that’s not making any money? The whole point o f investing in businesses is to make money, why take on a website that is making zero sales…..

Now we understand that some businesses come with some tangible and intangible assets that could be very valuable to an acquisition. But to a website business investor… it’s not worth anything. The whole point of buying these income generating websites is to get an immediate return on investment and hopefully grow it.

So does this non performing ecommerce website have a value? Of course it does. But the deal structure has to reflect the current status of the business. So I reached out to the seller and explained that since the business was not making a dime, I would be willing to take it over for him and pay him the $10,000 with an earn out only after training. He had nothing to lose here, if the business does  well, he can get $10,000.00, if he sits on it, he may never get anything out of it. At first he was interested, but after a few failed attempts to meet up, he reached out and explained that he would no longer be selling the ecommerce store.

About 2 weeks after putting that deal to rest, I reached out to another seller and was presented with something similar. The seller explained that he had an Amazon FBA product that was making hundreds of sales and was just waiting for a buyer. Apparently the owner had just stopped selling on Amazon, one of the easiest and  most passive platforms ever….. The seller explained that the owner of the Amazon FBA product had just “left it” for the seller, but the seller was too busy to get the product going. The seller explained that this brand was just ready to take off with the right person, but the product hadn’t been sold in over a year.

He was asking $30,000.00 for this “Amazon FBA Business”. I explained to him that if there were no sales, then the FBA business is worth exactly that … ZERO. He explained that the “FBA Business” was worth alot more since it had a BRAND, some product, Previous Sales, A great listing, and several other intangible assets. I then explained that most FBA biz are selling for a 2x – 3x multiple of the net income. If I took the net income from this FBA Biz, then it’s worth 0 x $0 = Zero. This is not an FBA Business, this is a product that is for sale. I explained to him that I was looking to buy an FBA Business, not an FBA Product to launch.

So, is this product worth something? Absolutely, but it’s not an FBA business because it’s not making any sales. Think about it, I can’t buy a few soccer balls and a goal and some cones and tell you I have a soccer coaching business. But I could sell  you the soccer balls and the cones as a product. But if I go out and get 5 clients and get them to sign a contract and include the balls, cones, and goals, now we are talking.

As I mentioned earlier, the product is definitely worth something (I didnt get a chance to look at the details, previous sales, etc), but not at a 2x or 3x multiple. I ended up offering to take over the product and list it, and then once the sales start coming in, we could discuss a multiple of 2x profit. He explained that he could not do that as he was unsure of a few things….

#1 How much money I would pour into marketing (…… so like a start up)

#2 How much effort I would put into it (….. so like a start up)

# How much money I would put into purchasing more product (…. so like a start up)

So basically I had to relaunch this product, market, and figure out the shipping, etc…. so what was I buying….. ? a product. So again we both disagreed with the actual valuation of this so called “FBA Business” or FBA Product.

In Conclusion, when a business is for sale and not making any sales or income, then you should really consider what value it has to you. Does it have equipment, products, procedures, data, email list, or any other type of value? Otherwise the terms of the acquisition deal would have to basically eliminate your risk.

In both cases I still offered  a win/win situation. For the ecommerce website I offered to take it over, with their help I could start the sales, make some money and then pay the owner the $10,000.00 he wanted for the business.

For the second FBA product business, I again offered to take it over and pay a 2x multiple!!!! That’s incredible and they still didn’t take it. They are going to try and find a sucker to give up all the money up front for a product that has no recent evidence that it will work. The new owner will have to pay a large amount up front, then do a relaunch on Amazon, then pay for more product, and start the Amazon PPC campaigns to try and compete with the other products that are already on Amazon and listed higher. And all this has to be  done BEFORE they make a penny…… talk about an ugly deal….. good luck!!

Instead I will focus on another Amazon FBA business making about $4,000/month for the past 2 years! The owner has a Brand, recent sales, reviews, great listing, no need to relaunch, procedures, it’s just plug and go! And the cost is only $96,000.00, which is a 2x multiple, exactly what I offered for the other business and I won’t have to launch!!! So the day I buy the business, I start making money!!! That’s the way to buy an AMZ biz!

Don’t outthink the room here, go with what’s working. If a business is not making money, it’s not worth anything.

The Journey Begins

Welcome to Diaz Acquisitions. I will be updating my journey on this blog. Come back and get an update on my journey to grow Diaz Acquisitions into a dynamic diversified portfolio of digital assets.

This past week I’ve been reviewing two websites for sale. The first one is a Shopify dropshipping business for sale in the soccer niche that was on the Shopify Exchange. This is a platform that sells established Shopify sites. I love this site for several reasons. The first one is that it is in a niche that I am absolutely in love with, of course, soccer or Football as it is known around the world. The site is currently making over $68,000.00 in a year. The second thing I love about it is that it is for sale at only $50,000.00. This brings up a few red flags. Why would anyone want to sell an asset that is making $68K/year for only $50K? Especially when the seller says he only spends about 8-10 hours a week…..

I reached out to the seller and finally heard back from him about 6 days later by email. I asked the seller to jump on a call to discuss the business. He explained that his English was not very good and that he would rather discuss it on Skype since he can write better than he speaks. This was another red flag, but I proceeded with caution. We sent some skype  invites and that same day we were on skype chatting. He lives in Eastern Europe.

I asked him to tell me about the business and he explained that he and his girlfriend run the business. He runs the site, while she helps with facebook ads. She has a background in design. They have a nice email list of 3,000 but not very responsive. He said he loves soccer as well and we discussed a little European Soccer. He said that he picked the niche, but they had other plans to build another site and needed the money. He feels that anyone can run this business as long as they can learn facebook ads, which he was willing to teach.

After a few days of discussions I asked him if he would be willing to take an earnout and he said there was no way, that he would need the $50K at closing.  I had some concerns regarding the Facebook ads. He had also mentioned that he made Video Ads on facebook since they worked so well. His girlfriend the graphic designer helped him. I knew I did not have immediate access to a graphic designer and this may be a problem for my company to duplicate. The entire time I was think about my mentor who has encouraged me to look at this as an opportunity to LEARN.

My other concern was the training I would receive from the seller. If he doesn’t speak good English and doesn’t have written procedures, would I lose something in translation?

The other major concern was the fact that the website only received traffic through facebook ads. I wanted the traffic to be a little more diversified, so I decided to walk away from this business.

Other concerns were that there were no social media channels established. There was really no brand established. At the end of the day it just wasn’t a great deal, so I thanked the owner and wished them luck.

The second website that I was looking  at buying was a much lower priced Amazon FBA website. The FBA Business was in the Home and Garden niche. They sold one premium bedding product. The business was for sale on a 24X multiple, which was intriguing. I loved their website. It was very clean and the photos were great. The site did seem a little empty, but a few bells and whistles could be added to improve it. It was clear that the owners were attempting to make this brand very clean.

This FBA business was listed on a broker site. I reached out to the broker and discussed the business.  I signed over the NDA and I received the business stats and PNL. A week later we set up a seller phone call. The phone call was great. The owner gave me a good background on the business. They have a few FBA brands established and according to him, were neglecting this one. They wanted to hand it off to someone else that could take it and do something  with it.

The problems I saw with this Amazon FBA business was that the profit margin was very low, at only 11%!!! That is pretty low for a product based business. I usually look for businesses that are earning at least a 25% margin on profit. I would rather have something over 30%, but 25% is doable.

The second issue was the fact that it was super cash intensive!!! Most FBA businesses will be cash intensive, which means that you must have a lot of cash ready to buy product and have it shipped from the supplier,  but since this was a premium product, it was very expensive. The owner explained that he usually purchased between $15,000.00 – $30,000.00 of product from the supplier. So if I added this business to the portfolio, I would need an additional $15-30K ready to purchase products, while only getting an 11% return………

I couldn’t see how I could grow this business without adding a ton of capital to it, and even then it was a flip of the coin. I loved everything else about the business except for the cash strapped issue and the 11% margins. I liked the seller, platform, and brand, just not the current business. I decided to walk away from this one as well.

We did find that the website may be a good strategic acquisition for another partner and we decided to share the deal with him to see if it would be beneficial to his current brand.

I have two other websites i’ve already identified to review. Make sure you come back and see what we are up to!