Website negotiation and buying process

We get questions about what the actual process is to purchase a website (and many sellers are confused since this dates back to the origins of mergers and acquisitions). It’s a business like any other; the typical process applies for purchasing. For this example, we are going to use a broker scenario where they are the middle-man to the transaction.

 

Summary of the process:

  1. Broker emails out the listing(s), or you find a business through networking and outreach.
  2. Get/Request the prospectus if there is one.
  3. Do basic due diligence on the site and make sure it passes your “rules.” This includes running through SEMRush if you have it, and any keyword research you can perform.
  4. Customize and send a Letter of Intent (LOI) with your purchase price, terms, and offer. Try to spell out the main details that will be a negotiation point for the business sale.
  5. Do some negotiations back and forth probably through email; it may be quicker to jump on a phone call with all parties. This can happen before sending the LOI as well.
  6. Seller signs the LOI and returns to you.
  7. Do the complete due diligence – mainly financials, look through tax returns, P&L’s, sales data, etc. to make sure it all adds up. In the LOI you specified how much time is allotted for this, and they are not allowed to pursue other sellers (they can have a backup list but not sell it out from under you). This is where you are really looking into who the seller is as well, are they responsive? Are they willing to help you make this business work? If they go dark during due diligence, you can still walk away. Do not get too invested in a business at this point.
  8. Submit the purchase agreement with funding and closing dates, make sure financing is in place to meet the closing date. The purchase agreement should nail down specifics regarding training, payment dates, anything you think is important to finalize the deal. Often there is a deposit paid at this point that is non-refundable. This means the buyer is able to perform, and the seller gets the deposit if not.
  9. Close, fund, and post-sale transition. There is where the work beings, getting the business under your control. The seller should have documentation to help with this.

Many inexperienced buyers or sellers might want to skip right to the purchase agreement, but the issue is you don’t have any recourse if the financials don’t work out. You can add that language to the agreement, but that adds unnecessary complexity.

Interested in selling your business? Contact us and we can talk.

 


Domain Name Tools

What are the tools that we can use to check domain name information and its history? This is important so we can see where the domain has been, how many times it’s moved around (hosting companies) and how long it’s actually been in service. We can also research who owns it, and how many other sites they own that might be a conflict of interest.

The first tool we are going to use is “whois”. You can use this from a terminal (MacOS or Linux), or you can use an online one like:

Type in the domain name or run “whois domain.com” from a command line and you can see the details. Important fields:

Updated Date: 2017-01-19T08:19:54.000Z
Creation Date: 2006-01-18T14:10:49.000Z

Here we can see when the domain was last renewed and when it was originally created. If the seller is claiming the business is five years old but the domain creation date is only two years old, they will have to explain. There are circumstances where the domain is dropped and re-purchased from another provider, but that is rare if it’s a real business (everything is auto-renew these days).

Also check the owner of record, this is typically private so you won’t see much there.

The next tool is a whois history. This will show the information above, but how many times the domain has changed accounts and been renewed. Many of these are paid services now, so purchasing a domain report from domaintools is the way to go. If you are doing due-diligence on a website and have already submitted an LOI, this report could save you so it’s worth the $49.

There is some basis for SEO purposes on domain history. It is believed that google looks for clean domain history as a ranking signal. So if the domain has moved around a bunch, it might look spammy to them.

When doing domain research, it is also useful to see other domains registered to the same person or company. This is called reverse whois. Type in a name or email address, and their database will show other domains they might own. If they use privacy mode, then you probably won’t find much useful information.

Reverse whois: http://viewdns.info/

The next step on checking domain health is looking at blacklists. This can tell you if their domain has been reported for email spam in the past and can cause harm down the road.

An all encompassing tool: https://mxtoolbox.com/SuperTool.aspx

Run the blacklist check and make sure it comes back OK for all the lists. If there are some issues here, it could take time to fix them. If the business depends on email marketing, this will cause issues down the road.

The last step we recommend it checking the hosting history. See how many different IP addresses it’s had over the years will tell you if it has been moved around a lot. Ideally you want just a couple moves as this signifies a stable site. If it’s been sold a bunch of times, you will most likely see different IP addresses across many hosting providers.

Tool here: Viewdns Tools

Type in the domain name in the IP history box and it will show the different providers used. We like to see at least 1 year between hosting providers, better if its only a couple for the entire history. If it is an e-commerce site, they are most likely sticking with one of the big players (Shopify, BigCommerce, etc) so they are not going to move the site. It takes too much work and lost sales.

We hope these tools provide some value in your business!


How to price a SaaS business for sale

There is a great blog from a VC at Redpoint by Tomasz Tunguz. In it he discusses every kind of SaaS business you can think of. He has a great article that analyses pricing over the last six years (read more). The large trend in SaaS is about a 3-4 times multiple of net. Online businesses are typically calculated from their net profit (income minus expenses), so a business that generates $100,000 a year in free cash flow/profit would sell between $300k to $400k.

There are many factors that determine pricing, but a few of the mains ones are:

  • Age of the business – is this a track record of earnings more than a couple years or is this business only a year old?
  • Quality of the product – do customer really need and value what you are selling? Do they stick around? What’s the churn rate?
  • Easy of management – does the Buyer have a long road ahead to on-board this business or can they take it over easily? Businesses that are setup correctly where the owner can swap out are worth a premium. This means to have processes and employees in place to handle the day to day tasks.
  • Longevity and potential growth – is this a fad based business or is there a real growth path? How has the business been faring the last few months/years, growing or declining? Have they been keeping good metrics and have quality customer lists?

There are many other factors that go into a great web business (brand-able is huge), but this covers the top level. We have written about due diligence before, so business owners should conduct their own version of it before trying to sell. This can often pay for itself by fixing a small issue the Buyer can work the price down with.

Interested in selling your business? Contact us today and we might buy it.


Quick tips on using Google Analytics

GA or Google Analytics is a great resource for any business owner. The amount of useful reporting and analysis that can come out of the platform is staggering. Many businesses are not using even a small percentage of the power of GA, so let’s discuss a couple things you can do right now to get better data out of it.

A. To start with, do you have GA enabled on every web page? If you are using WordPress, the cleanest plug-in I have found is called “insert headers and footers”. It’s very simple and you just paste the GA <script>stuff</script> code into the header section of this plugin. This will then track every web page that users visit and send a “pageview” to GA.

If you are using a custom site, make sure your code is sending a pageview event on each page that you want to track.

B. Next up, are you showing test data in your account?

If you are developing and using the main site to test against, that data is also getting recorded. There is a function called a filter to remove this from your statistics.

To setup a filter, go to the Admin section of the Analytics portal.

  • Filters are setup per View, so find your web property, and go to the views area
  • Pick the view you want to change (most just have one view), and click “Filters”
  • Create a new filter by clicking “Add Filter”
    • Let’s setup a filter to exclude any traffic that is going to a certain web page on our site that only developers go to.
    • Give your filter a name, “Filter Dev Testing”
    • Click “Custom”
    • Click “Exclude” – we are going to remove any traffic that matches the URL
    • In the Filter Pattern – enter a URL – “/testing” for our example. Anything you do not want to show in the Analytics view you can add there. Case sensitive then check that box.
    • Click Save, now you have a view that is filtered. This will be retroactive as well so you view won’t show any of the testing data now.
    • Photo:
    • Google Analytics Filters

C. Are you tracking visitors across their different devices? GA let’s you connect users with an ID so you can see if they came from a web page, switched to mobile and tablet. This helps to see how users are interacting with your site. If they constantly start on mobile and switch to browser, maybe the mobile experience needs some work.

This is setup by enabling the User ID functionality of GA. Read up on it here: https://support.google.com/analytics/answer/3123666.

Basically you need to connect google analytics with an anonymous ID that you can pin to each user. So if they login to your site, you can send a userID each time they login (that’s how we connect them from different devices). The function is: ga(‘set’,’userid’, {{id}});  It also must be enabled in the admin->property->tracking info->user id section.

D. Are your properties separated? Many people like to use the same analytics account for multiple properties, but they also use the same tracking ID as well. While this makes it nice to have just one screen, it’s very difficult to discern which property/app people are coming from. A better approach is to use different properties for every domain (approbo.com, app.approbo.com, etc) and if you need to link something together, enable cross-domain tracking (site linking). Read more about that here: https://support.google.com/analytics/answer/1034342?hl=en
E. Custom dimensions – You can create 20 different “dimensions” or data collection points in GA. This let’s you add data that GA doesn’t collect, an easy example is classifying different types of people into prospects or customers. So you can classify people who have visited certain sections of your site and filled out a form vs. people who have never interacted with you. Once they fill out a form, you can send in a custom dimension with the form name or some other identifier, and then you can track people and what else they do on your site, only related to who have filled out that form. Read more here: https://support.google.com/analytics/answer/2709828?hl=en
F. Custom metrics – along the same note as dimensions, you can collect your own metrics to measure against. An example would be someone clicked the play button on your landing page video. You can track how many people visit the page vs. how many people click the button and create goals against these custom metrics.  Read more here: https://support.google.com/analytics/answer/2709829?hl=en

G. Goals – Do you have goals and funnels setup in GA? This is the best way to see if users are actually doing what you think, otherwise they might not be completed all of the actions you’ve identified. The best way to see if someone is completing your user wizards, or finishing the start-up steps is to setup a funnel and goal. You can send custom pageviews to GA that let you track pieces of your application, or steps in a process.

 

Those are the main GA features and enabling or using them will let you get into much more details on what users are doing on your site, and where they drop off. If many users are leaving on the same page, it’s a great place to experiment with exit polls or some other form of exit interaction.

 


Is a business that’s less than a year old worth much?

To start with, if your a seller, then the business is going to be worth a great deal more to you than it is to a buyer. This is one of the due diligence points that we look through when purchasing a business (real site age). Finding out the true age of a site can be tricky. Domain names that are only a year old doesn’t necessarily mean the business is only a year old. A quick trick is to use archive.org to see what the site looked like in the past.

So let’s say the business is less than an actual year old, and we want to assign a value to it. There are quite a few ways to do this, the way we use at Approbo is straight income valuation/estimation.

We start with the revenue from the past year or number of months, and subtract the costs of running the business. We typically will remove anything related to building the site out, since this is mainly a one time cost (unless there is constant upkeep on a site, then the expenses are estimated).

The actual multiplier on a new site is going to be less than one that has been around for more than 3 years. We are seeing those in the 2.5-3x range for matured companies, so a company less than a year old is at the very low end, typically 1.5x – 2x.

Seasonality plays a large part as well, similarly fad based businesses. Is this a hit once and done? Are the dollars received the last year going to be the highest ever?  If it’s a new niche that is gaining traction, that is worth much more than a company following something fun in the news.

To get to a price, we look at the monthly net incomes (income minus expenses) and calculate the monthly growth rate.  We average out the month to month growth rates, and use that to calculate an estimate of the revenue for the next year.

An example just with two Months of data:

Month 1 Income: $1000

Month 1 Expenses: $200

Month 1 Net: $800. ($1000 – $200)

Month 2 Net: $950

Month 1 to Month 2 Growth Rate: 950 / 800 = 1.188

Month 3 Net: $1050

Month 2 to Month 3 Growth Rate: 1050 / 950 = 1.105

We continue with these growth calculations until we have as much data as available.

Once we have the month to month growth rates, we add those up and divide by the amount of months (average).

So for our two month example: 1.188 + 1.105 = 2.293

2.293 / 2 = 1.1465

So our average monthly growth rate is 14.65%

We can then fill out the rest of the year with this estimated growth. Note: if there is an outlier month, say a campaign of some sorts, we typically remove this from the data set as it will skew the data too high.

So Month 4 net we can estimate as $1050 * 1.1465 = $1203.83

And Month 5 would be $1203.83 * 1.1465 = $1380.19

Once we have built out the entire year, we then sum up the net profits (800 + 950 + 1050 + 1203.83 + 1380.19 ….etc) . We then multiply this value by our multiplier of 1.5x – 2x depending on the type of business.

 

So as you can see there is a way to put a price on a new business. Typically we advise against purchasing anything this new as there is no clear sign it will continue. Most sites with a quick growth curve are using a PBN, or Amazon based businesses which can change over-night. As always do your due diligence!

Contact us to have a quick seller consultation and we walk through your business

What is an NDA and does it do anything?

–We are not licensed attorneys, so please do not take this as Legal advice. Always consult council before signing anything you are not familiar with and do not completely understand. —

An NDA is abbreviated as a Non Disclosure Agreement. They are typically sent by the seller (or seller’s broker) to a prospective buyer.

The idea is to give each party some comfort (these are always weighed more to the sellers interests, however). If the deal falls through, or never goes further, the seller needs some “insurance” that the buyer isn’t going to steal the information and duplicate the business (or improve their own similar business).

The NDA explains who the buyer can speak to about the business, this typically is their attorney, the seller, and the sellers broker. This allows the seller to restrict access to their employees and customers, in case they are not aware of the sale. It could cause harm to the sellers business.

If the buyer is caught in violation of the agreement, the seller can sue. Sellers can get “relief, claims, and damages” which is a fancy way of saying a good amount of court costs. Typically this is handled in arbitration without a lengthy trial, but that is spelled out in the NDA.

Just about every seller and seller’s broker will require an NDA to look at the business details. Once you sign this, they will send the business documents over. This is the only way to really make an assessment of what the business is doing, and you can start your real due-diligence. (Want some help with a web site purchase and due diligence? We can help, send us a note). This is also where you can finally see if the business is worth what they are asking.

What sections are important to read through in the NDA?

Well all of it of course! The items that are typically included are:

  • Name, location, what the business does/operates
  • The length of this agreement, can vary from months to years (3 years is typical)
  • Who each party is, name, address, etc
  • What information is covered, financials, contracts, trade secrets, suppliers, customers, employees
  • Where and when information is sent – typically this is all electronic, but some sellers might want to use physical documentation

As a buyer at this stage, you should determine how the seller is communicating with you. Are they open and easy to work with? Are they responding with actual answers and not vagueness? This will determine a great deal down the road when you are ready to close and begin the very involved process of the hand-over.


How do I sell an online business?

If you are interested in selling your web property (online business), there are quite a few considerations.

The top ones are:

  • Is my business ready for a sale?
  • How do I find a buyer?
  • What about scammers or competitors stealing my ideas?
  • Should I use a broker, and who?
  • How do I price it?
  • What documents do I need?
  • What is proof of income?
  • How do I prove my traffic sources?
  • How much analytics data do I make public?

These are important considerations. Contact us today and we can work through them.

 

Typically you should start the “selling process” long before you need to sell it. This gives you time to get your paperwork in order, most importantly the financials and customer data.

Finding a buyer that won’t steal your idea or “Secret sauce” can be tricky as well. Many business brokers will give out your information without a basic NDA (non-disclosure agreement) which can be very detrimental. That’s why working with an ethical buyer (like Approbo) can save you time and money.

 

What things does Approbo look for in a business?  Read this to find out

Typically we do not invest in fads, a niche that is maxed out, nothing unique about the business, only competing on prices, no needs for the product/service, businesses less than a year old, websites created with a PBN, or terrible financials.

Contact us to have a quick seller consultation and we walk through your business