Should I Use a Broker to Buy an Internet Business?

The industry of buying and selling internet businesses is undoubtedly growing as awareness of the asset class increases and more and more people seek the benefits of owning a website or internet business. As a result, there are waves of new buyers entering the marketplace each month, each with a diverse array of experience and skills, not always “online”, but one thing linking them – a universal motivation to find and acquire quality internet businesses for sale.

That being said, opportunities to acquire good websites are increasingly more difficult to come by and win due in part to the more competitive climate but also as the supply of internet businesses for sale is limited. New buyers can sometimes feel disadvantaged in uncovering and accessing acquisition opportunities compared to buyers that have established connections with sellers directly or through intermediaries.

Equally, when a buyer gains access to attractive targets, they might be disadvantaged in successfully bidding due to limited insight into the niche, being overly cautious as well as possible situational, legal and financial factors that provide an experienced buyer with leverage.

As a result, a prospective acquirer may not be able to move quickly enough in a transaction process compared to other bidders to successfully compete. Risk also exists for a buyer to overpay for a target or to lose the opportunity altogether due to under-bidding or adverse deal terms. It’s not only new buyers that are affected, seasoned investors who run many other businesses can also miss deals by having limited time on their hands to consummate a deal effectively.

Due to these factors, some buyers are choosing to engage a qualified buy-side broker to execute a buy-side process of identifying, accessing and facilitating the successful closing of a deal on their behalf.

Buy-side brokerage is certainly not new but in the online business buying world it’s not entirely established yet. For buyers thinking about whether it makes sense for them, we’ve put together this guide covering what a buy-side broker does, what value they add, how much they cost and what a buyer should be think about when deciding which one to hire.

What Does a Buy-side Broker Do?

A buy-side business broker is there to work the buyer through the steps of a traditional business acquisition process. A good broker will lead the buyer through the stages, carrying out the hard work as well as educating and advising along the way. Each broker has their own process but broadly speaking it should fall within the scope of services outlined below.

1. Identification

The first phase of the buy-side process is to identify and engage acquisition targets. The main objective of this phase is to uncover and pre-qualify an acquisition target. A broker will typically identify and engage an acquisition target in one of two ways: (1) by direct outreach or (2) through sell side intermediaries.

Most brokers tend to opt for the 2^nd option as they usually have experience with the listing agents (brokers), there is a more robust sale process and they have greater success in execution. Most buy-side brokers are paid on success (more on that below) so they are prudent with how they spend their time and don’t want to spend significant amounts of time in fruitless search with unmotivated sellers.

A good broker will take time to understand the buyer’s interests and objectives from the outset to ensure they filter for the right type of businesses before presenting with a list of preliminary acquisition candidates. Oftentimes buyers will benefit from using a broker in “Identification” because of their pre-existing network and knowledge of business buyers, sellers and brokers. Many of the most attractive target opportunities are uncovered through such an established network.

2. Assessment

With a list of targets prepared and preferences made, the broker will proceed to engage the handful of candidates (or their representing brokers) and solicit information for review. The assessment stage is where a buy-side broker should first start to provide their value add to the buyer, by leveraging their knowledge and expertise to evaluate the strengths and weaknesses of each target and arrive at a fair valuation for each.

One of the chief concerns of new buyers in the industry is “not knowing what they don’t know”, namely they don’t know what they should be looking out for when it comes to analyzing internet businesses for sale. It’s important to note that this extends just as much to business’ weaknesses as it does to its strengths and potential opportunities for growth. Working with a seasoned buy-side broker should mitigate this concern.

Initially the advisor will conduct preliminary due diligence before exhausting more effort on a valuation. The goal of this step is to better understand the target and its investment merits, as well as to identify any deal-breaking issues prior to committing substantial time, resources and expenses in exploring an acquisition.

Issues that can immediately cause the abandonment of a potential acquisition at this early stage include any materially negative trends in the target’s earnings and growth, pending legal litigation or potential lawsuits, lack of a sustainable and defensive competitive position, personnel turnover, customer concentration or retention concerns and other factors. The broker should also gain a reasonable level of comfort that the potential acquisition target is a strong strategic and person fit for the buyer.

Once the broker has completed their preliminary due diligence, it is necessary to arrive at a preliminary valuation. Most brokers will adopt a multiple-based methodology and a good buy-side broker will have access to a host of market data as well as precedent transactions they have been involved in to help anchor their valuation. This is a very important reason for using a buy-side broker as many inexperienced buyers are concerned about overpaying for an asset. Ensuring the broker has sufficient valuation expertise is vital to getting sound advice on fair valuation.

3. Negotiation

With agreement on an acquisition candidate and a valuation, the broker will take the lead in drafting a letter of intent (LOI). Based on their experience, they should advise the buyer on the optimal structure of the consideration as well as the terms to attach, be they specific post-deal obligations, due diligence requirements or other checks relevant to the transaction.

An experienced buy-side broker will start to come to the fore in helping a buyer at this point. Getting the valuation right is half of the art in acquiring an internet business, the other half is getting the best execution and deal terms whilst still making it a win-win for the seller. This latter point cannot be underestimated and can make the difference between getting the deal done or not as well as getting a valuable deal done or not.

In formulating the LOI and in any subsequent negotiation and/or revision of the offer, the buy-side broker should advise on:

• Consideration – what makes sense to pay upfront vs. deferred (e.g. seller financing) vs. performance-based (e.g. earn out). Each transaction is different with different dynamics that impact the advice given e.g. number of competing bids, size of deal and the motivation level of seller.
• Deal terms – what are the requirements for post-sale training and potential consulting obligations, any specific seller representations required (e.g. keep certain links or content in place) and non-compete requirements.
• Execution – what is the timetable for execution, how much time is required for due diligence and what are the specific checks and information required to get to closing.

A good buy-side broker will know that all three are as important as each other and advise on how to construct a package that provides overall value to both parties.

4. Due Diligence

With a LOI accepted, the deal will progress to due diligence (DD). The broker will have established their DD checklist for the business (specific to its operations) and will start reviewing the information provided by the seller against the prospectus or marketing materials initially presented and throughout the negotiating process to date.

For a buyer concerned about unknown unknowns, a buy-side broker can be a significant relief in this part of the process. Here the experience of the broker should really shine through and it is imperative they have a good deal of experience in order to know what to look for. That being said, the broker may also recommend the use of a 3^rd party due diligence firm to support to verification which is certainly not a bad idea if the buyer doesn’t mind the extra cost for a 2^nd opinion.

Due diligence is an extensive task and one not to be taken lightly. Here is often where otherwise experienced but time-strapped buyers think about employing an advisor to save them the time and effort of diligence. A broker or due diligence firm conducting this task on behalf of a buyer will be auditing all aspects of the business including (but not limited to) traffic, financials, the owner, operations, technical features and legal considerations.

With the work complete, the broker will report back with their findings, usually presented along a spectrum of materiality (i.e. things that matter and things that don’t). Invariably if an advisor looks hard enough, things come up in most deals but typically they are immaterial in the context of the purchase. If they are not (e.g. financials misrepresented), then the broker should use their experience to advise on whether they constitute grounds for revision of offer terms or termination all together.

5. Legal

Assuming the business has moved through due diligence successfully, attention will now focus on drafting the Asset Purchase Agreement (APA) for the transaction. Depending on the size of the transaction, the buyer may wish to combine the expertise of their buy-side broker and legal counsel. For smaller deals, many buyers are comfortable without legal counsel though it is important to realise that no broker can provide legal advice unless legally qualified to do so.

As discussed in section 3, the deal terms attached to the business are just as important as the consideration itself. A buy-side broker will likely take the lead on drafting the APA or reviewing the contract provided by the seller and they should be at the least advising upon:

• Consideration – The size, structure, timing and form of the consideration for the assets. If there is an earn-out or seller financing the terms and timing of each payment should be made explicit. Likewise, holdback consideration should have very clear conditions attached to it that are ideally objective and verifiable in the case of conflict.
• Non-compete – Most online business sales involve a non-compete agreement. A good broker will craft a definition that strikes a balance between protecting the buyer from competition and the seller from being able to pursue other non-competing business in the future.
• Assets for transfer – A fully exhaustive list of the assets for transfer is essential.
• Transition assistance – Agreeing the level of post-sale support given by the seller is something that should be done upfront and made explicit within the contract. The number of hours per week/month, response time and nature of communication should all be recorded. It is also wise to build in an agreement to make all relevant introductions to partners of the business.
• Seller representations – What representations does the seller need to make to agree the deal? These can be representations over no debt/liens/pledges against the business, no previous or outstanding lawsuits, no knowledge of anything that would adversely impact the business, authority to sell all the assets advertised.

Naturally there will be more factors for consideration in the APA depending on the size and complexity of the business as well as the specific terms agreed. These are a starting point for reference and buyers should expect their counsel to cover these as well as any other ones pertinent to the deal.

6. Transfer

With the APA signed, the final step involves escrow and transfer. This is where some buy-side brokers differ in their offering. A full service advisor will support the buyer through the transferring of assets, review in inspection period and enforcement of any training or post sale obligations agreed in the contract.

Others prefer to stand back from the asset transfer and allow the buyer to coordinate the transfer and conduct the asset review independently. Some may provide some post sale strategic advice or give guidance on what to do after buying an online business.

Should I Use a Broker to Buy an Internet Business?

Throughout the process, it’s clear what kind of value add a good buy-side broker can provide to new and experienced buyers alike. To summarise those across the business acquisition process:

• A buy-side broker will spend time with the buyer to fully understand their needs, interests and objectives for the acquisition of an online business
• Buy-side brokers should have a large network of buyers, sellers and intermediaries with knowledge on who has the highest quality business for sale and who is best to work with
• They will save the buyer time in searching and evaluating businesses for sale and provide a list of targets to pursue
• They will understand the marketplace intimately and be best placed to opine on the strengths of the particular business models and niches they assess
• They will have access to market transaction data as well as their own precedent deal information in order to ground their valuation in empirical data, ensuring the buyer doesn’t overpay
• If they are experienced deal makers, they will know what to advise on consideration and deal terms as well as how to get leverage through the deal and post-sale
• An independent party is usually helpful in keeping the emotion out of things, particularly in negotiation where that can have a costly impact on terms agreed or execution
• They will have been involved in numerous due diligence exercises and know what to look for that may have gone wrong in the past (the unknown unknowns)
• If they operate an end-to-end service, they will assist in the transfer of assets and review during escrow
• Lastly, brokers invariably lead the transaction so that the buyer is only involved when they need to be saving time across all the steps in the purchase process

How Much Do They Cost?

In general a buy-side broker would be expected to charge between 5-15% of the total consideration of the sale. Their fee is typically success-based (contingent on completion of the deal) and they usually charge a small retainer up front to cover the initial costs of identification, assessment and submitting an LOI (negotiation). Some advisors will also charge a flat hourly rate similar to an attorney.

Is it worth it? That largely depends on two things: 1) how much a buyer knows already and 2) how much they think their time is worth. On point 2, if the opportunity cost of buying a business independently is significantly higher than the cost of hiring an advisor, it makes sense to do the latter.

On point 1, there is one important comparison above all that puts the cost of hiring a buy-side broker in perspective. It costs much less than the expensive mistakes that a poorly executed acquisition can cause.

How Do I Pick the Right Broker?

It’s very important pick the right buy-side broker. Knowledge, trust and a true alignment of interests are absolutely fundamental to the selection of a good advisor and to establish those, buyers should not be afraid quiz their prospective counsel heavily. Some considerations:

• Reputation – Buyers should have the advisor provide them with references of other buyers they have worked with in the past and contact them independently to ensure they had a good experience.
• Process – Look to deeply understand the process and services of the advisor. A good buyer’s broker will outline the exact services they will and will not provide at every stage. Work out which aspects of the process they are responsible for and crucially which they are not. Many brokers for example only transact on businesses the buyer locates first.
• Experience – A good broker should prove their experience and quality right away. The initial consultation will be the centre point of this assessment and should delve deep into the buyer’s profile, financial situation, expectations, timeline, the process, market conditions and deal case studies (to name a few). Quiz them on their industry connections, precedent deals and specific expertise.
• Personal fit – Work with someone likeable and trustworthy. If there is a bad sense from initial consultations then it’s probably best to avoid. That being said, it’s worth getting an advisor that gives isn’t afraid to give controversial advice. A ‘yes’ man seems positive at the start but can cost a buyer dearly post sale.

Final Thoughts

As the industry grows and formalizes it is likely that buy-side brokers will grow in prominence in the online business buying world as they have done offline. Buyers who fit the profile of someone who can benefit from buy-side counsel should not shy away from taking a serious look at hiring one despite the added expense.
That said, experience is absolutely vital. An experienced buy-side advisor will shine through all of the aspects of the process and offer bits of advice that save thousands of dollars more than you are paying them. Just think, the best advice you’ve received in life probably came from someone with a great deal of experience.

When it comes to buying a business, the philosophy is no different.