Will Rogers once said that “you never get a second chance to make a first impression”.  Whether you realize it or not, that is extremely valuable advice. When reaching out to a broker of an internet business brokerage firm, such as W3 Business Advisors, you must understand that we usually interact with hundreds of prospective buyers that are interested in any particular online business. Unlike a local or regional brick-and-mortar business, which has a limited pool of prospective buyers, online businesses attract buyers on a national and sometimes international level. Therefore, you should realize that there are usually other serious buyers looking at the same website business that you are. That said, we have come up with a list of “Don’ts” for serious buyers to consider when interacting with website brokers.

  1. Be truthful – This isn’t our first rodeo and we can usually smell BS from a mile away. If a broker asks you how much cash at closing you have for a business and your response is that it’s irrelevant because you have investors that you can go to if you need to, we know that you are a newbie tire kicker that likely does not have enough money to buy a business and/or you do not have your financing in place. We are extremely busy so please understand that we do not have the time to waste on buyers who aren’t really serious, qualified, or ready. Once an online broker knows that a prospective buyer is exaggerating and is not truly serious or qualified, it will not bode well for future interactions as they will not waste their time on them in the future. If you are in fact serious, then be truthful and the broker will likely be very accommodating and will want to work with you.
  2. Do not copy & paste generic questions and send them to a broker – Unfortunately, this does occur and many times, a prospective buyer will send over the identical questions for multiple web businesses he inquires about. We try to be as comprehensive as possible and answer buyers’ questions with detailed answers, and this does take the brokers’ and the sellers’ time. Again, if we reasonably suspect that a buyer is wasting our time, we will not take him or her serious in the future. If you are really interested, then take your time and ask valid questions because it will convey your seriousness.
  3. Do not ask questions that are already covered in the prospectus – Other internet brokers may not put much time into their CIMs, but those who have viewed our prospectuses know that we certainly do as we try to be as transparent and comprehensive as possible. Before asking a broker questions, put some time into reviewing the prospectus in detail and in its entirety because if you do ask a question that has clearly been covered in the prospectus then we will know that you did not read it , which does show that you are not very serious about that business.
  4. Do not make an offer prior to asking questions – Some buyers will make an offer immediately after receiving the prospectus without asking any questions about that business. To a seasoned internet broker, this is a red flag as it is apparent that the buyer is just trying to tie up the business during an exclusive due diligence period, which he will use this time period to either try to obtain the money for the purchase (he likely does not have it) or to negotiate the deal down. With this type of buyer, they will then find something that they don’t like about the business (they often invent something), but something that they easily could have discovered if they read the CIM in detail and if they actually took the time to ask some valid preliminary questions. An experienced broker will vet buyers who make offers and will make sure that the buyer isn’t just tying up the business and wasting everyone’s time. He will do his homework and make sure that the buyer is serious and that there is a high probability that he will close the transaction.
  5. Don’t ask unrealistic requests – An experienced broker knows that he does not have a serious buyer on hand when the buyer asks for sensitive information such as tax returns, customer lists, supplier information, and other potential trade secrets prior to making a valid offer. You can do enough preliminary due diligence without such information prior to submitting an LOI and can review the relevant documents during the actual due diligence period. All serious buyers understand that it is unreasonable to ask for such prior to due diligence.
  6. Do not submit a one-sided LOI – Again, you are not the only one looking at a particular online business, so if you do make an offer, then do your best to do so with terms that are as fair and neutral as possible. If a buyer’s LOI does contain one-sided terms, which obviously only favors them, then we will know that they will be very unrealistic and difficult going forward and will likely be impossible to work with when getting to the purchase agreement. Therefore, we would much rather prefer to work with another buyer who appears much more reasonable. Try to have open and reasonable expectations to how the transaction works and the logistics of it. It is not solely about the price offered and agreed upon, because the terms of the transaction, such as cash at closing, time period to close, earnest deposit, due diligence period, etc. are also very important variables to all parties involved.

There are other red flags that turn off brokers and sellers but if you are a serious buyer and follow the advice above, and also show that you have reasonable expectations, then you will indeed be taken seriously and be given the opportunity to be considered a desirable buyer for a highly-coveted business, where there is ample competition and a crowded playing field.

Just about a month into the new year, small-to-middle market M&A confidence appears to be gaining. A few recent surveys questioned M&A participants and business owners about their expectations in 2019. Most responded that they believed M&A activity would increase due to a strong economy, baby boomers exiting their businesses, GDP growth, and a favorable business environment.

Both strategic buyers and Private Equity firms are sitting on a lot of cash, eagerly looking for solid deals. The majority of the respondents also stated that they expect the average size per transaction to increase this year as well.

On the sell-side, we are noticing the same as there are many family businesses and baby boomers contacting us as they are exploring their exit options. Some are looking for outright exits, while others are open to taking most of their money off the table while sticking around for a prolonged transition.

On the buy-side, deal particulars vary as some buyers are seeking outright acquisitions while others would prefer to purchase a majority stake with the owner retaining a minority stake and remaining as the operator for some time.

While it is tempting to anticipate the future M&A market with rose colored glasses, there are some potential headwinds to consider. For instance, rising interest rates and economic uncertainty can be potential obstacles for deals.

Many respondents of a recent Deloitte study, “The State of the Deal M&A Trends 2019 Survey”, said that rising interest rates would slow their activity or reduce their ability to execute on deals. However, the “baby boomer effect” does remain a powerful potential tailwind as many of these small business owners ($100,000 to $10 million in sales) are looking to retire soon.

Last year, 36% of small business owners who responded to the survey said they plan to sell or transition their business within the next five years, which is up from 27% just seven years ago.

Therefore, based on Economics 101 – Supply vs. Demand, with a larger number of businesses up for sale over the next five years and with the current economic environment and corporate tax code, the conditions for a ripe M&A market are surely favorable.

When you are looking to buy an internet business, there are a few different models that are out there. Most fall under the following categories: web development, ecommerce, lead generation, and web directories. Of course if you are a website programmer or developer and are familiar with the business, the transition into the ownership of a development business shouldn’t be so difficult.

But for those of us that do not have that experience, unless the programming and development side of the business was being outsourced, it would not be very prudent to purchase this type of business. Lead generation and web directories can be good businesses that usually involve content creation and management.

However, most internet business brokers will tell you that it can be challenging to find one that has stable cash flow and/or growth. The most common types of websites for sale are ecommerce businesses. There are many different and unique ecommerce businesses out there which vary in many different operational aspects, such as the necessary owner time requirement, drop ship vs. stock, and pay per click (PPC) vs. organic search engine optimization (SEO), just to name a few.

Obviously as a buyer, you must choose a business that you can commit the time necessary to run it successfully. Drop ship is usually a better model for an ecommerce business, but while stocking items would require more working capital for inventory, it may make up for it with greater profit margins. Finally, an attractive ecommerce website should have a healthy combination of PPC and SEO. A good internet business broker can help you determine whether a particular internet business is the right fit for you.

In the midst of a tough job market with the unemployment rate unable to breach below the 8% mark, many of the unemployed are beginning to take matter into their own hands and are buying their own businesses. No longer able to remain confident in the long-term security that an employer had historically offered, working for your self has become is becoming more and more popular. As some of these business buyers are highly skilled in some particular areas it is difficult to find the right brick and mortar business to purchase.

Therefore, many of these individuals are seeking internet businesses. Many websites for sale are rather simple to run and have an easy learning curve. Additionally, many can be run out of your own home (and even from vacation) and offer rather flexible business hours. The high growth potential that many internet businesses offer added to the idea of not having a boss or a commute is very appealing to potential business buyers.

As a seller of an website, this bodes very well for you as there is a larger pool of potential buyers available and thus a larger potential multiple as a solid online business that is priced correctly will likely attract multiple offers. Reputable internet business brokers will know where to market your website and will also very likely have a database of potential buyers that are seeking businesses such as yours. It is however crucial to use a website broker whose niche is specifically to sell website as he will understand the nature of your business, the correct multiples and will also know how to market the site to the right buyers.

As many internet business owners seek out business brokers for a website appraisal to sell website business, it takes a website business broker to determine the most accurate valuation.

Because traditional business brokers don’t usually deal with turnkey websites for sale on a regular basis, it is only natural that it would be difficult for them to determine an effective listing price. For some, deciding to acquire an internet business can be a much safer investment than anything you will find on Wall Street. Sure there is definitely money to be made in the stock market, but any investor will only have so much control on how their investments perform.

For example, many companies that use to be considered “blue chip” stocks have brought a whole new meaning to the phrase. Not many people predicted companies like General Motors to essentially be trading for less than a dollar, wiping out many investors’ savings in what they thought was a fail safe investment.

However, when acquiring an internet based business, you are actually buying an investment that produces some type of fairly predictable revenue stream. Not only does this investment give you an immediate return on your initial investment, but by growing the business you can substantially build up a great deal of equity in the business so when it comes time to sell you will see a healthy return on your initial investment.

For example, let’s say you buy a business for $200,000… you’ve tied up your initial $200,000 in the business (just like you would if you bought $200k in stocks), but at least you immediately begin to collect revenues to recoup your initial investment. You run the business for a few years recouping your entire $200k plus some, and also grow the bottom line by expanding on operations while simultaneously growing the built up equity in the business.

When it comes time to sell, there is no reason you shouldn’t be able to sell the business for more than what you originally paid (assuming your bottom line increased over time).

As many website properties see substantial growth after the first year or two of operations, many business owners feel that adding more overhead will help support their growth. However a business model with less overhead can result in a higher website valuation for a comparable business that is much more capital intensive.

Part of the desire for most to own an internet based company is that most can be run with minimal overhead that brick and mortar business models simply can’t compete with.

As a website business broker, I have seen dozens of internet based businesses that begin with a strong start, see substantial increases in revenues, but because they add on additional (sometimes unnecessary) overhead, the bottom line sees hardly any growth.

In 2009, I have seen many business owners trying to drastically cut back on overhead they once thought was necessary, but as the saying goes, “sometimes more is less”.

For example, one of the most common unnecessary overheard expenses we see is office rent. Sure having a physical presence helps with credibility, but is it really necessary to maintain an internet company’s success? Could the business bring in the same sales revenue without an office?

For most businesses, especially those without inventory or employees, having a $20,000 annual expense for office rent in the financials is definitely going to hurt the valuation in the long run. There are plenty of examples of internet based companies that have office space because it really is crucial to the core operations of the business, but for those who don’t fall into that category, it may be time to consider how to grow revenues with less overhead.

However those who wait to cut back on overhead right before they decide to sell will probably not reap the same reward as they would if they had 6-12 months of financial history to show the positive effects after the cut backs have been implemented.