The Definitive Guide to Business Broker Terminology
The business of buying and selling businesses can be quite confusing for the uninitiated.
There are a lot of terms that are not commonly used in other areas of online business. We brokers have unique processes and, as a result, there are some unique definitions and terms that confuse people.
By the end of this guide, you will know every term necessary when it comes to brokering deals in the online business space.
Let’s get started.
The Ultimate Broker Glossary
To make it easier for you to grasp brokering concepts, we will try to keep these terms in order of how deals actually flow from the start of the selling process to the very end of the migration period.
A broker is an individual or a company that specializes in brokering online deals, i.e., making them happen. Typically, brokers make the buying and selling process a lot smoother. They bring experience to the table and often have processes in place that mitigate risk for both the seller and the buyer.
Deal flow is the actual number of deals flowing through a business brokerage. Smaller brokers might have very low deal flow as they only need one or two deals a year to make a significant income. Larger brokers, like ourselves, have dozens of deals going at one time, and we use our content marketing to amplify our market presence and increase our deal flow.
This is the area where the online business is operating and where their customers hang out. For example, you might have an Amazon affiliate business in the socks niche, or a Software as a Service (SaaS) business in the writing niche. Whatever product the business is actually selling is the niche as well as the audience that surrounds that niche. If the Amazon affiliate site selling socks happens to focus on athletic socks, you could say the broader niche for the business would be the sports niche or fitness niche, depending on how the content is written.
This is how the business actually makes money. No matter the niche, if you have an Amazon affiliate site, then the monetization strategy will always be through your affiliation with Amazon. This goes for SaaS businesses, too — regardless of what niche the SaaS product is servicing. Their main monetization strategy is SaaS.
A curated marketplace is where each business is vetted by a team to assure quality control. Typically, higher-value businesses will be found on a curated marketplace. The opposite of a curated marketplace is an open marketplace, which accepts every business. Currently, Flippa has the largest open marketplace, and Empire Flippers has the largest curated marketplace.
Vetting is the process we go through with each and every website that gets listed on our marketplace. The main goal of this process is to make sure that the business is legitimate rather than a scam. We check proof of income, traffic analytics, and many other different factors, looking at each website to make sure the site is doing everything that the seller suggests.
We take this information and use part of it for the semi-public listing of the business for sale. The rest of the information on the website, for example the domain name, is kept confidential from the potential buyer until they submit a deposit.
Profit & Loss (P&L)
The P&L statement is an extremely important document. It lists out the profit and expenses of the business on a month-by-month basis. However, it is not always presented month to month; some businesses will operate on a quarterly P&L or even an annual P&L. This can be a simple spreadsheet or a very detailed document that breaks down every expense in the business.
Not every business requires a P&L to be vetted and approved for our marketplace. The businesses that don’t are typically AdSense & Amazon affiliate sites. For these sites, we can use the affiliate account to verify earnings and — unless there is something unique about the website — there is usually few expenses beyond link building and content creation.
Proof of Income
The proof of income is checked during the vetting process. This changes based on the business model being sold. With an Amazon affiliate site, we look at the actual site through their Amazon Associates account to ensure that the income is real. Whenever possible, we prefer to see more than just screenshots since they can be forged. Initially, we do take screenshots for the partially public listing when the business goes live on our marketplace.
Proof of Traffic
We log into the site’s Google Analytics or Clicky account to check the seller’s claims about their site’s traffic. We then take screenshots of the traffic progression over several months of the business’s growth so that potential buyers can see how the business is trending.
Gross revenue is money that the business earns before any operational expenses are deducted. Net profit is what you get after operational expenses are deducted. For example, Amazon Fulfilment by Amazon (FBA) businesses are known to be very capital intensive. An Amazon FBA business might be making $30,000 a month in gross revenue, but the expenses might be sitting at $28,000, leaving only $2,000 a month of net profit for the owner of the business.
Expenses are the cost of doing business. Every business has a different grouping of expenses. An Amazon FBA or e-commerce business might have a very different set of expenses to an affiliate website. Some sellers break down their expenses in detail, listing one-off expenses and actual operational expenses.
An example of a one-off expense could be hiring a designer to make you a company logo, while an operational expense might be the monthly fees of a business owner’s Shopify account.
Add backs are expenses that should not be counted towards actual operational expenses. For example, if you owned a productized service business and decided to fly to Tampa, Florida for a huge conference on productized services, with costs of $12,000, you might consider this a business expense. Yet this expense isn’t an operational expense that the new owner will have to consider when they buy the business.
This is a term that gets thrown around a lot in the business broker industry. A multiple is the multiplication of a business’s net profit that gives the business a base sales price. If a business earns a net profit of $2,000 a month, then the multiple might be 24, making the business worth $48,000.
The valuation of the business is the actual list price that your online business gets when it goes live on our marketplace. The valuation takes into account the base multiple used for the business and then adds or subtracts various factors from the final listing price.
Some important aspects of a business that affect the valuation are the:
- Amount of traffic
- Lifetime of the business
- Size of the email list
- Complexity of running the business
And obviously, the business’s net profit.
The valuation portion is so important that we actually created an entire tool to help automate the process for sellers who want to know what their business is worth. While the tool provides a rough estimate, it is still a good guide for valuing your business.
This is the final price that a business is listed for on our marketplace. The price is determined through our personalized vetting process and our valuation tool.
The deposit system is something that we have created to help weed out tire-kickers and unqualified buyers. In order for potential buyers to see the full information on our businesses, they first must put down a percentage of the listing price. Once we know they’re genuinely interested and qualified, we give them more information on the business to aid them in their decision.
Due diligence is the research a potential buyer does into a business. For every potential buyer who has provided a deposit, their due diligence process is going to be different. Some will have very specific criteria, while others will have broader criteria that will open them up to buying many different businesses with varied monetizations.
Doing your homework on a new business prospect is important, so we devoted a whole post to the subject — The Due Diligence Framework.
Buyer Conference Call
A buyer conference call happens when a depositor starts asking more detailed questions about the business. As a depositor, the potential buyer is qualified to purchase the business. Our deal consultant will set up a time for both the seller and the buyer to meet on the phone — usually via a Skype call, on which our deal consultant is also present.
Our deal consultant then coaches the seller on who the buyer is and what they are looking for. While it is rare that a deal is struck right there on the phone, it does happen. If a conference call takes place, it typically means the buyer is very serious about buying the business.
The sale price is the price that the online business is sold for. For every broker, the difference between sale price and listing price is going to be different. At Empire Flippers, our businesses typically sell for within 10% of the listing price.
A wire is when funds are electronically transferred from one bank account to another. In the context of Empire Flippers, a wire is sent to Empire Flippers when a buyer decides on a business they are going to purchase. Once the wire is received, the migration process begins. After the site is fully transferred to the new buyer, Empire Flippers then sends the wire, minus our brokerage fee, to the seller.
The Wire Race
In the case that two buyers are simultaneously trying to secure the business, it’s the wire that comes in first that wins the business.
We talk about some strategies on how to win the Wire Race in this post.
Credit is a strategy that buyers use to make sure they get the business they want from our marketplace. In the above example where two prospective buyers send in a wire, the buyer whose wire came in later might decide to keep the money with Empire Flippers. Empire Flippers holds onto this money as credit, so that a website can be bought instantly without worrying that another buyer might again get first dibs on a business, with a faster wire transfer.
This is one of the best strategies to ensure you win the Wire Race.
Migration is the term we use where we transfer over the online business and all of its assets (site, domain, content, Amazon FBA listing, SaaS source code, etc.) from the seller to the new owner. This process is mainly handled by our staff, with some support from the seller. We change out all the affiliate links, push the domain to the new owner’s registrar, set up hosting, and take care of all the technical stuff.
After the migration is done, it is still not marked complete until the new owner has verified that the website or online business they bought is seeing the predicted traffic and income earnings that the site was receiving before the transfer.
Once the buyer is comfortable with the transfer, the migration is marked complete, and the profits from the sale are wired to the seller from Empire Flippers.
Earn outs are something that happen most commonly with bigger businesses in the $100k+ range, and only after negotiations.
An earn out is where a buyer has negotiated with the seller that they will put a down payment on the business and then pay the remaining sales price out over several months. For example, if a business sold for $350k, a buyer might put down $300k and then pay out the remaining $50k over the course of six months to a year.
Sometimes earn outs are tied to training goals that the buyer and seller achieve while working together post-sale. For example, if the business is a complicated paid traffic e-commerce business, the buyer may negotiate with the seller to pay the earn out after hitting certain training goals with the paid traffic education. This education could be anything from a simple strategy call to a full-blown screenshare showing how the paid ad strategy works and the intimate details of every ad set that the seller is using.
During an earn out situation, Empire Flippers receives the wires from the buyer and then transfers the earn out to the seller.
The total financial benefit to an owner’s business. From this cash flow, an owner must pay themselves a salary, pay business income taxes, purchase capital improvements (if required), all while putting savings away for living expenses.
Earnings before interest, tax, depreciation and amortization (EBITDA). The earnings of a business after eliminating non-cash expenses for depreciation and amortization, and after eliminating the discretionary expense of interest on debt and taxes. This is a measure of the cash flow of a given business, and is one of the more important figures to uncover during a business appraisal.
The first in-first out method of inventory accounting that presumes that goods that enter the inventory first are the first ones to be sold.
The last-in-first-out methodology of inventory accounting that presumes that goods that enter inventory last are the first ones to be sold.
The amount by which the price paid for a business exceeds the company’s Adjusted Book Value of its tangible assets and liabilities. Goodwill is a result of name, reputation, customer loyalty, location, products and net income, among other intangible factors.
A debt; a claim by an individual or entity against a property for payment of a debt that is owed to them. A lien is used to secure the payment of a debt or completion of a responsibility.
Purchasing a revenue-generating asset and improving or holding the asset to resell for a profit in the future. We see this strategy used a lot at Empire Flippers. Customers will purchase an online business and use their expertise to improve the asset. Once they have grown the business, they are able to flip it for a large profit.
Knowledge Is Power
The goal of this glossary is to make sure you never have to ask “what does that mean?” again. Hopefully, any confusion you might have had about certain terms or industry jargon has been cleared up.
Understanding what is being talked about will make it a lot easier for you to either sell or buy an online business. The more you know about the process, the more effective you can be in turning online businesses into a lucrative career.
If you were to invest in one thing, knowledge is always the best bet.
When you get confused about a term, head back to this page. As the online business broker world grows, there will be new terms, so check back periodically as we update it to reflect new trends.