We were understandably gratified when our principal and designated broker, Carrie Allen CBI BBS, was contacted by Fox Business News' Small Business Center to share her thoughts and expertise on the process of buying a business. As a leader in the Arizona Business Brokerage community, and recipient of the Business Broker of the Year Award in 2007, Carrie is an inspiration to our team, and leads by example by setting the highest standards of competence in our industry. There's nothing wrong with pumping up your boss once in a while, particularly when it's true, is there?
Our thanks to Cindy Vanegas of Fox for giving Carrie the opportunity to share some her thoughts, which she did with the same straightforward candor and integrity that our customers have come to know and appreciate.
Here's what Cindy's article, entitled "5 Questions To Ask Before Buying A Business" had to say:
After launching two Internet ventures while in college, entrepreneur Sean Bandawat decided to purchase an existing business over building one.
“I was attracted to the idea of having an established customer base, established revenue figures and established assets,” said Bandawat, president of American-made housewares manufacturer Jacob Bromwell.
While buying an existing business may present fewer start-up struggles, the business may be plagued with symptoms that can cause plenty of headaches down the road. FOX Business consulted a team of advisors to find out what buyers should consider before signing a purchase agreement.
The Business Broker’s Two Cents:
If you are struggling to figure out exactly what kind of business you want to buy, you may want to consider hiring a business broker.
At Allen & Young Business Brokerage, broker Carrie Allen helps buyers match their skill sets to opportunities within industries of interest. Once an industry and business type have been selected, Allen then looks at her client’s financial position and the business’ potential return on investment.
“We determine how much they are willing to invest of their own money and take into consideration the amount of money they will need before taxes to live on,” said Allen.
A broker also helps in pricing the target business, which according to Allen is typically pegged to one to four times the business’ current earning level.
Lastly, Allen asks her clients to analyze business risk by answering questions such as:
- What is the customer concentration, longevity and likelihood that they will go away?
- Is there layered management in place that will allow the business to operate without the owner having to spend every single minute there?
- Is it easy for someone to come in and do same thing at little cost, and with little experience or licensing?
An Attorney’s Perspective:
A common mistake buyers make is not bringing an attorney into the decision-making process early on.
“One of the first things I do with clients is make sure they understand what they are buying,” said attorney Mary Budge, founder of Budge Law Offices. “They need to be able to tell me if they are buying assets, such as customer list and equipment, or the business, with the warts and ugliness that come with it.”
Before delving into specifics about what the business will require, Budge recommended that entrepreneurs be able to answer these questions about their target business:
1. What am I buying?
2. How much and how am I paying for it?
3. What is the financial background of the business?
4. What is the timing to close?
5. What is the reason for selling?
A lot of this information will come from the current owner’s records so “don’t be afraid to ask questions,” advised Budge.
The CPA’s Word of Caution
One of the most important factors in assessing a business’ financial health is a thorough inspection of the numbers.
CPA Dianne Goodman, founder of Comprehensive Small Business Solutions, reviews documents, such as checks, bank statements and accounting, from which financial statements are derived.
Goodman likes to ask questions and advised that buyers bring a CPA into conversations with the seller. “You can learn a lot by the way they [the sellers] respond to the questions as to whether there is integrity in the numbers,” she said.
Goodman recommended that buyers consult an accountant as soon as they have a target business in mind.
“You should not be the one analyzing the financial statements unless you understand how they work and know what to look at,” she said, “We have a flavor for how a business should look and can spot right away if things are out of sync.”
According to Bandawat, Jacob Bromwell has now had two years of increasing sales, but not without some shortcomings.
“We underestimated the amount of cash we would need to run the company,” Bandawat said, “It is very attractive to acquire an existing company, but it does not mean it will be less of a burden on cash. Truly understand how much cash you will need to run and grow the business. And, if you don’t have that cash, know how you are going to get it.”
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This incredibly helpful post by Justin originally appeared here on FlipFilter.
We wanted to share it with you because it provides an excellent discussion of what is happening in the market as regards sellling internet businesses and websites. It predicts that, one day, internet businesses will be bought and sold much more readily as they become more common and better understood. There is also a discussion at the end of the emerging role of business brokers in this category of business sales, as well. It's important to remember that online businesses are --well, for lack of a better word -- businesses. In that sense, when it comes to buying and selling them, all of the same criteria apply that would apply to a normal bricks and mortar business, plus a few more considerations unique to an internet business model.
If you're looking to sell an internet business, or would like to explore the possibility of acquiring an online business, we can help you with that too. And, for what it's worth, we have a very small office, a virtual business model, and wear very normal shirts:) When you work with Allen & Young, you're getting expertise and integrity, not image and attitude.
Here's the article
Lately I’ve studied hundreds of solid, profitable websites for sale at the $10K – $150K end of the spectrum, but looking at the market on the whole there’s a definite change from this time three or even just one year ago.
Some changes are merely reactions to new technology; for example we’re seeing more sites built around Facebook or Twitter simply because their APIs probably didn’t allow then what they allow now. Other changes are definite trends – things that are probably difficult to quantify (for example, how do you measure ‘buyer sophistication’) but are still noticeable if you’ve been studying the market for sometime.
The following is a summary of what in my opinion are the most important changes to happen over the last year. This is in the hope that if we can see where the market is generally heading, we can design offerings better placed to give people what they want and ultimately sell quicker and for more revenue.
** At several points in the article I’ve borrowed the term ‘small cap’ to refer to sites that typical sell for less than $150,000. It has nothing to do stocks and shares.
Larger Gaps in Valuations
Originally, when very few people had much of an idea as to how to value a small – medium sized website for sale, multiples of monthly profit became the accepted norm, with most sites being sold at 8 – 10x monthly gross revenue. (Originally, most of these sites were content driven, so I can only assume that net profit was close to gross revenue as margins were typically very high).
Over the years this changed and morphed into an accepted figure of around 7x monthly net profit valuing sites much lower, but more realistically. Lately we’re seeing less of an ‘average’ (or technically speaking ‘mode’, if you’re a stats geek!) and more of a divide with sites either being valued at around 4 – 6x monthly net or significantly higher, with little ground in between.
On example is Petspeopleplace.com, which I wrote about in an earlier edition of Flippa’s A-List newsletter. This site was a good ‘old-fashioned’ portal, which had everything from forums, to classified ads for pet lovers. The site had a claimed net monthly profit of $2,282, but sold for $95,100 (and so far, the sale seems to be valid) which by ‘small cap’ standards would equate to a multiple of 42x monthly net. PPP are not alone; it seems more sites broke conventional valuation on Flippa in the last 12 months than any other year previously. What they had in common is the subject of an upcoming post (stay tuned here), but as an overview, they all
- Had revenues > $1,000 per month and usually significantly higher
- Kept an up to date mailing list and list of members
- Most (not all) had a documented system that detailed day to day operations
- Had multiple web formats (content blog, forum) and often multiple domains included in the sale
It seems that sites which ultimately sell for over $25K are moving more towards the valuation model favoured by more established internet businesses and offline companies, typically valuing a web business for sale at 4x EBITDA (effectively 48x net monthly profit).
(If you’re interested in the multiples that larger web businesses are currently achieving, I’ve found a free report by Software Equity that should provide some light bedtime reading)
Buyer sophistication improves
We’re in a market that I would guess is still at the very early growth stage of its lifecycle, and there are a lot of changes still to take place. There’s been a shift in the mindset of buyers for both new and more experienced owners.
New owners generally have a different mindset about the ‘primary problem’ they face.
- The rise in popularity of WordPress has made it easy for new entrepreneurs to build a site rather than have to buy one. People are now less likely to buy a site simply because of technical issues they might face in building it themselves.
- As more people attempt to start their own site, the ‘primary problem’ has now shifted from “How do I create a web site” to “How do I attract traffic”. This is probably why starter sites that offer to solve the problem of attracting new visitors outsell those that don’t.
Overall, new buyers appreciate that buying a site which already has traffic (and a system in place to keep generating it) will solve their biggest problem and justify buying a site rather than building it from scratch.
More experienced buyers also seem to have had a mindset shift; previously, a site would often sell purely on the strength of its revenue (or at least it seemed), but more big-ticket sales are taking place for sites that have relatively little revenue, but masses of targeted traffic. My assumption is that potential buyers are more commonly recognising potential in a site, thanks to education (blogs and forums) and experience in their own sites and previous purchases.
As companies move from one main site to having several sites in a niche, new motives arise for purchasing a site and each one gives the website for sale a different value to the person buying.Taking the financial industry as an example, a business insurance lead gen site that sells 100 leads per month at $50 per lead will typically generate $60,000 per year and be worth around $40 – 80K to the right buyer (Buyer A) who purchases it as a standalone business.
If a company with several sites in the business services niche (e.g. insurance, loans, payroll) decides to buy, it will have an entirely different value to them, especially if they know their lifetime value of a customer. If this value was $400 for example (from other services the client purchases across their other similar sites), they will generate $480,000 annually (8x the amount Buyer A would be able to generate), assuming all the leads are unique clients.
This scenario is becoming more commonplace as established offline companies are starting to notice, and purchase sites in the ‘small cap’ end of the market (especially in publishing). We can certainly expect to see a rise in competition for sites that have a strong presence in their niche, good traffic and a solid domain. There are also signs that more individuals and businesses are recognising the benefits of ‘mini-mergers’, buying similar sites purely to share traffic and advertising costs whilst increasing member retention across their newly formed group.
Domains become even bigger business
If I had a dollar (or preferably a pound) for every time I saw a lack-lustre site sold for a crazy valuation simply because of an aged or high PR domain, I’d be able to buy my own Pussycat Doll. Domains have always mattered to internet business sales, but never as much as they do recently.
My guess is that it would be in connection to the last point about buyer education and sophistication. Buyers are being constantly reminded as to the value of a good domain (good = keyword match, aged or high PR) that will ultimately help you rank for more terms in a shorter time span. Bloggers like Kenny Goodman are doing a great job leading the crusade and tools such as Domain Face, Fresh Drop and of our own FlipFilter Aged Domain Finder make it easier than ever to find ‘good’ domains.
The effect of a good domain is probably more noticeable at the sub $20K end, but it still matters across the spectrum. For example, you can pick up a PR4, aged .com with several backlinks for less than $50, but when coupled with a basic content site, the valuation (which would typically be around 7x net monthly) seems to jump significantly and hovers around the 12x mark when compared to a similar site on a regular domain.
Mobile Apps start to make their way to the market
There have been a small number of sales on Flippa for IPhone applications and I think the rate is going to increase exponentially in the next couple years.
Unfortunately, there’s a problem with selling standalone IPhone Applications. Every IPhone app is linked to an Apple Developer account ($99 per year) and all of the app’s sales history, downloads, reviews and ratings in the ITunes Store are linked to this account too. If you, as a developer, want to sell the app to another developer you have two choices:
- Sell the code only. This means the new owner has to have a developer account and re submit the application to be listed (which to Apple will look like a duplicate of a pre existing App). If the application is successful, all the details mentioned earlier will be lost.
- Sell the developer account. Probably the most viable solution, but a problem if the developer either wants to keep existing apps on this account, or develop new ones.
For iPhone applications, neither solution is ideal, and my guess is that we’ll initially see a few sales of entire portfolios of applications until someone finds a workaround.
On the other hand Android Applications offer an opportunity. Currently, the Android market is only a fraction of the ITunes market (approx 20%), but in $ value this is still significant. Amazon have recently entered the sector with their own Android Marketplace (with free registration for the first year). I don’t know Google’s T&Cs relating to the sale of Android Apps, but I would assume that it’s significantly less restrictive than Apple’s, presenting an opportunity for an owner to sell the right to an app to a suitable buyer.
Mobile Applications have an entirely different lifecycle and valuation process, mostly because they have a relatively short lifecycle compared to a website. Developers will often have a portfolio of other apps so I would expect there will initially be a lot of ‘off-loading’ of weaker apps, until the market grows and we start to see more profitable applications appearing for sale.
More than just Sites
Just as the type of websites being sold have evolved from simple content sites and blogs, the ‘package’ is starting to evolve too with more buyers offering more than just a website for sale. Take a look at these examples.
- More buyers are selling the company rather than just the site, which effectively will come with the company’s trading history, financial accounts and bank account. This will (theoretically) make raising finance for a new owner much easier.
- Some sites are being sold with exclusive contracts for distribution, national licensing or even grandfathered supply agreements that provide a product or service from a distributor at a preferential rate.
- In the past, it wasn’t uncommon for a physical product site to be sold along with full rights to a product the company had produced or licensed, but some sites are starting to appear which have granted patents, or patent pending technology included in the deal.
Coupled with the rise in mobile app business sales, I would expect there to be a significant rise this year in entire companies being sold rather than just the sites. This will create a gap for specialist legal and business transfer services operating specifically in the online business market. (And someone needs to give escrow.com a run for their money!)
There also seems to be some emigration from the traditional offline business sale market. Previously, many product companies who relied on their online presence for sales (and had no offline retail presence), would list their site alongside other offline businesses effectively as a ‘offline businesses for sale with an online presence included’. It’s only a hunch, but I think there’s a shift towards these same types of companies now listing as ‘online businesses for sale with an offline presence included’, both with brokers and in places like Daltons and BizBuySell. Many of these businesses have staff, offices and sometimes warehousing included in the sale but their primary marketing channel (the internet) will allow them to classify themselves as an ‘Internet Business’.
As technology patents relating to software catches up with the changes in technology on the whole (it’s still notoriously difficult to patent code), expect to see more businesses applying for patents and those assets being included in a business sale. It’s unlikely that we’ll see this at the ‘small-cap’ end of this market though.
Rise of the broker
They’re loved a little more than Realtors but probably less than Attorneys, and they are, to some extent, another necessary evil. High value transactions have always seen involvement with brokers, but there is a trend towards sites, typically in the $30K – $150K bracket, having broker representation too. This seems to be due to smaller niche operations appearing that due to lower overheads can afford to represent sites with a smaller potential sale value.
A combination of Flippa’s ‘double selling’ agreement (preventing listing outside of the site) and most brokers’ snobbery towards the service means the two shall probably never meet, at least for the short term.
Expect to see more brokers starting their own ‘mini marketplaces’ for the sites they represent. Further down the line, HTML 5 microformats combined with Google’s desire to scrape the world could see more and more business listings appearing in their classified search results, giving much wider exposure to a fragmented industry.
Less of a prediction, and more of a whim (or wish!), but I think eventually, everyday people will invest in online businesses in the same way that a parent may buy a property to give their child a residual income, or to contribute to their pension. That’s still a long way off, but as an industry we’re moving in the right direction and we’ll probably see the most change over the next five years.
This post by Justin originally appeared on Flipfilter.com
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The business’ recent profit history is a vital consideration. The general condition of the business including its facilities, inventory, equipment, furniture and fixtures, the completeness and accuracy of financial records, employee morale are important also.
Market demand for the particular type of business in its particular area is another key variable. Economic conditions of the world, the nation or the region that might directly affect the businesses as well as the cost and availability of capital or financing are important considerations. But one of the most important things effecting the price is the future profit potential; the kind of return on investment that a buyer can expect if purchasing a particular business.
Often the assets are less important to the buyer than the profit potential, whereas the seller sees the assets as more important since they had to pay for those assets. An Allen & Young pricing analysis does include asset value in it’s consideration of value attributed to the business. It is important to be aware that businesses, especially small businesses with small market share, often do not change hands at fair market value. There are many reasons for this fact. Among them are the special circumstances (urgency to sell, available cash, motivation to buy, length of time involved, and/or the affinity or lack there of between the seller and buyer). Another factor that affects the purchase price is the tradeoff between cash and terms. The more all cash is required, the lower the purchase price tends to be. The better the terms for the buyer the higher the purchase price might go. Another consideration, often overlooked, is the relative tax consequences for the buyer and the seller. These will determine not only by the pricing, but also by the purchase is structure.
In short, be flexible and realistic about the price for which you will ultimately sell your business. By definition, a fair price for a business is the price which both a willing buyer and a willing seller, both adequately informed of the facts and neither being compelled to buy or sell, would agree upon. However, in the market place, buyer and seller are always acting on different levels of compulsion, emotion, rationale, and determining factors, so the process requires finding a price both can agree to, understand and be comfortable with, and satisfies their interests. It is not impossible; businesses do sell everyday, but require patience and understanding.
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