What does it mean to sell your business when hundreds of internet businesses are for sale?
Business for sale marketplace is receiving hundreds of new listings every day and setting your business apart from the competition is becoming harder and harder. There are usually few hundred internet businesses on sale at any given time and in the recent months this number has surged significantly making it more than a thousand. Lots of internet business owners I know have been waiting for the market to improve for last several years before deciding to sell. Many of them are deciding to sell this year as some of them are facing a “now or never” challenge and some have just accepted a new paradigm of increased competition and lower revenue before deciding to sell.
Traditionally, there have been more buyers for internet businesses than sellers and selling a good profitable internet business has not been very difficult. Even today, there are more buyers than sellers in the market but getting a buyer to buy internet business have become significantly difficult as compared to previous years.
The dynamics of selling a business are significantly different when you are competing with many similar internet businesses in the market place. It helps to know what traits of the internet business are important for buyers and how buyers differentiate between different businesses available to them. I recently took a deep dive to analyze the patters of internet businesses that buyers are seeking. I used a variety of methods to collect data. We require all registered buyers to fill up a questionnaire to indicate what type of internet businesses they are in the market for. I also know many eCommerce chain operators who are looking to find an addition to their collection of websites. I asked them what criteria they use to purchase an existing eCommerce business. Other method we use to collect data is solicit a feedback when they decide they don’t want to pursue a business in which they showed an initial interest in. We ask them what factors were responsible for them to back out from their decision.
Here are some of the statements we are hearing
“ Businesses can fail even if you have a great sales revenue. Lack of capital can sometime be a killer. If the current seller is facing capitalization issue after being in business for so many years how can we expect to do better ?”
“ This business has too much dependence on paid advertising and SEO position. What if the next Google Panda update will ruin their SEO rankings ?”
“ This business has too many SKUs. I like a business with low number of SKUs. Lower SKU = low headache”
“I am concerned because there has been no real growth in the business and it is a very saturated market. Also, I am concerned about the internet history of dissatisified customers that apparently the owner did not appropriately address. The local BBB rating states that the business is currently under review. These are not indicators that give me a good feeling”
“ At this point I am not willing to move forward at the valuation the seller is asking. If future events raise cash flow or if the seller is willing to value the business closer to the 2.0x multiple we discussed, then i’d be interested. Thank you for your time and effort on this, and best wishes on getting this transaction closed. please keep me in mind if you have any other internet based B2C deals in the 200 to 400,000 range with strong cash flow; I like your method of doing business and i’d love to make a deal with you.”
“ I did not realize Amazon.com is selling same type of products at a much lower price. How can I expect to compete with internet giants and still make money?”
This all sounds pretty depressing and we should also consider other side of the coin. So which internet businesses are getting ahead in a race between sellers ? Quotes above already provide some clue but here is a bulleted list of recommendations based on what I see sells in a market.. As you can see, you don’t have control over many factors (e.g. # of SKUs your business sell ). That is why the factors that you do have control over requires careful consideration while listing your business.
Top 12 Factors That Buyers Look For While Comparing Between Many Available Internet Businesses For Sale
1. Pricing: Offer competitive pricing unless your business is doing exceptionally better than your peers. Learn about Internet Business Valuation Techniques here.
2. Growing Sales and Profitability: This one is obvious but even more important to understand is the effect of reverse trending. You can’t hide your declining revenue and profitability when trying to sell. And many businesses simply do not sell if you wait too long before deciding to sell. Unfortunately, many business owners do not realize that it can take anywhere from 6 months – 1 year for businesses to sale and keeping the profitability and revenue up during this period is many times out of owners control.
3. Stability In Revenue: If your eCommerce business is not growing while your business is in the market or during years prior to selling, it’s OK as long as it maintains the historic levels. Making tweaks to your Google Adwords account in hopes of achieving higher revenue is not something you want to do during or prior to listing your business for sale. Buyers hate fluctuations in sales and they will value your business at the lowest period during these fluctuations.
4. Inventory Level: Businesses that carry inventory present additional cash outlay at purchase time for buyers. Consider pricing your business on a lower side of the range you are considering if you require a buyer to purchase your inventory as a part of business purchase. Typically buyers don’t like to see businesses that require too much investment in inventory. I have seen that any inventory level greater than 20% of your asking price may be frowned upon.
5. Number of SKUs: Buyers like businesses with a lower number of SKUs unless they are dropped shipped. Consider adding a dropship component to your business even if you know that it can not be a significant percent of your business. When you do list your business for sale, buyers will like to have an option to grow the dropship component.
6. Number of employees: Buyers prefer internet businesses that require a smaller number of employee v/s the one that require a higher number of employees.
7. Longer domain and business History: Businesses with longer history and older domain are preferred over businesses with shorter history.
8 Offer Terms: We have a saying among brokers that “The seller sets the price and the buyer sets the terms.” I strongly recommend offering owner financing when you are ready to sell your business. Consider debt service calculation while deciding amount and term of owner financing.
9. Up-to-Date Financials: I can’t emphasis this more. It may sound silly but I have dealt with sellers who say their financials will only be available at year end. Buyers need up to the minute information before deciding to buy and if you make them wait when they are ready to make a decision, you may lose a prospect to another seller.
10. Business Prospectus: By having a very detailed information about your business as a Prospectus will help you significantly in satisfying buyer interest right away and keep them involved. I like to prepare two levels of information packet for my clients – one that we provide to every one who signs an NDA and the other that we share only with the prospects who show their continued interest.
11. Willingness to offer Non-compete: This may sound like a no brainer but sellers who are flexible to consider buyer non-compete requirement stand a higher chance of selling quicker. Buyers expect 3 to 5 years of non-compete. This item can be a deal breaker if you are unwilling or have a special situation (i.e. owning a competing site ). You should consider speaking with a competent business intermediary to help you decide its impact on saleability of your business.
12. Professional Representation: Businesses that are represented by intermediary stand higher chances of selling as compared to businesses that are owner represented. In addition to helping seller arrive at the right valuation, business intermediary play a big role managing seller’s expectations with market reality. A competent intermediary understands the importance of creating multiple options. As indicated earlier, while selling a business, the top priority for the owner should be to maintain and grow their business. Having a professional manage the selling process helps owner to focus in on their business during this critical time. Business selling is an extremely time consuming and emotionally challenging process, a good intermediary will help protect the seller from the emotional ups and downs of the selling process. Buyers are comfortable sharing their concerns with intermediary with lot more ease than they are with owners themselves and it increases the chances of closing a deal.
As you can see price and terms are among the very few factors that are under owners control when trying to sell their business and business owners who adjust their expectations based on competitive analysis of current internet businesses for sale are likely to sell their business quicker and for the fair price.