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WES S01E04: Understanding Buyer & Seller Agreements

Justin Cooke August 4, 2015

Subscribe to our VIP LISTThis may very well be one of the less glamorous aspects when it comes to buying and selling online businesses, but ensuring there’s clarity on both the buy and sell side is the best way to avoid losing the deal. (And problems down the road) Most problem deals come down to a misunderstanding by one or more parties, so it’s important to get this right.

In this episode of the Web Equity Show, Justin and Ace dive into contracts, agreements, and how to make sure everyone’s on the same page from the first offer through closing and beyond. We’ll get into things like negotations, escrow, due diligence, terms, and training agreements.

Serious points of interest here if you’re looking to buy or sell an online business.

Listen To The Full Interview:

What You’ll Learn From This Episode:

  • Understanding buyer and seller agreements in terms of clarity, getting the deal done, and post sale support
  • Negotiating the sale price when buying a website
  • Understanding all the parties (from both the buyer and seller’s perspective) and agents that might be involved
  • Pros and cons in using Escrow when buying/selling online businesses
  • Discussing the process when it comes to due diligence and closing the deal
  • Talking about terms
  • Training or on-going support after the deal is done
  • Post deal consideration that both buyer and seller need to be aware of
  • Being specific about all the different aspects of the agreement

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 Featured On The Show:

Ace:
I have absolutely found that the more buyers treat buying a business like they’re actually selling the seller, the easier the process is.

Speaker 2:
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 Cook and Ace Chapman share their real life. It’s sys examples and expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin an Ace.

Justin:
Welcome to the web equity show, episode number four. I’m your host, Justin Cook, and I’m here with Ace Chapman and today we are talking about understanding buyer and seller agreements. First of all buddy, I just wanted to say congrats on the launch. Really happy to have this podcast out and published and we really hope you’re appreciating the episodes.

Ace:
Yeah, it’s so exciting to have a podcast after being interviewed and being on podcasts for a while. If I’m excited to be able to dig a little bit deeper into this thing we call Web Equity.

Justin:
Yeah. Actually you were one of the guests on podcasts like all the time, your name was popping up all the time as a guest on this show, gas on national. I was like, why is this kind of, I have a podcast. I do. We’ve got to do something about that. I met us. Talk a little bit about what we’re gonna be getting into. First I’ll just mention this our legal disclaimer, we are not lawyers, we’re not contract experts. We didn’t go to school and study all the intricacies of contracts. So if you’re looking for that, we’re not your guys, but we do deal with contracts and agreements on a regular basis and have some tips on deals with buyers and sellers that I think will be helpful. This is something you’re looking to get into.

Ace:
Yeah. One of the things about this space that some people love and some people don’t is that it is a little bit of the wild west. And so every once in a while we get into a deal where attorneys are involved in, I always recommend that a person goes and gets an attorney and all of that. But when it comes to doing these deals, a lot of times they just too small to pay for the cost of an attorney. So knowing some of the basics about what you need to think about when you’re putting together these agreements, which a lot of times you may be putting together on your own, I can help out a lot.

Justin:
Yeah. And that’s what we’re going do today. We’re going to walk you through everything from negotiating the price to understanding all the parties and the different agents that might be involved. We’re going to talk to you til gins, we’re going to talk terms and even some post-deal considerations that you know both a buyer and a seller need to be aware of and you know, make sure they have an agreement on heading into finishing the deal. Ultimately the purpose of agreement so that you can have some clarity. There are going to be some points or objectives that both the buyer and seller want to achieve. And if you can come to some agreement on those terms, on those objectives and get it clear and in writing, I think you’re going to be heading into a much smoother deal on a win for both parties.

All right before we get into the show, let’s do some listeners shouts first up, I’ve got a question from Louis. He says, I’m a newbie norms. I’m brand new. I’m looking to get started with a smaller investment, less than $10,000 I’d like the site to be earning around $500 a month. Can I get some help? What kind of site should I be looking for? Ace, what you got buddy?

Ace:
Well, one of the things that is tough on these smaller sites is that a lot of what you have to do is research on your own. It’s gotta be tough to get a buyer representation or somebody who’s gonna walk you through the deal on a deal that small. The good news is there are a lot of resources out there that can help you when I’m missing Turka and others, just a lot of the blogs and information is out there and in this podcast to look for pointers on how to protect yourself. At the end of the day, the smaller deals is where a lot of the risk is, is tends to track the scammers and folks that are looking to trick people into buying aside from him, so he has to be careful. I think it’s a big mistake to get into a buying a small deal and just thinking, it looks like this is good. I’m going to throw my money at it and see what happens. A lot of times if you’re just going to see what happens, bad things are gonna happen.

Justin:
We talked about this a little bit before the show and how much more likely there are to be scams or problems with sites that are under $10,000 so actually I think you have to be a bit more careful with the smaller sites. And the bigger problem here is that there’s just not enough money in the deal for you get a whole bunch of representation. Ace, whatever piece you’re getting out of it, let’s say 10% or whatever that’s 1000 bucks month, $10,000 deal. You’re probably not going to put a hundred hours of work into helping on this thousand dollar deal for you. Right? Like it just doesn’t make sense financially. You’re not going to do it. So a lot of brokers run into that problem is that you’re not going to get a ton of help and support for the smaller deals and so you’re going to have to do some of that on your own.

And it does make sense. Once you get into 50, 80 a hundred thousand dollars deals, you’re going to get a bit more support and help from brokers because it’s financially viable for them to do so. Does that make sense?

Ace:
Yeah, that helps out a lot. And the other thing, it’s just a lot less risky. So first of all, with a $10,000 deal, it’s going to take just as much work to do the due diligence. And second of all, if you can get a slightly larger deal, there just are a lot less scams the higher up you’d go. So that’s something to keep in mind as well.

Justin:
In terms of what type of site you should be looking for. Louis, a lot of that’s … it depends on what kind of, what your skillsets and your interests are. So if you’re just, you know, the kind of guy that just loves like physical products, you love selling things, you can actually touch and feel maybe a drop shipping site would be great for you. I mean, it’s hard to find that, $8,000 drop shipping site, but they are out there. Just know that there’s gonna be a heck of a lot more work for $400 a month. You’re gonna be getting out of it. You’re going to be working through learning, and you’re not gonna make much money. You’re not going to get a great return on your time for that. A better return on your time and I’m more passive site would be an ad sense site, or an Amazon affiliate site.

You’re much more likely to get site that you don’t have to do too much too. Maybe you have to add some content here and there, but you’re going to find a lot more sites in that price range that are either add since or Amazon affiliate sites. If listen to the show right now, when you do like the web equity show, make sure to check us out and review us on iTunes. Your review will go a long way to helping make sure we get the word out, and we get, you know, everyone out there knowing that we’ve got this new podcast going on. If you do have a question either a [inaudible 00:06:11] you can leave a question on the site, web equityshow.com. You can use speak pipe to record a quick audio note, and we’ll be able to put you on the show and get back to you. All right man. Let’s get into the episode.

Coming to an agreement to purchase a business requires clarity and understanding between both the buyer and the seller. Sometimes this can run much deeper than just the sales price of the business. And today we wanted to talk about understanding buyer and seller agreements and what they mean in terms of clarity, getting the deal done and the post sale support.

Ace:
Yeah, Justin I think everybody focuses a ton on the price. You know, first thing we’re looking at us, the price, what’s the return going to be, but an agreement when it comes to buying a business goes a lot deeper than just agreeing upon the price. I mean, for instance, the previous secular has their own set of agreements with employees, affiliate networks, other contractors, and you may be inheriting some of those things. So we’re going to get into some of those other peripheral agreements as well.

Justin:
Yeah, I think price is important, right? It’s definitely something that’s important. It’s probably the first one of the first things you looking at. But I think a savvy buyer understands that you can get deals done. Like there has to be win, win on both sides. And so a lot of times the agreement involves negotiations on things that aren’t price right and so things that have value but aren’t necessarily directly tied to the sale price and you know, things that that buyers and sellers value and sometimes deals get done, you know, on an earn out where you know, the sales prices more than the listed price. Because the seller wants to build long term upside. Sometimes it’s all about non competes, right? It’s a really big issue with the noncompete. Te buyer’s pushing for that sellers trying to avoid it and is willing to take less money so that they can continue to compete. So there are a lot of, you know, side things that, that aren’t necessarily tied to price that come into the deal.

Ace:
Absolutely. And obviously being able to have a list of these kinds of questions, like what kind of training is going to be provided or what is the noncompete agreement? You’re making an agreement that’s not just about the clothes and it’s easy as a business buyer to focus on getting to the close of the deal and owning the business. But the truth is the agreement, it’s going to guide your ownership of that business. So beyond the close, what is the deal going to look like on an ongoing basis? But let’s start with the very basis. I mean at the end of the day we’ve got to come to agreement on the price before we even dig into some of these other things. And I think a lot of people, especially in the environment that we’re in right now, I’ll just come in with an understanding that the sales price is the sales price.

And in some cases there’s just a tremendous amount of demand and you have no choice but to pay that price. But sometimes there are these other things that we’re going to talk about. You know, like you mentioned a compete or non compete that the person’s willing to sign. There may be other things that seller is really interested in being on a cash payment. Like you know, how are you going to pay all of the money at closing? Do you need to pay some of it out as earn out? Those kinds of things can impact the price of the business and so I always tell people you want to look at the deal holistically. So it may be that you’re able to compete with this other person is willing to pay the full ask and compete with them by coming up with some creative aspects in the deal.

Justin:
I like how Justin Gill, Chris Talks about I don’t care necessarily on getting even the best multiple, like that’s not the most important to me and I’m willing to pay a higher multiple for certain terms in the deal. That makes sense. Right? So if I can get my non compete, if I can get less cash up front, if I can tie it to success, the site over time, right. Like, I’m fine paying more over time or paying a higher multiple and prices less important to me than some of these other things. And I think that’s the case for some other, especially savvy buyers, people that are in the industry. I think it’s the newer people that are like, look I want to get it for cheaper. Like if I pay less, that’s a win for me. And I think even as brokers we fall into that trap.

Sometimes we think, okay, well if they’re paying less, they’re getting a lower multiple, they’re potentially getting a higher return. But you know, those may not be the only critical things in the deal. I’m now looking at I don’t want, a crazy low ball offers people, hey, I’ll give you a 30% of acid. And that’s, that’s just not likely to fly. Right. But it depends on the deal. And you know, you were mentioning how many people are interested in this particular deal is going to determine the price. Well, you know, we have sites that if a site’s brand new and we’ve got eight people that just shouldn’t buying a site, well you know you’re going to be a tough spot when it comes to negotiating on price. Right. But a deal it’s been sitting around for two or three months and there’s a nibble here and nibble there, but not a ton of interest. You might have more leverage, more opportunities to negotiate.

Ace:
Yeah. I think in a lot of those cases when it comes down to demand and why it’s important to talk to your broker or talk to the seller and understand kind of what’s going on with that deal, it can just be confusing. So if you’ve got a seller’s attention, you have the opportunity to come up with that kind of creative offer, show them why the price is this amount. And the other terms that you may be more lenient on when it comes to that deal. But if a seller is making a decision between eight different offers, there isn’t a way for them to deal with complexity with all eight of those. So it just, because of the way the brain works, they’re going to go with the simple decision, this guy’s paying me the most money. I will figure it out the other terms, bless, get the deal done.

Justin:
That’s totally true. I didn’t even think about that. But that’s true. Like even if you may be offering a better deal, but it’s more complex, or it has more requirements or earn outs or seller finance or something like that. Even if it’s for more money 105%, 110% of ask, they may not do it just because they want the simplicity, and it gets confusing when you’re dealing with, multiple potential buyers. That makes sense. Tell me, under what circumstances do you look for sites that are, have been around for two months, three months, six months. Is it for sites that might be in terms of price, like a reach for you or your customer? You’re not sure you want to spend that much, but it’s been there three or four months. You’re willing to see if you can come in and get a deal. I know other times you look at deals right away as soon as they hit the market, you’re looking at him, but sometimes you wait, like what’s the determining factor there for you?

Ace:
I think it’s funny you mentioned that. I think the real opportunities are at both extremes. There’re amazing opportunities if you jump on them immediately. I think we were just talking about a deal that I just bought from my personal portfolio and you know, sometimes it comes out, it’s that’s a great opportunity. You see it, you know it. You’re looking at enough deals that you know when you see it. And so those opportunities are there and the other grill great opportunities or other end of the spectrum. It’s the one that’s been sitting there for three or four months because they got to think about it from the seller’s perspective.

They’ve talked to potential buyers, they’ve probably gone through some negotiations, some deals have fallen through. They’re kind of exhausted with the process and just ready to get something done. And that’s another really great time to jump in to those deals. There’s a little bit different in this space than offline where that period may be more like nine months or you know, past the six months period for sure. Whereas there’s a little more deal fatigue from sellers pretty quickly in this space just because of the dynamics and the number of people you’re talking to and all that good stuff. So yeah I liked those two extremes.

Justin:
So funny you mentioned that deal you just picked up. I actually said you snake that deal for me man. I Dunno. I Dunno. He’s got, so like there’s a site that we had, this is from a previous buyer, so we just said like years ago the guy bought it, sold it again. It went up like 50 60% but just a nice steady earner. Not huge or anything, but like a good earner and I woke up in the morning, I think that might be a good one for our investor. Come to find out snatched it up, man. While I was, that’s what I get for being an agent. I guess, right?

Ace:
Exactly. I was up there, the right out our that. Got It.

Justin:
I’ll get you on the next one I’m asked. I wish that quite a bit about price. Let’s move on to parties and the people involved in deals. And I think as a buyer or seller you need to make sure you’re aware and with all of the players. Right? And so you know the first one to look at is the seller from the buyer’s perspective who is this seller like is the person I’m speaking to the sole decision maker. Do they have a partner? Do they have multiple partners? Are they authorized to speak for all of the partners or parties involved in the sell side? The worst thing you can do is you know where you’re trying to get a deal done and you’re negotiating with one part and you find out that you know the guy and his wife on the sites and is just talked to his wife. And this is just like general sales stuff. But it’s the same thing with partners or what if one person is looking to sell and the other one isn’t and now you’re putting yourself in a really awkward position.

Ace:
Absolutely. I think it’d be good to chat a little bit about what you guys do to verify that the person you’re talking to is the person that can make the decisions to sell the site.

Justin:
Yeah. I think verifying the seller is really important to us. And beyond just like that they only own it. That’s important too, but that the sellers were real person, right? I mean all of our deals are done online, over the internet and who knows who is who, right? So we look at things silly things like do they have a Facebook page and do they have, you know, friends like did they go to their friend’s barbecue last weekend and are people responding to their Facebook photos. Is it a real person? Right. We look at in cases where they don’t have much social media presence, we require an identification and then we look to make sure that they actually own the site, that they have access to the domain, that the hosting account is in their name, all these types of things to make sure that it’s actually there is.

I think that helps we know for sure that the person something site is the person that owns it and is the decision maker. And that’s something we ask as well. Cause you know like what if there is a partner or something and we’re just not clear about how that happens and now we the buyer gets into a funky situation where they’re negotiating with half of the parties involved.

Ace:
Yeah. And unfortunately some people even use that as a negotiation tactic. Like well I got to talk to my wife and that kind of thing. But being able to ask up front who else is involved, who else is going to be involved in this decision that you’re going to have to make at some point when we receive an offer that just makes it a lot easier to get things to the closing table.

Justin:
Does this strike you as funny that we’re talking about sales tactics and techniques on the buy side? That seems funny, doesn’t it?

Ace:
It is, but I have absolutely found that the more buyers treat buying a business, they’re actually selling the seller, the easier the process is.

Justin:
Yeah. That’s weird. It just struck me as funny, but it’s totally true, right? I mean you’re, you’re trying to get over, objections and in the negotiation you’re making sure you’re talking to the decision maker. That’s really interesting. Regarding other parties where people involved depending on the size of the business and you start getting into six mid six and seven figure businesses. You know, a lot of times there are employees that are running, the majority are doing the majority of the work of that business. Are those employees transferring with the business? Right. Do they have contractors that are doing regular work? Are they coming along with the business too? Are they aware that the business is being sold? Are they okay with going along? Are they going to start looking for jobs as soon as the business solid? I mean these are some concerns you might have as a buyer.

Like what expectations, you know, are in the employee’s minds where they at any point told they have equity that they have some kind of profit share. Like are they expecting some kind of earn out or something when the business sales and leaving you on the hook for it how was it handled? How are the employees told? At what point are you brought in as the buyer introduced and put into the mix and how is that explained? So there’s a lot of clarity that comes with employees and contractors that needs to, I think carefully be dealt with.

Ace:
Yeah, I’ve dealt with those kinds of things in the past where there were these kinds of side agreements and a kind of thing. And unfortunately some sellers forget, it’s, do we talk about sellers hiding things, but sometimes they really make a promise and they forget and bid. You buy the business and the contractor employee comes to you saying, Hey, I was supposed to have this. And you go to the seller and I did say that.

Justin:
Weird and interesting scenario because like with a stock sale or whatever, like you as a buyer, you are liable for liabilities and the previous corporation you’ve bought the corporation and an asset sale, you’re not, but that doesn’t fly too well when you’re talking about key employees in the organization, right? You’re like, well, legally I’m not required to. Well, but they run your business. They are your business.

The other thing you have to consider in terms of parties involved. So the third parties and involved, and this can be minimal, it can be one or two other people or parties and it can be heavy just depending on the deal. And this could include things like accountants, attorneys, if it’s a lead generation site, the company or companies that are buying the leads. Affiliates, right? Some of the affiliate programs, the Ad Agencies, third party due diligence companies and the customers. Going back to lead buyers real quick, we’ve had some situations where it’s weird because you know the website is selling to just one customer, right? And so you have to worry as a buyer, like is that customer the seller sister, are they somehow related or in cahoots?

And so making sure that you’re aware of that person that you’re putting contact with that person and that you can verify them doing your due diligence is really important. I think the last one I mentioned to customers, I think that’s really important, especially if the business is heavily relationship based. How will that relationship change with you as a buyer stepping in and taking over and how can you and the seller come to an agreement on smoothing that transition and smoothing you into the job?

Ace:
Yeah. The more you can plan that up front, the easier it is. The biggest mistake people make waiting til the backend to figure out all that stuff. That’s when it can become a nightmare and surprise it start to pop up. So let’s talk a little bit about once you get to the point, you get the agreement and you’re ready to close the deal. Some people will use escrow and just a simple explanation. Escrow allows you to send your money and they hold the money. You can transfer the website over to your servers, transfer the domain into your account, and once you’ve got everything ready to go and you’ve gone through the site, looks like money’s coming in, you can release funds to the seller. The thing that I’m a big fan of is whether or not you’re using an escrow, having somebody in between you and the seller.

I did a deal early on figuring this stuff out, bought a site, US worked it out with the seller to send them half the money and then once we got everything transferred, we’re going to send the other half, which was, you know, better than nothing on my part. But the guy was such a nice guy. I really liked them. I was also young and naive. He came back to me and said, well I got something going on with the domain. There’s an issue on my side, but I really need that money. Do you mind you’ve got everything. You’re already earning the cash from the site. Do you mind just sending me the rest of that? And then, you know, we’ll get this domain thing worked out. And me being young, sweet, naïve, agreed to that, to [inaudible 00:22:22] go by three months go by, email.

The guy’s falling off the face of the earth. And in the back of my head I’m thinking, well, I’m making money from the side. Eventually I’ll get this domain. Six months later, the domain is now pointed to a new server with the same version of the site and he is now making the buddy. So it was flat, a small deal. And I’m going to have to one of my early experiences that you know, I was able to learn from.

Justin:
It was a small deal. So luckily it wasn’t that much money. It was a lot of money that’d be way more concerning. But also the fact that six months has gone by and generally you know you’ve done some work at that point, you put in the hours and the elbow grease and to have the half of man I was, as soon as you started, I was like, what’s your … where’s he going with this? And I was like, oh oops. That’s what’s going on. And that’s what happens without any third party in place.

I mean you have to figure out how you’re going to do it. So you can break it up into goalposts. Like I’ll give you 25% and then you do this, I’ll give you another 25% and then you do this. But like the lack of trust and the kind of confusion that’s going on there makes that difficult. So you know, if you can have agreements in place and there’s a third party, which is what escrow is, third party acts and we’ll hold the money until those agreements are met. And then escrow basically ensures that nobody ends up with both the domain and the money. Always every time it will never happen that someone gets both the money and the domains. So there’s a level of protection there.

Ace:
Absolutely. So you know, that’s the pro to going out and use an escrow. The, you know, con or a downside is there can’t be fees associated. If you go with a service like escrow.com and sometimes it can for a smaller deal, just complicate the deal. It’s a very simple blog and it’s a simple process. Sometimes it can add some steps that aren’t necessary. And I know you guys, Justin will act as the kind of escrow agent in between the buyer and seller so that they don’t have to pay those fees and deal with some of those complications.

Justin:
Yeah, I think, I’m not sure what deal, I wouldn’t use escrow. I think never reaching out to a brand new seller or me as a buyer reaching out to a brand new seller who I don’t know saying, Hey, just send me the money or something 50% up front. I don’t think I’d ever do that. If they don’t have some kind of reputation online where like it would be problematic for them to screw me. I don’t think I would ever do that. Even for small deals. Maybe you know a couple thousands dollars or something, I mean I think that would be very difficult pill for me to swallow. We Act as escrow for our buyers and sellers. So we, based on the terms of the agreement, we’ll hold the money and pay out the money based on that agreement being met. And again, we make sure that no one ends up with both the money and the domain. I think that’s important, but we only work for ourselves. There are other escrow companies out there, one of them being escrow.com and there’s a few others. It’s some of the other companies out there, escrow.com

Ace:
I’ve overused the escrow, they do their job, had good experiences with them, but I haven’t gone out and tried anybody else. I’m amazed that there aren’t at least a habit come across any of the other ones. But yeah, I’ll have to poke around and see if there’s some worth checking out.

Justin:
There are a couple others that I’ve come across that we’ve never used them. So I got to pitch right now, man, I got a little pitch. If you can give me a little leeway. I want someone to create an escrow company specifically for buying and selling online businesses. Like, I want that. I wish someone would do that. Great. That some attorney, some finance guy, it would create that. Because one of the problems with some of the other escrow companies out there, they don’t specifically focus on buying and selling online businesses. They do it for cars and trucks and property and crates and that kind of thing. And they do it for all different kinds of things. And so websites and businesses are just one of the things they do at four. So they don’t really know our industry.

So if someone created that, I think that would be awesome. We can’t, right? because we’re too involved in the industry. I don’t think you can’t either cause you’re a player in the industry, but I want someone to, I’ve been chirping about this to some attorneys and other people have. I’m hoping someone bites on this men.

Ace:
Yeah, I agree. I mean, well first of all, this is definitely a pitch friendly [inaudible 00:26:40] I’ve welcomed the pitches, but I cannot believe I, there’s a tremendous amount of transactions that are going through the space. That’s a huge opportunity for somebody to take advantage of. And right now it’s working, but a lot of the brokers are doing what you guys are doing and acting as the escrow. And fortunately we do have some people that are doing that with some good reputations, but that long term I think isn’t the right solution. So, that would be great.

Justin:
It’s awkward because we’re players in the deal, right? I mean we do have buyers and sellers interest to some degree, but like we have competing interests at times too. And so it is kind of an awkward situation. I think it’s the better situation than the current alternatives, although I wish someone would start a company that provides the best situation. I think that’ll come as our industry matures.

Ace:
And literally, I mean, I’ve been in transactions that a million dollar transactions and my client is saying, are we really going to let the broker hold? Is Escrow Dad has out? That’s what kind of outrageous. So yeah, I think it’ll happen eventually and hopefully somebody listen to this podcast, we’ll take that as a challenge and go create that business.

Justin:
Absolutely. All right, man. Let’s move to the next point, which we’re talking due diligence and closing the deal when it comes to due diligence. When it comes to closing, you need to set expectations for the due diligence period and the closing periods. So how long does the buyer have to make a decision? And again, that can be a negotiation point, right? So how long did they have to do their due diligence? What’s required before you even go into due diligence? Is it a refundable deposit? Is it a nonrefundable deposit? At what point are they tied to it or they have to walk away? At what point can other people go back to making offers? All these things did we figured out. Now on the sell side, obviously you’d like to make it a reasonable amount of time for the buyer to make a decision on the biocide you’d like a bit more time.

But that’s going to be a negotiation point and it needs to be laid out upfront. One of the ways deals can get lost and deals can go to crap are when that’s not decided. And so the buyer just wants to take their sweet time. They’re taking two weeks, they’re taking four weeks, they’re taking eight weeks. So I was like, look I know we didn’t have agreement on this, but this is getting kind of ridiculous. Let’s get this deal done or not. And the seller still try to lock them up and not let them shop to other buyers.

Ace:
Yeah, it can be frustrating. I think even from the buyer’s perspective, I think when you’ve got somebody that doesn’t know what they’re looking at, they really are just trying to get comfortable with the deal. But I encourage buyers look at this from the seller’s perspective.

Justin:
Yeah. I think virus in, one of the ways they can help with this is to give the seller an idea what to expect in terms of what they need to provide and do that early. Right. So let them know, here’s where I need and understand what you need for due diligence. Yes, you may have to go back and ask for additional information or access, but try to get as much of that upfront so the seller knows what to expect and it has the proper time to get you everything you need as a buyer to make a buying decision. And for sellers, they need to be prepared, they need to have their finances in a row, they need to have a sure that all of the tracking, all their expenses are accounted for and try to make the due diligence process easy.

They want to close quicker. So the best way to do that is to have everything ready and available and to quickly respond to buyer requests and get them all the information they need. The quicker they can do that, the better chance they have it at closing the deal on time or even early. I think it’s a good idea to be conservative with your due diligence period. So try to, as a buyer at tried to get that extended. And then for sellers, right, they’re going to want a shorter period generally, but it’s okay. Like try to be a little conservative, try to overestimate and then as a buyer, do your due diligence as quickly and as upfront as you can both because it’s, I think the respectful thing to do and not just waste the seller’s time, but also because if you can make decision quick and early and you want to bounce out of the deal, look elsewhere, but you don’t want to spend weeks and weeks, molding over this deal. If you can find out quickly that’s not for you, then get out.

Ace:
Yeah. I think a lot of times buyers don’t realize that this is opportunity costs. You know, your time and focus is valuable, so you’re not just wasting the seller’s time. When you take a long time, you’re wasting your own. So the more organized you could come in, get in, get either in the deal and close it or out of the deal and on to the next one, the better off you are.

Justin:
Yeah. That’s why you know, if people are being particularly picky, which I think in some instances it’s going to be picky about certain things obviously. But if you’re being particularly picky for like let’s say a low five figure deal and you do that with five, six, eight deals over the course of three months, four months, six months, you’re getting to the point where like even if you get this amazing Unicorn of a deal, you’re looking for like what kind of return are you going to need to make up for all the hours in trying to find it? So yeah, that opportunity costs definitely comes into play. At the same time. You don’t want to just be like, yes, I’ll buy it. Yes, I’ll buy that one sounded great too. So you know, there is some kind of balance there I think they need to consider. Absolutely.

Ace:
So when it comes to the actual terms of the deal, every once in a while, you know we closed the deal, we’ve done some deals like that, have the terms in addition to the price. These could be things like an earn out. So in addition to paying some amount of money at close, you’ve got a monthly payment that may be a percentage of revenue and that kind of thing. It could be a straight finance deal where you’re making monthly payments on an ongoing basis that may be in a specific fixed amount regardless of what kind of what those terms are. It’s a really important thing to talk about the specifics of those terms. So it goes beyond just, here’s the amount that I want to pay in earn out or finance and that kind of thing. You got to get into, this is what the percentage is, this is how we’re gonna calculate that percentage.

This is the date of each month that payment is going to be made and the more you split, but you can work those things out and begun to okay, this is what to expect and have clarity on both sides of the table to better. The other thing that can be toughest, making sure that you’re both on the same page because what means you may have defined profits. As you know, this is the amount after these expenses. Somebody else may defined profit as this is the amount after the product is paid for it. So you have like a gross profit and you have net profit. And so kind of spending some time and not try to make it to elementary, but expressing your definition of some of these concepts that people just may define differently, can’t and make the loan term aspect of the deal in that relationship as positive as possible.

Justin:
Yeah. That can get a little weird, right man. So like you’re talking about profit, do I get to count my weekend in Vegas as expenses? Right, right. Yeah. I was networking, I was meeting people or right. Like it gets through the lock rod and so if I want to count that as not profit, you know, there’s gonna be some unhappy party on the other side and I think yeah, that can get a little sticky and the other side of it. You can do it tied as a multiple of profit or like a percentage sorry, we’re getting detailed now, but you can do an earn out as a percentage of profit. But tied to revenue and say look, if you make this business less profitable, that’s on you. But I’m taking let’s say it’s 50% profit margin, I’m going to take half of the profit.

So I’m just going to say I’m tying it to 25% of revenue. So you could do something like that, but then you can have some frustrations from the new buyer who does have these added expenses. Maybe you, the seller accidentally left off and you know, some of the expenses that they had, or if there were some roads expenses that just need to be paid and now the buyer isn’t making anything and just paying out the seller, that can be frustrating too. But I think all these things need to be cleaned up on smaller deals. It’s normally just, you know, an agreement on, okay, here’s what the payments are. But I think especially as you get to larger deals, there needs to be penalties for not paying on time. And then also ultimately if those payments stopped coming, what happens. There needs to be some clarity on that. So that’s generally when you have attorneys involved in the contracts and writing them up. And I’d say those are important for larger deals. Definitely mid to high six figure and into the seven figure range.

Ace:
Absolutely.

Justin:
Cool man. So let’s talk about our other point we want to get into which is training or ongoing support and this is something that we’ve dealt with you and smear buyers is that with a site or with a business that not as clear up front I want the work is like there may be some either technical work or there’s like a process that isn’t terribly clearly defined by the seller because they just never done it or whatever. You know you’ve done deals where I want to pay this much up front and you know this much after 30 days or 60 days or however long we think it’s going to take for that to happen. And I think there needs to be real clarity on what’s required from the seller, what the buyer is asking for in terms of how many calls are we going to do, are we meeting in person? How long are we meeting in person? How much email support are you going to give and for what period of time? And all of these needs to be done before the deal’s even closed.

Ace:
Yeah. The more you can, and what I encourage buyers to do is just over estimate. You know, a lot of times buyers get into a situation, the reason they’re not specific about it is they say, well, I have no idea what I’m going to want or what I’m going to need. It’s like, think about the worst case scenario of absolutely everything you would need from the seller and then add to it. Because the worst case is, you do need that much help, but maybe you don’t. And that seller feels like, I got out and didn’t have to do all of that. And so maybe a year down the line, you need something problem. They’re like well, you know, they didn’t even use all the support that we negotiate it. So I’m more than willing to help them out now.

Justin:
That often happens where you know the sellers like you know, okay, yeah, no, I’m willing to do it. And then the buyer gets in there, requested a whole bunch of time and then at the end of 30 days, you know, so I was like, oh, that wasn’t much at all. You know, they, they even check in, hey, is there anything else you needed? Are you sure you’re good to go with this? And I can tell you that on the sell side offering the training and making that either contractual agreement or just agreement via email or whatever, making sure that both parties agree to that is pretty easy. That’s an easy gig for them because they’re selling their business, they’re excited to be cashing out on this thing and they’re already thinking about their trip to Vegas or the inventory they’re going to buy for their ecommerce business or whatever the hell am I to do with the money that’s already spent, man.

So they’re like, look, yes, no, all, I’m happy to train. I can give you 30 days, whatever you need, whatever you got there today. So I think it is important for the buyer to just kind of like really lay that out. I think it’s also important for the buyer to build a good relationship with the seller. But not be afraid to ask a silly or simple questions. I think, you know, if there’s something you don’t understand or you’re a new about it, you’re brand new to this and you don’t understand it, feel free to ask. But don’t be a jerk about it either.

Be Cool with the seller because you may need to go back to them someday for something, and you want to make sure that you end that, you know, well, don’t burn any bridges. Also, I really recommend this, that there’s opportunities to do business again in the future. You know, that seller sold a business that you liked, they’re probably going to do business again unless they’re totally out in, they’re retiring or something. They’re going to be building another business. Is there a possibility for you guys to JV and the future? Can you work together cause they sound on an advisor on the current business that you bought from them. There are lots of opportunities. So those are bridges you don’t want to burn.

Ace:
Yeah. I’m such a big fan of building relationships with the sellers at the end of the day, they made it past the entrepreneurial gauntlet and a lot of cases or you know, I call it women entrepreneurial lottery because no matter how smart you are, how good you are, you’ve got a vast number of these businesses that are going to fail and never make a single dime. So they’ve made it past the that and actually built something of value and something that’s more importantly profitable. So building a relationship with that person. You know, you never know what’s going to come from it, but you know that hey, this is somebody of quality. They built a business. It has value. There’s something that you can learn from that person.

In addition to obviously the fact that you know, I’ve had plenty of deals where we may have something a year down the line where it does get hit with a Google update or whatever and having a great relationship with that seller allows you to go back and say, hey, what would you do in this scenario? Do you mind coming in and doing some consulting where you work with? And a lot of cases we’ve built enough of a relationship that even when we offered to pay, they’re like, no, I don’t want any money. I talk good and let’s figure this out and get this thing back on track that’s been really valuable for us.

Justin:
Or that seller may be willing to, you know, you have a couple of questions for them about another business. You know the answer them for you. They can come to you. It could be turned into a friendship. I mean, it could turn into a mastermind where you guys are working together and meeting every week or every month and you got to start actually working together and talking about some of the other businesses that you guys are working on. I just think there’s a lot of opportunity there. I mean, clearly you talked about passing the gauntlet. They got first that past the initial phase of like most businesses don’t make a profit at all, so they got past that they’re making money, but they’re making money in a business that you’re not buying. So you clearly have similar interests. The interest is similar. So, you’ve got that in common. I think there’s plenty of opportunity to work together.

Ace:
Absolutely. Well, this has been an awesome episode. I think people are gonna get some value out of this and kind of be able to step back, look at the different aspects of the deal and make it a little bit easier to get the closing. I think the biggest key that we mentioned several times is being specific about all these different aspects of the agreement and not just going along feeling like, okay, well we know the price, we know where we’re going to close, let’s just get the deal done. The more you can be specific upfront, the easier it is to win long term.

Justin:
Yeah. I think clarity is the most important thing Ace. And you know us over at Empire Flippers, we’ve got beaten up a little bit as soon as we don’t use contracts and a lot of our deals are not contracts, especially in like the low five figure, mid five figure range like you know, but we do with those no contract deals, we do require some clarity from both a buyer and seller going into it. So that’s so important. I think the more complicated deals, whether it’s based on structure or just a larger like the higher sales price, you know having an actual contract and potentially bringing in attorneys to make sure that both sides are protected and comfortable, I think makes sense.

Speaker 2:
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.

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