Last post, we wrote about why 2015 is the year to buy an online business. Since then, buyers have been asking up the same question: “what now?”
Having made the decision to buy an online business, you will now no doubt be considering potential business models and turning your focus to the processes involved in a purchase. It’s natural at this stage, particularly for first time investors, to consider how best to position yourself for acquisition success.
That’s not unusual, in fact – we often receive enquiries from buyers asking for advice on their approach, acquisition strategy and what they should be aware of from a seller’s perspective. So we’ve put together some thoughts on the most common questions and what the ‘unwritten’ rules of buying an internet business really are.
1. Build a solid working relationship with your dedicated Broker
Acquiring a solid, legitimate and high potential internet business will become a much more realistic and enjoyable pursuit if you take the time to develop a solid relationship with a reputable broker. Whilst the broker’s ultimate client is usually the seller, a good broker will look to build lasting relationships with a collection of trusted, qualified buyers.
Brokers often have multiple business listings to manage, deal with a significant number of buyers who have differing levels of experience and proactiveness and work in a fast-growing and dynamic industry. As such, it is important that the broker is able to communicate with you on a timely basis and that you are forthcoming in providing constructive feedback when not moving forward with a particular deal. Doing so, will enable the broker to become increasingly accustomed to the type of online business that you are seeking – which will help them to point you in the direction of any suitable upcoming opportunities.
Put simply, if you don’t communicate well with your broker, you are likely to miss opportunities and fall behind other buyers in terms of credibility. Most of this is common sense, but it is important to remember during your search. It doesn’t take long for a broker to establish who is serious and who is just shopping around for an unrealistic bargain. It is better to be the former and keep in regular contact.
2. Identify the right business for you
With many businesses available from a multitude of brokers, finding the right business can be challenging in itself. Make sure that you are comfortable with the business model, monetization and requirements to maintain and grow the business in the future.
Actively engage your broker in detailed conversations about the various businesses on offer, covering topics such as historic data, growth opportunities, industry trends, etc. In all likelihood, a reputable broker would have gathered this information through their own on-boarding process, so will be well positioned to guide you on what business might be best to meet your acquisition goals. Often buyers come to us with preconceptions on what they think they want to buy, and after in depth reviews of various businesses, end up buying a website they originally had overlooked.
3. Don’t shy away from rising multiples
So, you have identified the business that you believe fits your acquisition criteria. The problem is, you don’t necessarily agree with the asking price or the multiple is beyond what you are prepared/able to pay. At this stage, we often see a breakdown in communication between buyer and broker, with the buyer’s interest rapidly falling off.
Why?
uyers often don’t want to be seen to ‘low-ball’ the seller i.e. put in an offer below the asking price – a simple mark of respect. Or, the buyer cannot reach the asking price and therefore considers the acquisition untenable. Even more likely, the buyer feels as though the market is too competitive and that somebody else will come in with a higher offer regardless.
The reality is, it is better to communicate your concern and strategize a more creative offer structure with your reputable broker, instead of assuming that a deal just can’t be done. Communicate your offer, the reasoning behind it and look for guidance from your broker. There are occasions when higher offers may not work out (timetable is a factor too) or the seller actually has a specific deal structure or buyer type in mind, from the outset.
One of our recent buyers did exactly this; paid an upfront deposit to convey credibility, offered a sensible level of cash on closing and followed this with six-performance based instalments tied to tiered levels of gross revenue being achieved. This is a great example of how a creative deal structure can make a deal happen. The earn-out stretched the total consideration of the deal to the level the seller wanted, whilst providing a risk-adjusted means for the buyer to pay out. A win-win. As the industry becomes more competitive and begins to reach more opportunistic offline buyers, ‘structuring for success’ will become increasingly important.
4. The process is there for your own protection
If you have worked with a reputable broker before or completed a website acquisition in the past, you will likely know that the sale process is purposefully robust to protect you and that the broker exists to help both the buyer and seller from start to finish.
Pre-sale
Before submitting a Letter of Intent, you should have been on a scheduled call with the seller to discuss the business, its history and growth opportunities going forwards. The process of buying a business is as much about building confidence and trust between all parties as it is about the business itself. By establishing a relationship and a provisional timeline for purchase early on, you stand a far better chance of setting yourself up for success.
Don’t forget, a seller is looking for a serious buyer, one who can grow the business, somebody who has an eye for detail and isn’t going to fall at the last hurdle. Failure to build this mutual respect is likely to reduce the seller’s confidence in the deal, which may result in them moving forward with another, more astute buyer.
Before signing the Asset Purchase Agreement (APA) you should also conduct a detailed due diligence review on the business’ operations, financials and traffic. This can be undertaken via a third party firm, or privately if you are confident in your abilities to uncover potential issues. Your broker should also be on hand to help with information gathering at this stage.
The Sale
Be under no illusions, the APA is a legal document with binding terms which both you and the seller must adhere to. Get a clear understanding of your pre and post-sale obligations/liabilities (and those of the seller) from your broker and your third party legal counsel. The success of an acquisition is largely dependent on the transfer of assets and training, so make sure to put a particular focus on this in any agreement.
You should also be very clear on the process once you have signed the APA, how Escrow works and the costs and timings involved. Having a good dialogue with the broker and seller pre-sale will help facilitate a smooth and timely handover.
5. Expect purchasing dynamics to vary at different levels of the market
As with many other markets with a spectrum of pricing levels; the dynamics at one level can be very different to another. This is particularly true with online businesses. Buying at two polar opposite levels of the cap scale will undoubtedly result in a dissimilar experience from at least three perspectives (outlined below). Consequently, it is important that buyers are aware of different purchasing dynamics and are able to adapt accordingly.
- Below the $100K level, the majority of deals are completed on an upfront cash basis – there may be an element of creative structuring, but this is usually dictated by business model.
- Deals with seller financing included are likely to have to reached or exceed the full asking price.
- >$250K deals are more likely to include seller financing and/or some element of creative financing.
Timing
- <$100K deals take less time to go under offer – deals can move very quickly at this level, often going under offer within a week of listing. Buyers at this level often wait for long periods of time before identifying an opportunity that fits their criteria/risk profile, so are quick to move.
- Good buyers at this level try to differentiate themselves by engaging actively with their broker and being well prepared to move on suitable opportunities – a good understanding of due diligence processes and being funded goes a long way in securing a deal.
- <$100K deals take less time to close – as a general rule of thumb, there is a positive correlation between size of business and time take to close. This is partly a function of increased complexity of the business but also reassurances required and involvement of third parties (lawyers, accountants etc.)
Competition
- There are more buyers in the <$100K space, which is a function of basic wealth distribution and buyers testing the water before looking to move up the cap scale.
- With increased competition in the <$100K space it is important for buyers to be quick to review and proceed through the process – having a good understanding of the process from the outset is the first step in achieving this and making your offer more competitive.
What now?
The basic rules discussed above are by no means exhaustive, but they will significantly improve your chances of success in 2015. Get in touch with your broker to discuss these points in detail and ensure that you are in a position to compete when the right business comes along.
