Over the years I have found that many buyers looking to buy a website or internet business enjoy the process as much as the final result. In that sense there are few things more frustrating to buyers and sellers than a deal collapsing.
Remembering why deals fell over is like reminiscing over relationship breakups; whether it brings back pain (if you screwed up) or relief (if it was the right decision), you always learn a valuable lesson (or two).
Experience is everything here and working with an established website broker can significantly reduce the risk of that happening (FE International’s close rate for example was 93% in 2015). That aside, it’s good to know about and learn from past mistakes so that the website sale you are working on doesn’t fall before the final hurdle.
Website Buying Deal Killers
So just like using past experience to dish out relationship advice to your friends, I have assembled a list of reasons why transactions fall through so you can go forward to deal success.
If you’re looking to buy an internet business or understand how to buy a website successfully, keep reading for some hard-learnt insights.
1. Misrepresentation
Probably the most common reason website sales fall over is accidental (or occasionally deliberate) misrepresentation by the seller. This is generally much more common in non-brokered deals (i.e. on marketplaces) where businesses are not vetted before listing and buyers are susceptible to fraud.
By contrast, brokers are economically and reputationally invested in listing the best websites for sale, so you can expect less issues.
That being said, it is certainly not unheard of for misrepresentation to occur. Nine times out of ten it is accidental book-keeping mistakes by the seller. For the most part it comes down to materiality and usually if the due diligence has been done pre-listing the adjustments are not significant enough to derail the process.
How to prevent this?
As a buyer, you can mitigate this by front-loading evaluation of the business (especially that can be done without the seller’s responses) rather than wasting time and resource and discovering it much further down the track.
Following a robust business review process will help as will vetting your deal sources.
2. 11th Hour Changes
If I had $1 for the amount of times I’ve seen an attempt to change deal terms at the 11th hour I would have enough to buy one beer, thankfully.
There’s no faster way to end a deal than this. Usually it’s the buyer thinking they have negotiating leverage as all the parties have invested time, money and effort in bring the sale process to a close. This can work in privately negotiated sales but tends to backfire in brokered sales where there is another buyer in the wings.
Remember also, the seller has a cash flow generating business so isn’t losing out from moving on to another buyer (just time and hassle). It’s also a lose-lose if the seller agrees because it erodes trust between the parties and there is still a 1-3 month transition period to get through post sale. Not the best way to start it.
It’s not always the buyer’s fault though. There are instances where the seller has announced last minute they are not including a vital asset in the sale or want to allocate the consideration in a tax painful way to the buyer.
How to prevent this?
Agree everything material upfront and in detail, preferably at the Letter of Intent (LOI) stage. Leave no margin for error or misunderstanding at the final stage. Things to agree beyond the value of the website for sale include training terms, escrow process, assets for inclusion, consideration allocation etc.
3. Breaching the NDA
A more unusual cause of deal collapse is the buyer or seller breaching the terms of the NDA. Usually this happens by one party breaching confidentiality and communicating sensitive information about the business or the sale to outside parties not under NDA.
There are some humorous examples of this such as posting on public forums about business information or better still, forwarding email chains with correspondence from other parties relating to the internet business.
Another example is contacting the website for sale’s business connections (affiliate and advertising partners) or their employees. Both are ok to do with consent from the seller only.
How to prevent this?
Understand the confidentiality terms you’re under with a non-disclosure agreement in place.
4. Going Outside the Process
Similar to the above, going outside the agreed process is not a good idea. Where you see this most often is buyers either contacting the seller directly (without broker consent) or trying to negotiate side deals.
It’s shady, creates distrust and doesn’t speak volumes about the party in question. Brokers will usually stonewall any further work with the buyer if it is a serious or repeat infraction.
How to prevent this?
Don’t go outside the agreed process. If you want to know more about how to buy a website, you can see our recommended process here.
5. Business Underperformance
Generally speaking as a buyer you want to give as much thought to ‘why’ the owner is selling as ‘when’ they are selling. Sometimes they may have simply given up on the business and this can really show during marketing or due diligence if the numbers start to slow down into closing.
That’s not to say that one bad month is cause to throw a deal, or indeed grounds for renegotiation, but without a solid justification it does not look good. Mainly this is cause for postponement but it has been known to derail a deal.
How to prevent this?
Sellers: Keep running the business as if you were keeping hold of it. Don’t make any rash decisions (emergency product discounts) or changes to the operations (e.g. hiring staff) without disclosing to the broker and buyer.
Exit planning is also very important here. Creating and executing a plan 3, 6 or even 12 months before you exit will mitigate last minute performance hiccups.
6. Timeliness of Communication
So simple yet occasionally parties get stung with this. If you’re buying or selling an internet business it’s a serious business and requires serious attention. Disappearing on holiday, working on other deals or otherwise not replying in a timely fashion is not good.
We’ve heard some fantastic excuses over the years including earthquakes and all sorts!
How to prevent this?
Read your email. Every day.
7. Aggressive Contract Negotiation
Like many people I watched Tom Cruise in The Firm and thought for a moment, “I am a born contract lawyer.” However, it’s important you don’t buy into this idea too much!
Agreeing terms and going through weeks of due diligence brings the buyer and the seller close together. If it then comes to drafting the asset purchase agreement and the buyer or seller decide to turn one-sided over specific deal terms, it starts to cause friction quite quickly.
Classic examples of this are stipulating very broad non-compete terms (i.e. “you can never work on the internet again”), demanding 1000% late fees on payments or insisting upon 2 hour response times to training requests for the next 3 months.
How to prevent this?
Be reasonable, collegiate and amiable. Coming to an agreement is about fairness for both parties so everyone leaves feeling they have won.
Still the best advice I’ve read on this to date is in Getting To Yes which helps parties understand how to get what they want but still create win-win outcomes.
8. Using an Inexperienced Lawyer
Similar to the above, using inexperienced (or offline-only) legal counsel can be problematic for buyers and sellers, especially if this is the first time buying or selling a website.
If your lawyer doesn’t understand domains, web intellectual property or Escrow, you’re not going to be get sensible legal advice on the asset purchase agreement. Make sure they have experience with selling websites.
How to prevent this?
Ask a previous buyer/seller or an online broker for a recommended lawyer.
9. Seller Losing Confidence In The Buyer
Any of the above can cause the seller to lose confidence in the buyer (unless it is their fault). This is an important factor in consummating a deal. With larger deals there can be a material amount of financing or performance based consideration which means the seller is placing a lot of faith in the buyer to run the business for growth and pay out on the agreed terms.
If there has been signalling through the process that weakens that confidence, it can be terminal for the deal.
How to prevent this?
Remember it’s not a slam dunk just on deal terms. Buyers should act professionally throughout, stick to the process and be a good acquisition partner.
Knowing Why Deals Collapse Will Prevent It
It might seem that there’s a lot of things that could go wrong with a website sale but actually the reverse is true if you follow really simple guidance.
The best advice to successfully buy websites is to work with experienced professionals, stick to the process and be collegiate and professional throughout.