If you are looking for an online business for sale you know there are 2 ways to get in business : start one or buy one that’s already working ! Or actually 3 : buy one that’s not working at all, but one that you can fix, which can be even better.
Today, we’re going to look at these options : where to find a good business and how to avoid the very expensive mistakes you can make buying one.
Where to find online business for sale
For the most part, there are only a few assets you can buy online that are business related :
- websites & Apps
We’re going to take a look at the main platforms to buy an online business for sale.
1) Existing websites & apps
Probably the most well known platform is Flippa :
You can easily find a set of websites that are sold over there by their owners (plenty of online business for sale over there) :
Flippa is probably the biggest website marketplace you can find around so definitely worth going take a look if you want to find an online business for sale.
Now there are other platforms around like Deal A Site but they kind of don’t really have the nice structure and clarity Flippa has.
Personally these are the 2 mains I take a look at from time to time.
2) Domain names
Flippa & Deal A site also sells assets separately like domains name, but the main player there is Godaddy. They have a pretty good service when it comes to buying domain names, just take a look at the auctions. It’s probably the one place on the Internet where you can find the wildest choice of domains :
So, these are the main players out there.
Of course you also can search on the web just by yourself, for websites that have been inactive for a long period of time and make a proposal. The research process involves more work but there’s also potential to get a better deal.
Now, the big question is : what to buy and what not to buy.
6 expensive mistakes to avoid at all costs
Here are a list of 6 very expensive mistakes one can do when it comes to buying (or selling) a business. All these mistakes will help you understand how a business is valued and what you need to look for and / or avoid. I STRONGLY advise you to read books about M&A before you spend any money on acquisition. This has been one big eye-opener for me and can’t recommend it enough. This is a GREAT resource of practical advise on how to buy businesses and getting good advice will save you a ton of money.
1) Not starting with a clear exit plan
Probably the biggest mistake one can make about buying a business is not having a precise exit plan. The big thing is to have a precise idea of the end in mind of what will you do with the business, and if you intend to sell it afterwards, how will you make the business valuable to a buyer (or even better : be high value and low risk).
That means, the business will have to create value in the eyes of someone else who will buy this company or it’s assets. So, what makes a business valuable, objectively and what criteria should you be looking for ? Let’s break this down :
- it’s ability to scale
- it’s processes to create value and deliver products
- it’s ability to sustain growth
- it’s proven – and profitable – methodology (number backed) to acquire customers (check SMA’s methodology in the previous article about promotional strategies if you want to take a look at an example)
- Ability to retain customers
- A steady cash flow
Here’s a description of a business that should make you tick on many criteria :
The business description shows no information about processes, or recurring customers or employees. That would easily have brought the value up (imagine : “250 one year contract customers, with 73% recurring conversion over years – 5 years data”). We would know there are specific processes in place that drive stability to the business. Now in this example – and with the information we have – it’s pretty hard to have a clear end in mind. We would need to structure the business entirely, create processes, make sure we have the right employees, and create a strategy to scale it and develop it enough. Is this really a good idea with Uber on the corner and automated driving cars ? Not very long run. Not sure who will buy this one !
Estimate the value
It’s commonly accepted that the value of an online business for sale is a multiple of it’s revenue and earnings before tax, depreciation and amortization (EBITDA). Let’s take a look at a business for example :
We have something much more interesting here business wise :
- monthly recurring billing of $68,000
- plus repair income
- 560 accounts
So the valuation of this online business for sale here relies on assets that are stronger than on the first business we saw. It’s easier to come up with a more precise end for the business : scale the customer acquisition strategy, expand, develop new recurring revenu streams, and maybe resell the business to a bigger company with a nice exit. Although we’d need to find who could be potential buyers.
Some factors we can develop will also help increase the value of the business :
- add new partners inside the business
- create a strong partnerships base with other companies as an affiliate base
- develop a strong management team – making the company attractive to new buyers over time
Of course the more we could demonstrate the business can run on itself, the better the valuation will be.
There also are 2 things that we could target for the company :
- build an increased sales and profits flow over time so we show great numbers to buyers
- develop a regular cash flow that supports operations and operating costs
At least here we can see a bit of a plan.
2) Not buying real business assets
Buying a business involves buying assets that will produce revenues or contribute to revenue production. I’m going to take a (ok, pretty hilarious) example about a online business for sale. We’ll analyze it’s assets and get a view of price asked and assets in the business ; for the sake of the example let me introduce you to… “My Free Implants” is for sell for $750.000 USD :
So this online business for sale is about (take a seat…) : giving the gift of big breasts to women… (who would have thought…). Basically it’s a crowdfunding website that gathers donors and women in search of getting a… better shape. I’m a bit skeptical about the niche but let’s put judgment aside and take a look at is as a business case. So what assets are sold for that price ?
- The domain name
- The website itself
- The code
- The IP
- The content
- The users
- Their mailing list (600.000 users)
- The brand & trademarks
- The relationships with customers
- The backlinks pointing to the website that’s making it’s ranking on search engines
- The revenues & profits made
- A customer base (donors)
- A customer base (women)
- The processes in place
- User’s engagement – they seem to do a good job there
- User acquisition
Here are some numbers provided by the owners :
So a first view of this business is interesting because the business does have a set of assets to buy. This is a good example you could compare with a business that did not build salable assets like the Limo service we looked at just previously.
More generally, interesting assets of an online business for sale can be :
- customers loyal to the company – not to the owner
- written contracts with customers (TOS), suppliers, and distributors
- documented process
- Ownership of the business core tools (self developed software, websites) – more than suppliers licences
3) No plan to develop the business
Here’s a good example about another interesting business – here, just a website – we can analyze (gsmspain.com) :
There are few informations about the website’s assets but we can see 2 interesting things :
- High number of visitors (1M per month, 3.3M page views)
- Not a great monetization strategy because they make 11K per month, 5K profit
It seems the owner relies on advertisement and affiliation to create revenues. This is not the best optimized process to create revenue on a business. So this can be a good opportunity provided one build relationship with the customer base and find products to fulfill their needs. So with a bit of work here, this business has potential and one could engineer a good plan to create revenues, considering the high flow of customers. So here we have high potential for scalability and some good assets to buy. Ideally we would need to interconnect this website to our own complementary offers and that would be a big win.
If you spend time on Flippa, or look at enough online business for sale you will realize that actually not so many offer good deals. Although, at least websites based businesses are interesting because they build transferable assets pretty quickly.
4) Not the right people on board
Getting a business to run properly involves having the right people on board, and most of all having the right relationships with them.
As the business owner your job is to build an efficient and effective team – and get out of their way! – Richard G. Stieglitz
Richard G. Stieglitz in his book has a good model for building a team around the business.
First point is to have people on board who will point the hard facts to the owner so he can make the difficult decisions to get the business to survive and grow. This implies surrounding the business with a team :
- Board of directors
- Board of advisors, in matters of :
- Financial management
- Business development
- Strategic partnerships
- CEO peer groups
- Business consultants
- Business development processes
- Public relations and company branding
- Organizational roles and responsibilities
- Documenting operation process
- Recruiting process
- Incentive programs for executives and employees
- Annual operating plans, staffing projections and budgets
- CPA / attorney
Without a good structure of people around it’s unlikely the business will get the right advice and knowledge to develop to high valuations. Not all businesses require this heavy structure, but high valuation usually does.
A good way to find out where you are at is to ask the team : “if the owner got hit by a car what part of the operations would be your biggest challenge” ; and then write a plan ! Usually here are a few things that will be missing : no written procedures for projects or finances, no personal policies, no policies for business development.
The CEO’s job is to question his own job on a everyday basis :
- Who’s job the CEO is doing today ?
- Who should be doing those things ?
- How to stop doing them and give responsibility to them ?
So the question is : did you found a business that had this kind of CEO ?
5) No precise vision of the company (and KPI)
Another vital point when thinking about buying a business is to have a very clear vision for the company – number wise. Here are some essential indicators that I personally got from the book Expensive Mistakes that will help you to put down a well structured vision about the company you’re trying to buy and build ; it will help you make an assessment of where the business is and where you can / want to take it :
- Revenue. Of course, the business has to have revenue, but also sustained revenues over time. This is an important criteria because it shows the process are structured and the market is good. A target number to reach would be to have a Compound Annual Growth Rate of 15% or more.
- Company size. The bigger the better for valuation. So buying a small company and transforming into something big will have a big impact. The higher annual revenue also will be more attractive to buyers (from 0.5 to 1.0x).
- Profits. Calculated as earnings before income taxes, depreciations and amortization (EBITDA). Usually the price of the company will be a measure of pre-tax cash flow – between 4 to 10 times.
- Predictability. The ability of a company to remove randomness, and get precise projections on sales, revenues, costs, expenses, and cash flow, budgets… All the processes related to these (customer acquisition, retention…)
- Good numbers. Short cash cycles, simple equity structure, and few abilities.
- Liabilities. What are the risks of acquisition ?
Customer’s related processes
- Customer’s service. How is the company currently serving it’s customers ? What are the KPI’s in that area ? What kind of relationships the company build with it’s customers ? How are these measured on a regular basis. What is the relationship with the brand and it’s values ? What does the brand stands for ?
- Customer’s retention. What is the average customer’s retention ? How is this currently measured in the company ? And what processes are in place to measure and develop that ?
- Long term contracts. Their presence show trust and ability to deliver consistant service over time. Having more than 6 month contracts average is considered good, while less than 3 month is not.
- New customer’s pipeline. Proven pipeline strategy with specific numbers is good. A full pipeline will be excellent for valorisations. Here are some target numbers : a pipeline exceeding 3 times annual revenues in total potential is considered good. A pipeline that predicts clearly future revenues will have logically high value for buyers.
- Long term contracts or indefinite contracts is also high value.
- Direct customer. Having direct customer relationship is much better than subcontracting. More than 75% direct customer is favorable.
- Customer’s segmentation. Having a regular steady pool of customers is essential for high valuation ; none of any being more than 20% of your annual revenue, otherwise there would be a high risk of loosing one customer.
- Business recognition. Having a know brand in the industry that produces a continuous flow of customers and sales a substantial staff credential and corporate awards if favorable (much better than having multiple customers in multiple industries)
- High end products. Having high end products are valued more highly than low-tech products because of higher margins and stability over time. Plus it brings a barrier of entry.
- Intellectual property. Proprietary software or patents, or processes, domain names, websites, apps, bring more value.
- Effective organization lead by a solid management team with ability and experience and good vision of the strategy is highly valued.
- Credentials. Staff with high credentials recognized in the industry is also highly viewed. High employee retention rate.
6) No process
If the business you’re thinking about buying doesn’t have a procedure manual, this is definitely a task that will have to be done. These manuals should describe how things are done so employees or future owners can conduct business efficiently and repeatably, even if no one is around. The manual describes the process and procedures to operate the business like :
- the roles and responsibilities of everyone in the company
- management meetings
- business development strategies
- marketing strategy
- sales reporting and forecasting
- project management processes
- product development and quality control
- customer service
- purchasing (approvals…)
- shopping and receiving
- cash management
- business hours
- equipement operations and maintenance
Consider an Wiki style manual for the procedures, it’s much simpler than hard copy manuals. You don’t need to hire the best people in the industry ; you need successful procedures and structured training that produces consistant results independant of the people we hire.
Personally I’ve learned a lot by all the research I’ve done through this articles ! It’s been an eye opener about how to structure a business in order to sell it to high valuation. It’s pretty clear that without looking at these criteria we can delude ourselves about real value of the company we build, as entrepreneurs.
However I feel much better equipped with a precise direction to go to. For SMA I think the lessons are multiple : design process to write articles, decompose the work that will be done to develop the blog, and structure it in form of processes… I think probably the next article i’ll need to write will be about proceduring everything we do here and start creating processes.
What about you ? What’s your take on this article ?