Selling an online business – How to it when buying or selling
Selling an online business – When to sell or buy
Not every business owner wants to keep their online venture once it has been established, so when is a good time to sell and when is a good time to buy a business. The struggle to create a business that is profitable takes its toll, so once you invest the time, you may feel like cashing in. There is no strict rule, but the valuation below will give you a good guide to attainable value, what you can expect to pay or receive. For buyers, the benefits of purchasing an existing business include the fact that the set up has been done, that the model has been proven to be profitable and that you will not have to invest the set up time, suffer the stress or wait for the initial growth. Traffic figures and conversion will show that there is a market and that visitors do buy. There is a lot to be said for buying an online business that is proven and where you can see the potential to increase sales per client or improve on existing margins. If you build your own online store, you can expect that your budget should be 20% to 33% for design & development and up to 80% for marketing. A beautiful looking online shop is of no use, if it does not have well converting traffic. Try to find a Niche and focus on that area, such as selling wild flower seeds that grow well in mediterranean climates.
Valuation for an online business
Valuation is usually about 20 to 40 times monthly turnover or 2 to 3 times annual net profit. This figure might be slightly more if a potential buyer has an associated business to allow them leverage off your venture. For example, if you have a store selling bikes and a buyer has a store selling hiking gear, there are synergies and the potential to sell many items to the one customer. The average value of a customer can be calculated or estimated and this might add a bit to the price. The main key differential that might add to the value of a business is where it is an established Subscription model, where the clients are signed up to weekly or monthly payments, that guarantees a steady income. This can double the valuation, so it is a major factor. Any prospective buyer will want to know how many hours a week you work on the business. The fewer the better for the valuation. If you work 40 hours a week to earn €100k a year then you have a full time job and not a business. If the business makes €100k a year net and you have to work 10 hours a week, then it is a business and is much more valuable when selling, maybe 3 times more valuable.
Brokers or selling agents for online business
Using a reputable broker can save you some heartache, as they know the steps. They can advise on doing due diligence and what legal steps are required etc. Fees vary from 2.5% to 10% for big stores to 15% for small stores, such as a €50k valuation. Most brokers are sales agents, so they are working for the seller rather than the buyer – but be aware that they only make money when they sell, so they will sell you on selling. This does mean that they are more concerned with the sellers interests, but at the same time they want to get transactions done, so they will sometimes try to get the price down to help you secure the business and allow them get their commission quickly. A good deal should be good for buyer and seller alike.
Flippa online marketplace with loads of hucksters
There are loads of brokers especially in the USA, so you will find loads of ideas, but be wary and go through the Checklist below.
Flogging a dead horse – what are the options
If you have a business that is not making money, you might consider selling just to offload it and allow you do something else. Or you might find someone who could take the business to the next level, so maybe consider offering equity in exchange for input. Perhaps you are a salesperson, but need a development team or the other way around, work together to build the product. Do not let your emotions decide for you, so if a business is simply not working, stop throwing time and money at it, swallow the bullet and move on. You could pivot by taking your cycle business and making it a cycle insurance site where you draw traffic because of the content and upsell Cycle Insurance as an Agent for a bigger company. Or sell accessories rather than cycles, maybe wet gear or covers, something easier to stock and ship.
Checklist when buying or selling an online business. Warning – Tips.
- Do not accept figures without seeing the proof or back up – Talk to your financial advisor
- Make sure that the margin is adequate
- Get control of the back end of the online store – have a competent developer look at it and do an audit
- Ensure that nobody else can access the back end, clear out other Super Administrators
- Talk to the product suppliers to see that you can work together and agree prices going forward
- Look at the freight costs to ensure they do not eat up your margin
- Check for a No Compete agreement, so that the seller does not set up in competition
- Study the marketplace, the competitors, the selling prices and the chances of sales increasing or decreasing based on normal market factors
- If you are buying a mailing list, check to see that the subscribers have in fact subscribed
- You will want all the code for the store and the ability to edit it
- Make sure the code is useable, not overly customised and that all plugins are all updated and work well
- Ensure that the theme or design is mobile responsive or can be made so
- Check what rates are being charged by your payment gateways
- Will Paypal freeze your account when you get started which can stall your Cash Flow
- Try to pay in agreed stages, perhaps 50% up front and the balance over 12 months, to ensure that the seller supports you, maybe even offer a bonus based on performance
- Write up a Digital Strategy before you buy and have a very definite plan about how to recoup your investment
- Ensure you get the rights to any trading name, domain name or brand name
- If there are existing clients or contracts, ensure they transfer over to or stay with you
- Get legal advice on the contract and to see that there is no litigation or debt outstanding
- If the previous owner had to work 80 hours a week to make a profit, do you have the spare time or resources to do the work. How will you add value to the business to help it grow.
Treat this like any business, just because it is “online” does not change the fundamentals, so do the checks, plan the future, provide for the resources required in time and finance etc. Discuss it with a trusted advisor or two and get input from professionals, NOT family or friends.
Conclusion: A good deal will be good for buyer and seller alike, so if you do not trust the other party, walk away. Try to do a deal where the seller stays involved for a period of time for a bonus consideration.