Buyers often look exclusively at price when positioning their offers.
Whilst the importance of the offer price shouldn’t be ignored, the true measure of whether an offer and its terms will succeed starts closer to home.
At FE International, we often advise buyers on the less obvious elements of making a strong offer, namely, being a strong buyer.
Here are 5 tips to that will make you the best buyer any deal.
1. Not Sure on Asking Price? Communicate Your Offer Anyway
Online businesses come in all shapes and sizes. They range in terms of age, niche, monetization model and a whole host of other variables. As such, our valuation team spends a lot of time analyzing financial and operational performance metrics, as well as precedent data to arrive at a suitable business valuation.
Buyers do the same. They will evaluate the same metrics, often coming to a similar conclusion, but sometimes not. In the case of the latter, we often see a lapse in communication between the buyer and broker. When buyers find a difference between the asking price and their own perceived value, more often than not they move straight onto the next opportunity without asking why there might be a valuation gap.
This is not a smart move. There is still a significant opportunity available.
Buyers should look to communicate the reasoning behind their valuation. If there is a genuine concern, supported by evidence there should be room for negotiation on price, deal terms and/or structure. A simple miscommunication or misunderstanding of the facts can lead to a missed opportunity.
Having sold over 300 businesses over the last 5 years, our brokers have extensive experience in creative offer structuring. Present your facts and seek the advise of a broker to help iron out the best offer to meet your objectives.
Case Study – Communication Creates Growth
We recently had a business listed in the mid six figure range, one particular buyer liked the business but thought it was lacking in terms of potential growth – he submitted an offer shy of the asking price. The seller didn’t disregard the offer, but instead communicated a number of exciting growth strategies (e.g. integration of new merchant processors and the launch of a new off the shelf product.)
Excited and increasingly motivated by the suggested growth opportunities, the buyer raised his offer on the basis that the owner helped him implement the suggested strategies. The result? The deal was agreed and now net income is up 20% on previous months.
Conclusion: Exploring the reasoning behind a lower offer can lead to a much more lucrative end result for all parties involved.
2. Execution Speed Can Create a Discount
Selling an online business can be an emotional process and some sellers are often mentally fatigued by the time they approach a broker to sell their business. Others often approach FE International to sell their business because they have little time to manage the asset – they may be busy working on other projects or their personal circumstances might have changed.
Experienced buyers will often leverage the need for speed and offer a lower multiple in exchange for an expedited due diligence and transfer period. Buyers who are able to demonstrate to sellers that they can execute quickly will often benefit from a more flexible sales multiple in return.
A good way to demonstrate this is to have funds readily available, have your advisory counsel in order and propose clear and concise due diligence requirements and a sensible deal timeline.
Case Study – Speed Over Price
A recent seller had been operating his website for a number of years and had become increasingly busy on other projects. So busy in fact, that he considered shutting down the software and site. His priority was to transfer the site to a new owner, as quickly as possible.
FE International listed the business at a multiple of 2.4x, received several offers but went with the one that offered almost immediate closing (2.1x) because of the seller’s desired sale timetable. The buyer got an execution discount and the seller realized value from his asset quickly.
Conclusion: Don’t be afraid to understand the seller’s motivation (in this case, speed of execution), being able to close quickly can sometimes put buyers in a better position when negotiating price.
3. Manage Expectations
The ability to set and manage expectations is important in every field of work; nobody likes surprises, particularly when executing deals.
Buyers that set and actively manage expectations pre-offer, during due diligence and through execution are setting themselves up for a strong working relationship with their broker and more importantly, the seller. When faced with multiple offers, a broker may default to a known buyer that has a history of professionalism and certainty in execution.
Buyers that pull out of processes without good reasoning despite having shown strong interest throughout can cause frustration to brokers and sellers, something which may be hard to overcome in future deals. All parties should take the time to evaluate the facts and figures of the business and allowed for an open back-and-forth on any issues and queries through the sale process in a timely manner. This will help reduce rash decision making and mistrust between parties.
Put simply, being honourable during the course of an acquisition is respected and will help facilitate a smooth transaction, both pre and post-sale.
4. Hire Good Advisors
There are many intricacies when buying or selling online businesses. Being an expert in all areas is not a necessity. Having a good understanding of marketing, finance, accounting and law can go a long way, but always seek the advice of a seasoned professional in areas that may be outside of your core competence or required heavy lifting.
Once a deal timeline is set (LOI onwards), parties are expected to deliver key milestones on schedule. In some cases the timeline can be as important as the acquisition price, so make sure to set realistic expectations and come to the party prepared.
Gathering an advisory counsel ahead of time is recommended. It can take weeks and months to find vetted representatives you are comfortable with and with relevant online experience. Some examples of relevant advisors including: attorney; accountants and due diligence firms. This process should be started way in advance of the online business search.
Conclusion: Not only will hiring a counsel lead to deliverables being met, it will also bring confidence to the seller that you are serious about the deal.
5. Show an Active Interest
The majority of the businesses that are sold at FE International have been built from scratch by the seller over a number of years.
Naturally, deciding whether or not to part with their online asset is a difficult decision. Sellers often look to understand more about the potential buyer’s intent – how do they intend to grow the site? Are they planning on changing the focus? What is their background?
Buyers are often not prepared for this line of questioning from a seller, which can lead to complications. As seller financing is prominent at the mid-six figure level and above, sellers take more of an active interest in the future of the business under new ownership to ensure their financed note is in safe hands.
Preparation is key: explain how your background fits with the business and how you intend to maintain or grow the business going forwards.
Conclusion: building a healthy rapport from the outset goes a long way in establishing mutual respect and trust, which help facilitate a smooth and profitable deal for all parties.
Tips That Will Make You the Best Buyer
When looking to buy an online business, there are many considerations that can set you apart as a great buyer. Achieving a successful deal often relies on more than just the upfront offer.
These five tips will help lift your offer above the rest.