Tuesday, April 8, 2014

How to Sell an Online Business

If you've built a successful business that's not only profitable but also attractive to potential buyers, and you are ready to retire or move on to other things, you may be ready to sell it.

The first thing to do is to figure out what the asking price should be. That is easier said than done, as most of us fall into the "Buy low, sell high" category, and that's not the formula for determining the fair market value.

Then there are the industry multipliers. Those can vary greatly and—like the previous example—may not be accurate as to what you should be asking for your online business.

From what I've heard, most small businesses advertised for sale by owner, are overpriced. I assume that many believe they can reduce the price to accommodate a potential buyer, but although I understand the thinking behind that strategy, I consider it flawed for two reasons.

  1. If your asking price is unreasonable, you risk alienating potential buyers who will know the price does not make sense and may not want to bother dealing with you in the first place.
  2. You may price yourself out of the market. There may be other similar businesses being offered for sale, and average asking prices may show that yours is too high.

So how do you come up with a fair asking price?

Don't waste time asking friends or relatives. Even your CPA may not be the right adviser in this case. You don't want people who like you and who may be full of good intentions. You need the services of an experienced professional.


BUSINESS BROKERS

I think that the best approach is to hire a sales pro that specializes in the sale of online businesses. Doing an online search can yield good results: click here.

Think about it for a minute. If you want to sell your house, for example, I am sure you will use the services of a Realtor®. Someone who knows the market, will help you with comps (so you can price your property correctly), advertise your listing through significant channels, and handle the whole spectrum of pre-qualifying buyers, accepting offers, making counter-offers, order inspections, handle contracts, and more.

Hiring a professional business broker to help you determine the right asking price, then handle the sale and transfer of your business makes perfect sense.


WHO DO YOU HIRE? 

I have dealt with many business brokers in the past. Some charge upfront fees that cover listings, prospectus design and printing, notices to investors, and more. Those fees can range from a few thousand dollars to ten grand or more. And you still have to pay a percentage if they make a sale.

I've always shied away from such companies as I felt they had no skin in the game. Plus, a couple of them painted a picture that was too rosy for my taste, so I passed on their high fees, and I am glad I did.

Then there are the brokers who will help you sell your business based on a straight commission, just like a Realtor® would, and those are the ones I recommend talking to. If there's no sale, you're not out of any money. The commission may be higher than that of the aforementioned agents, but not by much.

And speaking of commissions. I'd say you can expect to pay anywhere from 8 to 10% of the sale price. Anything higher than 10% I would question and—most likely—avoid. 

The commission will be based on the total amount agreed upon for the "good will" and other intangible assets of the business. Things such as inventory, vehicles, equipment, and real estate, for example, are not subject to the sales commission, but every broker is different, so you want to make sure you understand exactly what is subject to the fees before you sign a listing agreement.


LEGAL COUNSEL

Just like you use the services of a Certified Public Accountant to handle your tax matters, you will definitely need the services of a good business attorney to help you with the sale of your online business.

Not having a lawyer representing you is unacceptable, in my opinion. There are too many gray areas when it comes to agreements and contracts for you to "play it by ear."

Not having legal counsel before, during, and after the transaction is completed, is just too risky and not the area to "save money." Chances are that if a problem pops up after the fact, you could lose far more, so hire a good attorney who specializes in the sale of businesses and contract law.


LISTING

Once the asking price and listing agreements are in place, your business broker will start marketing your business to potential customers, and must present to you all serious offers tendered.

Those offers (assuming that you get several) will vary, as far as valuation and terms.


THE OFFER

Your broker will, most likely, secure a Letter of Intent, which will list the amount being offered as well as payment terms.

Since I do not know your particular situation, I will share what I think is the best approach, and to me that is to get as much of the agreed-upon price upfront in cash. Doing otherwise turns you into a lender of sorts, where you are "toting the note" for a pre-determined length of time, and that means you are at risk of not getting paid in full.

Anyway, through your broker you can counter-offer or reject the terms of the formal offer, as this is nothing more than a negotiation at this point with hopes to reach an agreement, for both parties, with the goal of moving forward.


THE SALES AGREEMENT

Once you (through your agent and attorney) and the buyer have reached an agreement, it must be spelled out in a formal and binding Sales Agreement. This document defines what is being sold, the agreed-upon price, the terms (cash, financing, etc.), and the parties to the agreement. Other information such as discovery or due-diligence, and a closing date, will also be specified.


DUE DILIGENCE

I refer to the due-diligence process as the colonoscopy of the business world.

Depending on how thorough the buyer is, this process may take anywhere from a few days to a couple of weeks. If the latter applies, at the end, the buyer or their representative will know more about your business than you. But regardless of how long it takes, know that it will be invasive and—at times—intrusive, maybe offensive. Just don't take it personally.

Because of the sensitive nature of the information, this is yet another area where having a good legal eagle pays off.

Having proper non-disclosure and non-compete agreements in place may be advisable and, certainly, something you would want when sharing financial information relating to your business. You don't want the buyer to walk away from the table only to become a competitor with such deep knowledge about how you conduct business, who you purchase from, and more.

By the way, a good broker will make sure the buyer submits a detailed due-diligence list so you can prepare those documents and answers in advance. This saves time for both parties.


CLOSING THE SALE

Brokers will take their commission at closing, so they are covered, but you could be left holding the bag if the buyer defaults on the agreement. That's why I strongly recommend you have a good attorney representing you, and also making the buyer or buyers personally liable in case of default.

Discuss this with your lawyer and make sure you understand all the nuances of selling and transferring your business. Once you transfer title, you are no longer in control, so make sure you are protected.

As a side note, some—if not most—brokers will use the original Sales Agreement (with the required addenda and/or exhibits) as the closing document, while others may choose to use a separate contract.


TAXES

Here's where your CPA will come into play.

Based on what you sold and how the deal was structured, you may have to pay taxes. Part of the proceeds may fall under Capital Gains, while some of the funds may be taxed as regular income. I am not an accountant, so consult with a professional before listing your biz as taxes will have an impact on what monies you get to keep.


IN SUM

Selling a business is not necessarily difficult, but that does not mean that it's a simple process. There are many layers to it, and that's why I strongly recommend assembling a good team that will advice and represent you.

And if you are selling a web-based business, you will definitely benefit from having a broker who is familiar and experienced with the process.

I hope this article gives you a basic idea as to what's involved, but understand that it is not intended as a substitute for professional advice.