2014 has been another busy year at FE International and for the industry as a whole. Currently averaging over a million dollars a month in website sales, we continue to grow as a firm and we are looking forward to seeing that trend continue into 2015. We have focused heavily this year on hiring great people, investing in our processes and systems, and most importantly, striving to sell quality online businesses.
Views from the sell-side
The big take-away from this year is that market is more active than ever. In 2014, we received over 2000 enquiries from potential website sellers. I personally reply to every single one of them, no matter how small or niche. This gives me (and FE International) a unique insight into the market trends and general seller confidence/mood as well as the benefit of having numerous conversations with successful entrepreneurs throughout the year.
At FE International, we only ever take on quality businesses, so whilst the absolute number of enquires continues to grow, we still take on a similar proportion of clients each year and 2014 was no exception. Our growth this year has come from our increased activity in the high six and low seven-figure range, whist maintaining our total dominance at the lower end of the market. Sub-$100K, our average time to secure an accepted offer being 5 business days (our record was 28 minutes!).
For sellers, 2014 has been a good year. Websites that withstood the organic turbulence in 2013 have generally performed well in 2014, some have even recovered sufficiently for sale. Well-funded and tech-savvy buyers continue to enter the market, meaning there is unprecedented (and more importantly, qualified) demand for software and SaaS micro-businesses. In previous years, buyers would often overlook more complicated business models, in favour of simple content based sites with ad-revenue. Whilst the demand for online businesses all across the spectrum continues to grow, there has never been a better time to sell a SaaS business due to the number of qualified buyers now in the space and relative premiums compared to other business models, especially due to their recurring revenue and generally better tracked accounting/customer metrics.
Valuation methodologies are improving
Valuations and final sales multiples at FE International have continued to become more consistent. Every business is unique and as such, there is no “one-size fits all” method of valuing online businesses (especially across different business models). All of our valuations (unless stated otherwise) will be based on a multiple of SDE but the multiplier itself can vary considerably based on hundreds of factors. We keep close track of our completed transactions and this means our valuations become more and more sophisticated with time. We continue to lead the brokerage industry in terms of volume of deals closed (we led this in 2013 and continue to in 2014, too), no-one has better data than us to accurately value online businesses in the sub-$4m range.
Whilst our internal processes are improving, the industry as a whole still has a long way to go. Perhaps due to the low barriers to entry in the “brokerage” industry, there continues to be misinformation spread surrounding valuation. Some will quote a fixed multiple, which, as already discussed, can never be accurate with so many variables behind a business. Others will quote whatever the seller ‘wants’ in order to win the mandate, leading to a number of sellers (and buyers) having their time wasted due to unrealistic goals.
Despite the above, final sales multiples at FE International have become more consistent over the year. All transactions follow the same process (whether $20,000 or $2,000,000) and get maximum buyer exposure. With the consistency of our processes and large (and growing) number of qualified buyers, it is extremely rare for a business to sell for less than it is worth, especially compared to those who decide to roll the dice and sell themselves on popular market places and auction platforms.
Be open to seller financing
Over the years at FE International, we have observed a common trend in deal financing . In the sub $100K market, it is extremely rare to see deals that require seller financing and the majority close for 100% cash up front. Once you get above $100K, this changes considerably. The majority of deals will contain an element of seller financing (usually 85% cash, 15% financed). Being open to seller financing is now almost essential. A good broker should actively encourage it as it opens the door to more buyers, speeds up the deal process, can ease due diligence scrutiny and should increases the overall sales prices. As long as the terms are fair (and the seller is contractually protected against default), it creates a win/win scenario that allows more deals to be done. Being open to financing signals faith in the strength and legitimacy of the business you are selling, as well as the willingness to work with a buyer to get a deal done.
I expect this trend to continue into 2015 as more and more buyers enter the market from traditional offline backgrounds, where seller financing is common. The vast majority of sellers I speak to want a cash-only deal, but in my experience this is more due to lack of knowledge of the process and fear over seller-protections, rather than over the money itself. An experienced broker should be able to walk you through the process and should structure sales contracts in a way that protects you (which also protects the broker’s commission).
Better educated buyers is a good thing
In years gone by, buying a website was widely cited as the best way to generate passive income. Whilst it is true that a number of websites are relatively passive in their operations, in the majority of cases this is not accurate. These days, buyers are more savvy to the potential dangers of buying an online business and conduct due diligence accordingly. The majority of make-money-online gurus have long moved away from the ‘site flipping’ space and the industry is all the better for it. Specialist due diligence agencies, such as Centurica, can help buyers identify which businesses are and are not valuable, making the decision-making process all that much easier, especially on quality business listings.
Whilst the improved knowledge of the average buyer may seem like a hindrance to sellers, it is actually a good thing, particularly when working with a broker. Buyers who are more confident before (and throughout) the due diligence process are more likely to pay a higher price and complete on a deal. A broker is mandated to help build that confidence in a buyer on behalf of the seller, ahead of and during the course of an acquisition. Having trustworthy and reliable third party agencies only acts to expedite this confidence building process. At FE International, we take this role very seriously and we invest heavily in our people, accounting practises, legal expertise, online/tech knowledge and internal/external systems and processes which helps us continue to deliver industry leading service for sellers and buyers of legitimate businesses.
2015 will be the best year yet
I expect 2015 to be the best year yet for sellers. With more consistent and formal sales processes, well-funded buyers will continue to enter the space and look to acquire businesses through reputable brokerage firms. I expect to see even less fluctuations around multiples, with more buyers willing to pay good multiples for solid businesses, rather than taking the more risky route of buying privately (which very rarely benefits the seller). Buyers also continue to improve their own infrastructures, teams and knowledge, meaning an increasingly wide range of businesses become viable propositions (SaaS, e-commerce, large content sites requiring teams and so on).
We will continue our focus on educating both buyers and sellers in the industry, so make sure to keep a close eye on our blog in 2015.
And from the buy-side
From a buying perspective, 2014 has been another interesting year for online business sales with perhaps the biggest changes happening in the smallest of industry areas (more on that later). From the outside things look the same. The demographic of the investor community is still heavily skewed to North America, the main characters are still internet entrepreneurs, offline investors looking for passive income and investment funds. Everybody still dreams of a business with a multi-year track record, recurring revenue and 1x net income sale price (don’t we all).
From the inside though, change was afoot. Buyers are getting smarter, structures are getting more creative and deals are getting done faster (Guess what? The three points are related). In our world, there’s always change going on and it’s good to reflect on the big things and the small things because everything matters whilst the industry is still in its infancy. Here’s what I think went on:
Content, awareness and buyer competition
2014 was pegged as the year of content (aren’t they always?) and it certainly felt like the website buying industry embraced that with open arms as we saw a marked increase in content posting by brokers, marketplaces and industry commentators alike. Centurica got the ball rolling with a 2014 website buying report and its co-founder Justin Gilchrist followed up later with an in-depth primer on business buying. Never one to be behind the curve, we published our own free Guide to Buying an Online Business in part to educate buyers on how to run through the process successfully but also to raise awareness about the asset class. It got a lot of good feedback so if you haven’t read it, perhaps put it on the Christmas reading list.
All of this content seems to be paying off, in 2014 we saw more offline and first-time investors than ever before making acquisitions. Most notably they accounted for some of the largest business sales of the year (typically $500k+) and some of the more ‘high-risk’ inventory (younger sites, distressed situations). It’s clear these buyers are readily absorbing the information and making moves into creating online portfolios of their own. Many buyers will search for 6-12 months before making an acquisition and it makes sense they are now coming to maturity and making business purchases. What’s more they are readily now buying active online businesses and making them passive themselves (outsourcing tasks) as opposed to looking for the ‘perfect passive income’ which as most seasoned industry participants will tell you is few a far between these days.
So what does this actually mean? More buyer competition and modest expansion in multiples. There’s absolutely no doubt there are more buyers in the industry than ever before. FEI’s buyer network doubled in 2014 (adding thousands). Our average number of enquiries per listing is up 40% and the variation in channels (where they are coming from) is more diverse than ever. I think there is still room to grow before a marked uplift in multiples but across the board they are firmer this year (+12%) and most notably they are being sold faster, with average sale times 1-2 weeks lower across the cap scale at FEI.
As a buyer it’s important to be cognisant of these trends and look to create a first mover advantage to get ahead of the curve (more on that below).
Valuation – dialogue improving but still anomalies to exploit
A challenge for brokers in the industry at the start of 2014 was definitely improving and harmonising buyers’ approach to online business valuations. Historically there has not been a wealth of data or guidance out there but that changed this year (as part of the above content trend) and it feels like valuation dialogue is improving with buyer sophistication. I wrote a piece in May on valuation that helped frame the debate a bit better and also participated in a panel discussion on it at Rhodium Weekend in October (well worth a visit in 2015). Based on buyer conversations this year it feels like people are beginning to end up in the same place methodology wise, but there is always going to be healthy debate!
The good news is that even with the valuation debate improving there are still anomalies to exploit. The most lucrative I have seen this year is the ‘age of site’ criterion. More than any other reason, the age of the site seems to be the #1 factor for not proceeding with a deal, despite all other positive aspects of the business. As a result, I’ve seen a number of excellent businesses that are 18 months old get picked up for relatively cheap (2x or below) when, if they were a year older, could have pushed 2.5x+, leaving their new owner with a handsome natural expansion in the multiple after a relatively short period of ownership.
Why fixate on age? Sure, it’s one measure of sustainability, but there are many, many other measures. I’d rather buy an 18 month old site with rock solid and consistent revenues than a 36 month old one that is fluctuating significantly. A slight simplification for certain, but there are other measures of stability and sustainability that buyers should look towards to potentially grab themselves a younger site at a better price. With most major Google algorithm updates out the way (Panda 4.0, Penguin 3.0 and Panda 4.1), there is a good opportunity to pick up a business that has survived these shifts and has a clear runway into 2015.
Structuring for success
We’ve seen similar levels of structured deals in 2014 I think but certainly more interesting deal terms attached. Hold back consideration with specific performance criteria (percentage of revenue average in a quarter, volume of sales in a month), earn-outs with variable earnings bands (percentages changing through revenue bands) and deferred consideration due on the release of a new product or service, are all examples of deals we have done this year.
I’m a big fan of structuring for success. No business is perfect but an acquisition can be if it is structured properly. Buyers shouldn’t be afraid to negotiate terms into their offers that protect the downside risks that they see, rather than walking away over the price tag. Nine times out of ten, sellers are responsive to (sensible) performance-based consideration. They believe in the quality of their business so it’s not a stretch to agree to a goal, usually an average of recent historic performance. Escrow launched a new domain name holding service in 2014 which has dramatically opened up the scope for this market in 2015. If domains are held in Escrow during the deferred consideration period then there is significantly less fear about default on payment, which warms sellers to the idea. It’s something to think about and most brokers will happily work with you to structure terms that benefit all parties.
Looking forward to 2015
I think 2015 will be another exciting year for our industry. I see volumes increasing right across the piste with more inventory coming to the market than ever before. I see rising awareness of the industry amongst alternative asset investors with more offline ‘baby-boomer’ types as well as more micro-cap private equity and family office investment funds coming in at the high six and seven-figure level. There will also be more creative deal structures than ever before as buyers realise there is scope to negotiate a better deal once they use their imaginations. Finally, I see more competition for brokers but there will be a concerted flight to quality as industry standards get better and sellers demand to work only with the firms that have the best brokers, give the most honest advice and have the best reputations.
If you’re a buyer with cash burning a hole in your pocket this Christmas (perhaps for tax reasons) I would say the following to help you secure the right business next year. The supply of quality sites remains a little constrained (though I hope this will change) and competition to buy them is getting firmer. Nonetheless, there is clear scope to gain advantage by working closely with a few quality brokers that you trust (see how here). Get in front of them, tell them what you want and stay in regular contact which puts you well ahead for when the business comes. Next, stick to your investment criteria but think about ways that a creative structure could help make a business purchase even better. Our industry is blessed with bright minds and creative thinkers so go outside the box on deals to create value on a business purchase. Lastly, timing and readiness is everything. Line up your attorney, accountant, due diligence firm, whatever else you need, when that business comes in 2015 (and it will), you want to jump on it and close fast.
Look forward to chatting in the New Year. As always, feel free to get in touch with the FE International team any time.