Buying Online Businesses: Your Complete Guide
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 a new owner 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.
Download our free guide below or keep reading to get a step-by-step breakdown of what it takes to buy an online business.
Download Our FREE Guide to Buying an Internet Business
Having spent over 10 years brokering the sale of internet businesses at FE International, working with thousands of website buyers and helping advise new entrants to the industry, we’ve built up a lot of knowledge on the art of buying internet businesses and now we’ve got round to publishing a guide on it.
Our FREE 83-page Guide to Buying an Internet Business is aimed at first-time and experienced website buyers alike. It is completely unique, at the time of writing there is no other broker guide dedicated exclusively to helping investors buy websites.
Over its pages, we take an in-depth look at the reasons to invest in an internet business, what investment options are available and what buyers should look for during an acquisition. The book then shifts focus to the practical aspects of executing an internet business purchase, giving best practice advice on business search, structuring an offer, conducting due diligence and closing the deal safely and successfully.
Why Buy a Website or Internet Business?
There’s a multitude of advantages to buying an internet business. The explosive growth of the internet is indisputable with 3.4bn internet users globally, up more than 7 times on 10 years ago. The most commonly felt influence of this has been the rise of E-commerce globally with latest forecasts indicating worldwide E-commerce sales will increase by 19% this year to reach $4.9 trillion, up a staggering $2.4 trillion from 2017.
In layman’s terms, this means more market opportunity to generate passive income through digital commerce. Also, the internet has continued to rise in prominence as an effective advertising medium. Digital advertising revenue is now worth $124bn in the US alone, and rising at 16% per annum. eCommerce and content website owners are well placed to benefit from these trends.
Macro-themes aside, internet businesses also enjoy a leaner cost structure and a more flexible ‘satellite’ operating model that gives more freedom to business owners to work remotely, and for fewer hours. If you’re exploring buying one, I imagine this is high up on the list of reasons why!
Another important consideration for any investment is liquidity. Many buyers approach the online arena with experience investing in real estate, well-known franchises and/or local businesses. A common theme among those individuals is a preference for unwinding from their investments quickly and seamlessly, something they have found hard to do with physical asset ownership.
Internet businesses are typically sold much faster than offline investments as due diligence can be performed quickly on intangible assets and usually, the operating model (employees, leasing arrangements, payroll etc.) is much simpler to review. With the opportunity to exceed the ROI of most real estate investments and the liquidity to invest and divest, internet businesses are a compelling asset class.
Should I Buy an E-commerce Business?
With easy-to-use e-commerce platforms such as Amazon FBA and Shopify, the internet has become a breeding ground for imaginative ways of making money, from SaaS services delivered through the cloud, dropshipping products sold through e-commerce websites, customers channeled to affiliate networks to lead information being sold to multinationals.
There are actually a wealth of internet business models to invest in, not just online stores, which all have their own benefits and potential pitfalls. Often buyers can get exposure to several monetization methods through online ventures.
As an investor, it pays to have a good understanding of each model, its strengths and weaknesses and suitability for your own background, time requirements and risk appetite. In essence, there is no such thing as the ‘best business type to invest in’.
In our free guide, we dig deeper into seven commonly seen e-business models and discuss their merits and flaws through the lens of traditional investment criteria so that you can become accustomed to what makes sense as a purchase candidate and what to look out for when deciding to acquire one.
We also explore three of the most important aspects for buyers to look at when buying a website business. Understanding these will help save time and energy during the search process and help maximize return on investment, by starting with a strong foundation from the outset.
How Do You Buy an Online Business? The Step-by-Step Buying Process Explained
Identify the Business 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.
Review 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;
- 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.
Make 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 interest (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.
Perform 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 of 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 workstreams. 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.
Sign Legal Agreements
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:
Note: an escrow agent may also be charged with managing the holdback 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:
- 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.
What to Look For in an Online Business Opportunity
From our experience assisting our clients on over 1,200 online business transactions, we’ve compiled a list of the 3 most important things to look for when buying an online business. Understanding these will help you save time and energy during your search and help maximize your return on investment by starting with a strong foundation.
Thousands of people may walk past a storefront, a few hundred may come in and browse, and some will purchase an item. Traffic that reaches a website is the equivalent of customers walking through the door, that’s why it is the most critical component of a healthy online business. When looking at the traffic of a potential online business to purchase, pay attention to the following:
- Diversity – the safest online businesses will have a healthy mix of online traffic from the main sources: search, paid, referral, social and direct. Relying too heavily on one source of traffic is risky. Many websites have been negatively affected by Google’s algorithm updates of late, in some cases wiping out 50% or more of search traffic overnight.
- Backlinks – Google and other search engines value relevant and natural backlinks, which is one site linking to another. In some cases, website owners have purchased poor quality backlink packages in an effort to game the system. This is a short term gain, long term loss strategy. For a more advanced look into a website’s backlink profile, free tools such as ahrefs.com and opensiteexplorer.com are available. For further reading, here is SEMrush’s take on SEO best practices for 2020.
- Historical performance – have a close look at every source of traffic and look for consistency. Did the site get hit by a Google update, if so, why? Has referral traffic been on a decline as of late? Are there traffic sources that the current owner has yet to pursue? These are important questions to ask, which is why a good broker will always strive to provide potential buyers with a close view of the historical traffic through the seller’s traffic analytics account. You can also use FE’s Website Penalty Indicator tool to get a quick comparison of historical traffic data to published Google updates for any website.
Unless you have the skill, experience and risk appetite to revive distressed businesses, you will want to stick to sites with consistent or growing revenue. Just like any business acquisition, buyers should dig into the books and review the financials in depth. For online, you should look for the following:
- Trends – check for trends in the revenue over the lifetime of the business. Did it peak after its first year and has been trailing off over the last 6 months? Is it a seasonal business that sees higher revenue during the holidays and slower elsewhere? Always ask to see financial data in monthly increments to clearly see the direction the business is heading. If it’s moving downward, you’ll want to fully understand what would be required to revive it.
- Expenses – every online business has expenses such as website hosting, domain renewals, web content, and marketing, but not every online business owner practices smart spending habits. Look for overspend in stated expenses that you could cut or reallocate right away that could increase profit. The biggest culprits are hosting and marketing. Also, look for expenses that seem unreasonably low or the owner failed to mention for the business model, such as payment processor fees, refunds for software products or on-going writing requirements for content sites.
- Growth potential – even if a business seems maxed out to its potential, have a closer look as to where you can add value in areas the owner neglected. There are numerous ways to increase revenue from existing traffic as well as build new traffic channels. Examples are hiring a Conversion Rate Optimization (CRO) service to audit the site for holes in the conversion process, increasing spend on paid ad campaigns or starting a social media marketing campaign. Also, pay attention to long term trends. You will want to know if the business is based on a fad or is now facing much stronger competition. These are things which could have influenced the owner to put the business up for sale.
You wouldn’t want to take something on that you don’t have time to properly manage or that you don’t have the confidence or experience to take to the next level. Even if you purchase an online business for a passive investment that will be managed by someone else, it should still ideally align with your personal strengths, interests or investment strategy. Here’s what to do:
- Envision working on the site – do your skills and experience match the business model and niche? If they don’t, is the seller offering after-sale training and support and do you have the connections to professionals to fill in the gaps? Does it interest and excite you? Remember, it’s tough to find the motivation to work on something you aren’t interested in when things aren’t going as planned.
- Time – no matter how passive an online business is, there is still some level of planning involved to maintain growth in the ever-changing online world. Unfortunately, the time required to maintain businesses are often understated by their current owners, especially with customer support and marketing if they handle these tasks themselves. Determine a realistic amount of time you are willing to spend per week running a business, but understand that more time will be spent in the weeks following an acquisition due to the learning curve. Always look for ways to automate and streamline business processes to lower your personal time requirements.
- Budget – as with any other investment, it is recommended to only invest that which you are comfortable with losing. This amount can be reached through your own cash and other liquid assets, or through other means such as a business partner, small business loans and lines of credit or peer-to-peer lending.
How Much Does it Cost to Buy a Website?
We could have written an entire book on this topic alone. There is all sorts of information spread across the internet on how to value a website business. Some of it is helpful and a lot of it is not. We sell c.230 internet businesses per year from $20,000 up to $20,000,000, across every niche and business model fathomable so thankfully it is something we know a lot about.
The guide goes into unseen-before detail on internet business valuation, exploring all the common and not-so-common valuation methods out there. We pull in data from 800+ transactions to show how valuation multiples vary across business models and why.
We go in-depth on how to properly evaluate an internet business, how to devise a multiple and what things to think about other than just the numbers.
Completing an Internet Business Acquisition
FE International is dedicated to making the acquisition of online businesses safe, smooth and accessible for anyone. Like many things in business, the devil is in the detail. Plenty of “amazing” businesses become not-so-amazing under the microscope. Whether you’re investing $10,000 or $10,000,000, that’s an important distinction.
From identifying new business opportunities to performing due diligence and closing a deal, FE International is the premier partner for small business owners and corporate brokerage clients alike. With a 94.1% sales success rate, FE International has a proven track record in successful acquisitions. If you’re interested in acquiring an e-commerce site, a SaaS company, or any other type of online business, download our FREE guide for additional insight.
Who Wrote The Guide?
Thomas Smale – CEO
Thomas is the founder of FE International and is passionate about entrepreneurship and online business. He is a respected expert in the industry with particular experience in due diligence, online business valuation and strategic exit planning.
Ismael Wrixen – Executive Chairman
Ismael is the Executive Chairman of FE International. With a background in M&A investment banking, Ismael has executed high profile deals across several sectors, namely Technology. Ismael is fluent in several languages and graduated from the University of Bath with 1st Class Bsc (Hons) in Business. He is responsible for business development and corporate strategy at FEI.