During the go-go days before the 2008 Financial Crisis, money was loose and it was easy to obtain third party financing for website transactions. During that same time frame, website valuations were significantly higher as buyers were able to put down 20% cash at close and as a result, even if they paid a higher multiple, their return on investment (ROI) was very attractive.

After the financial markets collapsed, banks would not even fund brick-and-mortar deals with hard assets, let alone internet businesses with intangible assets. Money has been relatively tight since then but just recently we have been noticing some changes in trends.

Last month we closed a website sale that involved SBA-backed bank financing. There were pros and cons to this sort of deal.

The main “pro” was that the seller did not have to finance a portion of the deal and was walking away with all cash.

The main “con” was that the sale took longer than expected as the closing took place nearly two and a half months after the signing of the LOI, when we were originally told it would take 45-60 days.

As a website broker, I must take all into consideration and in this case the pros certainly outweighed the cons. Dealing with an SBA-backed bank turned out to be pretty smooth but part of the reason was the financial strength and bank relationship of the buyer. The buyer was very active and sophisticated, which surely aided the success of this website sale. If a buyer is utilizing SBA funding to purchase his first internet business and doesn’t have a substantial net worth, then we would think twice about going that route.

While the funding environment is still a bit murky, we are noticing (and experiencing first hand) some changes and for the first time in years, we are at least exploring these options.

As we have stated in some of our recent posts, in today’s day and age, obtaining bank financing for the purchase of an internet business is nearly impossible. With that being said, without an all cash buyer, a seller must offer at least some owner financing. As internet business brokers, there are three common types of owner financing that we deal with; straight financing, performance based, and holdbacks.

Straight Financing: Straight financing is financing at its simplest and involves financing a specific amount of the purchase price at an agreed upon interest rate for a determined time period. The amortized payments are usually paid monthly in equal installments until the loan is repaid. An example of this would be if you sell a website for $1,000,000 and financed $200,000 for two years at 4% interest. The buyer would pay you $800,000 cash at close and then pay you $8,684.98 per month for 24 months.

Performance Based: Performance based financing, or “earn outs” involves a buyer making payments which are based upon the future performance of the website. In other words the seller is a share of the revenue or net earnings (whichever is agreed upon) for a set period of time. Using the example from above, as a seller you receive $800,000 cash at close and agree to a performance based finance in which you would receive 25% of the net profits for two years. In this hypothetical example, if your business was netting $400,000 per year, then assuming the buyer at least maintained that level, you would receive $100,000 per year for the next two years. Sometimes the parties agree upon a ceiling, floor, or both, thus protecting one or both parties from either an explosion of growth or a steep decline in business. There are pros and cons associated with performance based financing that a website broker can explain to you.

Holdbacks: A holdback occurs when a nominal amount of the purchase price is “held back” at the closing date and paid within an agreed upon period of time. A buyer will usually insist on a holdback when he is concerned about the seller fulfilling his training obligations. Usually holdbacks are for a short period of time (30 to 90 days) and most sellers are open to it as the time frame is relatively short. A seller can prudently insist on the holdback amount to be held in a neutral escrow account. While most deals are agreed upon with just straight financing, we have structured complex deals that have involved all three!

With the current climate of the economy, most of the different credit markets are frozen in regards to active lending, especially for small businesses.

As an internet business broker, I am often asked about SBA financing and what types of small business loans are available for new acquisitions. Unfortunately, unless you have a good relationship with a local banker, obtaining financing for an internet based business is near impossible in today’s lending environment.

Although most internet based companies have respectable cash flows, solid historical performance and simplistic business models, the bankers who make the decisions are stuck in that “banker’s mentality” of only lending to bricks and mortar that have hard assets.

Even for online retailers who do not drop ship and actually hold healthy levels of inventory, mentioning that the business operates primarily online can essentially halt the process of getting financing. Of course before the height of the financial crisis, it was somewhat easier to get financing for internet based company acquisitions (still difficult, but at least back then it was possible), but with the credit market tightening up in all sectors, the small amount of SBA financing that is being approved is going to brick and mortar businesses.

However, there are other sources of capital aside from traditional retail bank loans or SBA financing and looking into home equity lines or other types of loans can often prove useful in coming up with the resources needed to jump on the right opportunity when it comes along.

Clients often find W3 Business Advisors by typing in keywords such as, “selling online business” or “selling internet company” and often assume that we know of lenders that specialize in internet business acquisitions, but unfortunately those types of lenders are extremely rare.

I am confident that we will see an increase in lending for internet business acquisitions in the future, but until then it will be difficult to obtain financing the “brick and mortar way”.

As most are aware, trying to get a loan with the current climate of the economy can be extremely difficult at best. Sure if you aren’t trying to get financing this probably doesn’t affect you, but if you are trying to sell your ecommerce business, it might become more relevant.

The immediate question would be if you are trying to sell your site, why should you care about today’s lending environment? The answer is fairly simple: if buyers are having trouble obtaining financing for business acquisitions, many business owners are finding themselves assuming the role of the lender.

Over the past 12 months, there have been very few all cash deals that we have seen as online business brokers and we know that is primarily attributed to the cutback in lending seen across the country.

To help combat this, we almost always advise our clients to be open to some portion of owner financing because it generally is a win-win for all parties involved. On one hand, financing a small portion of the deal instills a real sense of confidence in the buyer that the owner is confident in the company’s future success and is essentially willing to back this by trusting the buyer with a promissory note.

On the other hand, the promissory note is usually secured by the assets of the business protecting the seller in the sense that if the buyer defaults on the payments, the business will ultimately revert back to the seller.

While there are risks with any business transaction, being open to owner financing shows the buyer that you are willing to share some of the risk in the transaction. In addition, the transactions that do materialize are often because the buyer and seller form a friendly relationship during the sale process as they usually work together during the initial training period, further reducing the risk of default.