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BUYING A SMALL BUSINESS

A Counter Offer

Business for Sale: A New England-based kitchen and patio furnishings online retailer priced at $9.9 million
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A Web pioneer, this online retailer began selling kitchen and home products--think pot racks and sinks--in 1996. Today, the average order is $310, and at presstime, the founder expected to close 2007 with $12.7 million in revenue and $1.25 million in net income. The company has 22 employees.

To make the business more attractive for a sale, the owner has recently poured $500,000 into an overhaul of the website. Now, pages featuring images and descriptions of products are created automatically from a database of information. As a result, website employees are "three times more productive," the owner says, because they no longer have to build an entire page from scratch each time they introduce a new product.

Though the business is a market leader--in 2007, trade publication Internet Retailer named it one of the top 500 Internet retailers--it faces stiff competition in two major rivals and hundreds of niche players. As barriers to entry fall, so do margins at most Internet retailers. Still, as keyword prices climb, generating traffic is harder than ever. In that context, an 11-year-old site has a leg up.

The Asking Price: $9.9 million. The price includes domain names and the site's technology platform, but just $10,000 inventory; most products are drop-shipped by suppliers. The owner will also lease his 2,500-square-foot office for $40,000 to $50,000 annually or will consider selling it. Some financing may be available.

Price Rationale: At 6.2 times EBITDA, the price seems a bit high, given that a common valuation formula in the industry is four times cash flow. (This company's EBITDA closely tracks its cash flow.) But the company's consistently high placement in search results for many kitchen products may justify a premium.

The Pros: The website's recent overhaul is the main selling point. Plus, the company reinvests only 6 percent of revenue into advertising and gets a hefty 55 percent of its sales from organic search, which insulates the company from rising pay-per-click advertising rates.

The Cons: Growth was generally flat in 2007, up only $250,000 over 2006. The owner blames a sluggish real estate market and his focus on revamping the website at the expense of adding new products, which in the past have generated most sales growth. Another likely factor: increased competition.

The Bottom Line: This company could be a good investment for someone who wants to own a category-leading website, one that boasts a brand-new technology platform. To get the company growing again, the owner suggests that a buyer add product lines geared toward other rooms of the home.

Company Financials 2005 2006 2007**
Gross Revenue $9.6 million $12.5 million $12.7 million
EBITDA* $1 million $1.3 million $1.6 million
Gross margin 33 percent 33 percent 31 percent

Inc. has no stake in the sale of the business featured. The magazine does not certify the accuracy of financial or other information provided by the seller. Inquiries should be directed to Michael Gravel of iMerge Advisors at (888-882-4324, ext. 203.

* Earnings before interest, taxes, depreciation, and amortization.
** Projected. Inc. also publishes paid business listings in the back of the magazine.

Last updated: Feb 1, 2008




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