St. Paul, MN – April 22, 2013 – Quiet Light Brokerage, a leading pre-qualified online business market, today announced its annual forecast of the top trends for selling a high-value online business in 2013, and the launch of the “Top Price Playbook for Selling an Online Business” valuation service.

As the U.S. economy rebounds, 2013 is ushering in a new era of e-commerce where entrepreneurs are increasing the amount of new online businesses being started, and more business owners are purchasing online businesses to expand their earning potential with the least amount of capital outlay.

With this difference of opinion on financing, how should you approach a seller if you want to finance a portion of the purchase?  What types of businesses lend themselves to financing?

Why Sellers Dislike Owner Financing

Many buyers do not understand why a seller would dislike an offer that includes owner financing.  After all, some styles of financing can actually result in the seller receiving more money in the long run.  Additionally, seller financing can open up more offers which in turn would likely result in a higher price for their business.

Yet even with these incentives for owner financing, it is very rare that a seller will prefer financing the sale of their business.  There are several reasons for this:

Most Sellers Cannot Collect on Defaults

The very first question sellers tend to ask when approached with owner financing is “what do I do if they don’t make their payments”.  In theory, default payments can result in having the sold assets repossessed by the seller. The reality, however, is that most sellers do not want to take on the repossessed assets and associated work with owning those assets again and also do not want the potential hassle and cost of trying to repossess the assets.

Most Sellers Want to Move to New Opportunities

Owner financing requires that the seller stay involved with their business at least insomuch as they are collecting payments.  Most sellers are looking for a clean break from their business.  They want to move on to something new, something more exciting (at least to them), and something different.

Most Sellers Want the Simplest Solution Possible

Although seller financing can actually be fairly straightforward, most sellers want as clean of a break as possible.  Seller financing stretches out what is already a very stressful transaction into several months of waiting for that transaction to be completed.  All cash deals are highly desirable for them as it gives maximum flexibility and the quickest route to their next opportunity.

Who Likes Delayed Gratification?

In general, people dislike delayed gratification – especially on the Internet.  Working on the Internet is working in a world of immediate results, immediate feedback, and usually immediate payments.  The idea of having to wait for payments in incongruous with how online business owners think and work.  Some people prefer to have a steady, reliable cash flow, but most online business owners will prefer the immediate reward of cash upfront.

The Market Dictates: There are Usually All Cash Buyers

Possibly most importantly, for most quality Internet businesses that are for sale, there are buyers who are willing to pay cash and close quickly.  Given the motivators above, and given the ample supply of cash buyers, most sellers won’t even entertain financing offers.

Despite this, however, there are many businesses which sell that have portions of the purchase price wrapped up in some form of financing. Below we will talk about three types of common owner financing.

Common Types of Owner Financing

1. Performance Based Financing (Aggressive)

Performance based financing is one of the most aggressive types of financing available.  The entire concept of this type of financing requires that future payments be made (or not made) based on the future success of the business.  Buyers tend to love this type of financing as it greatly reduces risk.  Sellers tend to strongly oppose this type of financing as it relies on the skills and talents of the new owner to reach certain benchmarks and places the value that they receive from their of the business strongly in the hands of a new owner.

It is for this reason that performance based financing deals are really only agreed to on businesses whose trends are strong in one direction or another.

2. Straight Financing (Neutral)

This type of financing is the easiest for most people to understand as we are all very familiar with taking out a loan.

They key to approaching a seller with a straight financing deal is to keep it simple, straightforward, and safe.  Do not be surprised, however, if the seller simply balks at the idea of financing any of the purchase price.  As was mentioned earlier, with plenty of cash buyers in the marketplace, sellers will typically prefer to get all of their money upfront.

3. Holdbacks (Passive)

Holdbacks are often times not considered to even be financing. However, they are common enough to consider here.

Tips for Securing Owner Financing

Transactions with owner financing are relatively uncommon (except for holdbacks).  If securing owner financing is something that you insist on having in a transaction, here are some tips which may help you get an owner to agree to finance a portion of the purchase price:

1. Recognize Their Risk. Too often deals fall apart because one or both of the parties involved fail to recognize the risk that the other party is taking on.  Owner financing requires a lot of trust from a seller, and while a buyer is always taking on a significant amount of risk, seller’s will question whether they need to take on what may appear to be an unnecessary risk.  Recognizing the seller’s risk will help you in speaking to their needs and crafting a proposal that makes sense for all involved.

2. Keep It Simple. Although creating a tiered payout system complete with balloon payouts and performance escalators might ultimately be the best solution for everyone involved, creating a complex deal will usually result in outright rejection.  Remember that  in most transactions a seller (as well as a buyer) is trying to protect their interests.  They protect their interests by being sure that they understand all that is involved in your offer.  Complex payouts introduce too many ‘what ifs’ for sellers to feel confident that it is a good offer.

3. Keep it Short. The primary concern for sellers with owner financing is always whether or not they will be able to collect on a default payment.  Shorter financing periods gives you fewer opportunities for defaults, and as such, reduces the risk for the seller.  Shorter payouts also help satisfy a seller’s desire for relatively quick gratification and the ability to move on to their next projects.

4. Be Willing to Personally Guarantee. In many of the transactions we have consulted on our buyers have been happy to personally guarantee the loan.   No financial institution would lend on an e-commerce acquisition without sufficient assets as collateral, and as such an individual should not be asked to do so either. Personal guarantees help seller’s know that you have every intention of paying back the loan in good faith.

5. Be Prepared for Rejection. Many seller’s would prefer to simply hold on to their businesses rather than sell them in a financing operation. As such, be prepared for most sellers to turn down owner financing deals.  In addition, do not expect to financing a majority of the transaction unless the business is in distress.

Owner financing can be a good option for the right business.  Many of our buyers have come into very strong businesses while utilizing owner financing to help leverage the upfront cost of acquiring that business.  Owner financing can be obtained in some transactions.  Knowing what to expect, the types of offers you can potentially make, and what motivates sellers can help you create a strong winning transaction for all involved.

How the Marketplace Values Internet Based Businesses

Fortunately for us and for you, the marketplace is in very strong agreement with how it values web based businesses.  Although there is some variation with some specific industries (such as the web hosting industry – their valuation models would not necessarily be the same as what I am about to explain), the vast majority of online businesses are valued using a cash flow multiplier (sometimes referred to as the owner’s discretionary cashflow discount multiplier).  The formula here is simple.  It is:

your discretionary cashflow x some number = gazillions of dollars

The first reaction most people have when they look at this formula is that it is overly simplistic.  What about the domain name? What about that #1 ranking in Google? How can you really place a value on that?

The mistake most people make when thinking about the value of their site is that they think of it in terms of a + b + c = total value.  In other words, they think the domain is worth $5,000, the Google ranking is worth $100,000, and the cashflow is worth $50,000.  The marketplace doesn’t view valuations in this way.  Rather, it looks at values in terms of a scale, not in terms of “sum of all the parts”.

Involved in the formula above is the determination of what the “some number” value is.  That “some number” makes a big difference in your eventual asking price.  Consider for a minute that your website generates $50,000 of owners discretionary cash flow per year.  If that “some number” is 4, then you could bring in $200,000 by selling your business.  If that “some number”, however, is 1.5, then you are only looking at $75,000.  That’s a swing of $125,000 just based on a simple multiplier. As we will see in this series, most of a proper valuation is spent on determining what multiplier should be applied to your business to determine its value.

About that Discretionary Cashflow

Before we get into determining the multiplier, it seems appropriate to define what “discretionary cashflow” means.  What we are looking for to arrive at this number is the total owner benefit over the course of one year of running your business.  That means that we take the net profits of your business (total revenues – all of your expenses), identify expenses that are not related to the business (you know, that “conference” that you went to last year and brought your entire family with?), add in any money you paid yourself, and come up with the number.  When we do an initial valuation we don’t worry too much about being terribly accurate on the cashflow, but a detailed valuation usually involves some investigation to make sure the number we come up with is correct and justifiable.

Many business owners lose money because they do not properly track their finances.  A lot of money can be left on the table for the business owner who is not able to properly identify and prove their true cashflow.

Determining the “Some Number”

So we know that there are two parts to a valuation formula – the cashflow, and the multiplier.  The cashflow is something that can be determined through accounting.  There is not much art to determining the cashflow of a business.

Determining the multiplier, however, is where having experience in dealing with the marketplace comes in handy.  When a broker is looking to determine the value of your site, what they are really looking for is how your site compares to similar offerings currently for sale and how you compare to those similar offers.  It could be boiled down to something as simple as this: is your site better than average, or worse than average?

Now there is more involved in this than simply going on “gut feelings”.  There actually are key things that a good valuation expert is going to look for when determining your value.  Below is a list, albeit  VERY incomplete, of items that are considered by most brokers (at least my brokers):

• Transferability
  • How easy will it be for a new owner to walk into this business from day 1 and make money?
  • Does the current owner bring any traits or skills which cannot be replicated easily?
  • Is the current owner too closely associated with the success of the business?
  • Is the current owner’s location key to the success of the business?
  • Are there any licensing requirements in order to run the business?
  • If the current business has vendors, are there any requirements which may prevent a new owner from being able to run the business?
  • Are there any outstanding debts that need to be considered before a new owner comes into the business?
  • Is there a steep learning curve for the niche that the business is in?
• Market
  • Is this a terribly competitive industry?
  • Is there are very low barrier to entry?
  • Is this market growing or shrinking?
  • What is the market cap for this niche?
  • Does the market have a sufficient level of appeal to grow the business within the marketplace?
  • How easy is it to branch off into complementing markets?
  • Is this a mutually exclusive market? In other words, can one client be serviced by two or more companies?
• Current Marketing
  • Is the business relying on just one source of marketing? How stable is that source?
  • Is the business spending a disproportionately high amount of money on marketing to turn a profit?
  • If the site enjoys strong search engine rankings, how secure are those rankings?
  • If the site enjoys strong search rankings, is it from short tail, long tail, or a mix?
  • How active is the customer base? Are they re-ordering? If so, at what clip?
  • How fertile is the customer base?  Is it possible to remarket to them?
  • How old is the site and does the domain name offer significant benefits?
• Finances
  • Is the business growing, shrinking, or stable? For any of these, over what period has that trend been present?
  • How old is the business?
  • Are the finances clean, easily verifiable, and easy to understand?
  • Are there any odd blips in the financial history of the business? If so, are they easily explainable?
• Other
  • Does the business offer any unique advantages? (exclusive product line, trademarks, etc)
  • Is the business limited by any self constraints? (software, market, etc)
  • Is there any specific technical challenges to running the site?
  • Is the business well planned out, or is it a “thin” business (this will need explaining at a later date)

As I mentioned, this is FAR from complete list – it is simply what I have thought of in a quick “stream of consciousness”. Given more thought there would be more factors (possibly organized a bit better as well). However, it should give you a slight idea of the various things that we will be talking about in future posts on this topic.  Learning how to control the answers to these questions will give you a great opportunity to identify flips, identify what you can do with your business to increase its value, and learning what types of businesses to establish.

What About Other Valuation Formulas?

I had a conversation with a buyer who I have gotten to know quite well over the past year.  We were talking about using different valuation methods on a particular business.  Specifically, rather than valuing based on cash flow, we were talking about valuing based on membership levels and the relative benefit each member means to an acquiring business.  For example, if you have 100,000 members, and you know Company X wants those members, and you further know that Company X  spends on average $5 per acquiring a member, it follows to reason that you have a value upwards of $500,000 for that membership base.  This method of valuation can produce drastically different results than the cash flow multiplier.

The fact is, there are many different valuation formulas that one can use.  People within the marketplace will often times have their own valuation formulas that are far more sophisticated than the one presented above.  They have specific items that they are looking for and specific metrics that they have identified as important to their goals.

The reason I am offering this formula as a good rule to judge by is that it is so simple and so generic.  The marketplace consists of hundreds, if not thousands, of buyers.  It is best to use a formula that is general to encompass the many needs, perceived wants, and requirements of the individuals in that marketplace.  It should never be assumed that when a valuation is done on a site that this is the price you are going to get – people will normally offer less than you ask, and they normally will come up with that price in different ways than you imagined.

As with all things that you read on this site, keep in mind that selling a business and buying a business, while very much a science, is also partly an art and a skill that involves identifying the unique aspects, benefits, risks, and drawbacks of each individual business.

In the next few posts I’ll look at what factors you can most control to increase your value.

If you’ve ever considered selling your web business, or if you have ever been approached by someone asking if you would like to sell your site, inevitably you start thinking about what it is worth.  You may do some searches and find some people who tell you that it is worth 10 times your gross revenue.  Others may tell you that the average site goes for 1.5 times your income.  Worse yet, you may find an online value calculator that has you input a few pieces of information and in return spits out some exact number (I am not a fan of those online value calculators, but that is the subject of another post).

Ultimately you are asking a basic question: what makes a site valuable? More personally, what makes my site valuable, and how does that translate to an actual figure?

When considering the value of a website, we are looking for the marketplace value of that website.  Although it is perfectly acceptable for a website owner to peg a specific value and tell people that they wouldn’t sell for any less than that, if we want to talk about a site’s value, we tend to do so in terms of the marketplace.

What is the Marketplace, and Why Does it Matter?

The marketplace is made up of all the buyers that are actively interested in acquiring an online business.  This may include people who are currently being aggressive with their search along with people who may have some fleeting interest should the right opportunity present itself.  On a broader level, the marketplace consists of all people interested in buying any business, online or not.  This group of buyers and the makeup of its members determines and greatly influences prices that business owners can ask for their businesses.  We, of course, are most interested in that group of buyers that are interested and looking for an online business to buy.

The marketplace matters because your business is ultimately worth whatever someone is willing to pay for it.  You can ask whatever you want for your site, but if there isn’t a person on the other side of that asking price with a checkbook in hand and pen writing out your asking price then your asking price is nothing more than a personal value.  When it comes time to sell your site, if your own personal value of the site doesn’t agree with the people who could potentially turn that potential value into liquid money, then you simply won’t sell your site.

What Influences the Marketplace?

The marketplace is ultimately influenced by the same forces that influence every other vertical: supply and demand.  In this specific market, the supply is the number and types of businesses that are for sale and the demand is the number of buyers that are both interested and capable of completing an offer.

When thinking about the value of your site within the marketplace, it is important to recognize that there is a ready supply of businesses for buyers to examine and evaluate. What this means for you is that the value of your website does not stand on its own – it is influenced by the prices and values of other websites.  You may have a site that offers unbelievable potential and benefits for a buyer, but if the price of acquiring that potential and those benefits are significantly higher than the other businesses that offer a buyer similar, or even slightly less, potential and benefits, a buyer will likely go with what is perceived to be the better value.  Buyers have different motivations and qualities that they seek in businesses that they are acquiring.  But, in the end, buyers are also value conscious and ROI conscious.  If your desired selling point is too far outside of comparable or slightly less beneficial businesses, then buyers simply won’t move on your business.

That being said, no two businesses for sale are alike, and every online business brings its own unique sets of benefits and challenges.  Some online businesses command a premium while others have trouble fetching an average marketplace price.  The difference between business owners who get paid more than the marketplace average and those business owners who get paid less comes down to each individuals understanding of the marketplace and what buyers are looking for.

Beating the Marketplace

If you are still with me on this post, then the question that I hope to answer (and that you may not be asking) is this: how can you beat the marketplace?  Not every business sells at the same marketplace average.  Two apparently similar sites may sell for very different amounts of money. What makes one site sell for more money than another? How can you control the value of your website?

That is what this post series aims to address and teach you.  In the next tutorial, we will look at the basic valuation formula (hint: there really isn’t just one) that the marketplace uses to determine average values.  Stay tuned!