Online Business for Sale by Owner (Buyer Beware)
If you’re looking to buy an online business, you could buy one via a marketplace, or through an online business broker. Or you could go straight to the source and buy the business directly from the current owner.
On the surface, this may seem like the best move. After all, you’re simplifying the process by cutting out the middleman, right?
Unfortunately, this is not always the case. Cutting out the middleman may reduce the number of people involved in the transaction, but it also removes a layer of protection that experienced business brokers bring to the table.
While sellers are highly skilled at running businesses, they often know very little about the intricacies of selling them. This exposes you, as the buyer, to a lot of unnecessary risks.
Don’t worry though, we’ve got your back. In this article, we’ll highlight all of the red flags you should look out for when buying a business directly from the seller. This will help you make an informed buying decision and give you the best chance of success with your newly acquired online business!
Accurately Valuing Online Businesses
Many business owners view their business as their baby. They’ve watched it grow from infancy, suffered through teething problems and unforeseen challenges, and spent sleepless nights formulating growth strategies and figuring out how to protect the business from competitors.
This makes valuing the business tricky as sellers are often guided by their emotions instead of facts. As a result, private sellers often over-value their business.
When buying an online business from a private seller, it’s important to ask them how they calculated the price of the business.
As a guide, here’s the formula we use when valuing an online business.
The multiple is determined by a variety of factors and essentially represents the stability and future earning potential of the business.
Depending on the business model, these factors could include:
- Business age
- Stability of earnings
- Growth trends
- Diversity of revenue streams
- Diversity of traffic sources
- Level of owner involvement
- Strength of the supply chain
- Trademarks and overall defensibility
- Size of email list and social media following
- Customer satisfaction and reviews
If you are selling an online business and are unsure of how much it is worth, use our free valuation tool to determine a fair asking price.
Vetting the Online Business
When a seller submits their business to our marketplace, our vetting team double-checks the business’s profits against the numbers provided by the seller and ensures that the business is legit before it goes live.
In fact, 91% of businesses don’t pass our vetting process!
When buying a business directly from the seller, you don’t have this layer of protection. The onus is on you to do your due diligence and make sure that the figures provided by the seller are accurate and that no problems have been swept under the rug.
One of the most important documents you should ask the seller for is a detailed profit and loss statement (P&L). This financial document outlines the business’s income and expenses so you can see where money is being spent, how much cash flow the business has, and exactly how much profit is being made.
If the business includes a website, ask the seller for access to their Google Analytics. Even with read-only access, you can still examine the site’s page views, traffic channels, and the type of content the site features.
It’s also worth using software like Ahrefs to check out the site’s backlink profile, domain rating, and authority. Keep an eye out for any black-hat SEO practices that could land you in hot water with Google algorithm updates.
If you’re looking to buy an Amazon FBA, Shopify store, or SaaS business, take a deep dive into customer reviews to get an idea of the brand’s reputation and if there are any complaints about the quality of the products.
Don’t be afraid to request additional details about the business from the owner. Buyer due diligence is a normal part of the sales process and sellers should be prepared to provide you with the information you need to make an informed decision.
If you’ve got a lot riding on the acquisition, you can also hire a company like Centurica to do a website assessment or in-depth due diligence on the business you want to purchase.
Ensure You Are Legally Protected
Even if the seller of the business seems trustworthy and honest, it doesn’t hurt to have a few legal documents in place to protect yourself and your future business.
An absolute must-have is a non-compete agreement. The seller has proven experience, industry connections and inside knowledge of your business, so they would make a formidable competitor if they re-entered your niche.
A non-compete agreement stops this from happening by preventing the seller from starting a competing business for a negotiated period of time (usually 2-3 years).
If you’re planning on using any financing options to fund the acquisition, you should consider hiring a lawyer to draft the financing agreement and negotiate the repayment terms. Make sure that the lawyer has experience working in the M&A industry and selling online businesses.
Migrating the Assets After the Sale
Migrating a business’s assets to a new owner is a complicated process, especially for sellers who have never done it before.
Transferring ownership of a business’s assets isn’t as simple as just changing account credentials and switching out email addresses. Each tool and software has its own unique terms of service, contract clauses, and security systems. If migrated incorrectly, these assets could be temporarily locked or your stored data could be lost.
This could hamper your ability to operate the business effectively, or worse, cause the entire deal to fall through.
To prepare for a successful migration, have the business owner draw up a comprehensive list of all the assets that need to be transferred into your name.
Then go through the list yourself and contact the service provider for each asset and ask them about their transfer of ownership process. This may take some time, but it will help to avoid any nasty surprises down the road.
You should also be aware that you may have to create a new legal entity and bank account before you can proceed with the acquisition. You will also have to apply for a VAT number when acquiring businesses in certain international regions and countries.
Access to Expert Advice
If it’s the seller’s first time selling a business or your first time buying one, you’re in uncharted territory.
You’ll undoubtedly have a ton of questions, but without a broker on your side, you won’t have access to a knowledgeable, neutral third party who can give you unbiased advice.
If you find yourself in this situation, try looking for online forums and communities where you can speak to entrepreneurs who have experience in this field. As with most advice you find on the internet, do your own research to verify the information you are given.
Having access to industry experts is one of the main drawcards of buying a business through a broker like Empire Flippers. We’ve sold over 2,000 online businesses, so we have the know-how to ensure a smooth acquisition process.
We have a wide variety of quality online businesses for sale on our marketplace so you’re sure to find a business that suits your needs.
Our highly experienced team guides you through every step of the process, from helping you find the right kind of business to suit your needs, to holding your hand through negotiations, to migrating the business’s assets for you.
We take the weight of these tasks off your shoulders so you can focus on preparing for your new role as an online business owner.
Important Questions to Ask the Business Owner
As you can see, acquiring an established online business isn’t as easy as buying something off Craigslist.
With so many boxes to tick, it can be easy to let important information slip through the cracks. Here’s a list of important questions to ask the seller, to ensure you’re buying a high-quality business.
- How did the seller calculate the value of the business?
- What was the reason the seller decided to exit the business?
- What skills will you need to grow the business?
- What are the potential growth opportunities for the business?
- What could the seller have done better when maintaining and growing the business?
- What challenges might you face when taking over this business?
- Are there any legal proceedings pending against the business or the seller?
- Are the business’s financials up to date?
- Will detailed standard operating procedures (SOPs) be included in the sale?
- How much time does the seller spend working on the business every week?
- What does the supply chain look like?
- Does the business have any employees or contractors?
Buying a Business Doesn’t Have to Be an Uphill Battle
Buying an online business is no small feat. It requires a fair amount of capital and could literally change your life.
With so much riding on this one decision, you want to make sure you have the best people in your corner.
Buying a business directly from the seller isn’t a bad choice. Entrepreneurs have been doing it successfully for a long time, but you do need to have a good knowledge of the M&A and online business industries to make sure you don’t get a raw deal.
If you don’t have much experience buying businesses, or simply don’t have the time to source quality businesses, vet the business and the seller, and oversee the entire sale process, consider buying a business through our marketplace.
If you’re still weighing your options, schedule a call with one of our business advisors to get a rundown of our acquisition process and the various ways we can assist you.