One observation of buyer behavior is that people often want to purchase the best website at the price of the worst website.  A frequent buyer refrain is, “But I saw something listed at 1.5x somewhere else!”

We have no doubt that you did see that pricing.  What we do doubt, however, was whether the listing you saw bore any similarity to the one you’re looking at now.  Think about it…if someone is willing to sell you their business for what they’re likely to earn in a year and half anyway (with an implied rate of return of 67%/year), do you think something might be fishy?  Typically the fishy things fall into one of the following categories:

False Multiple

They based the price off of a bottom line number that’s not really the bottom line.  They may have forgotten to include expenses like, I don’t know…contractor labor, merchant account fees, marketing!

Bad Trend

Maybe the site you’re looking at generated $100k profit in the past year and is for sale for $150k.  But did you notice that the profit dropped off a cliff last month after the most recent Google algo update?

Slimy Industry

Maybe everything is legit regarding the trend and the multiple.  But is the site making its money by tricking consumers into automatic reorders of some product that’s initially offered for free? (And by extension might be two weeks from losing its merchant account privileges!)  Or is it redirecting users to a porn site?  Or is it bombarding them with pop ups, malware, unintended downloads, etc.?  There’s a lot of money to be made doing those things.  There’s also a lot of money to be made by joining the Mafia, but that’s another business opportunity I’ll avoid.

What You Should Ask Yourself

In general, rather than obsessively focusing on the multiple of earnings, I think the better questions buyers should ask themselves are:

• Do I believe this business will even exist in three years?
• Do I have a propensity toward running this business better than the current owner and can I increase sales/profit?
• What are the black-swan events that could wipe me out, and how likely do I believe they are?

Next time you’re confronted with a deal that seems too good to be true, make sure to ask yourself whether you would ever consider selling a good business at the price being asked if YOU were the owner.  If the answer in your heart is “no”, then proceed with extreme caution.