Below is a sneak peak at our new Insider’s Guide to Buying an Online Business. In the first chapter, we talk about how to find the right business in your search process. We plan to post different chapters from the guide in our blog throughout the next couple of months, but if you want a more professional looking and complete eBook with images and graphs, we will make that available for download soon.
1. Find a Business
The first step in finding the right online business acquisition opportunity is to gain a clear understanding of your target. Specific search criteria will not only make it easier for others to help, but will also provide a framework for your decision-making through the process. When developing your parameters, think about your work experience and the skills that you bring to the table. What can be leveraged as the owner of an online business? Your criteria might look something like this:
- eCommerce apparel, personal care, home products
- Modest technical skills required
- Dropship fulfillment, Amazon FBA
- Strong social media presence
- Up to 10 hours/week to run
- $250k budget
TIP: Treat your search to buy a business like a job search.
Once you define what you’re seeking, there are a number of channels you can pursue as part of a comprehensive search, including (1) business brokers and online marketplaces (2) networking, (3) direct-to-business-owner inquiries, and (4) buy-side brokers.
Business Brokers and Other Marketplaces: Business brokers and online marketplaces are a great place to start. Opportunities sourced from these channels are generally easiest to assess since the businesses have been vetted, the owners have demonstrated motivation to sell, and due diligence materials have been prepared in advance. It’s also easier to browse businesses for sale when they are available as online listings. There is of course more buyer competition for “listed” businesses vs. those you source on your own. So, a comprehensive search should include tactics to identify both brokered and non-brokered opportunities. Putting in the leg work to identify non-brokered opportunities can allow buyers to develop a rapport with owners and to minimize buyer competition.
Business brokers serve an important role in identifying sellers, valuing and packaging their businesses for sale, and managing both the parties through a transaction. There are a number of business brokers that focus exclusively on web and tech businesses, including:
- Empire Flippers
- Website Properties
- Latona’s Brokerage
- QuietLight Brokerage
- App Business Brokers
- DealFlow Brokerage
- Digital Exits
- Acquisitions Direct
- Link Silicon Valley
- The Host Broker
The Hatchit Marketplace showcases current listings from these brokers and others, and buyers can reach out to brokers or sellers directly through the site. You will also want to keep an eye on main street business brokerages as well, as they occasionally list online businesses for sale. Sign up for listing updates on brokerage and marketplace sites and work to develop relationships with brokers so your search is top of mind.
Networking: As part of your search, you will want to expand your network to include other individuals involved with mergers and acquisitions and entrepreneurship as well as professionals that work with online businesses. Angel Groups, Venture Capital firms, Family Offices, Search Funds, incubators and educational programs all hear about deal flow – if a deal does not fit their criteria, it might fit yours. Similarly, M&A attorneys, CPAs, lenders, and other “deal professionals” often learn first about companies considering a sale.
They can be good sources of referral. Lastly, service providers that work with online businesses, whether marketing, SEO, PR, social media, website hosting or otherwise, might learn of opportunities among their client base. These individuals can be good additions to your network. LinkedIn and other social media platforms are a great path to efficiently building your network. Consider developing an informational web site that includes your criteria, bio and other pertinent information for sellers, brokers and sources of referral. Further, develop an email list of your network contacts and provide periodic updates to keep your search top of mind.
Direct-to-Business-Owner Inquiries: One often overlooked path to identifying acquisition opportunities is to proactively approach online businesses that are not for sale. It is estimated that upwards of 10% of businesses will consider a sale if approached professionally by a solid buyer candidate. Why not purchase a list of companies that match your criteria, contacting the owners about your interest in their businesses?
There are a number of list vendors that can help, including D&B Hoovers and Data Axle. Develop your target list by identifying the appropriate business types, refining it with company revenue and other criteria. When you have a list, take the time to click through web sites to ensure the companies could in fact be a fit with your criteria.
Keep in mind this approach is a “numbers game” – you may need to email a list of 500-1k candidates or more to find the right business at the right price. It also takes some work. Ideally you will want emails to be personalized (either manually or through a mail merge), and you’ll need to follow up with responders to learn more about the business and assess motivation. However, there are benefits to this approach in that you will be working directly with sellers, presumably without other buyers in the mix.
Buy-side Brokers: While the vast majority of business brokers for smaller businesses are on the sell-side, it is also possible to hire a buy-side broker to help you identify target companies and take you through the process. In addition to already having a robust network of brokers and sources of referral, a good buy-side broker will have an established process to identify “proprietary” deals by marketing their buyer clients directly to business owners.
Additionally, experience with valuation, negotiation, financing, due diligence and the other elements of a transaction can be helpful even for experienced buyers. Most buy-side brokers charge a retainer plus a back-end success fee (% of the transaction value).
Retainers can range from a few hundred dollars a month to thousands, while success fees can range from a flat 5-15% for small deals to a “Lehman formula” or similar stair stepped fee for larger deals (the basic formula is 5% of the 1st million, plus 4% of the 2nd million, plus 3% of the 3rd million, plus 2% of the 4th million, plus 1% of the 5th million in transaction value). If you choose to go this route, be sure to do your due diligence on the broker you are considering to ensure they have solid experience and can be trusted.
Takeaways: Find a Business
What skills do I bring to running an online business?
What type of web business am I most interested in running?
What is my criteria for narrowing my business search?
Where do I want to start my business search?
What is my time frame for finding a business?
To view brokered and non-brokered businesses on Hatchit, feel free to browse our latest posts.