To web entrepreneurs who contemplate selling their online businesses, experts issue a single warning: Get your financial house in order.
Online endeavors are frequently launched by people who have a great idea, a great passion or a distinctive skill set, but who often lack traditional business acumen. Partially-completed financial statements and an incomplete balance sheet might not impede day-to-day operations, but when it comes to selling the business, such disorganization can be a liability; a prospective buyer wants to see much more than a shoe box full of receipts.
When you commit to selling your business, “you have to start running it like you are going to sell it today,” said Mike Gravel, co-founder and managing director of eBizBrokers, Inc., a mergers and acquisitions firm specializing in Internet businesses. By doing so, you ensure that “when it comes time to sell, there will be no headaches. It will be an easy thing, from a due diligence standpoint.”
That means, as a seller, you should:
- Make sure you have a separate banking account for your business. Business income should not go into a personal checking account used to buy groceries, for example. Since the majority of online sales come through credit-card transactions, “you can provide the merchant account statements and bank statements to a buyer and have a very simple due diligence process,” Gravel said.
- Obtain a clean set of financial statements to demonstrate two or three years of business history. To boost your credibility, it’s preferable to have such statements prepared by an outside accounting firm.
- Be aware of the tendency to second-guess your decision. Your business may have had a few difficult months and that prompted you list your business for sale. You’ve prepped your financial history and signed with a broker to begin the process. If your business then reels off a few great months, will you begin to doubt your course of action?
“Make sure you do not have a bad case of potential-itis when you are halfway down the line trying to sell,” Gravel warned, “because many firms will lock you in and require you to declare a price that, if met, obligates you to finalize the sale.”
Once you’ve put your financial paperwork in order and have a sense of certainty that you want to sell, it’s time to act. Sellers usually choose one of two popular ways to put a website on the market.
A multitude of sites on the Internet, such as Votanweb.com and MergerNetwork.com, facilitate the for-sale-by-owner approach. These sites are, in essence, classified ad listings placed by site owners or brokers. The site that hosts the listings makes money by charging the seller a fee to list, charging a buyer a fee to see the full listing or a combination of both. These sites may offer web-based businesses as well as other “traditional” businesses for sale.
- The Pro: It’s cheap. A listing might cost you a few dollars, or it might be free. Some sites charge potential buyers a fee to browse the listings rather than charging the sellers for the service.
- The Con: It might be a challenge to sift the chaff from the genuine prospects. You may end up fielding inquiries from people who are more nosy than genuinely interested. Potential buyers won’t have been vetted to determine their ability to pay.
Some listing sites offer a robust set of search tools that allow prospective buyers to establish a personalized set of criteria — i.e., Internet-only businesses, those that sell retail products, ventures that gross $500,000-$1 million annually.
“We also have what we call ‘smart agents,’ programmed searches that run every day and alert buyers by email whenever a new business comes in that matches the criteria,” said Robert Brauns, president and founder of Brauns Online Media, operators of MergerNetwork.com.
Individuals or firms that specialize in mergers and acquisitions, or, more specifically, the sale of online businesses, can be a tremendous asset for a merchant who wants to sell his/her business. A business changes hands with a plethora of paperwork. Much as a real estate broker helps market a home and walks buyers and sellers through the process, a business broker can help an online merchant sell his/her store.
- The Pros: The business has an advocate who can “speak the language” of ecommerce and who actively looks for potential buyers. The broker fields the inquiries, thus enabling the seller to go about his/her day-to-day affairs and operate the business. Brokers are also a great source of information on current market conditions, issues related to pricing and financing and many other facets of the business-buying process.
- The Cons: This service will cost much more than a for-sale-by-owner ad on a listing site. Commissions can range from 5 to 10 percent of the selling price. There may be a “scale” of commissions — 10 percent on the first million and a lower percentage on anything after that. There may be a required period of time during which you agree to list with the broker exclusively (much like when you sell your home). The broker could specify a guaranteed minimum commission regardless of sale price, along with other fees.
According to Gravel, an owner looking to sell a business for $50,000 with a broker might have to pay $25,000 in commissions and guarantees upon the successful sale. In that scenario, from the seller’s standpoint, the broker’s services would not be of much benefit. However, “if you have a business that generates good cash flow, maybe close to six digits, you are going to want to talk to a professional about it,” he said.
Selling a business can be complicated. It may involve multiple contracts, noncompete agreements, due diligence disclosures and more. The price for the business sale may include assets like buildings, computers or inventory, so it’s important the purchase agreement be definitive and clear. If a seller accepts a down payment for a business and personally finances the rest, he/she must set up loan agreements, amortization schedules and other paperwork to ensure the transaction unfolds as planned.
Whether you use a broker or opt for a listing service, it would be wise to consult an attorney for legal help. Also, plan to set up an account for any potential tax implications.