When an online company goes up for sale, the company owners and officers usually place value on different aspects of the business than does a potential buyer. But it is important that sellers consider the factors that will be important to buyers, because these things can ultimately make or break a sale.
Overall, keep in mind that buying or selling an Internet related business is very different from buying or selling a brick and mortar business; the internet channel utilizes very different skill sets for customer lead generation, order fulfillment, and customer service.
In general, buyers seeing Internet businesses are concerned with the following factors. These characteristics can affect both the future earnings potential and risks involved with owning an online business.
Growth prospects If the company for sale is in a growth industry, it will immediately be more attractive to buyers. If the potential buyer is from the same industry as the company he is interested in buying, the potential buyer will probably have a better idea of the growth prospects. If he or she is from a different industry, on the other hand, the potential buyer will have to closely examine the growth prospects before he or she makes a decision of whether or not to buy.
Although the Internet makes it easier for potential buyers to assess the growth prospects of businesses than ever before, unless the buyer has a crystal ball, he will not be able to exactly predict the growth prospects for the business and the industry as a whole. But if the buyer’s research points to the company being in a growth industry, he will immediately place the company at a higher value.
History of earnings: They say the best predictor of future behavior is past behavior, so an online company’s historical earnings are one of the most important elements to a potential buyer. A buyer looks for a long history of increasing and stable earnings when shopping for a company, and he will probably steer clear of a company that has a short history and/or inconsistent earnings. Even when a start-up company has done well, its short track record will be seen as a negative to a potential buyer. A positive to start up companies is that there may be huge hidden growth potential that a new buyer may be able to quickly capitalize on.
Overall, the longer an online company has been in business and the more the company has earned, the higher its value. The Internet companies with the strongest track records will have been in business for at least five years, the companies with moderate track records will have been in business for at least three years, and the businesses with the shakiest track records will have been established for less than two years.
Type of business: Businesses have varying degrees of risk depending on the type of industry. An online company that was easily started required fewer skilled workers, and therefore reduces the overhead costs associated with wages and benefits. Most online companies do not required specialized knowledge about that specific industry, but those who do not become quickly adaptable will be less valuable when it is resold. In addition, some industries are more popular than others.
Management team: When it comes to an online company’s management team, both the number of the company leaders and the degree of their training and skills will help determine the value of the business, but it is not the only factor. In general, the smaller an Internet business, the less its depth of management, and vice versa. The more a company relies on a single owner or manager to run smoothly, the less revenue it takes to achieve a higher margin. An online company that has a strong management team in place, will positively impact the business to be valued higher. And some potential buyers prefer a company that has more than one layer of management in place when they make their purchase. For a single buyer who intends to purchase the business to run themselves, there are many suitable options for turning a company who was run by one level of management into several, and vice versa.
Employees: If a company comes equipped with well-trained and highly skilled employees who are happy in their jobs, it will be more valuable. Prospective buyers know that if a company does not come with stable employees, they will have to spend money hiring and training new employees. Therefore, a company that is staffed with an established, reliable workforce will go for a premium price. That being said, most online businesses come with a scalable infrastructure that allows for new employees and management to be easily trained and transitioned, making this premium not always applicable to every online business.
Flexibility: If a company is limited, either in its geographic location or its products and services, it will be less valuable than a company whose products are relevant on a national level and can be readily changed or expanded.
Competition: The Internet has redefined competition. It is no longer about having the lowest price, it is about the entire customer experience. Factors such as website design, customer reviews, brand credibility, price, shipping timeline and fees are not all factors of consideration for consumers, opening up the competition to offer an advantage in any or all of these areas. Markets and Industries that are “hot” will have the most competition, but that will not necessarily devalue the company. Because of the number of factors that influence a consumer online, “hot” or saturated markets are worth more online since they are in high demand with consumers.
Location: Companies located in a desirable geographic areas command a better price, as do businesses that have well-maintained facilities. This is true for online and offline businesses. Online the “well maintained facilities” translate to the website, inventory processing systems, infrastructure and customer database.
Terms of the sale: The terms of the company sale can also add or detract from its value. For example, if a company is stable enough to support debt financing rather than equity capital, or if it is a privately owned company that is willing to help finance the acquisition, it will be more valuable. In the online industry business headquarters are easily moved, which also makes the company more valuable since relocation, in most instances, is not required to purchase the business.
When it comes to the sale of a company, both buyers and sellers should be aware of the above factors that can affect the valuing of an online business. The better both parties understand these characteristics, the more smoothly the acquisition will go.
Buying or selling an online company is a complex activity that requires a third party to coordinate the activities of the seller and buyer. Many transactions fail when the buyer and/or seller try to exclude the business broker from the tail end of the transaction. A business broker has the expertise and training to assume that role. A business broker is not a sales person, but a business professional that facilitates the transaction to the benefit of his or her client, be it the buyer or the seller.
When you look for a website broker, search for someone who has a detailed understanding of the buying and selling of online companies so he or she can effectively facilitate the transaction.
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