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Our Team Weighs in on The Current State of Online Business Acquisitions
By Mark Daoust
I know you’ve received plenty of emails about how businesses are dealing with COVID 19. I recently received an email from a car dealership on their response. Really? Is that necessary?
While I want to be sensitive to “COVID-19 Response” emails and updates, this update is specifically for people considering buying or selling an online business in the near term.
We understand that this is a stressful time for you and your families, both in terms of health and business. There are plenty of great experts addressing these topics. But we did want to offer a response to some of the many questions we are hearing from friends and clients as to the impact on our corner of the market: buying and selling online businesses.
This Guide Is Broken Into Sections for Easy Reference
Recently, I created a very short questionnaire and sent it to the advisors at Quiet Light Brokerage. Collectively as a team the Quiet Light Brokerage advisors have a wealth of experience in personally buying, selling, and running online businesses. Our experience includes navigating the last major recession in 2008 as buyers, sellers, and for some of us, as brokers.
We don’t’ have a crystal ball, and we tried to avoid baseless speculations. The information in this document is based on what we are seeing right now, but it is our belief that a lot of the sentiments in this document are proven approaches to dealing with difficult markets.
This is a long piece. I would recommend reading it in sections as the sections pertain to you. A table of contents is below to help navigate this document.
IN THIS POST
As mentioned above, we want to avoid wild speculations on what will happen in the future, however, we are certainly eager to share with you what we are seeing in the marketplace today.
Here is a summary of what we are seeing:
- Supply chain disruptions were short-lived. Thankfully many online sellers were not impacted by the supply chain disruptions and those that were experienced short-lived disruptions.
- Long-term growth for online businesses looks good. As shoppers are forced to shop more online, the current conditions has the potential to reshape consumer behaviors for years to come. This appears to be a benefit to the online business community.
- Impacts are Localized to Verticals, but That’s Not a New Development. This really isn’t surprising, but some verticals are more impacted by this than others. Of course, this isn’t new as businesses always have some vertical-risk exposure. How you evaluate that risk is key.
On the outset of COVID-19 shutting down China, there was a real threat of prolonged supply-chain disruptions. Fortunately, those shutdowns have been short-lived. Just about every advisor at QLB is seeing this with their clients:
I believe the supply chain disruption was short-lived in many cases and is largely behind us. While there is still some disruption, our ability to bounce back is amazing and I don’t feel supply chain issues will be long-term.Amanda Raab
Most of the business owners I’ve spoken with sourcing from China saw a temporary shut down or delay in their shipments after Chinese New Year which has since recovered. This may be different for some business owners, but the Chinese government clearly wants to get everyone back to work as soon as possible.Chris Guthrie
David Newell noted that many sellers were actually insulated from the shutdowns as they had stocked up in anticipation of Chinese New Year:
Most sellers are reporting their Chinese vendors as back to business and it seems (at the time of writing) that China have got their outbreak under control. A lot of sellers were well stocked for Chinese New Year and quite buffeted from the initial Covid outbreak.
Finally, Chuck Mullins and Brad Wayland both noted the positive:
While there will be a short term impact, long term it should lead to stronger, more robust supply chains.
While these supply chain disruptions were short-lived, buyers and sellers should pay attention to potential disruptions in delivery schedules and prices which may materialize.
At the risk of speculation, more than one advisor noted that the long-term outlook for the online world looks good. Of course, any recession will reduce buyer demand, however, relative to other sectors of the economy, the online space may actually benefit.
From David Newell:
There’s likely to be a significant increase in e-commerce this year with Amazon already announcing they are hiring 100,000 more workers to cope with demand. The question is where will the demand be?
I think the 2nd, 3rd and 4th order effects on the economy are what will govern spending patterns amongst consumers and so my advice would be to think about acquisition opportunities and their correlation to this. Once panic buying passes, what will be the staple purchases outside of essentials? What are the next categories consumers will be moving into?
It’s also interesting to consider that despite Amazon’s huge growth, E-commerce in general is still a surprisingly small fraction of even US retail spend (16% in 2019 according to US Dept of Ecommerce). Things like home goods, hardware, kitchen items etc, that older generations might have gone to Home Depot for are likely to see transitions to Amazon in the medium term.
How COVID-19 impact businesses depends largely on the type of business (SaaS, e-commerce, content, etc) as well as the vertical. So far, e-commerce appears to have the most volatility, although what is more important is the vertical of a business.
Bryan noted this clearly in his response:
There will clearly be verticals that are affected more than others, as well as those that are affected less, none at all, or in a positive way. A major part of the world’s population is currently changing their lifestyles in a significant way, and that’s inevitably going to affect their spending habits, online shopping tendencies and more. Furthermore, the world’s economy is changing in an unprecedented way, which in turn is going to impact different businesses differently.
But regardless of the vertical, I continue to firmly believe that healthy businesses built on a solid foundation will survive any temporary hiccups on the market. It’s more important now than ever before to look at the underlying economics of each business and to not rely on short-term trends.”
Beyond stating the obvious, however, there was a common reminder that vertical risks are always present. This pandemic just happens to highlight a short-term risk.
From Chuck Mullins:
All business verticals are subject to risks. The key is to identify the risks, determine the likelihood of each, and figure out what your risk tolerance is. Then do a cost/benefit analysis and determine if the risks outweigh the benefits.
And Jason Yelowitz (who is channeling Warren Buffet):
Every business, both currently and in the past, has always had exposure to a set of company-specific risks as well as external economic shocks. Since we can only control that which is within our control, it makes sense to evaluate any business from the perspective of potential changing consumer, financial and government trends over time. Warren Buffett routinely purchases partial or complete ownership of companies during times of widespread economic distress. He likes to consider how people will consume the product over the next 20 or 30 years. If he believes they’ll still “drink Coke” or “chew Wrigley gum” in essentially the same way for decades, then he likes to buy when he believes prices are low due to an external event which he believes will eventually pass. But I’m not Warren Buffett and neither are you. So evaluate your personal risk tolerance.
For us, this may be the most frequent question we are getting from buyers and sellers alike. The good news is that so far our marketplace has been mostly unaffected by recent events. Axial had a similar report for the Lower Middle Market.
A few themes emerged from our advisors when asking this question:
- New capital could make buying easier. With stimulus funds coming, new capital may be accessible to a buyer pool that is already very well capitalized and looking to make acquisitions.
- Activity may slow while information is being processed. On the sell-side, many business owners may be waiting to see how the next few weeks play out, however, in the long-term our experience is that most of these businesses will list.
When asked this question, Walker immediately pointed to potential increases in credit and lower interest rates:
I believe in the short term, buyers will have plenty of access to inexpensive capital due to 0% interest rates, SBA’s support of “goodwill”-based business acquisition loans, and even the $1.2 trillion sitting in cash looking for acquisitions in the private middle-market funds.
I suspect that if the coronavirus media coverage continues to suggest quarantining as the best course of action, online sales should surge in the short term. This, in turn, will push YoY performance trends north on many companies and continue to secure the habit of online ordering into the behaviors of consumers.
In the same regard, membership sites, online communities, SaaS businesses will also benefit as the workforce turns to increased remote working.
We may think that the drops in the publicly-traded markets will also result in lower online-based business valuations, but we’re not seeing that at all. Who knows what the future holds but for now, demand remains high, capital is accessible and inexpensive, and online businesses are quite on trend.”
Speaking from personal experience, I navigated Quiet Light Brokerage through the 2008 recession. Credit restrictions drove that recession and did have an impact on the overall number of buyers in the marketplace, but even then there was a strong appetite amongst well-capitalized buyers.
The situation with the current market has a significantly different cause. Lending hasn’t dried up and actually appears to be getting a shot in the arm which should keep the number of buyers in this space strong. Record numbers of homeowners are refinancing to the point that banks can’t keep up.
While we certainly expect some sellers and buyers to pause so they can digest information, the market should remain strong for the long-term.
From Jason Yelowitz who has extensive experience in this space:
With 10 years experience selling online businesses, I feel confident that demand will always exist because there will always be a desire for work-from-home jobs. But, this is not the time to be a “flipper.” I think (and have always thought) that buyers and sellers should make their decision based on long term goals and needs (5+ years) and not based on “what’s happening in the market today.”
And from David Newell who, like me, navigated the Great Recession:
In the absolute near term (2-3 weeks) I think it will cause a pause for reflection much like it is in the wider economy at the moment as we see what impact self-isolating and social distancing has to flatten the curve. With two weeks more data and things hopefully calming across the populace, the focus can return to looking at the 2nd and 3rd order impacts of this on the economy and spending patterns. Then the scope for buying and selling businesses will open up in quite interesting ways…There will be a lot of opportunity for businesses positioned in the post-essentials categories.
Finally, from Chris Guthrie:
I believe there may be a temporary dip in the number of businesses listed for sale but many of these businesses will likely be listed for sale later in 2020 after the coronavirus has hopefully been better contained.
Many entrepreneurs planning exits over the next several months and even into the next year may be wondering how the current events should change your plans (or if they should change them at all).
I asked our team for their thoughts on what advice they’d give someone who was planning to list their business for sale this month or in the coming months. Their answers revealed themes that we have preached for years.
- Before deciding if you should wait to sell, understand your ‘why’. We have historically encouraged our clients to understand why they want to sell their businesses and to have clear goals. Once you understand your “why”, deciding whether you should sell now or wait becomes clear.
- Continue As Planned, Unless There is a Strong Reason to Wait. The overwhelming response from the QLB team was to not try and guess the market, but to let the market speak.
- Don’t Be Afraid to Test the Market. As of today, there is still significant buyer demand. Testing the market today will not hurt your long-term value, but it may bring things to light that will help you position your business if it doesn’t sell now.
Deciding to sell your business should take into account a multitude of factors, most importantly your “why” for selling.
Jason Yelowitz explained this point clearly:
Since no one has a crystal ball, the best advice is to carefully consider WHY you’re selling. If you need the money for some near term reason (marriage, divorce, buying a house, or your business is now worth “enough,”) then sell now. If you were only testing the market to see if you could “get your price” then [consider waiting].
Amanda Raab reminded us that it is up to each individual business owner to decide what is best for them:
This really depends in my opinion because we can’t predict the future. Every business and seller’s situation is different so we advise based on what we have experienced in the past and then let the seller make the decision that is best for them.
Not every business will weather this storm in the same way. While some businesses may be largely unaffected, others are seeing disruptions that will take months or longer to recover. How your business is personally handling these times should factor into your decision.
Bryan was the first to come in with this comment:
For now, my advice to sellers is to continue with full steam ahead, unless the current events have had a significant impact on the business. In the latter case, it would be a good idea to wait it out and ensure that the business is back on track, but for businesses not majorly impacted, nothing should be done differently from before.
David Newell had a lot to say on this question:
I think in the very immediate weeks now there is a lot of unknown so this is a period of monitoring as everyone sees how self-isolating and social distancing slows the virus and what the likely 2nd, 3rd and 4th order effects are on the economy. Almost every asset class has taken a steep decline in the last two weeks but there isn’t enough data yet to recalibrate. Selling right now means being somewhat exposed to that unknown.
However, I think this period will pass quite quickly and we will soon have enough information to model things forward. Then it will be a case of assessing how your business is likely to respond in a Covid purchasing environment. E-commerce should benefit in general but the gains will not be evenly distributed of course as if the economy falters, belt-tightening will reduce consumption across all channels.
If your business is actually one of the beneficiaries I see now as a very strong time to go to market because most other alternative asset classes have taken huge losses (e.g. crypto) and a 3-4x multiple on an online business is an incredible annual return for a buyer right now.
Even if your business has a recent dip due to current economic conditions, Chris Guthrie contends that many buyers will overlook that if the rest of your business has sound fundamentals:
Worst case scenario your business has been impacted by the current events and it’s probably best to simply delay listing until things have recovered. When putting together your financials, buyers will understand a temporary dip caused by the largest pandemic in our lifetimes.
Finally, Brad Wayland noted that current events should always be taken into consideration, but that your business’s health is what is most important:
Yes, I believe that current events should always be taken into consideration when considering a sale. If sales have been consistent for the last year and all of sudden they have dropped by 50% just before the listing launches the buyers may become fixated on the drop…On the other hand, situations, like we are experiencing today, is creating a second holiday season for some sellers. Regardless of when they go to market with their business, it is very important to price it in such a way that it is attractive to buyers even in a down economy.
The natural concern for sellers at this time is that buyers are running away from acquiring online businesses.
While we are still early in these events, that doesn’t seem to be the case. In addition, if we look back at the 2008 recession, buyers continued to acquire online businesses including many that had poor trends. Deal volume was consistent even though multiples were not.
Chuck Mullins, when asked if he thought current market trends should change a seller’s plans, gave the same advice he is giving to current clients:
It really depends on the risk profile, goals, and needs of the seller. A good business is a good business and will sell regardless of the economy. If you want to sell now, put it on the market and see what happens. If the offers don’t meet your needs, don’t sell it.
Brad Wayland echoed a sentiment he’s heard from clients in recent days as well:
I have had sellers tell me this week that they cannot believe that there are any buyers out there. The situation is probably never as good or bad as we think when we are in the midst of it.
At the end of the day, the marketplace is what ultimately rules. Our approach at QLB has been the same since 2007: use our data and experience to guide a transaction, but always listen to market feedback and adjust as needed.
If you are looking for your first acquisition, or if you are looking for your 50th acquisition, it may be tempting to let current events change your approach to the marketplace. However, the same rules of identifying a good acquisition should apply.
In speaking to the QLB advisors, this theme repeatedly surfaced along with a couple of other themes.
- The same rules apply as before. Changes in the economy don’t change the fundamentals of finding a good online business for sale. Follow the same principles that you would normally follow.
- Current events will impact books, how you evaluate those books is crucial. This was my biggest takeaway from the Great Recession. Every business had declining revenues. The job for acquirers was to determine why and if the business would recover with the economy.
When asked about how current events should change a buyer’s approach, multiple advisors responded with “My advice hasn’t changed”.
First, Joe Valley:
My advice doesn’t necessarily change. Look at as many listings as possible…in detail. Not just the teasers. The more listings you look at the better you’ll be able to act quickly when the right business comes along. Make a checklist of “wants” from what you have learned up to this point in your life and business. If you find the ideal business all of the boxes will still not be checked. But if you get to 70-80% and can fix the rest, pounce on it. You may find MORE opportunity to buy, not less in the coming months.
And next, Brad Wayland:
I would not give any different advice to buyers about a purchase now than any other time. Buyers need to understand the business they are purchasing. They need to be able to operate it or have a team in place to operate. If they get it under LOI then they need to do a thorough round of due diligence before closing. My advice is exactly the same now as it would be when people believe the economy is in perfect shape.
Chris Guthrie sounded the same tone:
I like to give the same advice to buyers regardless of the time. Never buy a business you aren’t 100% excited about. The last thing you want to do is move forward on a purchase with fear about the future.
Walker dug in more by explaining which fundamentals you may want to consider:
When looking at any business to acquire you want to understand what its strengths and weaknesses are–as well as your own. Every acquisition is a calculated risk and simply understanding the strengths and weaknesses will allow buyers to make the best decisions they can.
I also often suggest to buyers to understand both the staying power and the trends in the space. The staying power is a way of keeping an eye to the fundamentals and managing downside risk. Trends on the other hand often point to the best growth opportunities for that business.
On a macro level, a buyer looking to the online space for an acquisition, “online” may just be the key term here. It seems to address both the staying power and the trend as people are buying more online, increasing their remote workforce, and increasing their remote work habits such as video conferencing and other SaaS related tools.
With interest rates now at zero and the world increasing it’s online habits, this could prove to be one of the best times to buy an online business. Buyer’s just need to understand that all acquisitions contain risk and they need to keep an eye to making the best decisions for them, their strengths, their goals, and their financial situation.
During the Great Recession of 2008, the vast majority of online businesses for sale had declining revenues. The challenge for buyers wasn’t to determine if a business was growing or in decline – that was obvious. The challenge was to determine if the decline was due to the economy or an actual problem with the business.
We are fortunate that the current events are so pronounced that it should make this process easier. Not all declines in revenue are created equally. There will be a number of businesses that hit the market with short-lived, easily explainable dips. These dips might show up for a few weeks while others will have to wait months for recovery, but the source of the declines should be explainable.
It should be noted that we are certainly witnessing some businesses that have grown markedly in the past few weeks, although time will tell if these are one-time bumps.
Brad spoke to this in his response:
Buyers will have to discount the information whether it is helping or hurting a business. If on March 1st sales increased by 100% the buyers will know that this is not a new normal for the long haul. Inversely, if a business was performing strongly and the sales plummeted by 50% on March 1st the buyers need to also realize that this does not mean that the value of the business is gone because of a global pandemic. There will be disruption. It is going to have an impact on the numbers. The good buyers will stay the course and try to account for the information without overreacting to it.
David Newell dug a bit deeper with his response by digging into the long-term outlook of a business you may be evaluating::
The biggest things for me here are evaluating:
Purchasing Activity: Really looking at the business’ product/category fit with the medium to long term purchasing activity in the Covid environment we are now in. Looking for products that are close to household essentials and also for what I see as ‘transfer’ goods, those that have been historically purchased in retail outlets (e.g. Home Depot) but are now likely to move to Amazon or other ecommerce outlets.
Risk Mitigation: Naturally there will be a number of acquisition opportunities that aren’t perfect “Covid-winners”, but that doesn’t mean they are not good businesses to purchase. Here the focus should be on deal structures that mitigate the risk, so performance-based structures like goal-based consideration are well worth getting creative with.
Owner Fit: Now more than ever is a time to make sure you really to get to know the seller of the business you’re acquiring from. Understand deeply how they have experienced the outbreak, what they did, how they are looking at things, and ask deep, probing questions to get the best insight and build trust going forward.
I am sure that many who are reading this are experiencing wildly different effects from the current marketplace. Some of you are enjoying that boost in sales while others are worried about whether and when sales will come back. While we believe in the long-term outlook for most online businesses, we are certainly sensitive to those who are worried due to their current numbers.
With that in mind, I asked our team for their overall thoughts and advice.
Brad made a great observation that things are never as good or as bad as they may seem, and to use this thought as a starting point to evaluate your decisions:
Things are usually never as bad or as good as we perceive. The current climate could slow your plans to buy or sell and to be frank, that is ok. The best thing you can do is pay attention to your business. Work hard in the good seasons and the bad seasons. If you always work to protect the business you will have an easier time attracting buyers and ultimately selling when the time comes.
Amanda had short and potent advice for buyers to stay focused on the long-term picture:
This too shall pass so think long-term with your purchase decision. Don’t assume! You may be missing out on a great opportunity.
Keeping a level head is necessary for business in general, not just in times like these. From Bryan:
Fundamentally sound decisions are likely to be the right ones in both calm times and during crises. As long as both buyers and sellers remain calm and avoid making fear-induced short-term decisions, everybody will win the long run.
Jason reminds us to always listen to the market in its entirety and to take stock of what drove you to this market in the first place:
This is not the time to “get cute.” If you’re a seller, listen to the market and either accept or reject what it’s telling you. If you’re a buyer, consider if your “strong stomach for business ownership” was based on a long term bull market, as opposed to a legitimate willingness to accept the risks and rewards of being an entrepreneur. I’ve started seven companies. Several of them failed in spectacular ways. I’m ok with that because at heart I’m an entrepreneur and I understand the risk/reward spectrum. Times like these will help people figure out if they should work for themselves or continue with a more traditional type of career. There’s no shame in either decision; the best decision is to be true to yourself.
Be safe out there, keep an eye on the long-term goals, and remember, as Brad said, things are usually never as bad or as good as we perceive.
I may need to put that advice on a plaque to hang in my office.