I recently received the survey results from a major online multiple listing service for businesses for sale. The survey conducted included over 1700 business brokers in the US.
The report clearly established some trends I have been reiterating in my blog lately. In particular, the trend towards more owner financing in the deal structure. Because of the economic downturn and credit crisis, traditional bank and SBA financing has been much more difficult to acquire for buyers. Especially when there are no "real" assets involved like real estate or capital equipment. Banks still seem to have a bigger aversion towards 'virtual' real estate or internet businesses even though the financial statements are solid and show stability!
Consequently, buyers who are willing to make fair market offers that a seller is likely to accept are requesting owner financing of 20% - 50% depending on the deal. In the case where cash flows are strong and growing the percentage is less and higher when the sales trend is flat or in decline. This allows a reasonable and fair market price to be accepted, as well as keeps some 'skin in the game' as it were, for the seller - an often important element for buyers who consider this an act of confidence in the business's future.
The seller benefit is getting closer to their asking price and actually earning interest on their money in an investment they are familiar with and have more control over. A big issue for sellers is where they will invest their funds upon selling their business? With the uncertainty and volatility in the stock and bond markets and real estate and the ultra low interest rates for bank savings, there are not too many good options to invest larger sums of money at the close. So, doing some owner financing at a fair rate - say 8%-10% - can be an excellent long term strategy for a seller to contemplate.
Another aspect the survey unveiled was the time frame it is taking, on average, to sell a business has increased by 3 months to an average of 12 months. This is the time from attracting a buyer to completing the close. Now, the vast majority of these deals are traditional brick and mortar which tend to take longer to close, however, we have experienced a similar trend from our previous average of 4-6 months , now stretching to 7-9 months. Of course a lot of this has to do with the attractiveness of the business opportunity as well as the price and flexibility of the seller.
We recently sold an ecommerce website that was listed and closed within 2 1/2 weeks - the niche, the price and the terms were all attractive and an ideal buyer was there to acquire it! The seller was also very organized, had clean books and detailed information available, and was very flexible and reasonable with regards to the fair market price.
So, despite the economic doldrums we find ourselves in, there are still internet businesses being bought and sold regularly. The keys are to maintain flexibility in the deal structure, be organized and prepared for intense scrutiny, and find a balanced selling price that is fair and acceptable for both parties.
David Fairley
President, www.websiteproperties.com
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The historic day has arrived after 20 months of an intense political race, economic uncertainty and global recession. How does the effect of the election and the apparent recession affect your internet business or the opportunity of buying a website business now?
I am personally looking forward to completion of the process and hope that ultimately the division in this country is reigned in and we can start unifying to take on the enormous challenges of this new century. I think that in itself will allow people to refocus on their opportunities and challenges in their personal and business life without the distraction of the political pundits and abrasive political campaign ads.
The internet has been more of a harbor in the tempest of this economic meltdown - many prospective buyers are looking at investing in solid cash flow internet opportunities because there is a greater sense of control of the potential returns that in the volatile real estate and stock markets. In addition, internet businesses tend to have more resilience to economic downturns because the more affluent and educated consumers are shopping online, researching online and saving money online instead of spending more time and money driving to make purchases for certain products. Website businesses also have a broader market to sell to - with a national or international customer base verses a more local or regional market like most brick and mortar businesses.
In economic downturns there are always niches that thrive and opportunities that become much better deals than they were when the market was up. This means it is a buyers market with more attractive opportunities to consider and at less inflated multiples than a year ago. Looking for an established website business that has a long history of growth, profitability and stability will be a wise investment in a downturn providing the niche is resilient to consumer spending - such as necessity items verses luxury products.
There are lots of excellent opportunities to cherry pick now that will be worth a lot more when we rebound from this morass of poor leadership and uncertainty into a new era of global respect, a healing in this country and new opportunities arising from the enviromental, economic and health challenges we face currently.
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.
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.
The opinions expressed herein are meant to provide information based on the personal experience of each broker posting to this blog.