In July, I shared the lessons I have learned selling websites with Quiet Light Brokerage since 2006, but the seller is not the only important part of the equation. Buying an online business can seem scary, but if you go in knowing how to conduct a deal you’ll improve your success rate immeasurably.
I learned these lessons by observing literally thousands of smart buyers over the years, some of whom saw returns of over 1000% in their first year alone.
The deals are out there, and these 19 lessons will help you get your footing (and your money’s worth) as a potential buyer:
1. Always Trust Your Gut
Sometimes a deal just doesn’t feel right, even though you can’t place your finger on why. While analysis of a business is usually enough to determine if you’re making a good investment, sometimes there are intangibles you can feel in your gut. History tells us that this gut feeling is often correct. Learn to identify it and trust it. However, a smart buyer needs to learn the difference between a gut feeling and cold feet. Everyone gets cold feet now and then; ignore them and trust your brain, your gut, and your analysis.
Lesson: Don’t let cold feet scare you away from a good deal. Trust your brain, and trust your gut when choosing whether to abandon or go through with a deal.
2. Understand Market Prices
When buying, you have to understand that online businesses are sold in a marketplace with market forces at play. What you are looking for is going to be bound somewhat by that marketplace. For example, a buyer may tell the brokerage the following criteria for a business:
- 5 year history
- Low workload
- No inventory
- Steady growth
- Diversified traffic
- Asking price of 1.5x yearly earnings
Since there are hundreds of buyers who want a businesses that matches this description, prices go up rapidly. If you understand the market and you know what the price ranges are for the type of businesses you’re looking to buy, you’ll go into the marketplace more confidently.
Lesson: Get familiar with market prices and develop a sense of what is a good deal before buying.
3. Start Small
If you’ve never bought an online business before, start small. Go in with the knowledge that you may lose everything, and remember that even if you do, you’ll at least get a tax write off.
Many new buyers buy big (because they know the value of their time) only to find themselves overwhelmed with the purchase and miserable.
Online businesses lose value much faster than offline business. Without physical assets, it’s just a fact of the industry. If you buy big and fail, you will have little to no recoverable value.
Lesson: Start off buying small to protect yourself from failure.
4. Make Your Offers Simple
When negotiating, the more complex your offer is, the more likely a seller is going to view it as risky. To boost your chances with a seller, keep your financing simple. Don’t rely on complex earn-outs or balloon payments. Simplify your payment system to its easiest form for both you and the seller. By making financing offers easy to understand, you make the process easier for everyone.
Additionally, sellers are typically inexperienced in high value transactions. As a result, they are usually very stressed about making the right decision. Complex offers put them into a difficult position, so suggesting something straightforward can make your offer more desirable.
Lesson: Consider your seller when putting together your offer, and keep things simple and in cash if you can (see lesson eight) to get your deal moving forward.
5. Learn How to Use Olive Branches
Strong buyers know that they are not the only ones taking a risk. Extending the occasional olive branch can help you get a better deal. If a seller trusts you and likes you, they will be much more responsive, especially during and after the transition period.
Always remember you never know when you will need to contact a seller for more information. If a problem arises a day after the deal closes or three years later, you’ll want that communication channel open. Keep that relationship strong from day one, and you may have earned yourself and your new business a valuable ally.
Lesson: Learn how to use olive branches strategically. Treat your seller well, and they’ll treat you and your new business well in the future.
6. Ask a Lot of Questions
When approaching a deal, take advantage of the chance to talk with your seller. Ask every question you can think of. There’s no better way to get to know a business intimately, and you may not have this opportunity again. You can also use this time to look for inconsistencies and red flags in the seller’s answers; If you catch them lying, walk away immediately.
Even if you think you know the answer to your questions, ask them anyway. You don’t want to be blindsided by a detail after a deal because you assumed something about the business beforehand.
Lesson: Take advantage of the opportunity to ask your seller questions. Learn as much as you can about the business before closing.
7. Always Hold Some Money Back
Experienced buyers hold some money back during the transition period to ensure that the seller is cooperative and fulfills their side of the deal. A typical holdback would be 15% – 20% for a thirty-day period. While sellers usually don’t like this, they will agree to it, and it’s worthwhile for you to have it in place.
Remember that held back money can also help cover incidental costs that the seller should have covered initially, and having this resource can be invaluable if something with the business goes wrong.
Lesson: Hold money back during the transition period, in case something goes wrong with the seller or undisclosed costs surface.
8. Be Open to Doing a Full Cash Offer
If you have a very good understanding of the business, a full cash offer can often beat out all other competing offers. Offering a full cash payment will give you leverage in negotiating other aspects of the transaction because of the tactic’s rarity, and because it makes things easier for the seller (going back to the ‘olive branches’ and the simplicity we talked about before.)
There is a certain “cleanliness” to doing a full cash offer that makes them simpler for you and for the seller. Sellers will often take cash offers over other financing deals just because they’re less complex – it lightens their load, and you’re more likely to land a discount in the process.
Lesson: If you can, consider doing a full cash offer to make your offer stand out from the rest and increase your chances of getting a sizeable discount.
9. Don’t Forget About the Closing Time for the Sale of a Business
You can often gain an advantage over other buyers by simply offering to close faster. For valuable businesses, the standard closing time is within 30-45 days. Offering a 21 day close would give you an advantage, by settling the sale for the seller up to half a month earlier than they’d anticipated.
Warning: Only do this if you can commit to making it work. You have to be comfortable with the fast turnaround, and it will backfire on you if you’re not.
In one of our most competitive sales ever, we had multiple buyers all making between $350,000 – $425,000 for the business. Which offer won? An offer for $375,000 (all-cash, see points 4 and 8) with a promise to close in 10 days. They beat out other offers that were significantly richer because the offer was simple and quick. How did it turn out for the buyers who won the bid? 18 months later we resold the business for $650,000.
Lesson: If you have the ability to offer a faster closing time, take advantage of it. Sellers want a fast turnaround, and it might give your offer the edge it needs.
10. Forget About Asking “Why Are You Selling?”
It might seem like an obvious question when you’re looking into businesses, don’t put too much stock in the “why are you selling” question or its answers. Sellers often don’t know why they’re selling, or they’ll intentionally obfuscate their reasons. Some sellers won’t want to explain why they are selling out of embarrassment because they: need the cash infusion, can’t get the business to grow on their own, or they’re disappointed in negative trends.
Even if a seller has put their business up because of negative business, they won’t normally disclose negative industry trends or upcoming changes in vendor relationships to you just because you ask. Most people who sell their businesses do so because “it’s just time to move on.” There is no good reason, and the sale might not even be in their best interest. Regardless, the question holds little value for you.
Lesson: Ultimately, asking about the seller’s reason may make issues with the business less clear or put the seller on the defensive. There are better questions you can ask to learn about the business.
11. Find Natural Areas of Leverage
Some businesses have warehouses in which they can consolidate costs while others are naturally good at conversion optimization. With solid strategy, you can take advantage of the latter by buying underutilized companies. If buying multiple businesses is your plan, find areas where you can consolidate expenses, talents, or advantages to your benefit.
Examples of strategic leveraging:
- If you buy a business that owns a warehouse, you can often find and take advantage of savings for multiple e-commerce stores in space and fulfillment costs.
- If you buy a business with an Amazon store that has a Platinum rating, you can add similar product lines across your businesses and grow a much larger audience that they can access.
- If you buy a business that has in-house content teams, in-house SEO’s, or any in-house operations, you can find businesses that benefit from those specialties.
Lesson: Find your strengths, the strengths of your target businesses, and leverage them to your benefit.
12. Never Re-Negotiate an Offer Unless You Have a Good Reason to Do So
Re-negotiating an offer you’ve already made one at any point in the process might seem seductive, but it’s a bad move. For one, it’s not very nice, and you’ll be establishing yourself as a dishonest buyer. Brokers can and do take notice of opportunistic re-negotiations and, if they see you making them, will consider that when you make future offers. If there’s a significant problem after an offer is made and accepted, either make a fair negotiation offer with some basis in the problem, or respectfully walk away explaining why.
What constitutes a good reason to re-negotiate? In one of the early deals that I negotiated for a client, we discovered during final due diligence that one of the minor vendors would not transfer to the new owner. Since this represented a line of income for the new owner, we simply adjusted the price proportionately for the reduction in income. Both the buyer and seller agreed that this was fair.
Lesson: Plan for your accepted offer to be your only offer, and only consider renegotiation if a serious issue arises in the deal.
13. Understand Most Financial Statements are a Starting Point
Most brokers will represent ODCF (Owner’s Discretionary Cash Flow), a modified version of EBITDA (earnings before interest, taxes, depreciation, and amortization) as a starting point. You can learn more about Discretionary Income here (which is a resource on our website). Within the deal, you may have some expenses that the current seller does not have, and you may have some savings that the seller does not. The point of ODCF is to provide a universal starting point to make your decision.
When approaching this, be sure to ask whoever prepared the financials exactly what is being presented. If add-backs (expenses that were not included in the presented profit and loss statement) were made, make sure to request a schedule of add-backs so you can see if you agree with them first.
Lesson: Know that financial statements are not final. Understand the differences between yours and the sellers expenses and savings, and know when to request more information.
14. Have an Attorney Review the Acquisition
When buying, have an attorney on hand to review the acquisition. While they’re there to help you, remember you need to be in charge. Attorneys can be very helpful in identifying problematic language and also inserting language that will help resolve any disputes.
However, be wary of attorneys on either side. Outside of your control, they can derail a deal before it closes. Remember that they work for you and not the other way around, and be careful of racking up billable hours with your attorney needlessly.
One of the very first deals we closed nearly didn’t happen because of an attorney. In any conference call we had, he became aggressive and obstinate. After wasting several weeks on final contracts, the seller decided to walk away from the deal. A week later the buyer came back to us with a new attorney who was able to get the deal done very quickly. That buyer later resold the business for a substantial profit.
Lesson: Hire an attorney to review your acquisition, but be vigilant. Plan your hours, and don’t allow them to derail your deal.
15. Don’t Rule Out SBA Loans
SBA loans provide leverage to allow a business to pay for itself. Typically, with SBA loans, you will get a 10 year loan with 20% down and a friendly interest rate.
However, SBA depends more on the buyer’s personal financial situation than the business itself. To get the best deal, take your time to get aggressively prequalified. You have to be prepared, and you must be comfortable with the liability portion of taking on such leverage.
Lesson: SBA loans are a useful tool for buyers who are qualified and financially prepared to sustain them. Don’t dismiss them without looking into how they can help your deal.
16. Be Clear With Deadlines
Never string a seller along during due diligence. If they feel you’re wasting their time or they’ve gotten a sense of “moving goalposts,” they’ll close off. Sellers who do not believe you will close the deal will become obstinate, and will be apprehensive to give up key details that you need to know.
Know that many sellers are incredulous about buyers being serious. You can dispel this by being clear as to your decision process and setting goalposts to each milestone. Sellers will view this favorably and be more willing to work with you once they’re certain you’re serious about the acquisition.
Lesson: Be clear about your deadlines and decision process with your Sellers. Set clear goalposts, and keep your seller in the loop throughout the process.
17. Always Respect Boundaries
It is scary for a seller to share sensitive data about their business, especially with a stranger who may not close on the deal. Never take this for granted, and always be transparent about how the information is being used. As the buyer, take the seller’s feelings into consideration and respect them. Never contact their clients or vendors without permission.
If they’ve hired a broker, always work through them. Never try to bypass the broker unless you’ve been instructed otherwise.
Lesson: Respect the boundaries of your seller, and don’t try and circumvent the system they’ve laid out without communicating with them.
18. Get to Know the Dealmakers in the Industry
The squeaky wheels get the grease. Stay close to brokers and dealmakers in the industry and check in regularly. These people know what they’re doing, and surrounding yourselves with them will at once educate you and make your interest known — a double win. Always offer feedback to brokers about their offerings – they will be more willing to give you an advanced look at deals in the future if you’re communicative to them now.
Lesson: Get to know influential and active brokers and dealmakers in the marketplace, and use their knowledge to your advantage.
19. Know That You Get What You Pay For
When I started out, I made the mistake of buying a low-multiple business thinking I could turn them around. The reality was that the money I paid and the time I had to invest in the business made it a bad deal. To keep yourself from making the same mistake I did, there are a few red flags you can look out for. If something is priced unusually low, it ordinarily means one of the following:
- The business is sick and needs someone who can cure it
- The business requires significant new investment
- The business owner needs to sell extremely quickly
- There is a high element of risk
There is a legitimate strategy for buying low-cost businesses used by experience buyers, but you must be sure that you know exactly why it is low-cost and that you have the resources needed to fix it and the time you’ll need to invest.
Lesson: Be wary of low-cost businesses. When you do go for them know the risks and the red flags for bad deals.
Bonus: Never Let Pride Dictate Your Decisions
After hundreds of closed deals and thousands of conversations with buyers, there’s one lesson a potential buyer should take into consideration above all the rest. We recently had someone buy a business because he wanted to prove he could. That’s a bad reason. Buy a business based on its metrics, your analysis, and your ability to invest the time it needs.My advice will get you nowhere if you push through the process for a sense of pride. Remember: Humility is a great protection against losing money.
Have you bought a website? What advice would you give to someone looking into buying an online business?