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25 Must-Do’s When Selling a Dot Com Business

I could probably write a book about this but I’m going to touch on the finer points of what to do when someone says “hey, I want to buy your site”, and how not to mess up a good thing. I recently talked to a guy who was pretty hasty with the sale of his site and didn’t do anything right. If you follow these tips, you won’t make his mistakes.

You have to be well versed in business and legal tactics to get there even though those subjects are like a visit to the dentist for some people. So for motivation, you might want to focus on the image of sitting on a pristine beach in Hawaii and throwing back a cold one with a beautiful woman beside you, because that’s the likely end result of completing a successful sale of your site. Even smaller deals can buy you a slice of freedom.

Five seconds after you receive that email saying, “I’d like to talk with you about buying your site”, your first reaction will probably be to fall out of your chair. If you don’t react that way, it’s probably because you’re jaded and have received a lackluster offer in the past. Regardless, it’s very important to (1) never ignore a request to buy your site even if you’ve received low offers in the past and (2) keep your emotions in check, reign yourself back in after the initial shock and don’t “count your chickens”.

The Pre-Sale

(3) First sign a non-disclosure agreement with the buyer before revealing anything about your business.

All buyers want to see documentation of traffic, revenue, expenses, (all by month for the past 1-2 years) and eventually, material (relevant) contracts that you may have with any partners or employees. (4) Google Analytics is a simple & free way to take care of recording traffic and you should set that up right away - I can’t overemphasize this point enough. (5) Keeping good books (Quickbooks etc) is also important to be able to easily provide historical revenue and expense reports but if your revenue sources are simple and you don’t have time to maintain Quickbooks, you can usually provide Google Adsense or other partner reports to a buyer to show revenues.

The Valuation

I think this is the trickiest part of selling a business. How much do you accept, and how do you get the buyer to offer what you want? There are all sorts of formulas for this that vary greatly. A wise venture capitalist once told me that ultimately, the right valuation is the one that you can live with later. (6) Pick a number that you’re happy with and ignore the market, I say, but it’s always a good idea to try to look at “comps”, transactions for other sites that are comparable to yours where the value of the deal was made public, just to get an idea of a range. Usually, formulas look at multiples of revenue: I’ve seen deals valued equal to 10 months of profits, ranging to 15 years of profits. Small sites get closer to 1x trailing 12 month profits, larger sites can push the multiple up to 3x, 5x, 7x, 10x. (7) What if your site has decent traffic but no revenue? In that case, you’ll just have to put together your own magic formula to take into account how much effort you put into the site and perhaps what the money will mean to you in your particular financial situation. These unique user valuations may help.

Deal Terms

Most deals are straight asset-cash deals where a buyer pays you a one time cash payment and acquires specific assets from you (your site content, domain name, code, customer lists, etc). There are times when a buyer will offer some kind of equity in their company as part of the sale price, sometimes buyers will offer deferred payments instead of all up front cash, and earn outs are also popular.

If the buyer is a public company and they offer you stock, (8) make sure your attorney explains to you what kind of stock it is and under what conditions (including timing) you can sell it. (9) If the company is private and they offer stock, the stock is usually quite worthless until the buyer has a liquidity event (that is, they sell their company or they g(o public), so do keep that in mind.

An earn out is a term used to describe additional payments that are contingent on future performance. So say for example, you sell your site and you sign on as an employee of the buyer to continue running the site, and the buyer agrees to pay you an additional amount of cash at the end of the first year if your site has achieved at least $x in revenue over that year. It’s an incentive to get you to stick with the company and grow it.

I’m very much against earn outs unless they are merely icing on the cake. (10) If you negotiate a healthy up front cash price plus an earn out to sweeten the deal, that’s fine, but I’ve seen offers where 80% of the consideration is earn out and that’s just foolish. All too often, people are blinded by the cash that is being offered as an earn out and they count it as part of the purchase price when it is anything but. Trying to collect on an earn out can be like trying to collect that $20 that your friend borrowed from you 10 years ago - good luck. The larger the earn out, the more disincentive a buyer has to help you achieve your earn out, which then compels them to do squirrelly things with accounting or traffic numbers to say that you didn’t achieve your earn out, and they can pull support of your site or even shut it down to keep you from earning your earn out if it’s in their best interest (well drafted contracts can and should prevent those things).

When I sold my sites, there was a substantial traffic based earn out which required the buyer to provide a certain level of support for the sites, yet the buyer failed to maintain records of traffic and failed to provide support. At least, that was my take on it, and they disagreed of course. The result was 18 days of costly arbitration in New York City (preceeded by months of stressful and time intensive preparation), which I won. I actually liked arbitration and thought it was fun. I got to see what it was like to be a high class Manhattan lawyer for a few weeks, but I don’t recommend it, so know what you’re getting into with earn outs.

Negotiation

Negotiation truly is an art, and there isn’t enough space in this post to do it justice. Some negotiation tips include:

(11) Never give the buyer an “asking price” number or even a range. Let them throw out the first offer. Giving a range puts a cap on the maximum possible sale amount from the get go.

(12) Never accept the buyer’s initial offer. Assume that it’s a low ball offer. A savvy buyer assumes that you’re going to negotiate a higher price and therefore they will start low. They figure that if you do negotiate with them, then they won’t end up overpaying by making a low initial offer and if you don’t negotiate, then they will snag your business for a steal. This assumes you have the stomach to negotiate of course. If the buyer is offering a sweet deal and you are happy with it, consider taking it. “Splitting the baby” is generally a good practice: if they offer you $10,000 but you really want $20,000, don’t come back to them with $20,000 because they’ll offer you $15,000 at the most. Come back to them with $30,000 and they’ll be more likely to come back to you with $20,000.

(13) Don’t seem overeager to sell. Convey that you’re happy running your business and will be content to continue doing so.

(14) Be creative with the deal structure. If the buyer proposed a one-time cash payment, come back to them with a higher proposed cash payment and tack on some deferred payments. If you’re feeling brave, suggest an earn out.

(15) Emphasize your unique value proposition, or the thing that your company does uniquely and really well. This is the thing that makes the buyer really want to buy your business and they shouldn’t forget about it.

The Contracts

A more professional buyer will usually send over a “letter of intent”, a legal document that spells out their initial offer (and it will get tweaked as you negotiate better terms until there is a final draft). If you sign it, you’re usually bound to a “gentleman’s agreement” to sell, and you’re also usually forbidden from trying to seek other buyers for a period of time (like 60 days). For smaller deals, the buyer might just email you an informal offer, such as “I’ll pay you $10,000 for your website content, your domain name, customer lists and email addresses.”

Once you accept a buyer’s offer, they will usually send over an asset purchase agreement. That’s the document that spells out all of the terms of the transaction. (16) Don’t sign the thing two seconds after you receive it. (17) If you’re doing a deal that’s worth over $10,000, hire a lawyer to review this document, especially if the buyer is proposing any kind of deal that extends beyond closing (like deferred payments, an earn out aka bonus payments in exchange for future performance, etc). (18) Don’t let the lawyer’s fees erode your profits though and be sure you talk to the lawyer about estimated costs - it may take a much larger deal ($50k-$100k+) to make sense involving an attorney depending upon their rates but get an attorney if you can afford one. (19) Never try to negotiate the terms of such a transaction yourself. All will seem well at first, but inevitably the buyer will stick it to you eventually, if anything goes south later. There are so many ways that a buyer can make life hell for you and a good lawyer will really save you a ton of hassle down the road. (20) In any case, never sign a purchase agreement without reading it.

Make sure you understand and are comfortable with areas of the agreement such as:

(21) Venue and type of dispute resolution (location and usually arbitration or court)

(22) Reps and Warranties: a buyer will want you to make various representations and warranties about the assets that you’re selling to protect them. Make sure you can live with these.

(23) List of assets being sold: Double check this and make sure you’re not including something in the sale that shouldn’t be included.

(24) Confidentiality: If you want to be able to announce the sale to the world or appear on the cover of Forbes, tweak the confidentiality clause to your liking.

(25) Non-compete: The buyer will want you to agree not to work on anything that competes with them. If you’re going to continue running your business and you’re just selling off a part of it, make sure that the non-compete doesn’t bar you from being able to run your business and also make sure that the buyer won’t own all of your ideas.

If no buyer has sought you out and you’re looking for a place to sell your site, try Digital Point or Sitepoint Marketplace.

** I am not a lawyer and nothing herein is intended to be legal advice. Seek the advice of a qualified licensed attorney prior to entering into any transaction.

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Wednesday, October 24th, 2007 at 4:35 am and is filed under Web Business. If you like this post why not subscribe to my full text RSS feed. You can leave a response, or trackback from your own site.