Reviewing an online business for acquisition is no small task and can generate a lot of work for a potential buyer. The average business buyer typically goes into the process with an arsenal of boilerplate questions for the seller but the questions that really need answering are the ones they usually don’t think to ask.
If you’re looking at business prospects at the moment, these are the five questions you should be thinking about before making an offer:
1) Why and when is the owner selling the business?
Knowing the seller’s rationale for a business sale is vital. Buyers should look for natural reasons and explore them in depth. If the seller is moving to another business venture ask in detail about what the venture is, why they are moving on and what they intend to use to capital for. As a buyer you should keenly examine the seller’s motivations and look for any evidence in the information provided that conflicts or confirms the story.
Just as important but asked a lot less often is the ‘when’ instead of the ‘why’. If the seller’s answer to why seems unconvincing then take a look at the timing of the decision. Are they selling after a recent growth spurt? What has contributed to this and will it last? Is the opposite true and sales are sliding? Has the seller run out of ideas to grow the business?
You should look for a cohesive sale rationale that provides an honest message, backed up by the information provided during due diligence. E.g. “I’ve managed this business for many years now and am moving on to fund a new venture in another niche.” If the business has financial statements for several years, performance has been solid and the seller has given you information on his new business plans elsewhere then it makes sense to proceed.
2) How much time is involved and what is required to run the business?
Online businesses can vary substantially in the amount and nature of work associated with them as described in more detail here. During the business sale process the seller will usually make various declarations about the amount of time they spend on their website and what they do in the day-to-day running. It’s unlikely there will be any formal record of this as most online businesses are owner-managed so the buyer is somewhat reliant on the seller’s honesty. It’s very important though, especially if you only have a limited amount of time or specific technical/management skills, that buyers due diligence these claims before making an offer for the business.
The best way to do this is to build a strong understanding of the workings of the business through the prospectus and Q&A with the seller. Ask yourself questions like:
- How much content is written and uploaded per week?
- Who is posting to social media and how often?
- How many support requests are there per week?
- How much SEO / link-building is being done?
Once you have a list of work tasks, start estimating the time required to carry each one out. Then arrange a call with the seller to go through their version of operations and see how the two compare. Make sure you are clear on the technical requirements for each task, which will help you understand whether to insource or outsource and at what potential cost. This exercise will give you more comfort on your ability to run the business after the sale and also more information to factor into your offer for the business.
3) What would the seller do to grow the business?
Naturally, a common aim for business acquirers is to grow the venture beyond its current profitability. Unless the buyer has significant experience in the space, the person who is most qualified to offer a perspective about the business and its future growth prospects is the current owner. Buyers should carefully probe the seller’s thoughts on potential growth strategies and get some detail on the proposed execution.
4) Will the seller agree to a non-compete?
An established business, brand and customer base is a major reason for buying an existing business versus starting one from scratch. That falls away though if the owner plans to sell the business and compete with the funds raised. As a buyer you should be sure to have the seller commit to a non-compete and ensure this is contractually agreed in the asset purchase agreement. As always, the devil is in the detail and you should pay close attention to the wording of the ‘restricted business’ as well as the duration of the agreement. Typically, a three year non-compete is standard.
5) What does the seller care about?
Before making an offer for the business you should carefully think about what the current owner wants to get from the sale. Although it’s unlikely that the seller will disclose their bottom line before the negotiation process has started, it’s important for the buyer to make an effort to discover what matters to the seller.
Knowing whether the seller is open to financing or contingency-based consideration for example is very important and will allow the buyer to structure a deal that is fairer for both parties from risk and value perspectives. Equally, non-cash motivations can be useful to know and potentially a powerful negotiation tool for buyers. If the seller is entertaining multiple offers for example and one is differentiated by offering strategic support for a new business venture, this could be a deciding factor for the deal.
Bonus Question: Will the seller stay with the business?
Having the previous business owner stay on at the business or agree to a transition period could make all the difference in maintaining a profitable venture. There will be more time to pass on the necessary knowledge to a new owner, and the change in management will be less likely to affect other employees. In most business sales, the owner will be on call for a transition period, but asking to extend this period could be worth considering. One should always be wary of a sale where the owner doesn’t agree to spend any time on the transition after the sale.
Making an offer with the intention to close
Overall it’s important that as a buyer, you do a lot of work upfront and gather enough information to get comfortable before you make an offer. If you have to pull out of the deal during due diligence because of a simple oversight on your part, you will damage your reputation with both the seller and the broker. Asking the right questions early on will help you identify the best opportunities quickly and potentially get you ahead of the competition in the process to acquire the business.