Monday, September 28, 2009

Pposh Up For Sale: Asking a pretty penny

Penny Auction Watch just broke the story that is up for sale. Pposh is the penny auction site focused on travel packages that employed some very suspicious practices after launching late this summer. According to Website Broker, where Pposh is listed for sale, the site has a monthly income of $3000, expenses of $350 and an asking price of $500,000.

As someone with a little bit of experience in the private equity world, let me evaluate this deal for all you prospective buyers, free of charge.

While PAW said some Pposh employees were not getting paid, let's just assume this is a wash and that it really only costs $350 a month to operate Pposh. That brings EBITDA to $31,800 per year. With the asking price of $500,000 you are looking at about a 16x multiple for Pposh. That's on the very high side, a good multiple on a brick and mortar operation of similar size might be 4 or 5x. However, before we declare Pposh overpriced by nearly $350,000, let's dig a little deeper and evaluate it's business potential, market potential, competition and barriers to entry ie let's do a quick and simple SWOT analysis:

Strengths: The site looks good for a penny auction.

Weaknesses: As I have long argued, the only barrier to entry in this space is credibility, Pposh has none. In fact, for such a young site Pposh actually has a very bad reputation (see earlier posts on PAW and Penny Auction Insider). They have no site traffic. Travel packages have huge inherent challenges. For example, selling a flight from one city to another requires the bidder to be in one of those cities and have a need or desire to go to the other city within a limited window of time. This severely limits the number of potential customers.

Opportunities: I believe there is a lot of room for growth in the penny auction industry.

Threats: Pposh has no barriers to entry. There are nearly 100 sites offering similar services for a similar price. The only thing that makes Pposh unique is its product set - travel packages - which poses inherent challenges, and even if there was an attractive market here, more established sites could easily enter this market and leverage their existing customer base to win this sector. There are many larger, more established penny auction sites with experienced management teams and some with VC funding.

In conclusion, Pposh has a weak business model in a competitive industry with no barriers to entry. Pposh has very little site traffic and what reputation it does have is negative. The stated costs are far lower than would be required to adequately run the site and income potential is small given the limited customer set in travel auctions. One big problem is that if expenses are only $350 per month, Pposh can't actually be selling much of anything, which raises questions about the legitimacy of their earnings. According to the Pposh ended auction page they sell over a dozen items a day, including expensive travel packages, car rentals, flights, computers and other electronics. Clearly, Pposh is either not counting the products it sells in its expenses or not actually selling products, which is something we accused them of doing weeks ago. This is very suspicious and appears to be one big fraud.

After doing a basic analysis of the company fundamentals, I believe is overvalued by approximately $500,000 and wouldn't pay a single cent for the "company."

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