Quirky Small Biz E-tailers Seek Buyers

N E W   Y O R K, May 14, 2001 -- "I bought this domain name with a vision," says Inder Sharma, proprietor of hotel.com, "because I am a visionary." So why is he selling his business? And is it worth the $6 million asking price?

Sharma, based in Southern California, says he needs to sell hotel.com to pay for a lawsuit. But prospective buyers have offered no more than $2.5 million in recent weeks, he says. And Sharma feels that's not good enough.

"I can build this into a $100 million company," asserts Sharma, who says he bought the domain name for $10,000 in 1996 with money he took out of his daughter's savings account. He believes the site, which offers discounted room reservations, can become "the Yahoo! of the hotel industry."

But Sharma has yet to see a payoff. And he is just one of many small e-business owners, looking to sell for personal or financial reasons, who have placed a listing on the San Francisco-based site webmergers.com, where prospective buyers can find businesses like hammocks.com (asking price: $2.25 million), personalbestnutrition.com (about $1.5 million), or touchheaven.com, an online telescope dealer offered for a mere $12,900.

But a year after the Web bubble began to burst, those looking to sell are finding it much harder to cash in than it would have been in 1999 or even the spring of 2000.

"There is a massive lack of will on the part of buyers," says Tim Miller, head of webmergers.com, who keeps track of transactions in the Internet sector in addition to providing a listings service. "There is a huge amount of indecision and delaying and canceling of deals."

According to Miller, a total of $600 million was paid for Internet companies in January of this year — which sounds like a lot, but pales in comparsion to the $3.7 billion shelled out in January 2000.

Foot Soldiers of the Internet Revolution

Owners of online small businesses are the foot soldiers of the would-be Internet revolution, toiling away on sites with profiles much lower than big-money ventures such as amazon.com or the now-defunct eToys.

But with the revolution seeming to have fizzled, potential purchasers of e-businesses have been scared off. Even those with more down-to-earth aspirations and smaller asking prices than Sharma are frustrated by the market, and blame the failures of their high-profile, publicly held cousins.

"The dot-com bombs out there do not represent the majority, or at least the significant portion, of small businesses having a lot of success out there," asserts David Fairley, owner of hammocks.com.

"If my business had been where it is now at the beginning of the boom, I bet I could have sold it for $10 million," says Elizabeth Carmel, owner of personalbestnutrition.com, which caters to endurance athletes.

Fairley, from Washington state, and Carmel, a Nevada resident, both say they are running profitable niche businesses from their homes that are basically one-person operations. And both say they are getting out because they are weary of the everyday responsibilities running a Web site and want to devote more energy to their families. But the hours aren't bad: eight a day for Fairley and three for Carmel.

What's a Fair Price?

Still, with the market for online businesses having dropped sharply, sellers and buyers have very different ideas about fair value.

Typically, the sale price of a company is measured as a multiple of its annual earnings. Fairley says hammocks.com pulled down $500,000 in gross revenues last year, meaning that at $2.25 million, he's asking for about four times his annual earnings.

Paul Kedrosky, a business professor at the University of British Columbia who has analyzed Internet-business valuations, says that is somewhat higher than historical selling prices of traditional brick-and-mortar companies.

"Two times revenues is generally a good deal" from the seller's point of view, says Kedrosky, although he notes, "Those rules tend to be pretty ad hoc, and they change a lot over time." But for dot-coms, he adds, "It was nothing, 24 months ago, to ask for and get 15 times revenues."

The problem for Fairley is that annual earnings can be in the eye of the beholder. Fairley saw one potential deal for his site fall through in recent weeks precisely because he and the prospective buyer had different views about where hammocks.com revenues were headed.

Fairley says his business has just about doubled in each of the last three years. Given his $500,000 in sales last year, he projects $1 million in revenue this year, $2 million in 2002 and $4 million in 2003. In his webmergers.com ad, he touts the site as the leader in an "explosive niche of on-line retailing."

But his potential buyer figured the retail market would be more cyclical in nature, and held off — which Kedrosky says sounds like a reasonable decision.

"It's easy to double the size of a business when you earn a dollar," contends Kedrosky. "It's hard when you go up to a higher level."

Patience Needed

Fairley started selling hammocks about a decade ago, and moved online in 1998. But, like Sharma and Carmel, he says his site could be bought and run by someone without prior knowledge of hammocks who is simply willing to put in some time to learn the business.

"You'd have to be a moron to drive something like this into the ground, by not responding to people in a timely way," Fairley says. "We fill orders fast, and that's why we're successful."

Kedrosky, however says that should make the company cheaper, if anything: "That's an argument for why the valuation of the company should stay low," he asserts, adding that the lack of specialized knowledge needed means the "barrier to entry" in the field is lower.

With Internet companies having become a buyers' market , Fairley and Carmel both say they are willing to wait until a buyer meets their prices.

"I'm not really desperate to sell," says Fairley, while Carmel adds: "We're not in a fire-sale mode at all."

Sharma seems more eager to move on to other ventures, but recognizes he may be in for a wait before a $6 million offer comes along.

"I think now the market is very bad," Sharma says. "Any time you have a dot after the company's name, it's now a bad name." But he vows to hang in there: "This is the best investment I ever made in my life."