Whilst some of the preparation for buying an online business can be completed once a suitable acquisition target has been found, proactive buyers start prep work well in advance.
Buyers can often find themselves delayed during the sale process, having not considered some important items pre-offer. Buying an online business is often a competitive process and as such if you’re fully prepped you can often step through the process quickly securing the deal.
We have summarised some of the key areas that should be considered prior to finding an online business for sale.
1. Think Through Financing Options
Every deal involves a cash consideration.
When buying an online business with cash have funds readily accessible to avoid delays in consummating contracts. Being able to prove these funds upfront is also important, so have them in one or two locations, ready to prove to a broker when asked. If you have cash tied up in liquid assets (i.e. equity) make sure to know how long it will take you to get these into your account.
Buyers without cash often ask about 3rd party funding options when looking to acquire a web asset. Prior to offering on a business, you should take the time figure out the extent you can fund the acquisition with a blend of cash and owner financing. As a rule of thumb, the more owner financing and less cash, the less competitive the offer may be.
If the only option available is to buy a website with finance, there are a number of routes available. Some options require a fair amount of upfront work and time, particularly if going down an SBA route which requires eligibility and pre-approval.
Prior to searching for an online business, you should evaluate your current assets, move cash into one or two accounts and if going for SBA funding, start the process as early as possible.
2. Consider Tax Implications
There are two main forms of tax to be aware of when buying an online business – income tax and long-term capital gains. Long-term assets (asset held for over a year) can be subject to favourable capital gain rates. If you are already in a higher income tax bands, you should discuss likely tax implications with your CPA to ensure that the purchase consideration is allocated in the most tax-efficient way for your specific situation.
3. Search and Sign Up with Brokers
It may sound obvious, but there are certain steps that need to be taken to find an online business for sale. There are a number of different channels open to you, including marketplaces and dedicated online business brokerage firms.
The best way of getting the most up to date information on available listings is to sign-up to the mailing lists of reputable brokers. Buyers who share their acquisition criteria with a broker are also more likely to find a suitable online business for acquisition.
Being under NDA with a broker, signed up to their regular newsletter and in frequent contact over the phone or via email is a great position to be in.
4. Consider Structuring Options
The way in which a deal is structured will depend on the size of the acquisition and willingness of the seller to accept certain financing terms. Educating yourself to the market norms will go a long way to understanding what may or may not be possible – talk to a broker ahead of time to get an idea of what is expected to put you in a better position to pose suitable deal structures, when the right online business is found.
5. Find Legal Counsel
Most brokers will provide templates for both the Letter of Intent (LOI) and Asset Purchase Agreement (APA). You should hire legal counsel to review the intricacies of these contract, particularly so on larger deals.
Hiring the right counsel can take some time and you should take care to vet them to understand their knowledge and experience of online transactions. This process should be started way in advance of the online business search.
6. Prepare for Due Diligence
The due diligence period is an inevitable part of buying an online business and serves to protect the buyer. Whilst the broker is able to facilitate the process, the nuts and bolts of due diligence has to be carried out by the buyer. As such, you should look to learn as much as possible about conducting due diligence.
There are plenty of tools available that help with the process. You should look to download our due diligence checklist in advance, compiling some of the core requirements and information that they will need to validate, will speed the process up.
7. Setup an Escrow.com Account
Most reputable brokers will use an escrow service such as Escrow.com as a third-party service for transactions. Escrow is an independent service that collects, holds and releases funds online, according to the transaction terms agreed upon by the buyer and seller.
Whilst the broker is responsible for setting up escrow during the transaction process, it helps if buyers have an account setup in advance. This doesn’t take long, but is another time-saver. To setup an account, you should navigate to the site and register.
We have published an article that explains Escrow.com in a bit more detail.
At FE International, we are always looking to help buyers move through the online business acquisition process as efficiently as possible. The seven steps outlined above are all useful tasks to carry out in the weeks and months leading up to a possible online business acquisition. Carrying them out is likely to set you apart from the competition, helping you to secure the deal.
It’s also worth thinking about the business transfer and ultimate management of the business. Having a team of partners, employees and contractors already in place to enact the work required to grow the business, will put you in a very favourable position immediately post sale.