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.
Brokers include:
Flippa online marketplace with loads of hucksters
Empire Flippers
http://www.digitalexits.com Jock
http://feinternational.com/
http://websiteproperties.com/
https://www.websiteclosers.com/
http://ibbfl.com/
http://bizbroker24.com/
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.
What is your website worth?
If your business is not eCommerce, what is your website worth?
Perhaps you have a website for your Legal Practice or Financial Advisory Services business, maybe a Construction firm or even a web design agency, any business that does not transact online much, if at all.
How do you put a value your website?
You invested time and resources in to it, when you planned, designed, developed and marketed it. Graphic Design, Development, SEO, Hosting etc. You built up its reputation every time you advertised or mentioned it online. On your livery, notepaper, invoices etc. Simply by renewing the hosting every year you added value. Every day of every year that your website was online, added value in the eyes of Google. In many cases this will have helped your ranking in Google SERPS search engine results pages. This higher ranking will add to your website valuation.
Is it on your balance sheet?
It should be. Talk to your accountant if it is not. As an Asset or a Liability? It would be very unlikely that the website would be a liability or carry a negative valuation. You would have to have done something terrible with your content to have your website retain no value. Although we have seen one or two such instances of this. Even a poor website has a value. Perhaps you have a website that attracts visitors because it ranks well in search, however these visitors do not convert to being customers. That is a problem, but it is one that can be resolved.
Having no visitors, no traffic, no conversions would be more of a sign that your website has little value to offer visitors at present. But once again with a bit of optimisation even a poor ranking, poor converting website can be improved, which would increase its value. Its history with Google alone will add some value.
In this day and age every business should show its website on its balance sheet. Some businesses rely on their website to:
1. Bring in new potential client enquiries
2. Inform existing clients and therefore save time for you or your team.
3. Answer questions online or deliver guides and tips 24/7 to pre-qualify callers
4. Launch new products or services
5. Recruit staff, without having to pay recruitment fees
What figure should the value show on the balance sheet?
We covered the value in some ways, as in bringing in new clients, saving time, adding to your customers experience with you, but what would be a figure that everyone would agree is a fair monetary valuation. You can project the value of the benefits above. Then look at how many new clients you get a year from your website. What is the average order value? What is the LTV Life Time Value of a client.
Example:
MEANit Web Design Services Inc – Hypothetically, lets say we get 6 telephone or email enquiries a month and 4 found our details online, not necessarily on the website. People can find us without entering the website itself. And most will not use the Contact Form in the website, they just call you. Always ask where they got your contact information. If the answer is online, then attribute this to your web presence.
If we work on a conservative 50% conversion, then we get 2 new clients a month through the website. You should be aiming for 3 or 4 if the website has pre-qualified the caller. Lets say an average sale is €3000 for a first time client for a service in year 1. And in an average year we provide a further €2000 in ancillary services such as SEO or Digital Marketing advice. And most clients stay with us on average 10 years. That is €3000 plus €2000 as in €5000 for 10 years, so we get €50,000 in LTV. Usually clients grow so the annual fee will increase, by say 20%. This makes the LTV closer to €100,000.00 at a minimum. Plus a happy client will refer a few more over time, especially if you ask for referrals, which you should do.
Now we have 2 new clients a month or 24 a year with a life time value of €100,000.00 each as in €2,400,000.00. And say even 2 referrals in the 10 years. That gives us a further attributable value from the website of €200,000 by 48 new clients for another €200,000 or €4,800,000.00. This is just for one year.
You might be saying this is too high, what is a ‘realistic value’ that a potential buyer would accept. Lets say we accept the figures above as being correct. But they seem really high. A buyer might say that you could estimate the income from one year at the €7,200,000.00, but the actual pre-tax profit after expenses is only 10%. Fair enough, so now you can value your website at just 10% or €720,000.00. Any questions? What is wrong with this logic? This will work for your Legal Practice or Accountancy Firm just the same way.
Our clients only spend about €2500 a year for our services, not €5000.
OK fair enough then that is 50% less and the website value is closer to €360,000.00. What value do you currently have it on your balance sheet?
Our clients only spend €1000 and it is a one off sale.
In that case at a minimum you are looking at 24 new clients by €1000 which is €24,000 in new business without any repeat or referal business, which does not really make business sense. Nevertheless, lets accept these low figures, and say your pre tax margin is still 10%. That makes your website worth €2,400.00 a year to you. Now what value will you attribute to it on your Balance Sheet. Is it on your balance sheet at any value?
Note: Usually the only time a website appears in a balance sheet is as a cost when it is set up or for its annual hosting fee. This is so missing a critical asset in your business.
Can a website add value other than sales? Yes, absolutely.
Marketing platform – The big one is that you can use your website and overall web presence as the foundation for all your marketing efforts. By this I mean that you can add content to your website initially, then promote it via Linkedin, Facebook, Instagram, Press Releases, PPC Google Ads or Facebooks Ads, even Linkedin Ads. Use any marketing spend to bring people to your website, your land online. Here you can edit and update content, monitor and measure traffic and engage with visitors. Every addition of content or visitors will add more and more value.
Recruitment – And you can post job or career opportunities on your website and have people make contact with you after they see what you have to offer and read all about your firm on your website. Promote these positions online continually and get constant stream of CVs. Save a fortune in Recruitment fees and find the right people for your team. Use the website to sell your firm as a good option to the right potential candidates.
CSR Corporate Social Responsibility – How do you give back to the Community? Do you have a way of doing this? Does anyone know? Does your team know and work with you on this. Write about it on your website for clarity and get the team behind your efforts. You might get visitors who want to help you in your efforts. And if nothing else, you will be letting your clients know how you make a difference in the community you serve, with the profits you make from their custom.
Bottom Line – I hope you can see a higher value now to your website and overall web presence. If you are ever to sell your business, make sure there is an adequate value attached to the asset that is your website. Even if you are merging with another firm, establish the value of your website before agreeing terms. If your name is changing and the domain name as in www.meanit.ie is to be dropped you can still bring over the value to a new website. You just need a web design agency who know exactly what they are doing, in order to bring over any history and value.
All too often firms sell or merge without attributing adequate value to their website. The smart ones engage someone like us to independently assess a realistic value that is acceptable to both parties.
Plus having this asset valued on your balance sheet might help when it comes to looking for funding from banks or investors.
