As a business broker, I get to speak to hundreds of sellers about their businesses and get to see all sorts of financial models and approaches. At the same time, I have the opportunity to see different assets in these businesses and understand the value they can bring and what they could be worth.
Oftentimes, owners have assets that they have built or acquired that they don’t realize can have real value to potential buyers. In this article we will take a buyer’s perspective on what hidden assets to look out for when purchasing a business. In some cases, it can be the difference between an overpriced deal versus a great opportunity.
At the same time, the opposite is true. I see sellers highlight assets in their business that are often not that valuable and assign a high worth to them. This is often not done maliciously, but is simply an outcome of not understanding some options that may exist at a much lower price point. We will take a look at some of the more common assets and discuss why they may not be as valuable as one might believe.
Business Assets That A Seller May Have Overlooked
It is important to note that the same asset may have a different value to different people. For example, you may have a customer list for your business that you feel has a certain value. I, on the other hand, may have 4 of 5 other businesses where this customer list can become a prospect list that I could leverage for those companies. I would most likely give that asset a higher value than you would.
Also, it is important to note that how you acquire a business can create more or less assets for you. For example, if you are buying a business through a share sale (and therefore owning the entire business, including its history) the credit history may have real value. If the business has been exemplary at paying its bills for a decade, you may be able to get favorable borrowing terms on the back of the business.
So let’s look at a few “hidden” assets that may have value but are often overlooked.
Some sites may have customized software that is used to run the site that could have real value beyond the business itself. For example, we recently purchased a print-on-demand business and the seller was a developer who had built a software that would automatically respond to social media posts as a way to promote the products.
Although the business was a sound purchase, in and of itself, our client was able to take the software, improve upon it and spin it off as a new B2B business venture.
From the seller’s perspective, they knew the software had value for the business they were selling but hadn’t looked beyond to see the opportunity of an entire market.
When buying a business in a share sales versus an asset sales, there can be value hidden in the outstanding money that customer's owe the business. If the company is sitting on Account Receivables (AR), you can sell those (called factoring), borrow against those or aggressively try to collect them in order to free up some cash. Sellers of smaller businesses may forget to add this into the business price.
We recently purchased a business that had substantial AR that the owner had mentally written off. After the acquisition, with a bit of effort we were able to collect half of the amount outstanding.
Cash and Equipment
In that same vein, the business may be sitting on cash or tangible assets like equipment, office supplies, inventory, real estate, etc.) These are all assets that can be sold or borrowed against. This approach is often used on larger acquisitions where asset-based financing can be leveraged to make the business purchase with minimal down by the buyer.
We recently looked at an acquisition where the seller was throwing in 50 domains that they had collected in the same niche over time.
After reviewing each url, we noticed most sold for a few hundred dollars to upwards of $2K. Overall, there were about $10K of URLs and the purchase price of the business was only $45K (which was a 1X multiple of revenue). This was a great find for us and helped us make this an even more profitable deal.
Another acquisition that we did recently involved a business in a niche that the seller wanted to get out of. His main site was making all his revenue but he started a second site on the side with the hope of growing it quickly. During negotiations, we convinced him to throw in the other site since he wanted to leave the niche anyway and we were adamant that we wanted a non-compete. So he threw that website in at no extra charge.
We ended up selling that 2nd site a few months later for enough money to pay for all the website development work we needed on the primary business.
Seller financing has become a standard offering in the world of online business buying. This stems from the fact that there are drastically fewer lending options for online business as there are for brick and mortar companies. To compensate and help sell these businesses, seller will offer to take back a loan (typically at 0%) for a portion of the purchase price for a short period of time to help the buyers afford the business.
Considering typical commercial loans rates hover between 3 and 12% (depending on the vehicle used and age/assets of the business), seller financing has real value. The less you put upfront to purchase a business and the more you push payments out while earning profits from that business, the higher your returns are going to be.
Many sellers understand there’s a cost of borrowing but feel they have to help in order to make the deal happen. It’s also not in the best interest of a broker to urge their clients to charge a nominal interest rate as this may put the deal (and their commissions) at risk. So try to negotiate buyer financing on every deal.
I find buyers and sellers completely underestimate the value of agreeing upfront to keeping the seller involved in the business. A motivated seller that is committed to staying engaged will help train you on all the system, processes and inner workings of the business. Many engagements stop there.
I urge my clients to go a step further and request that the owners provide much more value and ongoing support by staying committed to the transfer process for no less than 3 months (in a consulting capacity).
The seller typically has years of experience running the business, dealing with customers, maneuvering against competitors, and living and breathing the niche every day. They can provide guidance on industry changes, make recommendations on approaches, introduce the buyer to influencers, vendors and key industry experts, explain what they’ve tested in the past, suggest improvements, and much much more. This type of consultant would be worth tens of thousands of dollars.
Automation And Outsourcing
The more a site is automated (whether through technology solutions or outsourcing using virtual assistants or other types of employees) the more valuable the site is. If you had 2 businesses to choose from, both making $100K/year but one needed constant oversight while the other was on autopilot, which would you prefer?
Many sellers are so used to operating their website a certain way (in this case with heavy automation so they have little involvement) that they don’t realize this is a major value add to a buyer.
As a buyer, finding a site like this can be a gold mine. It is always recommended to have some reporting mechanism that you review at least weekly to ensure your site is still performing well, but knowing that you can take a few days without being engaged in the site provides a ton of freedom.
While all these assets may have been missed by a seller, there are times when a seller and their brokers will put a certain worth on assets that really shouldn’t. Let’s take a look at some of these.
Business Assets That A Seller May Overestimate
I see so many prospectus’ and teasers that highlight different business assets as huge value for a company. In some cases, it makes sense but sometimes it’s simply wrong. It’s important to ask the right questions to really determine their value to you, the buyer.
Email lists are one of those assets that can be extremely undervalued or overvalued. Many brokers will be proud to tout a list of 30K emails. But not all emails are created equal. Are these previously paying customers, prospects, newsletter signups, vendors, or maybe a purchased email list from a 3rd party provider?
Each of these will have a different value. A list of paying customers can be a strong list as long as they haven’t been over marketed to. It would be good to understand how often they are emailed, how many are repeat buyers, what are the email metrics (bounce rate, open rates, close rates, churn rates, etc) or if the email list was ever sold to a 3rd party.
If these are prospects and were obtained because the seller provided something for free in return, the list may be filled with bogus emails.
Newsletter signups can be a valuable list if the seller provided a strong newsletter, consistently and if they’ve built trust with their readership base.
Also, an email list with a consistent process of date stamping and hygiene is important. If 29K of those 30K emails are old, you’ll be spending money storing the emails and marketing to a group that may not be interested in what you have to offer.
Social Media Followers
I purchased a site a few years ago where the broker was adaments the 39K facebook followers were deeply engaged. During due diligence, we realized that only a tiny percentage of those followers ever really looked at the postings, let alone commented, liked or shared them.
Social media accounts can be very valuable if the audience is engaged and captivated by your content. At the same time, social media can be very time consuming to manage and in some cases, the relationship with the audience is with the business owner, not the business itself or the account. So you can’t assume the same response and interaction will take place when you take over.
Do your research when acquiring a business that is heavily dependent on it’s social traffic to make sure you can replicate the same success as the previous owner. And understand that now, all social channels have ways to advertise. You may be able to cost effectively reach the same audience through Pay-per-Click without having to spend loads of time managing the channel.
It drives me crazy when I see sellers or brokers that state a business has a “strong brand”. OK, if you’re buying a business under $20M, most likely the business doesn’t have a brand. It may have a reputation, a logo and a mission statement, but not a brand (yet). Coca-cola and McDonalds spend hundreds of millions on their brands. The marketing dollars of the business you are acquiring is most likely not driving brand recognition yet.
What the company does have, is a strong reputation. There is tremendous value in reputation. We recently purchased a dropshipping business and they had 5 start reviews from every one of their 400 customers. The business was a sound investment to begin with but it was those reviews that made our decision to buy it an easy one.
But don’t confuse branding with local or social reputation.
Catchy urls can definitely help your customers remember your site. And there is value in shorter 1 or 2 word urls as they are easier to remember, faster to type and less prone to making an error when entering the url.
There are many sites out there that will help you ball-park the value of a URL. This is the best way to really determine what a domain is worth without being sucked into a subjective discussion.
Some sellers and brokers will put a premium on their business because it’s in a certain niche. In very few cases where the barrier to entry is extremely high (like if you need a license) this could be warranted, for example, when Canada legalized Cannabis, they only allowed a few licenses for dispensaries to operate in Ontario. If you have one of those licenses, you can charge a heavy premium for your business..
But this is very rare in the online world and often niche should not be deemed an asset that drives a drive valuation.
Funnels / Processes / Systems
It’s one thing for a seller to highlight some key functions, processes or systems they have in place as part of the value of the business, but this should not be itemized out separately (outsourcing being the only exception). These processes are why the revenue and profits are what they are. And the profit has driven the bulk of the price of the enterprise. We should not be double counting these.
I’ve had sellers tell me that they are including documented standard operating procedures as part of the sale and this has value. And it does, but that value is already calculated as part of the sales price and is a standard training protocol.
When looking to buy a business, it’s important to properly align value to various assets. Many times what an asset is worth is very clear. But sometimes, the buyer and the seller will have different views on the value of certain assets and it can create a difference in opinion on the overall price of the business.
Our recommendation for buyers is to understand where the seller is coming from but to explain to them why some of their assets just aren’t important to you and that you are not willing to pay a premium for them.
At the same time, in any good negotiation, it’s important not to lose sight of the forest from the trees. It may be well worth giving in on some overpriced assets, to gain access to many more underpriced ones that can create a significantly higher return on investment overall.
Help us grow this list and provide value for more readers. If you think of other commonly underestimated assets that buyers should look for or have seen overly inflated asset prices, add them into the comments below.