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THE CUTTING EDGE: FOCUS ON TECHNOLOGY

Exiting E-Tailers Often Opt for Online Auctions

Commerce: O.C. firm among latest small Web businesses to sell themselves on Net, as stronger players squeeze out weaker ones.

March 06, 2000|ROBIN FIELDS | TIMES STAFF WRITER

After six years and two rounds of private financing, the owners of an online nutrients business in Laguna Beach are ready to throw in the towel because they cannot compete with the giants crowding into their corner of e-commerce.

Early next month, Active Nutrients plans to auction itself over the Internet.

Up for auction is not only its domain name--a common sale item--but also everything else the company owns, including its Web site, its brand of nutritional supplements and its customer list.

The auction tactic is a novelty, a brazen attempt to create a buzz, acknowledged Doug Walters, whose Florida company, HitDomains.com, is handling the auction.

But more and more small "dot-coms" such as Active Nutrients are selling out online--if not through auctions, then in negotiated private sales--according to Internet brokers. The trend signals a long-predicted shakeout among e-tailers as sectors consolidate and marginal players, their dreams of hot public stock offerings faded, hold virtual fire sales.

"People are finding out that not everyone can be Yahoo," said Malcolm Maclachlan, an e-commerce analyst at International Data Corp. "Most small businesses fail, but failing on the Internet can be profitable if you're lucky enough to own a potentially valuable domain."

Increasing numbers of Web-based businesses are looking to the medium on which they were born to find an exit strategy.

EWebSitesforSale.com, a New Jersey firm founded in January, already has logged listings for more than 2,000 Web-based businesses that are six months to a year old, selling two. Universal City broker GreatDomains.com said a rising proportion of its 4,000-plus listings are for developed Web sites and Internet businesses, rather than for mere addresses.

"Building out a simple site isn't expensive, and people are willing to pay more for the [online] real estate if the traffic is there," GreatDomains.com Chief Executive Jeff Tinsley said.

But the trend demonstrates that would-be entrepreneurs are realizing how expensive it is to build their own brand names on the Internet. And financing is becoming tougher to obtain, said industry experts, as Wall Street sours on Internet retailers that fail to show signs of profitability.

"People thought every site that went out becomes an IPO, and then you cash out and go on vacation for the rest of your life," said Kevin Medina, EWebSitesforSale.com's director of sales and marketing. "They're finding out it takes a lot of money to be successful."

Active Nutrients owner Louis Shapiro said he opted for the auction block when it became clear he could not expand his site and his marketing efforts to match those of industry giants such as Rexall Sundown Inc., Vitamin Shoppe and More.com.

Shapiro hopes the sale generates enough excitement for him to cash out gracefully--the minimum bid is $3.6 million--and to attract a buyer with deeper pockets.

"If I can't take it there, I want to give it to someone who can build it into a billion-dollar company," he said, adding that he hoped to stay on as a manager.

Active Nutrients, through its Web site, Nutrients.com, offers about 100 products, from beta carotene to milk thistle extract. The company, which was founded in 1994, sells brand-name supplements and also manufactures two lines in-house. Shapiro would not disclose revenue or profit figures. The company has about 1,500 regular customers, he said.

The auction will take place in six-hour periods over two days, during which bidders can call in, e-mail or fax in offers, raising the price at $25,000 increments, said auctioneer Walters, president of HitDomains.com in Fort Lauderdale.

Once the high bidder is declared the winner, there will be a three-day period in which the buyer and seller swap financial records before the sale becomes final.

HitDomains.com said it has sent out four bid packages so far and hopes to attract as many as 10 bidders.

Some in e-commerce question whether reputable buyers will trust the auction format to handle such a transaction, which involves not only tangible assets but also intangibles such as brand equity and customer loyalty.

"The auction scenario might work if I'm buying a Furby, but when I'm buying something more complex, doing due diligence might be more difficult," said Charles Wilson, vice president of marketing for software maker Pivia in Cupertino, Calif.

Others, however, called online auctions an efficient way for mom-and-pop dot-coms to change hands.

"It's not cost-efficient for them to hire an investment banker to represent them," said Larry Johnson, accounting firm Deloitte & Touche's managing director of corporate finance for the Western region. "There's a role and a place for this service."

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