I’m always preaching about the virtue of due diligence. Faced with buying a new site, I get a sick satisfaction in pulling up every detail around the sale and looking for signs that might indicate problems ahead; a misspent (and very geeky) youth taught me skills that come in useful for digging up hidden information about online properties. In fact, if you asked me last month how good I was at doing DD I probably would have quoted something about writing the book, but you know the saying – pride comes before the fall.
A short while back I kind of got scammed. I say kind of because if it hadn’t been for a complete stroke of luck I would have handed over nearly £8,000 ($12,000) for a complete turkey of a site and whilst I’d like to claim skill and experience prevented it from happening, it really was just luck. I’ll get to what happened in the hope you can avoid it happening to you, but first a little background.
I often buy UK based ecommerce sites. For the last five years I’ve owned a corporate catering and food logistics business and which occupies about 50% of the premises we’re in. This leaves a potential 4,000 sq ft of unused space in one section of the unit with its own access and staff who are always happy to work extra hours. I usually find an ecommerce site that sells small items (e.g. industrial electronics or aftermarket components) where the suppliers don’t drop-ship, buy the site (bearing in mind the requirement to hold stock means they usually have less buyers at < $20K, so prices as a buyer are generally good), fulfil orders in the short term from the unit and eventually move everything to a 3rd party order fulfilment warehouse. As an example, I’ll usually buy at around 9x monthly net and resell at around 2 – 3 years once the business has been renovated which is a significant profit even though net margins will have been reduced by the order fulfilment company.
Not too long ago, a lead came in from a seller based in Southport (UK) who retailed led lighting bulbs direct to consumers. Most led lights in the UK come direct from china, but as this seller had such a wide range of products, he purchased stock from a few UK wholesalers (who I guess were importing) but still managed to achieve a decent gross margin.
Here are the basic numbers he supplied (all the figures are in UK £ which is approximately $1.50 USD)
Traffic: 3,200 Uniques (14% ppc, 62% search, 5% display)
Net Profit: £975 (after PPC costs, hosting and cost of goods – the seller didn’t include staff or warehousing costs into this … typical!)
Average Transaction Value: £11
Domain: 6 months old UK domain
After a little discussion on price we agreed a deal in principle and the due diligence process started. Everyone has their own approach to due diligence and whilst I use a framework I’ll often use common sense to tailor it to the type of site.
At first glance everything looked good. The seller gave me access to their Google Analytics, Paypal and Google Checkout Accounts to verify traffic and revenue. There were a few links from a variety of ‘good’ neighbourhoods, a few mentions in forums and some lower level bookmarking and blog commenting. I took a look at their customer list and all the credit card transactions seemed genuine and from multiple people. I also briefly checked the websites of the suppliers they used.
We settled on £7,800 (with no stock) – possibly more than I wanted to pay but conversion on this site was good at around 4% even with the (screwed up) shopping cart the seller was using. Furthermore, it had a very profitable PPC strategy that just needed to be ramped up with more keywords and a higher budget to grow its revenue.
Fast forward one week and I was around a day away from completing the transaction. The seller could easily verify who I was and had agreed to release the domain to me if I then transferred the money and he would finally transfer the site files. (Yeah I know, use Escrow, but sometimes common sense can save you time and money if you weigh up the risk involved. Either way, escrow wouldn’t have saved me here!). That morning I had an article to finish up for the Flippa A-List and had to do some research on a company listed. I went onto Companies House (http://www.companieshouse.gov.uk – public accounts of all UK limited companies) and while searching through a list for the record I needed, I happened to scroll past a company name that looked really familiar; it was the same trading name as one of this site’s suppliers. One click told me everything I need to know, when the director (CEO) of this company (which had been filing dormant company accounts) happened to be the same individual who was selling the site.
At first, I thought that maybe he owned the company and just didn’t want to tell me, in which case I would still have been ok with this although a little suspicious. Some further digging showed 80% of all the site’s purchases were from this supplier, so the first thought to come to mind was what if he puts his prices up?
I went onto Alibaba.com and made a few enquiries to find some other suppliers who stocked the same inventory, but realised that even buying directly from China, it was unlikely I could get a unit cost anywhere near what he claimed to be paying for the stock. In fact, the website I was about to purchase was retailing at around the same wholesale unit price as the best quote I had received and that was based on buying 10,000 units and collecting from China. The penny dropped! The supplier (owned by the seller) was fake company who in fact didn’t actually sell anything. The seller was buying certain popular items in bulk from overseas and selling them at cost through the website I intended to buy (I actually think he made a loss) to undercut every competing site in Google Shopping or in PPC, which naturally meant fantastic conversion and growing monthly sales.
As far as this mystery supplier was concerned, everything from the fake invoices through to mailing address and telephone answering service was, I guess, part of a scam to eventually con someone out of their children’s inheritance. Everything about the site for sale was real though except for the price it paid for stock which turned a £975 net monthly profit (growing at around 25% each month) into a £400 loss if the stock was bought from any regular supplier. I’m half relieved for never having parted with the cash, but mostly embarrassed for ever letting things go that far without at least making a phone to the suppliers and grilling them on their prices and terms – something I would have done if doing due diligence for someone else.
After getting in touch with the seller I tried to convince him to meet in person (without revealing what I knew). He must have guessed something was wrong, as I never heard back and the site is now being redirected to another domain which seems to have nothing to do with him (WHOIS privacy has also been enabled).
I’m still p!ssed off that people like this seem immune to British Law and will probably do the same thing over and over again. The IP address on the comment form he submitted lead to a small serviced office company who he recently left owing £1,000s to. Fortunately, the person who answered when I called, gave me a lead which resulted in speaking to a string of people that he owes money to including a disgruntled ex business partner who claims he lost over £50K. We discovered he was using a fake name, (real name Simon Granger) so my guess is he is likely to do this again.
This is something which I managed to avoid out of luck, but I hope my lesson can save someone being a victim to a similar scam. I overlooked some small details here because the amounts involved weren’t huge, but if I had lost the money, there would have been weeks of endless man-tears. As far as further reading goes, be sure to take a look at a post I wrote last year on some common ‘short-cons’ – Website Selling Scams.
- A step by step guide to spotting fraud and scams
- Analyse potential purchases and save costly mistakes
- Spot potential problems before they happen