WES S02E08: Making Offers And Closing The Deal
Now that we’ve looked at the various types of deal structures you can implement, it’s time to close the deal.
Nervous? You don’t have to be! In this episode we walk you through the tricks and tactics you can use to come to a win-win agreement that will work for both you and the seller.
Whether you’re using a broker or working out a deal directly with the seller, we’ll cover the various processes so you can feel confident heading into the deal and all the way through the process.
This can be one of the most exciting (or costly) periods in the buying process. Your next moves will determine whether you walk away with a steal…or empty-handed.
Do you like the show? Please stop by iTunes and leave us a review! We love to read the feedback and will give you a shout on an upcoming episode!
Listen To The Full Interview:
What You’ll Learn From This Episode:
- What’s The Process
- Letter of Intent (LOI) Process
- Empire Flippers Process
- Private Purchase Process
- Our Best Tips On Closing The Deal
- Find out what the seller REALLY wants!
- Get the broker working for YOU! (Insider trick)
- Be mindful of the seller’s ego/feelings
- Consult your Accountant/CPA about tax benefits
- Be SUPER clear about the terms and deal structuring
- Make it clear you’re a good fit for the business
- Be understanding if seller responds with a touch of hostility
- If deal stalls, rely on broker. (Or lawyer / 3rd party)
- If you’ve been through several rounds of offers, give the seller a small win to close the deal
- Don’t rely too heavily on contracts post-sale
Featured On The Show:
- Empire Flippers
- Empire Flippers Podcast with CPA Mario Lucibello
- Web Equity Show Podcast with CPA Mario Lucibello
Justin Cooke: You want to team up with the broker? You both have the exact same goal getting the deal done. So the more that you guys can coordinate and figure out “okay, how do we need to get this thing done?” The better.
Female Speaker: Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show where thousands of successful entrepreneurs go to learn about buying, growing and selling online businesses. Your hosts Justin Cooke and Ace Chapman share their real life advice, examples and expert interviews to help you build and grow your own online portfolio. Now to your host, Justin and Ace.
Justin Cooke: Welcome to the Web Equity Show I’m your host Justin Cooke, I’m here with my co host Ace Chapman today, we are talking making offers and closing the deal. This is one of the most fun parts about actually getting the deal done can be a little scary, a little hairy, but we’re going to be excited to be talking to you about this today. What’s going on guys, how you doing, buddy?
Ace Chapman: I’m doing great man. Right now they are a lot of deals going on that makes me very happy boy. So I’m excited to jump into today’s episode.
Justin Cooke: Yeah, we got a ton of deals going on and a ton of negotiations and offers being made on your side, on our side with other clients sure you gather deals going to, so it’s been really exciting I’d say a couple of months, for this episode we’re really getting into the final stages of the deal now, in the last episode, we talked about all the different types of deal structures and that’s kind of like arrows in your quiver. Those are bullet points you can use to make the offer but today we’re going to talk about actually making that offer and how you can do things like turning their broker the sellers broker over to your side, and we’re going to get into all this stuff today.
Ace Chapman: Yeah, one of the toughest things is emotions are high when you get to this stage and so having a game plan definitely helps out and we’re going to walk through all that.
Justin Cooke: Okay, before we do that let’s get into the listener love section. We got a question from [inaudible 00:01:54] had a question said, “I’m super pumped about this guy’s in the middle of closing an equity round of investment for a SaaS company, we’re getting a very good multiple on the equity stake restarting around five times sales,” wow in five times sales, that’s fantastic. Goes on to say, “we have put in a great team in place since this past October, update the software, close some sales deals. So a little more complicated and deals used this discussing the podcasts. But the principles still apply. Do you think you all can do an episode or two on minority investment? Thanks, Lam.”
Justin Cooke: Well, then we’re not doing episodes on these topics, but we will talk about this briefly at the top of the show. First off, I should say this is outside the scope of what we do in terms of minority investments. It’s not really I can’t speak about that as a professional [inaudible 00:02:39]. Can you make a professional opinion on that? I can give you the Justin opinion, Ace will give you that the Ace opinion based on our experience?
Ace Chapman: Yeah, so I’ve done quite a bit of minority investment especially with my clients, where we’ll go out we’ll find a deal and I’m best alongside of them in the deal and I’ve taken minority investment, a lot of the deals that are in my portfolio right now, but when it comes to those types of things, it’s more impact to be like 10 episodes there’s so much that goes into this so many different ways to structure those deals that it’s one of those things that you’ve got to figure out one by one each investor that you deal with us looking for something a little different but it’s a great I mean the deal that you’ve got the sounds like that’s a great start to be at five times sales, so that’s the one thing I will say.
Justin Cooke: Yeah, you did well there, right, you’re getting a nice valuation there. Well, what I would say is that from the person taking on the investment so you’re taking on 20-30% and this is a lifestyle business, small high growth we’re going to be like Facebook kind of business right, with SaaS can be so I don’t know the situation you’re in, but let’s say it’s a lifestyle business doing well it’s growing quickly but not super stratosphere growth.
Justin Cooke: It can be a bit of a burden for the person take on that investment if you’re stuck hanging out and say 20-30% a month or quarter to your investor, right? So we can limit Yes, you get that initial cash influx, but it can be a little rough on cash flow long term it can stunt growth, I think so there’s a bit of an issue there. Unless you’re using that money, as the person taking on the investment, let’s remove using that money for very high growth opportunities. If you’re just kind of continuing to run your business day to day, I’m not sure that you’re going to get a great return on that and your cash flow is hard.
Justin Cooke: There also needs to be a path toward an exit if you’re the person coming in with the minority investment, if it’s a lifestyle business that you’re investing in, or it’s kind of moderate growth company, that there has to be some kind of plan to exit otherwise, you’re not going to get your capital back. Like, how do you get the money out of someone’s kind of lifestyle business? Makes it really tough.
Ace Chapman: It does. And if you’re in a business that you feel like, “hey, long term, this is a business that I just want to have control of. I want to be able to decide what I want to do with it.” Even if they’re minority you don’t want to take them on, even if it’s a great deal and all that. And so I’ve just seen where you end up with these very tough situations where somebody has control. But the other person isn’t happy with what’s going on in the business. And quite honestly, we’ve taken advantage of situations like that, we’ve got two partners in the deal, they raise some capital, that person, they’re both just absolutely annoyed with each other. And they want to exit the deal as quickly as possible, just so they don’t have to deal or talk to that person anymore, and we come in and we get a great deal on those businesses.
Justin Cooke: I can see how from your perspective based on the buy side, when you run across those opportunities, there’s real value, right? And it’s something you can log out. What do you do? So [inaudible 00:05:49] have bullet point about this, that you should have an option in the contract for either party to walk while you’re in the deal. So my question for you is, what do you do when you’re in a deal with someone let’s say you’re 20% or 15%, or 30%, whatever your minority or their minority, and it’s just not going well it’s going horribly. And one of you wants out, do you account for that from the get go? Do you just deal with it when it comes up? How do you get out of those?
Ace Chapman: That’s actually a great question and a great point to make. So a lot of the things that we do in these deals, one thing that helps from the very beginning is in the contract, basically having a boss sale clause. And what that does is make it extremely fair for both parties to be able to exit the deal. And the way it works is either party at any point can make an offer to buy the other person out. The kind of caveat to that is that whatever multiple or whatever valuation that you put on the deal when you make your offer to them to buy their equity, they can buy you at the same valuation.
Justin Cooke: Yeah. I love that. I think that’s really good advice I’ve heard that before and used that before. Basically, whoever decides the deal, the other party gets to pick which side of the deal they agree with, right? So if you want to buy them out and they want to buy, you say, “look, here’s where I think the valuation is, here’s where I think the buyout should be.” And the other person has to pick two, they want to keep it or they are the ones buying them out. That is great when both parties are on board with that, when it’s gotten to the point where the other person wants to screw you more than they want to get out of the deal. They want to work it out like that can get ugly, that you’re in a bad position there.
Justin Cooke: One thing we did with the Investor Program, on our end was we said, “look, we want to make sure people can’t get out to us is we put in a penalty. So if someone wants to get out, they pay a penalty. And then the other investors would receive that penalty. They would get that penalty money and then they have the first option or first dibs on buying up their share, right?” So they’d have the first dibs to do it. And then other than that, we go outside and see if we can get that investor replaced. So they would pay a penalty, the other investors get the benefit of that person dropping out. And they also get first dibs at buying out the procedure.
Ace Chapman: I love that, I really liked that a lot, especially for structure that’s like the investment program.
Justin Cooke: Yeah. And then, the other thing I think, is really important if you’re doing these minority investments is need to be very, very clear about the roles responsibilities, go again. So I’m going to be a minority investor, the other party or the person that owns the business, expect something from me that I wasn’t willing to do. I want to be a completely private investor. And they’re trying, they’re like, “Oh, I thought you were going to do this once a month or I thought you’re going to do this once a week or something,” right? So there can be some lack of clarity, you need to really make sure that’s clear. And I’m not talking about like long legal these contracts. I’m just saying, written out very clear on what kind of roles responsibilities on both parties are.
Justin Cooke: I’ve seen when deals like that happen and they’re kind of like splitting up their responsibilities. They didn’t account for everything. And the business kind of goes to crap because one party thinks the other party is handling this, the other party this, they don’t[inaudible 00:09:10] gets really messy because they didn’t clearly define the roles early on.
Ace Chapman: Yeah, I am when you get into the situation of the work going into the deal, that’s where a lot of problems can occur. And one of the things we try to do in any deal where we may be raising capital or anything is when we … when I’m raising capital from investors on buying the deal, I expect to do all of the work, and I offered them as a benefit, “hey, you can be involved where you want to,” and a lot of times at the beginning, people are excited about something and what typically happens is, those first few months, they’re like, “oh, man, I’m excited to be in a deal.” And it is opportunity to learn and figure things but they’re willing to commit to everything, I want to help with the social media and this and that[inaudible 00:10:00] like content, and then three months down the line is like, “Okay, I’ve got some other things that I’m excited about now.”
Ace Chapman: So it’s out to encourage people just to say, when you’re in a deal, somebody is going to take basically all responsibility and try to delegate but if it doesn’t happen, they’re going to take on that responsibility.
Justin Cooke: Interesting as I mean, when you’re a solo entrepreneur, and it works for you and work with you, but and you have partnered on deals and stuff. But you know Joe and I have a partnership, business partnership where any the business we get involved in, it’s just split 50-50 we’re just … we’re all involved in everything that Joe does right now. We’ve noticed that, especially early years and years ago, there were times where the workload ebbs and flows, right when I’m doing a whole a lot more work or let’s say it’s more valuable work than he is, right? And it’s stressful and frustrating for me. And [inaudible 00:10:53] to two where there are times where I’m just doing a lot less work. I’m just not as needed. And what he’s doing is like, really important, he has to do a ton of it.
Justin Cooke: And it can be really frustrating, and a business partnership where you’re doing less work, or you’re doing more work, and the other person getting paid the same has the same equity share like saying[inaudible 00:11:09]that can be frustrating, but we realized that over time, those ebbs and flows just kind of go back and forth and that’s just the way it is. We’ve I think we’ve come to terms with that. But it was harder early on in our business partnership on the same.
Ace Chapman: Yeah, I can imagine
Justin Cooke: All right, well anyway Lam, I hope that was helpful. I hope you appreciate it. We’re going to get into the [main 00:11:27] of this episode now.
Justin Cooke: As we’re talking making offers and closing the deal buddy and this is something I know you love to do you love and negotiation stuff, you love to get into, deal making and how do you work it out, and you make it happen? How do you make the offer? How do you counter? Where you’re talking about all that [stakes 00:11:47]? It’s kind of like set the scene though. I think we need to talk about their the process for making offers for kind of closing the deal. There were three processes. We’re going to talk about these the ones you’re going to see the most, if you kind of in this space and isn’t very quite a bit depending on which broker you’re going with? Which party you’re going with? Whether it is the privately done deal? So we’re going to talk about three things.
Justin Cooke: The first is the letter of intent process, or they also call it LOI process. Now, what does this is basically a document you’ve signed to non binding offer that’s made and agreed [inaudible 00:12:22]signed LOI from the buyer to the seller. It’s basically just kind of like setting up the offer. Here’s we plan to do here’s the intent. Again, it’s not binding, it’s not saying okay, the deal[inaudible 00:12:32] saying, “look, I want to do this deal.” And usually, an LOI comes with a certain amount of days of exclusivity, this might be 30 days, it might be 60 days, it might be 90 days at some depends on the broker kind of their process. But there’s going to be a period of exclusivity where that buyer is the only one that can make offers the only one that can have that communication, and it’s like the exclusive period for them to do their due diligence and to make an offer.
Ace Chapman: What do you guys like to see when it comes to, giving that buyer a certain period of time, can you talk a little bit about what a person should expect that they’re dealing with a broker on … they have that exclusivity?
Justin Cooke: Yeah. So it really just depends on the broker, right? So as they do 30 days, 60 days, and if another buyer steps in or sees listing, a lot of times you’ll see that it’s [inaudible 00:13:22] is pending sale with a broker so, it just means that they’re not going to put you in contact, there are other buyers and contact they’re not allowed to make offers or kind of begin get into negotiation process. I think this ultimately is protecting the buyer from other offers were being in and taking a deal, and I think it’s more important, I think I’m very large to so you’re going to $2 million transaction.
Justin Cooke: It’s not like a $20000 fee on the credit card to guide me it’s much, much larger than that and you’re going to need like a longer period of due diligence and you don’t want someone else’s swooping in and snatching it up while you’re doing your due diligence when you’ve already made it clear that you want to do it at this price and the sellers effectively accepted that. Now, those deals change all the time. So an LOI that says, “hey, I’m buying this at 1.3 million, you may close the deal 800000 it may end up going for 1.6.” Right?
Justin Cooke: So that’s not a guarantee on what it’s a software but it’s at least someone put it up and saying, “look, I think we’re going to do this now.” Once the final offers made after this is after the deal is done and offers made negotiate and accepted. The money is generally sent to Escrow, or sent to a lawyer or do a third party or sometimes the broker will actually hold the wire as well. So it’s sent to either the broker, Escrow, or lawyer or some other third party to start basically get into like the migration process.
Ace Chapman: Yeah, it’s interesting, as a buyer who’s done stuff in the offline space, in the internet space, the LOI and having that protection is just a lot more crucial because you do have people that are just going to pop along, they see the deal, they like the deal that may be in the background, doing a lot of research.
Ace Chapman: And it’s need because you can find out a lot about a business with just a prospectus, just access to Google Analytics and figure out everything you want to know, and not really be interacting much with the broker. So offline, really the only way you’re finding out information about that business is through the broker, through the seller and asked him about two questions requesting more info and all of that. So the broker knows, and the seller knows exactly who’s really interested in how far along in the process they are, and who’s not. When it comes to the internet deals, and a lot of people I have constant get frustrated by it, because a lot of times a broker says has no idea and one day it’s like, “oh, no, yeah, nobody’s really interested” Talk to a few people then seemed like people are very interested we don’t have any offers, you have time and then the next day, they write and say, “oh, somebody bought it last night.”
Justin Cooke: Yeah, so you mean that the LOI with online[inaudible 00:15:59]protect you. So I’d see how like as a buyer that would benefit you. That’d be awesome. You dig? What did you not like about LOI process?
Ace Chapman: Well, the biggest downside when you’re putting together the LOI is the fact that the seller thinks they have a done deal. And just like you said you’re going to have the LOI that is for 1.3 million. But at the end of the day, I mean, it’s just the LOI is the letter of intent. And all it’s given that buyer is the time to dig in and figure out what is the actual price that I need to buy this at? How do I need to structure this deal in order for it to be the right structure? And then you come back with the purchase agreement, and that’s the final agreement. So the toughest thing is having that seller understand that and not be completely frustrated or upset when you come back as buyer and say “well, I need this to be little, little bit I found this issue that kind of thing.”
Justin Cooke: So, basically having to go back to them and be the bad guy and say, “Look and due diligence, there’s this, this and this. I didn’t notice it’s a fraud this changed the deal.” And then obviously you’re going [inaudible 00:17:17] and say “what, this and this LOI I thought it was 1.3 million,” right? Yeah. Are you on the bad buyers? Right? They will use LOI and then totally low value you an exclusive period, right? So on the seller, the buyer can use it but it’s not as a gift from the seller. So okay, so that’s the letter of intent process. Quite a few other brokers use that. We’ll talk about our process event at Empire Flippers, a little bit different than most we have buyers or depositors actually pay a refundable, good faith deposit is made and due diligence start. So someone wants all the details in the business they pay a refundable deposit that’s held by Empire Flippers and they could start the due diligence full price offers accepted the first to have the wire received by Empire Flippers gets the deal. So basically, we leave it open.
Justin Cooke: Whoever wires the money, and we receive that money, so whoever Empire Flippers received the money first is the deal. If there’s an offer that’s made, that’s less than the list price that was listed for, $300000, someone makes an offer at $260000, then that offer is sent to any depositors that are earlier than them. So the depositor three will tell depositor two and number one, that a $260000 offer was made on the $300000 deal. Do you want to bid that? Right? And if they bid it, then we don’t tell the depositor three, they just lose the deal. Right?
Ace Chapman: Yeah.
Justin Cooke: So if a full price offers accepted, with no other buyers, the money’s wired to Empire Flippers, and then the migration process because we actually hold the money between the two parties until the deals done. I like that because, we were not a third party that we understand how these deals work probably better than most. So we … I think can provide a clearer path to what is working what’s not who did the right thing, who didn’t and we’ve got outlines that lay those terms out for both the buyer and seller. So, ours is different. What do you like better about our process?
Ace Chapman: Number one thing is the refundable, good faith deposit. I think it protects the seller and also protects the other buyers, it don’t want especially with some of the more sensitive business models out there like FBA, or but really just a lot of internet businesses. I’ve talked about this before, finding that niche or that product that is profitable is a lot of the work, a lot of the work that that seller has done.
Justin Cooke: Yeah and the lock, right, it can be like they are not just like they tested 10 and this happen to work.
Ace Chapman: Exactly. So they go out there and that’s what a lot of people don’t know is that man, it was 10 different projects, to get to the work of that one. So to just go out and throw out that prospect is like the protection of the what that website is, in their niche and they are their product isn’t valuable has always been one of my biggest concerns and so the reasons as a buyer like I just I really encourage people to work with Empire is because of that good faith deposit, so with you guys that’s absolutely my favorite thing,
Justin Cooke: A kid in his parents basement can sign a digital signature for a non compete non disclosure, right?[crosstalk 00:20:27] I’m good yeah.
Ace Chapman: Yeah, well and not only that, but have a competing website up that night ready to go in the morning.
Justin Cooke: These millennials that they could do that, that’s what they’re all about. So yeah, so that’s where you like[inaudible 00:20:43]. It’s not all peachy keen on the Empire Google shop. What are some of the things you don’t like about the process?
Ace Chapman: The number one thing I don’t like is getting outbid Justin. Don’t let these people outbid me.
Justin Cooke: It’s a real deal, from our bit from you about this membership perspective, like I want to get the deal done. Right And so, if someone comes in and swoops in and does the deal before you are steps ahead of you or they were early depositors, I feel bad for you like it kind of sucks, but we got the deal done, and we move on to the next one, right? And maybe you should have acted sooner, and I do understand how it’s frustrating for a buyer’s perspective, especially if it’s happening more than once, right? And you’ve done it but she’s also it has it more than once, but it’s not all the time still know when you have that you’re like I really want this one I got my client or good and we got the wire from someone else first. Yeah, it sucks.
Ace Chapman: Pros and cons.
Justin Cooke: Yeah, let’s talk about the private purchase process. In this there is less protection offered. This is effectively where a buyer comes along, finds the deal and find a site they’re interested in contacts who doesn’t who has searched finds a seller, let’s say and says [inaudible 00:21:57] or it’s a competitor, or it’s a customer that makes an offer on the business and offers made negotiate between the buyer and seller directly. So there are no third parties[inaudible 00:22:06] negotiate the deal you’re doing it directly with the seller. Again, there’s no protection against outside offers. So if I make an offer of 303000 and the seller tells me, “Oh, I just sold this one for you know, 380 or whatever,” you’re like, “Oh my god, I would have paid 400,” they can swoop in of course do that, or they can obviously tell you there’s a fake person out there trying to make this offer. So you need to be aware of that.
Justin Cooke: Once the deal is agreed generally money for the wire is sent to Escrow or an attorney. Most attorneys are licensed are bonded to hold up to X amount of money in Escrow. I generally think lawyers are probably a better route to take and Escrow Services, I think Escrow Services are not really most of them. In fact, all of them that I know of aren’t made specifically for websites, online businesses, not the lawyers are but I chose to an attorney generally better than I would trust [inaudible 00:22:55]the last serve our company either way, you definitely need to use a third party. When you’re doing a deal between the buyer and seller, don’t do the “hey, I’ll pay you 50% up front, then you transfer me the domain and then I’ll pay the other 20%.” Don’t like try to break it down like that. Because ultimately, there’s a point at which one party could screw the other right in that process.
Justin Cooke: So even 30% or 40% or 60% done you can get screwed in that process a really bad idea. It’s one of those we never do. Most brokers would never do this is, this allow you to the buyer or seller to have let’s say, own the domain and have any of the money. So no party gets ever do that ever. It’s really important.
Ace Chapman: Yeah. And the other thing is don’t even … it’s not really worth doing a deposit on a private purchase. I actually had a past client that contacted me they went through the program a few years ago did a couple of deals and then they just did a recent deal. And it was on an offline business like found the business you they really didn’t contact us to walk through the process because felt like, “hey, we’re going to figure it out.”
Justin Cooke: I got it. I don’t need Ace, I got it.
Ace Chapman: Yeah, I don’t need Ace man, So I’ve done two deals now. So negotiate it, a got everything done in this business was kind of hurting, but he wasn’t going to fix it up. So he makes a pretty large … the guy told him, “oh, well we got other bidders that adopt me to take them off the market, I need you to make this large deposit.” The guy makes a deposit. And it’s trying to get some due diligence done here from home. And long story short, eventually goes by the business and everything is shut down. The guy has left the country. So you just even … online, offline got to use common sense and on these private purchase deals, you want to make sure that neither person has all the leverage at any given point.
Justin Cooke: Yeah, that’s interesting. So you know we at Empire Flippers we have the deposit process, and we get asked that from skeptical potential buyers for people that wouldn’t ever do this. They say, look, “how do I know I don’t just send me this $6000 deposit. And you guys just close up shop or never get back to me you just take my money.” And that totally makes sense in your situation, right? Where you’re a buyer, there’s a buyer dealing with a seller directly and sending them a deposit. Who knows they may be going out of business, they maybe a complete scam. Who knows?
Justin Cooke: But we’re in the public eye like we’re out there. If we were screwing you over deposits we wouldn’t be in business very long, right? Like you were just taking it as a positive all these people who do hundreds of deposits a month several hundred deposits a month that we were doing all those and not giving them back, you will be all over us on the internet. You know what I mean? So we’ve got a reputation protect whereas this random seller, offline seller business seller, they don’t care does disappear, right? Or a so let’s get into it man. We’ve got 10 tips, or we want to share with the listeners in terms of making offers negotiating the deal, then we will talk about the three different process LOI process, the Empire Flippers process and kind of the private purchase process I think we can kind of get into this will make a little more sense.
Justin Cooke: So the first tip is as a buyer you want to find out what the seller really wants, right ? They’re going to have their kind of superficial reasons for selling I need the money for something else or I whatever, like there’s something deeper to that generally, right? It’s kind of like a described as like peeling back the onion, there are layers kind of what they’ll tell you if you’re more comfortable with, once you find out why they’re really selling and you find out that and you really need to get this far but you find out that they need 60000 because they want to give 20000 to their brothers about to get foreclosed on and then 40000 to buy this new rental property and the deposit for that, like you find out exactly what they need. So they need 60000, they need $100000 deal they need that 60000 up front, you can’t go below it. So it gives you kind of idea of what kind of deal structure you can work out.
Ace Chapman: Yeah. I’m a very big fan of like specifics getting specific on what they’re looking for. And it does take a little bit of work, it’s peeling back the onion and getting into what they want, but it can help you tremendously and structuring the deal because just like that example, Justin, when you get not just even the rock bottom price, but the rock bottom amount of the upfront down payment, and you know some kind of timeframe, because sometimes it may be that I can make that 60000 over the course of 90 days, I’m not going to really do anything for the next three months, but you can answer their true need, then that can be flexible on everything else. So a lot of times people get focused on the total sales price, and they’re trying to lower their down payment and that person is saying no, but the real reason is because they would go down on the sales price as long as they could get that upfront amount, the other part of this when it comes to negotiating is getting the broker to work for you.
Ace Chapman: And this is one of those kinds of inside of choice that a lot of people go in and they see the broker as an adversarial kind of position. They’re aligned with the seller that not aligned with me. And they treat them as such. So they go off of their kind of figure out their own thing.
Justin Cooke: Yeah, like us, I see you’re the buyer, right? And I’m the seller’s agent. And let’s say you’re a newbie buyer. So you think that I’m necessarily representing the seller, I’m representing sellers interests, and I’m against you, right. So there were negotiating, but it doesn’t have to be that way, right?
Ace Chapman: Yeah, and the truth, the bottom line is brokers want to get a deal done. That’s their real jobs, they get paid when the deal gets done in order to get a deal done. You need not just the seller, but also a buyer. So they want to get the seller the best value. And again, a lot of times they’re in tune with what that seller really wants. And so value is not just a sales price, and so you can get a lot of this information from the broker because I want to get the deal done. So they’re going to help you figure out how do we need to get this thing closed in a way that it’s a win, win for both parties.
Ace Chapman: So if you go to a broker, you let them know that you’re serious, a big part of that is actually showing them that you have the money, you actually close the deal. And then the other the second part of that is saying, “I love the deal, I want to do this deal. The only thing that’s going to keep me from doing this deal is that there’s something materially different. Once I get into due diligence, then the information that you’ve given me.”
Ace Chapman: And no broker is going to say, “Oh, yeah, that’s going to be totally …” you know what I mean? So they’re going to say, “Okay, great, get into the deal,” do the due diligence, and then you will do understand up that we talked about due diligence and walking through that process. And the truth is, when you’re in there, you don’t want to walk away from the deal unless you really do get in and it’s something that is materially different in that builds your reputation with the broker as well.
Justin Cooke: Yeah, this is some insider baseball stuff. I think it’s an interesting perspective, right? So buyer seller is a new brand [inaudible 00:30:04] might be interested to hear this too is that in general a lot of the interest for the broker and seller are line but not everything. So even example, you know $500000 deal, is going through as the broker as a seller’s agent, right? Like we’d rather do the deal at 400000 then not do the deal at all, right? Like really being paid if we get the deal done period. That’s not necessarily the sellers interest, right? They lose $100000 in value on that deal.
Justin Cooke: But we don’t get paid at all if we don’t do the deal. So if for example, you comment and say, “look, I’m offering,” let’s say, a buyer comes in, says, “look, I got 450 cash or $450000 cash show us look, here’s my investment account is my your cash cow, whatever, I can do this deal. I want to close this quickly. I’m a work once everything’s for sure good, unless there’s something material well, and I’m going to do this deal, I’m asking for reasonable discount, I want to get this deal done I’ve already looked at this way I really want let’s get this deal done.
Justin Cooke: All those things happen, you can actually turn the broker into your agent. So that’s always a good like[inaudible 00:31:05]. Look, “I’ve got this do guy I’ve worked with him before. He’s awesome, I know he has the cash, or I’ve got some of the cash, whatever, like I’ve got, I can get this deal done.” They’re actually working for you. They’re trying to sell the seller on getting the deal done. So sometimes you’ll have brokers that will turn around and end up working on behalf of the broker because they want to get the deal done more than they want to get the seller the most amount of money and it’s kind of a conflict of interest, but it is something you can use to kind of leverage as a buyer and get them working for you. So anyway, good insight or trick there.
Justin Cooke: The third one we want to mention is that you need to be mindful of the sellers, ego and feelings. Now this sounds a little touchy feely, I mean, we’re in this business transaction after all, but it’s not a lot of time for the seller. I mean, it is a business transaction, but they put blood, sweat and tears into this website or online business and they may have built it from scratch when they were struggling to make their first dollar in this thing and their first customer and now they got this like $4000 deal or $800000 deal or do whatever, it’s a big deal, quite possibly, if it’s their first deal, the biggest business they’ve ever sold. And if you’re kicking the tires, and you’re pointing out like dent in the hood, like they’re likely to take that personally. This isn’t a used car you’re buying this is like their blood, sweat and tears. So if you start beating them up too badly, you can bruise the seller to the point that they’re just pissed and don’t really want to do business with you.
Ace Chapman: Yeah, it’s such a crucial thing. As much as we want to pretend like all this stuff that we’re doing is just numbers and figures and businesses and all that, it really isn’t an emotional thing. I’ve seen it over and over where we get into the negotiating a deal. My client has a really great relationship with the seller and they just feel like man, this is the person that I want to own my business and they can’t afford to pay as much as this other guy that I feel like as an[inaudible 00:33:00] But I’m willing to take that lower offer because of that relationship. So taken into consideration their ego and their feelings. It may sound fluffy, but it gets deals done.
Justin Cooke: Yeah, it save deals from marketing done right, but you attacking the seller about their business or you see if you’re very factual and just kind of like talking about the evaluation methods we’ve discussed in previous episodes and the way that can be sure, I think that will help. We also kind of guide our sellers to understand as brokers we got our social, let me know and we’ll buffer soon as you get statements from buyers that are aggressive and not so understanding of the sellers kind of position and we soften that blow a bit, and we mess up the seller. So that’s one of things we can do to help get the deal but of course as brokers.
Justin Cooke: The fourth thing we’re talking about is to make sure as a buyer to consult your accountant or CPA, about the tax benefits or lack of benefits before you get the deal economy. It’s not something you want to … need to necessarily spend a ton of time on, but you definitely want to know kind of what you’re getting to and all the deals that we do.
Justin Cooke: This is almost always an asset sale and lot of stock sale. So as a buyer, you’re not buying stock in business, you’re not taking over the liabilities. It’s primarily goodwill that you’re purchasing. But it does make sense to look at how you’re going to break down the line item value for each piece. How much is goodwill? How much is the domain worth? How much is this worth? And you can do that and get some tax benefits.
Justin Cooke: We, in some instances, you can actually point out to the seller, why the tax benefits are better for them and doing like, let’s say it doesn’t hurt you. But it helps the seller and it can kind of like that could be one of the pieces that gets you over the hump ”look, if we do it this way, you’re going to get a better tax advantage. Talk to your CPA about it we can work it out.” And if anyone’s wondering about this, we did an episode interview with Mario, who’s a CPA on Season One of the Web Equity Show can be shown I have one with the Empire Flippers podcast, to I’m going to put links to those in the show notes for this episode so people check it out.
Ace Chapman: Yeah, I mean, it’s good. You want to have these folks on your team. That episode in particular was great episode. So I would definitely check that out. After that you want to make sure when you look at your terms, and especially when you move in from LOI and you’re getting into the actual purchase agreement that you’re clear about what those terms mean and doing the deal structuring. So when we and we talked a little bit in the deal structuring episode about this, but when we’re structuring the deal, sometimes it can get a little complicated especially if you’re not very clear that you’re doing an earn out and it’s going to be this percentage, above that amount, is percentage below that amount, and it’s going to have a cap at this time period or this total sales price and it just gets really, really crazy. So you want to be clear about that. Absolutely, just you don’t want to get stuck in contract [hill 00:35:54] and trying to make everything sound right and legal lease.
Ace Chapman: I like to have things written in plain English. And then I like to have explanations and just make sure that everybody is clear as possible. And just recently, we had a deal where somebody came back and they were asking a question where it’s like, we were very clear about what the structure was and all that and so I kind of list it on the contract, I explained it very clear language, and that kind of day they came back and they’re like, “Oh, no, I didn’t mean to upset you.” I know it’s not about being upset. It’s just about being very, very clear. And reiterating I don’t want any misconceptions about what the deal was.
Justin Cooke: Yeah, we were on that deal. I remember that. Yeah, that’s interesting.
Ace Chapman: So we want to be clear.
Justin Cooke: Yeah, I think the point about the contract how is social definitely from my perspective[inaudible 00:36:50], but from the buyer and seller to what happens is, especially when they’re new, is like, “okay, I want to get this purchase agreement in place. I want to get all the details ironed out in a legal lease contract.” That’s the worst way to do it right because it’s like your sandwiching the details the meat of the contract or the points of agreement or disagreement that you need to work out so why not work out in plain English first and then put that once everyone’s agreed on that. Then you can put that in the contract it’s fine but you’re trying to do that in contract so I signed my contract and send it to you, your lawyer reads it and sends it back to my lawyer, my lawyer is reading it and then they’re just like[inaudible 00:37:25] back and forth, lawyers are happy to do that all day, right? This[inaudible 00:37:29] get paid, right?
Justin Cooke: We can’t come to terms also maybe we should just do in writing an email and then handed them, “hey guys make this happen.”
Ace Chapman: Yeah, that is so true and sometimes we can make these a lot more complicated than they actually need to be.
Justin Cooke: The other thing is you don’t want to be core your[inaudible 00:37:47] in kind of like your approach, right? You don’t want to mislead maybe not even mislead but like trying to hide your true intentions, you which one is clear language of transparency in fact is a buyer … If the seller is intentionally being vague, or you see where they’re kind of being misleading in the contract, it might be time to walk. And I’ve seen examples of this when it comes to like non competes, right? So where the sellers are like, “well, I want to limit it to this keyword. I won’t compete on one keyword. Okay, so the other the plural. And that keyword your yes, yes, I’m going to compete.” No, not [inaudible 00:38:26] So that’s, I mean, you just gotta spell it out. So the seller starts to be a little[inaudible 00:38:31] they’re trying to lock it up and legally as they’re trying to, not be as just direct to the point, you got to dig down a little further peel back more on you.
Ace Chapman: So a big part of that, and all of this is, how you respond to the seller. And every once in a while these things can get heated. As a buyer, in our mind, the folks in our network, we’re dealing with people that have built something from scratch, and so they’re going to have a lot more emotions tied to it than you do. And so we want to be a little more understanding if the seller response to something that we say, with hostility, I’ve been cussed out by sellers before over an offer and that kind of thing, and then still gotten the deal done later. So, it’s how you respond is a lot more important than the seller. And it goes to the sellers as well as like, the buyer is also putting maybe their life savings that they’re emotionally attached to. So [inaudible 00:39:31] can be how both sides and you want to stay away from the hostility.
Justin Cooke: Yeah, this moves into our six point, I think, which is that as a buyer, you want to make it clear to the seller to your good fit for the business. You’re thinking, Well, I’m just putting the money out there accepting my money, why do I need to sell them on the fact that I’m going to be a good for the business, shut up and take my money and don’t worry about it, right? But that’s not the way it works. I mean, a lot of sellers want to find a good home for their pet business, right? And it’s not an artist being facetious or not just saying that like a lot of actually believe it’s not lip service.
Justin Cooke: So if it comes down to right as a seller or handling former brokers and there’s one buyer offering the same price as another buyer offer the same price and one of those buyers seems like a better fit has a better plan for building out that business or you’d be more successful the sellers want to settle to that person, right? So all things being equal if you agree a better fit for the business they’re probably going to work with you. Now, money talks so we’re talking about a 10-15% difference in value that probably doesn’t matter as much but it doesn’t matter when the deals are the offers are close, right?
Ace Chapman: Yeah, it really does I mean once you close that deal everything really begins, we feel like it begins when we’re negotiating and all that and then it ends at the closing but that’s just the beginning of your relationship with that seller and so you want to make sure that it’s a good fit with them as far as you’re working relationship for the next 90 days of training the business as a good fit for you, and you’re going to be able to grow it and make it prosperous.
Justin Cooke: Also, it comes down to the fact that if you, as a buyer are showing them that you’ve got a good plan to take over and run the business, there’s some research within that they’re not going to have to do a whole lot of hand holding. So again, if I’m looking at the person that has a plan, has a plan of attack, and they can run with it, they maybe a couple of calls and little bit turnover, and they’re good to go, versus someone whose brand new, is going to need more hand holding all the things being equal. I’m going to go the person that has a plan in place and wants to take over the business. Now, you can’t help the fact if you’re new, but you cannot the fact that what do you have a plan and you’re sharing that plan the seller and kind of like what you want to deal with letting them know that you’re going to take and run with it. And again, it’s one of those touchy feely things but I’m telling you like this does matter, and these types of deals. And so I think that’s pretty important.
Justin Cooke: The next one we want to get into is, I don’t think this is especially true with private deals, but that sometimes you as the buyers are 7.8 you the buyer used to be the bearer of bad news, right? So if we were[inaudible 00:42:02] is competitor, which even worse or I’m a customer there’s I’m making an offer on their business I’ve done due diligence, when I come in I make an offer, I have to be the one to tell them that business isn’t worth nearly what they think it is. And you’d be surprised at what some sellers have in their head sometimes think their businesses work a lot less but in most cases, sourcing their business is worth a lot more, because they’re looking three years down the road and they want it to be worth today when it’s working three years and that’s just not realistic.
Ace Chapman: Yeah, I mean, that’s a big part of what you deal with, especially when you’re dealing directly with the product sales. And obviously what you guys deal with every day dealing with potential sellers and again and they feel like their business is amazing, they know how much potential it has, and they want to sell that potential and, top buyers don’t want to buy potential they want to buy what it’s doing right now.
Justin Cooke: Yeah, brokers generally dealt with the sellers are ready and I’ve already dealt with that elephant in the room, right? So we’ve already had to kind of beat them up a bit on value and say, “Okay, here’s what it’s really worth have the talk.” And so they’re there, they’ve agreed and they’re open to selling at that price. That’s easy, but when you’re doing a private deal, you’re going to be the bearer of bad news. So understand that you may be coming in and sort of may think your offer is offensive, based on where they’re sitting at, right? They’re like, “no way, right this is worth way more and you have to kind of explain,” the best way to do this, I think is to be sympathetic of their situation right and like totally understand it, but blood, sweat and tears into this.
Justin Cooke: But then revert back to the valuation reasoning that we’ve talked about in previous episodes, and say, “Okay, this is worthless, because if we look at your net profit over the last x months, and we multiply that by this multiple here’s why I came with them multiple we add on the inventory, wholesale cost, this is the valuation that we get.” Now we can argue pieces of those which piece would you rather argue, but at least if you can put it in that framework, it’s less and worth more and you’re belittling me by saying, “you know that you’re giving me this offer do you know what I mean?”
Ace Chapman: Yes, that is I mean, it has to be kind of an educational thing, not turn into a debate, which turns into an argument. Just like “hey, check out this resource and check out these deals that are similar that sold for that price.” If you put it on the market, that’s probably what it’s going to sell for. So, it is reasonable what we’re talking about. So it can’t be an opinion debate between no, this is what I think it’s worth, I wouldn’t pay more than this. And like, no, it’s worth more.
Justin Cooke: Yeah, for sure. The eighth point out we’re about to get into is, when you see the deal stalling, you can rely on your broker. So this is broken and the overland the broker, there’s not a broker rely on a lawyer or potentially a third party, if at all possible. Now, if the deal looks like it’s not going anywhere, you’re not able to get the deal for whatever reason stalled because you can’t come to terms on the earn out or they just seem to get stuck somewhere, you can let someone else kind of step in that’s involvement deal the broker or attorney and let them handle the back and forth between you can take some of the heat and the emotion out of it.
Justin Cooke: My business partner Joe is and it’s funny knowing him personally like you’ve been friends for a long time, but he’s really good at this, he’s really good because like, de escalation between buyers and sellers when things get heated or emotional kind of like bringing it back to reality and getting both parts and parties really a better than I could be honestly, I’m glad I got out to the business but he’s really good at it. I’ve watched this go over the years to get better and better and he’s good at that, so I think that’s a real value that you should rely on your brokerage do they should be offering it to you. If you don’t have a broker that obviously you can use your attorney like a second and don’t have them go in there and muscle right. They’re not stepping in as your attorney there an attorney that can help you facilitate the deal, so they may be nice to the other party just to get the deal done.
Ace Chapman: The other part of this at the end of the day it takes all three parties that are trying to make the deal happen. I mean, we’ve been in deals just and I’ve had other deals where me and the broker realize that well actually, you go talk to them as the buyer directly and … kind of smooth out the ruffle feathers and other cases, we realize, what the broker really means. And so this goes back to our other point of you want to team up with the broker, you both have the exact same goal, getting the deal done. So the more that you guys can coordinate and figure out, “okay, how do we need to get this thing done? The better.”
Justin Cooke: Yeah. Our ninth point is that if you’ve been through several rounds of offers, so as the buyer you made an offer, they countered, right? You made another offer they countered you made another offer they countered, you keep going through this process. What do you may have to consider is that the seller is one of those people that will just refuses to accept an offer. That was your idea or that came from you or you seen this before as but they’re just like if you [inaudible 00:47:04] them an offer they say, “no, here’s my counter.” And they just want to counter for everything to the deal gets so convoluted that if you know the seller will present like an earlier off of that was better for the buyer and then just as their offer so a lot of times when you’re dealing with someone like that you just need to realize that the other party has this need to win.
Justin Cooke: So let them guide them to make me an offer that you won’t refuse, that you refuse to refuse because a good deal and let them win on something small. It maybe just like it’s a while you have to pay for hosting for the next couple of years or the domains coming up you have to pay for that, okay don’t what is that 100 bucks covered sure let’s do that or you have to pay for the shipping of the inventory, “okay, yeah I’ll pay for shipping its 300 bucks.” okay it just got hung up on the stories you know I’m talking about.
Ace Chapman: I do.
Justin Cooke: Like on a $280 bill you’re going to break on $120000 deal like that is crazy talk.
Ace Chapman: Yeah, it’s all emotion and ego and so you don’t want even if the other person is coming from that place, you want to negotiate around it, as opposed to getting into that back and forth.
Justin Cooke: It’s funny as and this is a quick slide, but man, this isn’t real shit right here. This is real dude like, I know deals that you would I’ve been involved in just together on different sides of the aisle where things like this happen, right? And like other tools because I’m thinking in my head I know specifically, a deal recently. It’s a few hundred dollars. And like Joe stepped in and said, “Look, I’m going to buy you something. Let’s just get this done. Is that okay?” [crosstalk 00:48:45] Here you go. Let’s just get this done. Right. So yeah, so fun[inaudible 00:48:51] even if you can give up a concession to that just aren’t that important to you to get the deal done on the deal is important to you. Just let him do it. Let them win those battles you can win the war.
Justin Cooke: Again, our last point and this is our 10th Point is, as a buyer don’t rely too heavily on contracts post sale. I’ve done a whole article on like my thoughts on contracts on Empire Flippers blog, I’ll link to that. I think it’s pretty helpful. But once the seller has been paid, you lose your leverage. So if you have all these things in the contract that the solution to do at this point at that point in the future, and you don’t hold any leverage over them, there’s no guarantee they’re going to do it. So they are critically important things need to happen post sale, it’s better to have a whole back it’s better to include that as part of the earn out contract because there’s no guarantee that’s going to happen.
Justin Cooke: And the other question is this, because there’s no guarantee it’s going to happen? Are you really going to hold that seller accountable, legally post sale six months from now, nine months from now? What do you think about that that Chinese national living in New Zealand or whatever, like what jurisdictions this fall under for your $30000 deal, it’s probably not going to work lower fees, so you better have that cleared up and locked up before you get to that point?
Ace Chapman: Yeah, and this is why I’m a really big fan of just building relationships. At the end of the day, all this stuff. We’re in a relationship business, if you’re going out and buying and selling businesses, you’re building relationships with brokers, you build relationships with accountants, attorneys, sellers, and then the clients and customers are the businesses that you’re buying. And so the better you get at building those relationships, the more profitable you deal making is going to be.
Justin Cooke: That’s right man. So let’s do a quick recap of this episode. We talked about the different processes you can use an excellent very broker to broker it’s independent what do you know private deal or not? You talked about the letter of intent process and some of the advantages and disadvantages there. We talked about the Empire Flippers process, some of the advantages and disadvantages, talk about when you’re doing a private purchase some of the advantages and disadvantages there. We talked about our best tips on making offers. Again, find out what the seller really wants. Get the broker working for you by showing your cash showing you’re willing to deal asking for a discount and how and then go and sell the seller.
Justin Cooke: The third point be mindful the sellers egos and feelings it’s a little touchy feely but it’s a real world stuff before they consult your account or CPA about tax benefits specifically look at the line items, super clear about the terms and the deal structuring don’t get started to contract hill, work out the details beforehand and then put in the contract was worked out make it clear that you’re a good fit for the business. Sell them on why you are a good buyer, you have a plan for building it out and understand that if the seller responds with a touch of hostility, it’s their baby right there trying to sell their baby be sympathetic but revert back to your valuation reason that we talked about the deal falls through buyer broker or a third party or some lawyer that could step in and kind of revive a stock deal because he did emotions and ego start default.
Justin Cooke: Again, if you’ve been through several rounds of offers, give us all a small wind to help them close the deal. Make them feel warm and fuzzy inside and kind of fix their bruised ego but to the point, don’t rely too heavily on contracts post sale oftentimes those contracts aren’t going to save your [board 00:52:06] if you need them too. [inaudible 00:52:07] is that pretty good rap.
Ace Chapman: Yes is a pretty awesome episode man, people need to appreciate this value are given.
Justin Cooke: Dude I love it. I … this is a much better episode I’m feeling better about the episode that I did when we started I was like “okay, you know deals and make it offers. It’s fun,” but we don’t know how good the services I think it was one of the more viable once we’ve done and I hope our listeners appreciate our next episode it’s going to be about migrations, which sounds kind of boring, but I think we’re having a bit of fun with that one too. So it’ll be talking about, we’ve agreed on the deal. But is the deal really done? Not quite. We need to wrap it up. We’re going to do that in the migrations, turnover and transfer of the business.
Female Speaker: Thanks for listening to the Web Equity Show. Now is your chance to be a part of the action go to www.webequityshow.com/gift and send us your business acquisition or exit question and have it answered on the show.