How to Effectively Negotiate When Buying an Online Business
Opportunity always comes with a price.
When it comes to buying an online business, that price tag is often very flexible and negotiable. People look at our marketplace and often do not realize that while the listing price is what the seller desires, there is still plenty of room to negotiate.
Whether you buy an online business privately or use a broker, the ability to negotiate always exists. Of course, negotiation ability varies deal from deal, as every situation is unique.
One of the benefits of using a broker is enhanced negotiation ability because brokers see these deals day in and day out. This often gives a broker better leverage, as they understand what kind of negotiation would make sense in the first place.
Regardless of whether you use a broker or not, by the end of this article, you are going to be a far more effective negotiator. This will allow you to buy your online businesses at a much better price, which makes for a better investment.
Since we are in this to win this, as far as these businesses are concerned, a better investment is always something we should be on the lookout for.
Just remember, though negotiation can be a useful tool, it doesn’t mean it is required in every deal you make. Sometimes, you want to avoid negotiation altogether!
To Start, Forget Negotiating
Don’t negotiate? Isn’t that the antithesis of this post?!
This post is about helping you get the best deal, and sometimes that means throwing negotiations out of the proverbial window. There are a few reasons why you might want to forego negotiations:
- The business is being sold beneath market value
- The seller is being unreasonable
- Last minute changes
Let’s quickly explore these three concepts.
When a Business is Being Sold Beneath Market Value
While this rarely happens on our marketplace, it might show up in other marketplaces or especially in private deals. A quick way to judge if a website is being sold beneath market value is to use the 20x-60x+ multiple range.
We typically take the average of the last 6-12 months’ net profit and then multiply that figure by a multiple ranging from 20x-60x+, depending on a number of factors.[6-12 Months’ Average Net Profit] x (20 to 60) = Listing Price
How does a site end up undervalued?
Was there some shady backlinking that might ruin its future organic rankings in Google? Did the affiliate account attached to that website get banned? It is extremely important to find out the reason why the website is undervalued if you plan to pursue any negotiations.
It could be an honest error on their part. Or, if the website is being sold privately, the seller might have run into seller’s exhaustion trying to find qualified buyers. Since most sellers don’t have a huge buyer reach like brokerages do, many times they will take far lower offers out of an almost pure desperation to get the website sold.
But what happens when a seller is just not working with you?
When the Seller is Being Unreasonable
This is something you will want to take into serious account, especially if the business you are buying involves a lot moving parts like Dropshipping, Amazon FBA, or eCommerce businesses.
If the seller seems noncommittal in handing everything over, seems as if they might not introduce you to the suppliers, or something else key to the business, it might be best to move on.
There is one way to mitigate risk with an unreasonable seller, and that is to use a professional broker, like Empire Flippers, who will take extra measures to make sure that the buyer is satisfied before releasing the funds to the seller (at least that’s what we do with every deal we broker!)
Obviously, we’re biased in this case — but the truth is, if you were doing a private deal, it might be very easy for an unreasonable seller not to give everything you need to run the business successfully. Then they just up and disappear, with your hard earned cash.
We definitely don’t want to see that happen!
A professional brokerage can hold the funds and only release it upon the successful handover of the business (including any kind of required training, supplier information, etc.).
If you are doing this deal privately and you are getting an uneasy feeling from the seller, it might be better to just move on completely from the deal, rather than wasting time negotiating with someone who has already proven to be pretty resistant. There are plenty of businesses online to buy, after all, so there is no shortage of opportunity for you.
Plus, moving on might end up saving you a huge headache, or worse — a financial disaster — if the business wasn’t transferred to you as promise with all of its working parts in order.
When There are Last Minute Changes
You have talked through the entire deal, done your due diligence, and have agreed upon the list price. Everything is done, and the business has started the migration process.
That is when you ask for more, a classic mistake by people new to negotiating.
Maybe you decide you want to pay even less, or suddenly ask for a lot more training or something else along these lines. This is the worst time to negotiate because the deal is already closed. Both sides already agreed to terms.
If you want to keep negotiating, avoid agreeing with the terms until either your needs are met, or the seller come up with a comparable compromise that will work for you.
No one likes someone changing up the program in the final act.
By asking for last minute changes, you could seriously hamper or destroy a carefully crafted deal altogether.
Negotiating Done Right
Now that you know some of the reasons why you would not want to negotiate, let’s explore the much more fun section — when you should start wheelin’ and dealin’ to get the best investment!
Just as above, there are a few reasons why you would want to negotiate:
- The business is overvalued on the marketplace
- If the business is relatively new
- If the business has a Private Blog Networks (PBN) associated with it
- If the business contains a lot of moving parts
Let’s look at each of these concepts a little deeper.
When the Business is Overvalued
This is something that most often happens when a website is sold privately by the owner. Just like an undervalued business, with lack of oversight from a broker, a seller could be likely to overprice their business as well.
This is especially true if it is their first business, as the seller usually has an emotional relationship with this business.
While a business is usually undervalued by a private seller after they get frustrated and exhausted with the pool of unqualified buyers, an overvalued site usually happens right at the start — when the seller is overly optimistic about being able to unload his beautiful gem of a site.
This can also happen with a brokerage, too, but it is unusual.
Typically, a brokerage that overvalues a business often is doing so just to get the listing (see other things a shady broker might try to do here). Then once they have the listing, they will encourage the seller to bring down the price of the business, so that they can actually attract more serious buyers. This is not always the case, but it does happen.
On average, our marketplace listings sell within 10% of listing price. We are fairly good at valuing businesses (we did create a Valuation Tool after all), but there is often wiggle room in prices.
Sometimes it is not even about price.
Sometimes a buyer will want to put down 80% of the listing price, and then pay 20% after migration and some training. This is totally fine, and many sellers are more than open to this idea.
As we mentioned, we help mitigate risks, and one thing we have done in the past is collect 100% of the money upfront from the buyer, release a portion to the seller, then hold onto the remainder until both parties are satisfied with the migration and transference of the business.
While not every deal works out this way, it is just another potential advantage of having a broker in place when the time comes to buying a website. You know the seller will want to comply to their end of the bargain if they hope to get the full amount. You are able to pay in good faith, through a safe process that mitigates most risk.
A good way to tell if a business is overvalued is if it is above the 30x multiple numbers, or even close to the 30x. There are some legitimate businesses that deserve this kind of multiple, but it is a much rarer occurrence, and so deserves extra due diligence.
When you do make a counter offer, don’t lowball the seller. This is the easiest way to offend someone and make them go from a reasonable seller to an unreasonable one, as mentioned above.
Instead, put yourself in the seller’s shoes, and offer them something you would consider is a genuinely good deal for the website.
Many brokers, ourselves included, will have a deal consultant that will help you and advise you on what to do in these situations, such as we do. Since a deal consultant will represent both sides, they tend to be more neutral and able to create win-win situations, where both the buyer and the seller are happy with the transaction.
When The Business is a New Business
This is a pretty straightforward area to negotiate on.
If a business is less than 6 months old, you are going to have a lot more wiggle room, and you should negotiate the price down. If the website’s main source of traffic is organic search engine traffic, it is especially important to negotiate.
A website that has only been around for a few months may not have had to go through a Google update yet. This means that when the Big G does update their algorithm, the website could suddenly be drained of all that profit producing traffic overnight.
This is just one risk with buying a new business.
Other risks could be the affiliate account, or a paid traffic source, being shut down if they decide they do not like the content or the offers you are promoting on your website.
And you shouldn’t even look at a business if it has less than 3 months of profitability under its belt — which is our requirement when it comes to listing websites on our marketplace.
(There is an exception here, like the case of this business that was only a few days old when it was bought for $85k and went on to do sales in the high six figures — in these super rare cases, make sure to do some very good due diligence and really ask yourself if you have the skills to handle this risk.)
When It Depends on PBN Links
Private Blog Networks (PBNs) are a very popular method for SEOs to rank websites. In its most basic form, a PBN is a collection of websites that the business owner bought and uses to rank very favorably in Google (read more about the risk and rewards of PBNs here).
Since the main website is favored by Google, the business owner will set up these websites on different hosting and registrars, and then create content, using the articles and information pages to link back to the actual website that makes them money.
While PBNs are not going away anytime soon, and they can be extremely safe, it is still something you will want to be wary of. A PBN that is poorly set up could lead to your new purchase being deindexed completely by Google during the next algorithm update. This can be devastating and could totally kill all the profits of the website.
The first thing you should find out from the seller is whether or not you can acquire the PBN yourself. This way the seller can’t just remove the links after you buy the money-producing website. It would also allow you to make sure the PBNs are safe by following best practices (plus you could use the acquired PBN network to rank other money producing websites of yours in Google search).
If the seller won’t give up the PBN, make sure they at least give their word to the permanency of the links. Also, this would be a good time to negotiate on price, using the PBN risk as a reason for the seller to come down on their price.
When There are Lot of Moving Parts
Some businesses are just more complex than others.
While an Adsense or Amazon affiliate business model is fairly simple to migrate over to a new owner, other types of online businesses can propose a bit more of a challenge.
Usually, this crops up in businesses such as Amazon FBA, eCommerce products where the business owner is sourcing the products and storing the products, and dropshipping businesses where there is a list of vendors.
Typically, the price will still stay within 10% of the list price (if you are looking on our marketplace), but there are extras you can negotiate on here.
Usually, this comes in the form of training, and the seller offering some after sales support to the new buyer.
It could be a week’s worth of training or even a couple months of email support for the new buyer. All of this is negotiated before the sale is made.
In a situation where a broker is used, the brokerage will hold the money until all terms are met and then release the funds to the seller. Sometimes the buyer will put down a portion of the listing price and pay out the rest after training is done or after support is no longer needed.
The Savvy Negotiator — More than Just Price
As we have mentioned, the price is only one part of the negotiations. There are other elements at work here as well.
We already talked about PBN transference or at least negotiating for permanent links on the PBN that the seller used if they’re unwilling to sell off the PBN completely as well.
There is also the idea of exclusivity and non-compete.
These two things are very important. You don’t want the seller to go and start a brand new website in the same niche, the moment they sell this one. Make sure they agree to a non-compete before you agree to the final sales terms.
As we mentioned above, training can be an important asset to have when negotiating.
Yet, there are also situations where you can actually have the seller do some work on your behalf. These are often seen in more complex businesses where there is an inventory to manage. You may be able to get the seller to agree to work on the business and help you manage the inventory for the first couple months after it is under your ownership.
Finally, you can decide to do an earn out for the business.
There are a few different ways to arrange this. Not too long ago we had a business where 80% was given upfront and the remaining 20% was paid over the next 3 months, using 70% of that website’s net monthly earnings.
The advantage of a deal structure like this is that it can be used as leverage for your other negotiated terms. When you do an earn out where the seller only gets the full amount for their website if they keep up their end of the bargain (such as doing some work, like offering training or email support), it can take more of the risk out of the acquisition for you.
The Negotiation that Works Best
You do not want to lowball the seller on price.
You want the seller to be on your side, and the only way you will get that is by offering something respectable for the business that they are trying to sell (and often have an emotional attachment to). There is an old saying in sales and marketing, “People buy from people that they know, like, and trust”.
If you are going to get the seller to work with you, they have to buy you — you want them to want to sell their business to you, specifically. When they have that desire, they are going to be more flexible, and try to accommodate you to the best of their abilities. As you and the seller go back and forth, you need to mention your concerns.
Be honest. If you have real criticisms of their business, be constructive about it and demonstrate why this is important to you. Most sellers respect this kind of dialogue, and it can significantly lead to much more lucrative negotiations than if you had blatantly told the seller parts of their business sucked and they should just give it to you for a lower price.
One of the best negotiation strategies, and of course I’m biased, but I find this holds true, is to simply have a third party involved. A broker acting as an intermediary, that helps to facilitate the deal, can lead to a much better experience during negotiations.
The broker represents both the buyer and the seller, and both the buyer and seller know this. Because of that, they realize the broker wants everyone to walk away from the deal with a warm happy feeling. A broker has seen countless deals and negotiations and knows where there is wiggle room or where a buyer is being unreasonable in their demands.
One the strategies we use personally here at Empire Flippers are Buyer-Seller calls. These calls are set up between the business seller and the prospective business buyer that has put a deposit down to gain access to more details about the business. These calls allows the buyer and seller to “meet” and talk out their various concerns. Before the call starts, one of our deal consultants will be on the phone with the seller and will coach them throughout the process.
Our deal consultant also can also talk with buyers on their own to advise them regarding their best options.
This kind of call is great for hashing everything out, and it is a good way to get a seller to get to know, like, and trust you. That is the first real foundational thing that needs to happen to make the seller as open to the idea of negotiating as possible.
Closing the Deal
Negotiation strategies should be used when appropriate and totally avoided in other situations where it could hurt or even kill a deal. Some people view negotiating as a way to get as much as possible out of the seller, but I would dissuade you from this line of thinking.
Instead, you should be negotiating from a platform that you believe is fair for the seller and also a good deal for you. The more you can make your negotiations work so both you and the seller win, the more likely your negotiations are going to be more effective and actually work.
It is important to remember, too, that there is often more to be negotiated than just price. Training and support can be just as or even more — valuable than buying a business for lower than its list price.
At the end of the day, using a third party broker will often allow you to get a much better deal, which is why we recommend brokers whether you choose us or someone else. If you do decide to use a broker, we recommend someone like us that vets the actual websites they sell and also oversees the entire migration process of switching the business over from the old owner to the new.
Now that you know how to negotiate, it is time to put that knowledge into action. You can check our current business listings today by clicking here.
Great tips! There are definitely times when negotiations are appropriate, and when they’re almost disrespectful. Knowing the signs and how to deal with them will help any buyer with purchasing a business. Thanks for sharing!
Glad the article was able to help you Heather! 🙂
Thanks for the article – very informative and spot-on I think. I’m a newbie norm and appreciate the guidance!