Recently, we have had some issues come up with non compete agreements for a few deals we are working on. I felt was a timely opportunity to cover this aspect of a website business sale for both buyers and sellers.
Every internet business sale will incorporate a non compete agreement or clause at the very least. This non compete element of the business is there to protect the buyer from an unethical seller who sells their existing business and turns around and starts another similar or identical business that competes with their old site! Of course this could devastate the new owners hopes of maintaining or growing their newly acquired business opportunity, as the seller would have complete insight on the marketplace, vendors, customers, marketing and advertising channels, etc. The non compete is designed to effectively legally eliminate this scenario from unfolding.
The usual length of time is 3 years, however some busines opportunities necessitate longer terms - 5-7+ years and some buyers demand more protection. If their are proprietary products, software, business practices that need exclusivity to stay competitive, then a longer term may be in order.
On the side of the seller, the term should not be as big an issue - assuming they are done with the niche and they typically have infinite other ideas and niches they would like to pursue! The seller's case usually involves not being limited or restricted to explore and develop other businesses providing they are in unrelated niches or businesses. This is usually accomplished by specifying exactly what they can not pursue - based on exactly what they are selling currently. An example case is identifying espresso makers and accessories as the specific products off the table - but perhaps not coffee beans, for instance. Making it crystal clear in the non compete agreement will avoid any future problems of overlap or competition, intentionally or otherwise.
In the case of another client, we discovered after going into due diligence when an LOI (letter of intent) or written offer was presented with the traditional 3 year non compete clause, the seller would not accept it? We discovered subsequently, that the seller had multiple sites in the same space selling a similar product! Whether this was naive exclusion or intentional misrepresentation is debatable, but what is important is securing a deal with the protection of a clear and concise non compete that is reasonable and fair to both parties. Obviously, this was a deal killer and likely saved the buyer from an unsavory experience.
In the end, most sellers sincerely want their buyers to succeed beyond them and are very accommodating with this aspect of the purchase agreement. If both parties place themselves in the other's position, a fair and balanced non-compete and purchase agreement are the final result.
David Fairley
President, www.websiteproperties.com
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Sometimes during a negotiation between a buyer and seller, there are definitive signs that start rearing up that lead to what is known as "deal fatigue". This can happen as early as the LOI (letter of intent) stage - which is where an initial written offer is submitted and is negotiated, accepted or rejected. It can also happen well into the due diligence phase.
In the case of the seller, it may start becoming clear that, although they may have been agreeable to a deal initially, the buyer's behavior and manner during the due diligence period may cause concerns about the future dealings with the buyer after closing. These can be anxiety about the buyer competence to manage the business (the seller's "baby") and the amount of support and maintenance that will be needed to transition the business. It can also be an attitude of nickel and diming and trying to chisel away at the agreed upon price and terms unreasonably. It also can be awareness that the buyer has unrealistic expectations or limitations they want to incorporate in the final purchase agreement that creates unnecessary risk and responsibilities on the seller that are beyond their control - such as guaranteeing specific SEO ranking, traffic and sales. The business history and fundamentals should be reason and motivation enough to make a purchase decision - which inevitably contains some risk as there are certainly no guarantees in business. Buyers need to assess the risk reward factors of a business opportunity while concurrently evaluating their own skill set they bring to the new venture to determine the probability of succeeding or meeting their goals and aspirations.
Many times, these early warning signs should be weighed and a decision to walk from a deal and trust that a more harmonious deal will follow. This is much easier when the seller is not under pressure to sell or in a rush to sell. They can afford to be patient and wait for the right buyer and deal. The right deal usually means it is a smooth and fluid process where both parties are respectful and even.
On the buyer side, when a deal is agreed upon initially and they enter due diligence, red flags can start appearing in the form of incomplete data, inability to corroborate data or financial numbers, unorganized or incomplete presentation of materials to verify the business history, and erratic or highly emotional responses from the seller. If a seller is too pushy with closing in an unrealistic time frame - like 1 or 2 weeks instead of allowing a more normal due diligence and closing period of 3-4 weeks, this may be an indication of future problems. It is important that a buyer is kept current on financials of the business and that they know the seller is focused on the business health during the process. Any signs of impatience, or excuses for abnormal discrepancies in the numbers or current sales may be a sign the business is being dumped. If too many red flags show up, a buyer should really consider moving on to find a business where these are not present.
Business transactions are primarily about dealing with people and relationships. Buyers and sellers typically will share at least 60 -90 days in a support and training period and so building a good relationship from the start - during the LOI and due diligence phase - are good indications of how the transition of the business phase will go. Both website buyers and sellers should be choosey when consummating a deal. The easiest and smoothest internet business for sale transactions are usually the most successful for both parties. If it is not win win across the board and clean and clear it is probably a good idea to move on and wait patiently for the ideal.
The last 6 weeks have been quite a shock to most Americans and people around the world. The economic upheavals have been monumental and without precedent. In our business as website business brokers, we have seen multiple deals fall apart or not move forward as a result of the uncertainty and fear in the marketplace. Of course, in any economic swing there will be people and businesses that reap massive profits and actually thrive. However, the vast majority of people and businesses feel the effects both financially and emotionally as a result of the meltdown on Wall St and now Main Street.
In this climate, there are definitely more sellers than active buyers in the internet business sales and acquisition field. The point is - is that there are buyers! These buyers are being extremely selective and cautious and are literally cherry picking the most attractive website business opportunities available providing the price is right. Sellers with online business opportunities that are stable or still growing despite the economic malaise because of the niche they are in, stand the best probability of consummating a deal in this period. The other sellers that will succeed in closing deals will be those that are more aggressive with their selling prices.
Just like in real estate, the seller that drops his price lower than the rest of the market gets more attention and sells quicker. If you hold out too long for a premium price or average price in volatile markets, you can find that you wind up selling for much less in the long term if things get even rougher.
A year ago, the average multiple on an average website business with solid fundamentals was 3-3.5 times the net trailing 12 month profit. In this global financial crisis, average sites are tending to be moving if they are priced between 2.0 - 2.5 times the trailing 12 months all cash at close. The selling price may be higher if more owner financing is involved, which, with the current credit crunch, has become more prevalent. The risks of a further down turn are tangible, so buyers are factoring this in when making offers. As I mentioned earlier, there will be lots of good deals to pick up for buyers with good capital reserves but buyers needing financing are just not able to secure the funds to get a deal done currently. The best opportunities will still get a better multiple on their business because they are able to thrive in this environment, but the pressure from the market means that it is a buyers marketplace and sellers will need to adjust their price expectations if they want to get acquired. The other choice is simply to ride this out and hope there is a quick turnaround later in 2009.
As website business brokers specialists, we get contacted daily by potential clients with internet busines opportunities they want us to sell for them. Over the years, we have streamlined our process of evaluating online businesses that we feel have the qualities of a great buy side opportunity. With the precarious economy making headlines, we are getting more seller inquiries every week as many of these business owners are weighing the uncertainties of the future with the future of their business prosperity.
From this circumstance, we seem to be getting two types of sellers: panic sellers or cautious sellers. The former are in a state of reaction to the current economic calamity we are facing and the latter are testing the water in terms of timing - do I sell now prior to the lucrative holiday season or wait and see if the government bailout revives the economy and keeps us moving upward.
Panic sellers often approach us with weaker fundamentals such as shorter business history, declining revenues, profits and traffic, etc. Cautious sellers are typically doing their research - their companies are more stable, have longer history, are still doing well despite the news and generally have attractive businesses to buy. The issue for cautious sellers is more a question of timing - do I sell now or should I grow this further and hold on until the economy swings back to the upside so I can cash out for more money.
As internet business brokers concentrating solely on website business opportunities, we have to scrutinize these seller opportunities more carefully than ever with as much up to date data as possible - to the day in fact - to discern how the business is currently coping. When sellers have to make elaborate explanations about the issues, troubles or potential of the business, this usually is a sign that the website business will be difficult to sell in light of other opportunities available and the prevailing marketplace. Basically, a solid business opportunity should sell itself without much finesse! The financial statments will depict the stability and growth, profit margins and cash flow. The model will be self explanatory and the niche and potential will be obvious to any interested prospect.
We likely turn away 75-80% of the seller inquiries because they don't meet the basic criteria of a website business that will pass the scrutiny and confidence indicators that buyers in the market now are seeking. If a business has a longer history - 2-3 years minimum, has consistant revenue and profit growth that is continuing to present, good natural search engine positioning, a strong domain name, a healthy database of customers/members, stable and or growing traffic and page views, a large and viable market size, a product or service that will thrive in any economic condition and especially in a downward one, then this is the kind of internet business that will be attractive to active buyers. Investors are shifting their money from real estate, stock market, etc into proven cash flow businesses where they can essentially realize a 25-35% return on their money.
If your online company meets these criteria, and does not need a long explanation, then it is ripe for acquisition and will be snapped up quickly by saavy internet investors.
President, www.WebsiteProperties.com
With the news story of the week once again shifting from political pundits discussing "lipstick on a pig" as a reality show diversion to influence silly voters to the cold hard facts that our economy is in worse shape than otherwise expected, voters as well as buyers and sellers of businesses are getting a rude awakening if they were not paying attention.
We try to explain to our selling clients that part of their selling strategy, including finding that magic listing number that is fair for both parties, should be looking at the overall market condition and assessing the risks as well as the rewards of their website business model. Any prudent buyer will be considering all the elements of the market niche, current sales trends and future exposure in a weakening economy. If these are adressed up front, the opportunity will tend to have greater resilience to the swings on wall street and the ensuing 'fear and loathing' it produces to the masses in the subsequent main stream media frenzy about the latest bankruptcy.
In todays marketplace we are seing more sellers listing while the buyers are tending to be much more cautious and choosey. Any internet business is going to be ultimately compared to other internet opportunities in terms of stability, current revenue and profit trends, current and historic traffic, the market niche the business is in, and the revenue model of the business. All businesses will be under greater scrutiny to assess their future market resilience.
As in any economic down turn cycle, there are going to be business opportunities that will thrive, remain stable and some that will be more affected. An ecommerce site selling necessities, or like a couple of our clients, products that are in high demand like alternative energy supplies, are seeing good growth, whereas a luxury goods retailer may be seeing sales trending south as consumers tighten up on their discretionary spending and start saving more.
So, these types of market conditions tend to favor the buyers because they have more choice and will ultimately cherry pick the best businesses that are showing growth, both revenue and profit-wise, despite the economy, have a predictable business model and longer history, loyal customers, strong fundamentals including good natural search engine rankings, unique and diverse product mix that is higher on the needs list for consumers, good domain name, etc.
For sellers with great businesses, these market conditions actually favor your successful exit, as your website business will stack up much better against more mediocre internet businesses that are not as strong and resilient to this economic 'meltdown' as has so eloquently been touted by the mainstream media. To the shrewd investor/buyer this can often be one of the best times to snap up great online businesses at a great value.
The cream will always rise to the top in any market but especially in tough economic times - but that means the best buyers and sellers will consumate great deals from the masses of slock that is being pitched online. At Websiteproperties.com we endeavor to represent only what we consider to be the best internet businesses available at fair market prices that insure both buyers and sellers come out winners in any economy.
President , Websiteproperties.com
The opinions expressed herein are meant to provide information based on the personal experience of each broker posting to this blog.