We thought we’d do something different for this post, since many case studies show the cherry picked success stories, or in our case some of the failures, we decided to put together a post on some of the businesses we looked at, but ultimately rejected.
This should give you insights not only into how we operate here at Onfolio, but also some of the pitfalls you can avoid in your own efforts.
These are not the simple “obvious pass” businesses where we didn’t spare them more than a few seconds thoughts. Instead, we’re focusing on businesses that initially seemed reasonable, but after digging deeper we decided not to move forward.
As a bonus, we’ve also thrown in a business we wanted, but flew off the shelf so we missed it, and a couple of businesses that are for sale now, and what we think of them.
I put this post together with the help of Onfolio’s Director of Acquisitions Yury, who did the majority of the actual research and recommendations (or lack therefore) featured in this post.
The Ones That Didn’t Make The Cut
Below is a list of the businesses we passed on, including notes from Yury, and my own commentary added.
Recurring Subscriptions – Financial Planning Resource – $6.4K MRR
Yearly revenue: $72,000
Yearly net profit: $67,000
Asking price: $213,000
Reason we passed: This business was for the Australian market and offers financial planners the ability to list services to target potential clients. Since we have no familiarity or experience with the Australian market, we passed.
Dom commentary: This might not be the best example of a bad business, because we actually didn’t explore it further as soon as we saw it was outside of our US focus. It’s important to include it though because it fits into the theme of knowing what you don’t know. We could quite possibly operate this business fine, but we don’t have any desire to branch out into markets we’re totally unfamiliar with, so we passed.
2. Domain: 17 month old pet product business that generated $1,023,303 USD in the last 12 months and $223,746 USD in profit. Seller is looking to maintain 15% equity (Listed on ecommerce-brokers.com)
Reason we passed: Looks like a low quality Aliexpress dropshipping site. These sites have no inherent value and are usually riddled with negative reviews due to low quality products, long shipping times, and other issues. These sites rely heavily on paid Facebook ads and once stopped, the traffic/revenue dies completely. Additionally, the Facebook accounts usually have low quality scores because of the poor shipping times.
You’re basically inheriting a ticking time bomb
There are a few good ways to check whether a business is dropshipping from China.
- Visit the Shipping page on the website. If a business is dropshipping from China, you will see long shipping times (ranging from 7-40 business days).
2. Another good way of checking is to google the brand name/url + reviews or trustpilot, bbb, etc.. Trustpilot. You’ll usually see something poor reviews and comments about low quality products and long shipping times
3. Do a reverse image search and you’ll see the products from the site listed on Aliexpress
3. Outdoor Furniture Ecommerce Business
3 year old business that generated $57,602 USD in sales in the last 12 months with $814 USD net profit due to covid.
Reason: Aside from being based in Australia, the margins are terrible. Average margins for a dropshipping business are usually around 15%. This may have been due to high ad costs or poor management but wasn’t really worth digging into and turning the business around because it was so small.
Dom commentary: Sometimes you have to ask yourself if something is even worth trying to make work, when a better opportunity exists elsewhere.
Yury Commentary: Shopify has a profit margin calculator but keep in mind you still need to take into account other expenses when doing business like ecommerce platform fees, credit card fees, advertising, customer service, etc..
4. Highly Profitable Content Site – Health & Fitness Niche – 1.25X Multiple – Not distressed
Asking Price: $459,000
Reason we passed: The website was about SARMS. “SARMs and other similar research chemicals aren’t approved for human usage. Always talk to your doctor for medical advice. Articles on this website are only meant for education and information”
This site explains the legal issues with SARMs:
5. Affiliate/Display Advertising – Finance & Alternative Income Guides – $10K Gross/Mo
Yearly revenue: $124,000
Yearly net profit: $111,000
Asking price: $330,000
Reasons we passed:
- It was overpriced at a 3.8x multiple (especially because the increase in traffic is pretty recent)
- I believe the owner has certain relationships which helps him acquire links. He’s mentioned he spends time participating in the community and answering media requests. I’ve also seen he’s a contributing writer for Flippa. I think this is something worth taking into account because that will be necessary to maintain that participation and will need to see if the new owner would be able to continue these agreements. His current link building investment is very low for this niche. This is likely because a lot of the links he acquires through his participation in the community.
- The site currently has a high bounce rate and low sessions per user
- Display advertising – Revenue here seems very low for the amount of traffic he’s getting. I’m not sure who he is using but could be an opportunity to switch providers and get higher CPMs
- Looks like traffic was dropping in February in Ahrefs so we’d want to see updated info
- Quality of content is not very good (he’s paying 2-3 cents a word and it shows)
- Seller is marketing his business in prospectus as alternative income/investments but it’s really just side hustles
- This is a super competitive industry and will require significant investments into content/backlinks to continue to maintain/grow the business
6. https://app.empireflippers.com/listing/unlocked/48446 – News & Education
Monthly Revenue: $19,333
Monthly Net Profit: $18,725
Pricing Period: 10 Months
Pricing Multiple: 32x
Reason we passed:
50% of the site’s traffic is landing on one page and India traffic is 38% which I think negatively impacts the value. The site is relatively new. Way too much risk here.
Yury Commentary: Always dive into Google Analytics and see if anything looks suspicious (like traffic to a low quality page, mostly international visitors for a U.S. based site, a large percentage of visitors to the top few pages)
Monthly Revenue: $18,660
Monthly Net Profit: $18,084
Pricing Period: 12 Months
Pricing Multiple: 33x
Reason we passed: Payday loans are considered super shady/unethical and have been banned by many companies (including Google)
8. https://app.empireflippers.com/listing/51558 – Employment
Monthly Revenue: $9,767
Monthly Net Profit: $9,687
Pricing Period : 9 Months
Pricing Multiple: 47x
Reasons we passed: We would not recommend this business for many different reasons but here are some of the top ones:
- 57% of traffic is driven by a single page
- “The Seller has not written any new content for the business in quite some time meaning minimal effort is required to maintain the asset at this time” – this is actually not a good thing. When a site does not publish new content over time, it will start to decline. Not to mention this is a way for sellers to get a larger asking price by showing lower expenses.
- Website was impacted by a Google algorithm penalty in February 2019
- 100% relies on Google Adsense. It’s possible the website can actually make more money with display ads instead of adsense but I am not sure if the companies accept sites with their kind of traffic breakdown by country (Great Britain (15.04%), Pakistan (10.04%), and India (8.36%) audiences respectively)
- Extremely high multiple – 47x
- 7 Months Pricing Period (they didn’t use at least 12 month pricing period because that would lower their valuation)
Bonus – One We Wanted
6 Year-Old Subscription-Based Business With Low Workload and Strong Margins
Asking Price: $125,000
We actually didn’t pass on this one. It was a tea subscription business. Because of the price point, it had a lot of interest and had 2 offers above asking price before we were even able to schedule a call with the seller.
Top Reasons We Pass On Businesses
As well as the reasons given above, here are some of the more common reasons we pass on something:
- Not our area of expertise
- Too much of a risk profile for the price (expired domains, pbns, etc..)
- Too much traffic going to 1 page
- Traffic from third world countries is typically not as valuable or reliable
- Questionable/Illegal niches
- Requires specific knowledge from owner that is difficult to outsource
- Owner would need to be replaced which would be expensive and drive the multiple much higher. For example the owner does a lot of work for the business for free (writing content, networking, sales calls etc).
- Site has recently been hit by an algorithm update which hasn’t been reflected in the multiple. For example, a site which was earning $12,000 per month before an update earns $5,000 after the update, but is listed as averaging $10,000. This is just misleading.
Ultimately it comes down to how much risk there is, and how much opportunity cost. Sometimes we see a business that doesn’t have anything wrong with it per se, it’s just not something we think we can do a ton with compared to other opportunities.
This isn’t the biggest factor though, because half of the time you end up wrong about what you can do with a business anyway (both negatively and positively wrong).
The vast majority of the time we skip something, it’s because we see too much risk. The easiest way to lose money in this space is to buy something risky rather than just playing it safe. Online businesses are lucrative enough that you don’t need to take risks in order to make money.