Points to Consider When You Buy or Sell Websites

Points to Consider When You Buy or Sell Websites

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Points to Consider When You Buy or Sell Websites

Reprinted with permission of VotanWeb.com

I've worked with many website sellers and many more potential website buyers over the years. I strongly believe that the best way for an entrepreneur to successfully get into an online business, or expand what they already have, is to buy an existing profitable website.

To help those who are considering buying or selling a website, I offer the following overview of what I think are the most important issues when buying or selling a website. These have been excerpted in part from my book, How to Get Top Dollar for Your Website.

Lawyers Can Kill Any Deal

There certainly is an important role for a competent commercial law attorney to advise and prepare the legal structure of a website purchase and sale transaction. The problems arise when lawyers see themselves as business negotiators whose mission is to get the best deal for their clients. They frequently forget that the best deal has to involve both parties, the buyer and the seller, and that compromise is usually the best solution. Lawyers generally have a very difficult time with compromise in this type of situation because they often see their role as advising their clients on how to get the better deal. Usually, an attempt at a lopsided deal for either party will result in no deal at all.

Trust Only What You Can Verify

As a matter of basic principle (and law in most States), all website brokers dealing with the public are bound to be honest and forthright in their conduct concerning the website that they represent for sale. But they also have a fiduciary relationship (position of trust) to uphold between themselves and their clients (the business seller, in most cases). They must present a business for sale in its best light without misrepresenting any significant facts but at the same time not pointing out all of the potential business pitfalls. This usually establishes an adversarial relationship between the buyer and the broker as well as between the buyer and the seller. The best course of action for a buyer is to trust only what they can verify during a rigorous due diligence process and the best approach on the part of the seller/broker is full disclosure of all pertinent information.

A Website Is Worth Only Whatever Someone Is Willing To Pay For It

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Buyers and sellers are natural adversaries; the sellers want as much as they can get and the buyer wants to pay as little as possible. The broker is intensely interested too, because the commission amount is usually based on a percentage of the total selling price. So, what process should you use to value a website? Forget about putting a value on the assets based on resale value. Forget about comparing the website to the one that sold two months ago for a particular amount. Forget about all the rules of thumb like X times earnings or Y times gross income or some dollar amount per account or any other shortcut formula. A business value, and therefore its selling price, only makes sense when it's based on the capitalized earnings stream. Capitalization is simply the process used to determine today's value of a stream of future earnings. In the case of valuing a business, "today's value" is the value of the business, and the "stream of future earnings" is the expected future years' profit of the business based on current earnings. Most small websites sell for a price in the range of 2-5 times earnings before interest and tax expenses are deducted.

A Website Buyer Is Really Buying a Stream Of Earnings

The assets of the website are just the tools of the trade that enable an earnings stream to be realized. Without the earnings stream, the business essentially has no value. You should note that in using this method, a business may actually be worth less than its fair market asset value or in many cases worth substantially more. A seller will be able to get the most they can for a business by showing a buyer the true investment value in the business based on provable earnings.

Ignore All Claims of Unreported Income

This is a very sensitive subject known as unreported cash sales. Some website sellers may try to get you to accept their claim that they had significant amounts of cash income that did not show up on their IRS Tax Return and accordingly want you to include this phantom income in your valuation of their website. I highly recommend that you totally ignore these claims and deal only with the website’s reported income. Who is to say if the website owner's claims are true?

Approach All Information with Some Skepticism

Most sellers are honest people trying to get by in life like everyone else. However, a buyer should approach all information provided in the sale with some skepticism. Buyers are making a major financial decision and should carefully consider all information presented during a detailed due diligence process. If a buyer approaches the purchase of a website with a good healthy dose of skepticism then it will be difficult for them to get burned.

If A Seller Really Wants To Sell, You Probably Shouldn't Buy!

Whenever you look at any website for sale, you should approach the situation with a great deal of caution. You should make it your business to verify all of the facts possible about the website, including determining the reason for sale. There are some very good motivations for sellers to sell and other ones that are not so good. Usually, the best reason for a sale from the buyer's perspective is a sale necessitated by illness.

Most Potential Website Buyers Never Buy a Website

This alone may be reason enough for a seller to list their website with a serious online-market. A professional website market shields the website seller from the many non-qualified potential buyers to get to the few who actually do have the means and motivation to buy a website. Once the unqualified potential buyers have been culled out, still only somewhere around 50% of these folks eventually buy a website. For this and many other reasons, I strongly recommend that sellers use the services of a professional website marketplace.

Always Assume There Are Skeletons In The Closet!

Most websites have some negative features that the seller will be reluctant to talk about. You can be sure that any problems will come out later as buyers begin analyzing the website (due diligence), and it could kill the sale if the problems are perceived as cover-ups. This is because buyers will ask themselves "if they hid this fact from me, what else are they hiding?" If the negative aspects are clearly presented and discussed with the website buyer, it may not be a serious problem because the buyer may feel that it can be overcome, avoided, or changed. The website seller should strongly consider this and determine all of the possible negative factors that could affect the sale of the website. If the problems are very serious and non-correctable, the business may not be salable.

Someone Will Always Get Cold Feet Just Before the Closing

Closing the deal is always difficult, but usually the shortest part of buying or selling an operating website. After all, the valuations, investigations, and negotiations are complete and now it's a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the website can take place. However, you can definitely count on someone getting cold feet just before the closing. Be prepared for this! The seller and buyer may both start to wonder if they are really getting a fair deal. The best way to get ready for this is to anticipate it happening and then to deal logically, reasonably and unemotionally with it at the time.

Negotiations Must Stop At the Signing of the Purchase and Sale Agreement

Once the Purchase and Sale Agreement has been signed by both the seller and buyer, there is an excellent chance that the sale will actually take place. But, there must be an end to the negotiation process or things will begin to unravel. The deal at this point is like a house of cards with many parts of the negotiated deal contingent on another part. Trying to reopen negotiations after a Purchase and Sale Agreement has been signed will most likely lead to a collapse of the entire deal.

After Buying a Website, Do Not Change Anything

Of course, this doesn't hold true if you're buying a turnaround situation; but in general, if the website you are buying is profitable, leave it alone while you learn how to manage it in accordance with the status quo. One of the experiences I have had that best illustrates this point is as follows: One buyer of a t-shirt website soon after the closing changed t-shirt suppliers because he found that he could get the t-shirts for 20% cheaper. What the new owner did not realize was that these t-shirts were larger than those provided by the original supplier. The new website owner completely wiped out his profit margin by paying a lower price per t-shirt while being forced to refund or replace many of the t-shits sold because they did not fit the customers!
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