The Process of Buying an Online Business

Acquiring an online business can potentially be a confusing and complex process but with the right knowledge from the start it can be exciting, quick and easy. As a general rule of thumb, you should always try to work with a well-established online business broker when making a business purchase. A high quality broker will help guide you through the process and invariably represents the best quality businesses in the market for you to review.

With an increasing number of first-time buyers moving from the offline world into the lucrative online space, there are often a number of questions that come up with the acquisition process. Below we split out and explain in detail the steps to buying an online business .

Identifying the Opportunity

If you have reviewed the broker’s business listings and found a website of interest, you should contact the broker either directly or through their website. Alternatively, most brokers have a mailing list and if you’re registered you will be notified immediately of new listings.

If it’s the first time you have requested further information, most of the time you will be asked to complete a non-disclosure agreement (NDA). This protects the seller’s information and allows a broker to share information with you on all future listings. In some cases you may be asked to further qualify your eligibility for information, including documented proof of funds.

Reviewing the Business

A professional broker will prepare a very detailed prospectus for you to examine the business. Remember, transparency is very important so if the prospectus is light in detail or confusing, be sure to investigate further. The document typically includes information on:

• Business operations;
• Growth opportunities;
• Market trends;
• Traffic;
• Financial performance; and
• Continuing obligations

The prospectus also usually includes a detailed seller questionnaire covering a number of topics including day-to-day operations, sale rationale, customer base, products/services and marketing etc.

After reviewing the materials you should ask questions of the broker and arrange a call to discuss the business with the seller before making an offer.

Making an Offer

After reviewing the prospectus, following up with Q&A and conducting your own background research, you should be ready to make an offer for the business. You formalise this with a letter of intent (LOI) which is a standard-form non-binding agreement between buyer and seller to proceed forward with certain offer terms on a good-faith basis. Note, it is not legally binding but changes to its terms later in the process without reason or mutual consent is frowned upon.

The most important things to factor into a competitive LOI are:

• Consideration – make it explicit what the offer structure is. What is the split between upfront consideration vs. holdback and/or seller financing? What are the conditions attached (if any)?
• Owner financing – financing is typically offered on a case-by-case business. The majority of smaller transactions are all-cash.
• Non-compete – most sellers represented through a broker will typically commit to a non-compete agreement of 2-3 years provided the business is of appropriate scale but ensure you ask for this in any event.
• Exclusivity – a period of no marketing may be agreed to by the seller if the terms of the offer are very competitive, the business is very complex or the seller has a high level of confidence in the buyer’s ability to execute.
• Speed and certainty – the demand for online businesses is high and continuing to rise as more investors are attracted to the asset class. With a significant amount of new and inexperienced buyers in the market, often the best offer is not the highest but the one with the greatest degree of speed and execution certainty. Buyers that can proceed through due diligence, legal workstreams and into closing the fastest will be more likely to have their offer accepted from the outset. Buyers should seriously consider using speed of execution as a way of making your offer more competitive.

Due Diligence

Once an offer has been accepted, the transaction proceeds into due diligence (DD). Due diligence of an online business is slightly different from a brick-and-mortar company which can often confuse first-time buyers.  Naturally, the principle of fact-checking is still the same but without tangible assets and a very different customer acquisition process, due diligence is usually focused on the following areas:

• Traffic – whilst a brick-and-mortar business will often have customers walking in through the front door, customers for internet businesses visit from a variety online sources. Buyers should focus on checking the traffic sources, the backlink profile and metrics for visits to make sure everything stacks up. Most established brokers will provide access to Google Analytics, or another service is provided to the buyer to carry this out.

• Financials – traditional investors often expect to see audited books or tax returns for the business during the sale process. In reality, the majority of online businesses are owner-managed and having audited statements is quite rare. A good broker will perform extensive pre-listing due diligence on the financials and then provide all the supporting documentation (PayPal statements, invoices, credit card statements etc.) to the buyer during due diligence. As a second step of verification, you should always arrange for a live screen-share with the seller to walk through the back-end of the website and associated payment platform(s). This will authenticate ownership and validate the numbers you have been looking at.

• Maintenance – most online businesses (even relatively large ones) have grown out from “hobby websites” or family businesses, and as such are very often owner-run. Because of this it’s important for investors to analyse the business owner’s daily, weekly, and monthly tasks to be able to properly account with the cost and effort of outsourcing or taking on those work streams. It’s particularly important to evaluate and understand the difficulty of the tasks that the current owner is performing if you are going to keep them in house.

Without physical assets to examine or a large amount of audited statements to review, due diligence for online businesses usually takes 1-10 business days.

Legals

In tandem with the due diligence process, the broker will usually prepare the Asset Purchase Agreement (APA) for the transaction. This typically works from a standard-form template and is then tailored to suit the specifics of each transaction. Within the contract, buyer and seller formalise amongst other things: the consideration terms, the assets to be transferred, the breadth of the non-compete and the training and support for the buyer post-sale.

You should always have your legal counsel independently review the contract before signing.

Transfer & Escrow

Once due diligence has been completed and the APA is signed, the transaction proceeds into closing. Most well-established brokers will use an escrow process to facilitate the secure funding of the transaction and transfer of assets. The go-to solution below $500K is usually Escrow.com and most tend to use attorney escrow above this value. Be extremely cautious about transferring funds outside of an escrow service. The process typically moves in the following steps:

Source: Escrow.com

Note: an escrow agent may also be charged with managing the hold back or financing payments. In this case, it is common for the escrow agent to hold all of the funds upfront, and/or hold the domains of the business until all payments are due.

Naturally, first-time buyers quite often ask what protection is afforded to them during this process. In the very rare case that assets have been misrepresented or not transferred in entirety, the buyer can notify the escrow agent during the inspection period. If there is a legitimate misrepresentation, the transaction will be reversed. However, the escrow inspection period is not a “try before you buy” – once all of the assets listed in the APA are transferred, accounted for and operational, it is expected that the buyer will immediately release funds.

The transfer of assets usually involves (but is not limited to) the handing over of:

• Domain(s)
• Website content
• Graphics, images and logos.
• Social media accounts.
• Client database (email lists)
• Source code repository
• Database repository
• Advertising and affiliate accounts (if applicable)
• Hosting account
• Physical inventory
• Customer service account (e.g. HelpScout)
• Marketing automation account

A recent ICANN (Internet Corporation for Assigned Names and Numbers) update has made the transfer of domains a bit trickier. As of December 2016, any change made to the domain, such as changing the owner’s name, email or address, could place a 60-day transfer lock on the domain. This is especially important for people looking to sell their business in the near future. There are a few exceptions, but make sure to talk to your broker before doing anything. Placing a 60 day waiting period on the domain accidentally could cost you a deal.

For more information on what to do after buying an online business, download our Advanced Buyer’s Guide. In the guide, you will find a step by step process for buyers before, during and after a deal closes. It includes a section on the legal side for transfers, details of the Asset Purchase Agreement (APA) and what to expect at the end of the deal process.

Make sure you keep up to date with other important changes regarding buying and selling businesses by regularly checking this page. We will continue to update it as new changes come out.

Training & Support

After the transaction has closed, there is typically a four week period of training and support where the seller helps the buyer learn the day-to-day operations of the business. Occasionally, in the case of transactions with contingent consideration or seller financing, the seller will maintain a high level of involvement in order to meet mutually-agreed performance or training goals.

Make sure that the level of post-sale support is agreed beforehand and included in the signed APA.

Buying an Online Business – Client Experiences

FE International is dedicated to making the acquisition of online businesses safe, smooth and accessible for anyone. Below is a sample of feedback from recent first-time buyers we have worked with recently:

“Being familiar with brick and mortar purchases in the past, I was a novice when it came to an online purchase. With the help of FE and the use of Escrow.com, I was able to be guided, educated and put at ease throughout the entire process.

First… I ended up with more in-depth information upfront with FE’s prospectus than most of my brick and mortar purchases. Their prospectus weeds out many sellers and produces quality businesses for FE to represent to the buying public. This alone saves everyone time, prevents wasted energy and conserves resources. It allowed me to determine my true interest level much quicker.

Second… FE structured the process so that once the deal was struck, the seller and I were both protected. I was able to receive assets for a five day inspection period and the seller had the purchase money in Escrow.com. I was able to confirm everything was as represented and released the funds. I have never bought a business with such favourable verification conditions. This streamlined process produces success for all parties… a true win, win, win.”

Randall Wilkins

“I bought my first business from FE International and it was the best experience. FE made me feel comfortable by going through the due diligence, interviewing the seller themselves and sending me additional information as well as ideas on how to grow the business. I still needed to do my own due diligence but it was definitely a time saver. They also verify income from the seller so you’re at ease that the website is legitimate.”

 Amit Bhalla

If you are interesting in acquiring and online business through us or have any questions please get in touch directly.