If you are looking to buy a profitable online business, it is important to follow this 6-step process.
Buying a business is often one of the largest investments a person makes in their lifetime. The more you understand the buying process and leverage it to your advantage, the more informed your buying decision will be.
In the space of internet businesses, there is a real concern around fraud or at least misleading expectations. So breaking down the buying process into steps allows you to control each aspect and validate the information you get
You do not want to cut corners.
Many folks make them mistake of buying an online business through an auction site (like Flippa). The risk is very high that the numbers provide by the seller aren’t real or that the business may not even be owned by the person selling it.
It is important to be thorough and thoughtful in your buying approach regardless of the size of the investment. If you use this 6-step process in conjunction with the rating process from this other post of mine, you will drastically improve your chances of finding the gem of a deal
Here is the buying process defined:
1. Review listings
The process is slightly different for On-Market Deals vs Off Market deals but fundamentally, the first step is to review the high-level details of the listings that are posted by the seller or the broker. For more information on where to find listings, review this blog post.
When you’re looking at listings you want to review the niche, monetization method, age of the business, revenue and traffic trajectory, workload required by seller, opportunity for growth and improvement, risks and valuation. Here’s a rating process that I use to compare sites on these metrics.
And then make sure that at a high level it meets your investment goals
2. Sign NDA / Speak to Broker
If after you reviewed the listing you feel this could be a good investment for your portfolio then request a prospectus.
Typically, this is done right from the listing page. Just completed the form and press submit and it will tell the seller/broker that you want more information.
If this is a private sale, contact the seller and ask for more details on the business (contact information should be on the listing site)
Often times, you’ll need to sign a Non-Disclosure Agreement. This is to protect the seller by ensuring you don’t learn everything from the seller and then replicate their business without buying it.
It also protects the broker from you going directly to the seller and them missing out on commissions
3. Receive and Review Prospectus
Once you receive the prospectus, take your time and dive into the next level of detail.
Back to the original rating systems you did in step 1 above, you want to update this with the new information you learned. Be thorough and make sure you understand niche, monetization method, age of the business, revenue and traffic trajectory, workload required by seller, opportunity for growth and improvement, risks and valuation.
You will also get the domain name of the site (or if you are purchasing an Amazon FBA asset, you’ll get a link to the products). Review the site (or product) in detail.
If you feel this may be a site that you’ll purchase, then spend a lot of time on the site seeing where the advertising is placed, order their product to see the process, contact their customer service to see the response rate and try to uncover anything wrong.
Start taking notes on what you don’t understand or need further information from the seller. Often times, there will be something in the detail that you don’t like and will require further inspection.
Confirm this still meets your investment goals.
4. Seller Calls
Seller calls are critical. This is where you build rapport with the seller and where you can get a lot of information. The key is to ask open ended questions and let the seller do most of the talking. You’re looking for anything that doesn’t seem right.
– First seller call
The first seller call is all about relationship building. You’re trying to explain to the seller why you’re the right guy for him to be spending time with. Things to cover:
- Explain who you are
- Compliment them on their business
- Show that you’ve done your research on the business by making comments on what you like in their business model and site
- Ask for a history of why the business was built
- Ask some high-level questions about growth and opportunity
– Second Seller Call
Here you want to get to the next stage and get all of your questions answered. You’re not negotiating yet so maintain a complimentary tone and just be inquisitive. Things to cover
- Ask detailed questions about financials (especially seasonality or uneven distribution of revenue and expenses). Really understand the financials
- Ask how they would invest into the business for growth (don’t let them just say more SEO or pay per click advertisement…that’s too easy. What else can fuel growth)
- Ask questions about any concerns you have
- Ask questions about operations, marketing, sales, fulfilment, product order
- Confirm amount of training they seller will provide.
- Thank them and say you need to think a bit more.
– Third Seller Call (optional but recommended)
Here you are showing that you’re the ideal buyer but you’re also setting the stage that there are some thing that are going to make it impossible to give a full asking offer. Show excitement but make sure they are aware that you have concerns.
- Illustrate concerns at a high level (don’t imply that they are show stoppers) and ask how the seller would recommend they be addressed?
- Explain however that you are excited to take his site on and grow it
- Tell them you are considering putting an offer
- Ask them if there’s anything else you should know to take into consideration for the offer
5. Create Letter of Intent (LOI)
The letter of intent sets the stage for an offer. Although most seller wants you to start with an offer (so that they may counter and it becomes binding), a Letter of Intent is much safer from a buyer’s perspective.
LOI’s are non-binding and set the parameters of the deal. This is a great way to understand if the seller and buyer are aligned. An LOI typical covers:
- Name of buyer and Seller
- Offer terms
- Anticipated close date
- Any requirements (such as seller training, due diligence, included items)
- Specific Asset sale vs Business Sale
Submit the Letter of Intent to the broker directly
As an investor you’re looking for a great deal so unless there is tremendous competition or urgency, start your offer very low with a lot of seller financing terms. This gives you some negotiation room as invariably the seller will counter.
6. Negotiate / Due Diligence
If you’ve structured your LOI correctly, the seller would never accept your first offer. If they do, you left money on the table.
This is where the negotiation begins.
In most cases, I actually get a call from the broker saying that the offer was so far off that the seller won’t even counter as the offer was too far apart from what the seller was looking for. That’s ok.
This allows you to speak to the broker and ask them what it would take to get the seller to the table.
Remember, even though the broker has a fiduciary responsibility to the seller, the broker wants to make a deal. He doesn’t get paid unless a transaction closes.
Walk the broker through the issues you have and why you structured such an aggressive deal. Then ask them to suggest an approach (higher price, less financing, equity to stay on, etc)
Then submit a new LOI to help bridge the gap if you feel you are willing to pay more for the deal.
Once the final LOI is accepted, then conduct your due diligence to validate all the numbers the seller spoke to.
Once the due diligence is completed, put in your offer which shouldn’t need to be negotiated as this was done during the LOI stage.
Close the deal and take possession of the assets. The broker should help with the transfer of all assets, keeping money in escrow and help ensure training from the seller.
Conclusion
Although it is only 6 steps, they are involved and this can take anywhere from a number of days to a number of months depending on the types of business.
When I closed on my first deal, an Amazon FBA site, it took me 4 months from start to finish. I wasn’t sure of what I was doing so there were a few mis-steps along the way. But I learned a ton.
Hope this helped provide some guidance on the 6-step process of buying a profitable online business.