A definitive guide to the successful purchase
of an internet business
GUIDE TO
BUYING
AN
ONLINE BUSINESS
Official Partner
Foreword
i
Thank you for downloading this 'Guide to Buying an Online Business'.
This book has been put together to help inform, educate and advise
individuals interested in potentially acquiring an online business.
Over the following pages we take an in-depth look at the reasons to invest in
an e-business, what investment options are available and what buyers should
look for in any acquisition. The book then shifts focus to the practical
aspects of executing a business purchase, giving best practice advice on
business search, structuring an offer, conducting due diligence and closing the
deal safely and successfully.
We hope you enjoy reading it and find the information found within these
pages useful for your business dealings in future. If you have any questions,
comments or feedback please don't hesitate to get in touch.
The Brokerage Team
FE International
Why Buy An Online Business?


Why Buy An Online Business Versus Offline?


Build Or Buy A Business?






Investment Options






Choosing The Right Business Model



What To Look For In An Online Business


How To Buy An Online Business



The Buying Process






Working With A Broker






How Do You Value An Online Business


What To Ask Before Making An Offer


Completing The Deal







Financing an Acquisition






Due Diligence








Legals and Escrow







Transferring the Business





About Us








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Table of
Contents
Chapter 1
Why Buy An
Online
Business?
'For business, our internet love affair was a
gift from the gods.'
- Gary Vaynerchuk
Why Buy An Online
Business Versus
Offline?
SIX REASONS TO BUY AN
ONLINE BUSINESS
Tap into the explosive growth of the internet, across
mobile and desktop
Leverage remote working to realize significant
operational cost savings
Make instant changes in marketing strategy and track
customers real time with unrivaled granularity
Generate a passive income stream and create the
freedom to pursue other things
Relative ease of scalability
Own a high return asset with liquidity
Investors looking to acquire a business typically start the process
contemplating what business model is right them, which sector(s)
they want to invest in and what they want to get out of the
experience personally and financially.
Every buyer is different but there are some common investment
objectives across the market such as strong profitability, good
growth potential and operational flexibility. Though there are many
options in the traditional offline business-for-sale market, an
increasing number of investors are starting to realise that benefits
offered by online businesses could actually be superior on all fronts.
This section explores the rapid growth of the internet and the rise of
the online business. It explores some of the operational and financial
advantages of e-business models and how investors can reap
significant benefits through investing online.
WHY BUY ONLINE VS OFFLINE?
4
The explosion in growth of internet users and
usage in the last decade is remarkable. It was
estimated there were 2.7bn
internet users
globally in 2013 (39% of global population), up
more than 6 times on 10 years ago. The
demographic has switched significantly too, in
1996, 66% of internet users were from the US
and now that figure is just 13%, with Asia and
Europe accounting for nearly 70% of all internet
users.
Increased penetration of smartphones and
tablets has been a major driver of both internet
adoption and average usage time. Multi-device
ownership is incr easingly becoming
commonplace in developed markets with 1 in 4
smartphone owners in the US and Western
Europe also owning a tablet. Early signs from
these markets indicate that multi-device has not
served to cannibalise desktop browsing but
instead complement it with overall usage time
rising.
SECTION 1
INTERNET FACTS
The number of internet
users globally has
increased six-fold in the
last 10 years
The proliferation of
smartphones and tablets
has served to double
overall usage
Global eCommerce is
forecast to grow from
$1.5 trillion to $2.4 trillion
in 2017
Digital advertising
revenue is now worth
$37bn in the US alone,
rising 5x faster than any
other medium
$7.7bn was spent on
banner advertisements
alone in the US in 2012
Percentage of internet users located in US vs. RoW (1996, 2012).
Source: ComScore (2012).
0
25
50
75
100
1996
2012
87
34
13
66
US
Rest of World
8%
9%
14%
27%
42%
Asia Pacific
Europe
North America
MENA
South America
WHY BUY ONLINE VS OFFLINE?
5
Percentage of global internet users by region (2013).
Source: ComScore (2013).
But what does all of this mean for online businesses and for a
buyer looking to acquire one? Firstly, the number of consumers
online is growing significantly each year and as the internet
becomes an increasingly popular purchasing channel,
eCommerce businesses will continue to experience explosive
growth.
According to eMarketer's latest forecasts, worldwide business-
to-consumer eCommerce sales will increase by 20.1% this year
to reach $1.5 trillion, up a staggering $400bn from 2012. That
growth is coming primarily from the rapidly expanding online and
mobile user bases in emerging markets, increases in mobile
commerce as well as improved shipping and payment options for
customers. Interestingly, the latest research indicates online
consumers are more valuable than offline ones. In a recent
comprehensive study of European consumers, the consultancy
firm McKinsey found that 38% of online buyers had household
income of >40,000 versus just 25% for offline channel buyers.
Secondly, the attractiveness of the internet as an advertising
medium for major brands continues to rise with the growth in
internet adoption and value of the eCommerce market. Digital
advertising revenue is now worth $37bn in the US alone, second
only to TV, and rising at 15% per annum (5x faster than any other
medium). Don't think that it is just search engines benefiting from
increases in advertising spend, though, $7.7bn was spent on
banner advertisements alone in the US in 2012 . Website owners
with authoritative content in the right niches and of course the
right traffic can command a good price for onscreen real estate.
0
0.75
1.50
2.25
3.00
2012
2013
2014
2015
2016
2017
2.3
2.0
1.8
1.5
1.2
1.1
SECTION 1
US total internet time spent (billions of minutes).
Source: ComScore.
B2C eCommerce sales worldwide, 2012 - 2017, trillions.
Source: eMarketer (2014).
0
225
450
675
900
2010
2013
115
0
308
63
467
388
Desktop
Smartphone
Tablet
WHY BUY ONLINE VS OFFLINE?
6
'Domain names and websites are
Internet real estate.'
Marc Ostrofsky
Superior Operating Margins?
An often cited benefit of the online business model are the
potential cost savings. There are typically much lower start-up
costs when creating and running a website. Without physical
assets there is no large capital outlay and instead the focus for
many online businesses is on creating relevant content and
outreach (not always the case with SaaS or Software etc).
With so many e-business models and unique monetisation
methods, accurate studies on the differences in cost structures
between on and offline businesses are somewhat sparse. One
good comparison is an analysis of profit margins between
retailers, e-tailers (click-and-brick operations) and pure
eCommerce stores. Matt Carroll at FailHarder has written
extensively on the economics of each. His analysis of the
average profit margin achieved in the apparel niche (he models
the sale of shoes) shows retailers on average achieve 51% gross
margins whilst eCommerce achieve 65% through charging for
shipping. Note, gross margin doesn't then take into account the
savings in operating expenditure for the online model (rent,
utilities, employees) which can take the typical net margins of
eCommerce stores to ~30% versus ~10% for offline equivalents.
Asides from eCommerce, there are a number of e-business
models that offer very attractive profit margins to business
owners. Using data from the sale of over 150 online businesses
over the last four years at FEI, we have compiled the net margin
comparison table below for the most common business models:
SECTION 1
EBITDA margin percentage comparison for the most common online business models.
Note: owner's salary excluded.
Source: FEI (2014).
0
25
50
75
100
AdSense Affiliate
eCom Lead Gen
SaaS
Software Subscription
60
50
50
80
30
80
80
WHY BUY ONLINE VS OFFLINE?
8
Online Provides More Marketing Insights
Great marketing is at the heart of many successful businesses
and the online space is no different. What is interesting about
internet marketing is that whilst it requires a slightly different skill
set to traditional businesses it offers a number of major benefits
versus marketing in the offline world.
The tools and strategies for marketing to consumers online
provide much more data to the marketer in terms of customer
engagement, relationship building and fine tuning of the
conversion funnel.
Make changes on the fly
Marketing online allows business owners to instantly split test
new landing pages, site layouts, order forms, email sequences,
newsletters, all within the click of a button.
Track real-time results
With internet traffic, webmasters often have enough of a
customer sample to observe the impacts of changes in just a few
days or a week allowing analysis and decision-making in a
comparatively short time period and with low operational impact
on the business.
Target specific demographics for marketing
The rise in social media as a platform for marketing has enabled
internet business owners to target specific demographics and
customer profiles (e.g. age, gender, ethnicity and location). Paid-
traffic campaigns can be run on specific locations to expand
awareness in particular areas (local and national) as well as
driving the right traffic to the business.
Variety of methods in marketing online
Online marketing strategies are increasingly adopting a
multimedia approach to create and develop relationships with
consumers, embracing content across email, audio, video, blog,
social media and newsletters. E-mail marketing has been shown
to be a powerful tool to help raise brand awareness, build
relationships and generate revenue.
SECTION 1
"The aim of marketing is to know
and understand the customer so
well the product or service fits him
and sells itself."
Peter Drucker
WHY BUY ONLINE VS OFFLINE?
9
SECTION 1
Online Provides More Freedom
One of the major draws of the online business model is the ability
to operate from home and in fact anywhere in the world. With
more people looking to supplement income from their main jobs,
the attraction of an online business as a means of passive
income is on the rise. Latest figures show 1 in 6 people in the UK
alone (8m people) are operating an online business from home as
a way to do this.
Without employees and infrastructure to manage, the owner time
commitment on a well-established online business can be very
low. Using the same transaction data, we have compiled an
estimate of the average owner time commitments for the most
common online business models:
Ease Of Scalability
Operating an online business can require little in the way of
ongoing costs and a generally lower time requirement can often
mean it is easy to own and run several e-businesses
simultaneously. Comparatively speaking, with an eCommerce
business versus a traditional offline retail business, it would be
significantly more onerous to acquire or open another physical
store. It may take years to raise the funds and find the right
location with enough footfall and a lengthy lease could be
required to secure the premises.
Operating online is somewhat simpler in this respect; owners can
take a model in one niche and apply it to another with relative
ease if they have the relevant experience and knowledge. There
is little or no physical presence required and there is often
opportunity to synergise staffing. Buyers can use their skills and
resources across their entire portfolio, significantly increasing
their ROI and financial independence.
Average hours per week spent by owners on the business.
Source: FEI (2014).
0
10
20
30
40
AdSense Affiliate
eCom
Lead Gen
SaaS
Software Subscription
20
10
20
5
10
5
5
WHY BUY ONLINE VS OFFLINE?
10
SECTION 1
Greater Liquidity Than Offline
Any prudent investor should be mindful about the liquidity profile
of their investments and buying an online business is no
exception. The good news is that a website is typically a much
more liquid asset than an offline business. Given most online
businesses are geography-independent and quite often simpler
from an operational standpoint, there is a lot of investor demand
and shorter due diligence periods during sale.
At FEI, depending on the size and complexity of the asset, we
typically see websites sell within 24 hours of listing to 3 months
with the average being somewhere in the middle. Many offline
businesses can take 6 or more months to sell with 3 of those in
due diligence alone.
Businesses That Help The Environment
Whilst probably not a deciding factor in a decision to make an
online vs offline business acquisition, being environmentally
conscious is becoming increasingly important in this day and
age. An online business offers significant carbon footprint
savings with fewer employees, remote working (thereby no
transportation costs) and no requirement for utilities like water
and heating. Information is processed electronically and stored
online too which helps to save paper. Research shows that
approximately 65% of total emissions generated by the
traditional retail model stemmed from customer transport.
Accordingly, online retailers use 30% less energy than traditional
retail operations. Clearly though the internet does present more
demand for power consumption but research conducted by the
ACI found that eCommerce will still achieve a net reduction of 1
billion tons of greenhouse gas emissions per annum, constituting
11% of US annual oil imports.
Online Versus Offline: The Key Is Getting The Right Fit
Operating in a high growth environment with superior margins
and often a reduced time commitment, an online venture should
be an attractive alternative to a traditional offline business. That
is not to say there aren't other considerations though. Some
businesses will require more work than others and that may be of
a technical or bespoke nature. It's important as a buyer to
approach any business acquisition taking due consideration of
background, skill set and acquisition goals.
WHY BUY ONLINE VS OFFLINE?
11
'Fools build houses, and wise men
buy them.'
Proverb
FOUR REASONS TO BUY
AN EXISTING BUSINESS
The business model has already proven itself, a buyer
can enjoy positive cash flow right away
Gain existing assets, years of customer data, supplier
relationships, intellectual property, that can be
leveraged for growth
Improve the business from a fresh perspective and
with different knowledge, contacts and resources
Leverage the existing knowledge of seller
BUILD OR BUY?
Build Or Buy A
Business?
The decision to build a business or buy an existing one is an
important one investors should take from the outset. Three
important considerations for the decision are time available, funds
for investment and resources accessible to the buyer.
This section explores some of the benefits and drawbacks of
buying an online business versus building one from scratch and
looks at how investors can make a quick decision based on their
personal situation and business objectives.
13
SECTION 2
Advantages Of Acquiring An Existing Online Business
There are a number of advantages to acquiring a business versus
building one from scratch.
The business model has already proven itself, a buyer can
enjoy positive cash flow from day 1
Being able to hit the ground running is one of the most attractive
things about buying an established business. From day one, the
business will be making a new owner positive cash flow and has
a proven business offering.
Gain existing assets, years of customer data, supplier
relationships, intellectual property, that can be leveraged for
growth
Particularly where the business has a long history, the tangible
and intangible assets associated with the business are very rich.
For example, the intellectual property attached to a software
business that has been developed and successfully monetised
for five years is very high.
Improve the business from a fresh perspective and with
different knowledge, contacts and resources
Often business owners are looking to sell because they have run
out of inspiration or energy to continue to grow their venture. It is
quite common for buyers with a different skill set and resource
base to come in and add significant value right away. In the
online space, this is most often seen with buyers who bring fresh
sector or internet marketing experience that hasn't yet been
employed in the business. The rate of the subsequent uplift in
value can be startling.
Increase an existing market position
If the buyer already operates in the niche and is looking to
expand the business' activities either directly or with a
complementary offering, then strategic acquisition may make a
BUILD OR BUY?
14
lot of commercial sense.
Leverage the existing knowledge of seller
Having access to the seller's contacts and experience is
invaluable, especially if the buyer is acquiring a business with a
long history. Sellers usually commit to a minimum period of
transition assistance post-sale (see section "Transferring the
Business" in Chapter 4) which is a valuable for buyers to master
the operations of the business as well as learn some unique and
beneficial market information.
Disadvantages Of Acquiring An Existing Online Business
There are also a few potential drawbacks to acquiring a
business.
Takes a significant amount of upfront capital
Typically businesses sale for a multiple of their annual earnings
(see more on this in the section 'How to Value on An Online
Business') which for can be a significant capital outlay. Whilst
this can be partially mitigated with creative financing there is an
initial hurdle of upfront consideration that an investor should be
willing to sacrifice for inheriting the assets and associated
goodwill.
Inherit the previous owner's issues
Not always obvious is the potential to inherit the previous owners
operational problems when taking over the business. This could
be for example poor quality content and backlinks, lack of
customer service, soured relationships with suppliers or
haphazard internal processes. It is always highly recommended
to conduct proper due diligence to avoid purchasing something
with insurmountable faults.
Risk of loss
As with many investments, there is potentially a risk of losing
some or all of the initial consideration when purchasing an
existing business. Many times a loss comes from a lack of work
by the buyer so its important to correctly assess the time and
skills required to run the business being acquired.
Buyers should look to actively manage this through exercising
cautious business judgement from the outset, conducting
extensive due diligence during the acquisition process and
employing a financing structure that matches their risk/return
profile.
BUILD OR BUY?
15
SECTION 2
Advantages Of Building A New Online Business
It is worth taking a similar approach to analysing the merits and
drawbacks if building a business from scratch.
May cost less in the long run
Typically online businesses have low startup costs and it is
possible to create a new website with professional design,
outsourced content and basic SEO for relatively cheap. In the
initial stages then a build approach can be comparatively much
less expensive. Naturally though, building a compelling value
proposition and marketing it to customers can take substantially
more time and money.
Buyers should always aim to compare the cost of building vs.
buying on any new acquisition opportunity.
Gain first-hand knowledge and experience
Either through success of failure, entrepreneurs will always know
more at the end than the start.
Full control over the quality
Starting an online business from scratch means that important
things such as SEO, monetization strategy and testing, products
and services, customer service, direction to take the business,
etc. can be under control from the outset.
Disadvantages Of Building A New Online Business
Takes a significant amount of time and resources
There are no guarantees of success in business and this
especially stands true with starting a business from scratch.
Just as in the offline world, a high percentage of online
businesses struggle to take off, remain consistently profitable or
worth the owner's effort. An established business can help solve
these issues from the outset.
Final Thoughts
Clearly there are a wealth of advantages and disadvantages to
both building and buying with only a handful of these considered
in these pages amongst the array of other factors that are
personal to each particular buyer.
For most investors it seems in principle to be a trade off between
time, inclination and knowledge. As a buyer you should carefully
consider these in your decision and see how buying versus
building may be a better fit. If you remain interested, Chapter 2
overleaf goes in-depth on what potential options are available.
BUILD OR BUY?
16
Chapter 2
Investment
Options
'Know what you own, and know why you
own it.'
Peter Lynch
Choosing The Right
Business Model
The internet has become a breeding ground for imaginative
ways of making money, from software services delivered
through the cloud to products sold through eCommerce
websites to channeling customers onwards to affiliate
networks.
There are a wealth of e-business models to invest in and many
online ventures are an amalgamation of two or more
monetisation styles. As an investor, it pays to have a good
understanding of each model, its strengths and weaknesses
and suitability for the buyer's own background, time
requirements and risk appetite.
This section explores a range of popular e-business models,
discusses their strengths and weaknesses and classifies them
into seven common categories.
'Opportunities multiply as they
are seized.'

Sun Tzu
SECTION 1
INTERESTING
MARKETING FACTS
Email opens on
smartphones and tablets
have increased 80% over
the last six months
(Litmus)
By 2016, more than half
of the dollars spent in US
retail will be influenced by
the web (Forrester)
The average yield for
email marketing is $44.25
for every dollar spent
(OptiMind)
Consumers who receive
e- mail marketing order
28% more often than
others (OM)
Blogs are 63% more likely
to influence purchasing
decisions than
newspapers (OM)
1. Advertising
The web advertising model is one the simplest
and most popular e-businesses. It is the
internet's digital extension of the traditional
media broadcast model. Effectively a website
provides content, usually for free, interspersed
with advertising messages in the form of banner
ads or other ad placements.
Naturally the value of this type of business is in
the volume of traffic that the site has, the
demographic of visitors and usually the niche it
is in. Content sites come in many forms
including blogs, forums, news and informational
sites etc. Webmasters of these sites have a
range of advertising payout models to adopt
(see box overleaf).
CHOOSING A BUSINESS MODEL
19
ADVERTISING MONETISATION
Pay-Per-Click: advertising revenue is generated by
users clicking on the web advertisement.
Pay-Per-Lead: advertising revenue is generated when
users click and sign up through a web advertisement.
Pay-Per-Action: advertising revenue is generated
when users click and purchase something through a web
advertisement (the site owner receives an agreed %
commission of the sale value).
Pay-Per-Impression: advertising revenue is
generated by users viewing the web advertisement. This
is usually paid per thousand impressions (CPM).
There are two common avenues for monetising content via
online advertising: 1) through an automated advert delivery
platform and 2) via direct adverts. Google AdSense is by far the
most common ad-delivery network and generally speaking is one
of the best paying for the average webmaster. Second tier
alternatives include Media.net, Chitika and Matomy. The other
option is to organise advertising relationships directly with
relevant product/service sellers. This more hands-on approach
requires some time investment from the site owner but often
translates into improved advertising terms.
High quality content sites with a strong traffic profile are typically
very attractive to buyers as they offer relatively secure income
with low maintenance requirements.
2. Affiliate
An affiliate business model is one where the business exclusively
sells other suppliers' products and services in exchange for a
commission payment that is an agreed percentage of each sale.
Affiliate marketers are effectively independent sales entities that
are paid on a performance basis (i.e. when an actual sale is
made). Websites use tracking codes which identify who referred
the sale to them.
SECTION 1
CHOOSING A BUSINESS MODEL
20
SECTION 1
eCommerce sites tend to be attractive to both online and offline investors as retail experience can often translate well into this model. The market is very
large and growing with global eCommerce forecast to grow from $1.5 trillion to $2.4 trillion in 2017, mainly driven by mobile.
Some of the major affiliate programs include ClickBank, Amazon
and Commission Junction. In some cases affiliate marketers can
receive c.50% of a sale (especially with digital products) but this
usually ranges from anywhere between 5% to 75% depending
on the product and the niche. Typically physical products are at
the lower end of the spectrum and digital at the higher end of the
payout range. Usually, there are higher tier payouts for those
who send a high volume of sales.
Successful affiliate marketing sites are ones that have become
an authority product referrer, usually through building high quality
content around the product or service being sold.
3. eCommerce
eCommerce has been a dominant theme of the internet for the
last decade and is one of, if not the most common e-business
model. By definition, eCommerce is buying and selling of
products and services over the internet. There are different types
of eCommerce sites depending on the approach to inventory and
CHOOSING A BUSINESS MODEL
21
One-third of people go online to
purchase an item.
Intent index (2013)
distribution taken.
Store - A store approach requires the site owner to hold
inventory, ship the product and effectively take control of the
entire supply chain.
Dropship - Becoming more common is the dropship model
where the eCommerce store acts as an online platform for selling
goods but outsources the storage and shipping of the products
to the original supplier. Naturally there is some margin reduction
in a dropship model but it also cuts out the logistical burden of
running a retail store and allows the owner to focus on internet
marketing which is typically their core competence.
Brokerage - Somewhere in between store and dropship is the
brokerage model which brings buyers and sellers together,
facilitating but not actively participating in the transaction.
Marketplaces like eBay and Fiverr are good examples of this.
eCommerce sites tend to be attractive to both online and offline
investors as retail experience can often translate well into this
model. The dropship approach is generally favoured as physical
warehousing and responsibilities for logistics can for many
outweigh the natural benefits of owning an online business.
Buyers reviewing eCommerce businesses should focus on
product margins, owner time involvement as well as traffic
sources, trends and sustainability.
4. Lead Generation
Lead Generation business models are those where a website is
used to attract traffic and convert users into leads for a sellable
service (e.g. car insurance). Typically the site owner creates a
website of relevant content for the lead-type and then employs
an internet marketing strategy to attract traffic to the site. User
information is collected (usually through a customer form) and
then the lead data is sold to companies interested in marketing
to or selling to those collected leads. The quality of the lead
(contact information, conversion rate) will correlate heavily with
the price paid.
An example of a lead generation business is LendingTree.com,
where they use radio advertisements, Google Adwords, SEO,
etc. to drive leads to the site and then sell these to banks and
mortgage companies. Another good example is QuinStreet.
QuinStreet works in a series of verticals to develop proprietary
content sites, publisher partnerships, ad placements, email
campaigns, etc. to develop a lead flow, and then sells that on to
buyers at a higher price per lead than they are paying overall to
acquire the leads.
The main focus with a lead generation business is establishing a
higher revenue-per-lead (RPL) than the total cost-per-lead.
Owners of lead generation businesses can arbitrage paid traffic
well if their conversion rate and RPL is higher than the CPC of
CHOOSING A BUSINESS MODEL
SECTION 1
Software and Software-as-a-Service (SaaS) businesses are popular with investors, particularly those that operate a recurring revenue model.
running AdWords (or equivalent). Lead generation businesses
can be very high margin (80%+ net margins) and relatively
hands-off once established. Buyers reviewing lead generation
businesses for potential acquisition should focus on traffic
sources and sustainability, owner time involvement and of
course conversion rates for both leads and sales.
5. Software
Software businesses often spring up from hobbyists looking to
create a relevant product within their niche. Usually the
developer has created a niche software product and either
opted to sell through word of mouth and referrals or to employ
affiliates to sell it via an established partner network such as
ClickBank. Software businesses can be set up with either one-
time or subscription-payment types depending on the nature of
the product and the customer base.
CHOOSING A BUSINESS MODEL
24
SECTION 1
Buyers looking at software businesses should focus on the
marketing strategy, traffic sources, quality and integrity of the
software's source code as well as technical requirements for
future upgrades.
6. Software-as-a-Service ('SaaS')
Software as a Service or 'SaaS' is a business model where users
pay a subscription to rent software hosted online instead of
purchasing it outright and installing it locally on their
computers. SaaS is at the core of centralised or cloud computing
with the aim being that users can run their computer tools as
online rented products. All of the processing work and file saving
is conducted on the internet with users accessing their tools and
files using a web browser.
Users benefit from reduced upfront cost of ownership, quick and
easy access with immediate upgrades, no need for additional
hardware and often much better technical support as well as
customer care.
SaaS businesses are becoming increasingly popular for online
acquisition as, like subscription businesses, they typically
employ a monthly or quarterly billing model and enjoy a strong
amount of recurring income. Again, acquirers should be
focussed on the strength of the base, churn, monthly-recurring-
revenue (MRR) and customer lifetime value (CLV). Often SaaS
businesses are backed with a high amount of content marketing
to get users into the conversion funnel and onto a subscription.
They also require a strong technical support system in place for
good customer care.
7. Subscription
The Subscription business model is where users are charged a
periodic daily, monthly or annual fee to subscribe to a
service, commonly a content offering (e.g. Netflix, Listen.com). A
number of these businesses combine free content with premium
(i.e. member-only) content (referred to as a "freemium" model.
Often converting customers into long-term billing relationships
requires time and effective marketing so many successful
subscription models have a well-refined internet marketing
strategy and conversion funnel in place.
Subscription businesses are attractive for online acquisitions as
they typically employ a monthly or quarterly billing model and
therefore enjoy a significant amount of recurring (vs. 'one-off')
income which is held in high(er) regard. Acquirers should be
focussed on the strength of the customer base, churn rate,
customer lifetime value ('CLV') and the associated customer
acquisition costs.
Choosing The Right Business Model
The internet has helped create a number of e-business models
and investment opportunities for buyers. We have outlined seven
of the main models we see, but many can fall into more than one
CHOOSING A BUSINESS MODEL
25
SECTION 1
category or be rotated for fuller effect. Ultimately, the key to
acquiring the right business (both on and offline) is for buyers to
know their strengths and limitations, leveraging their experience
and put these together into a growth plan for the business.
Whichever business model(s) an investor takes a preference for,
there are a few golden rules when it comes to reviewing a
business for potential acquisition. The next section goes into
detail on precisely this.
26
CHOOSING A BUSINESS MODEL
What To Look For In
An Online Business
Purchasing an online business, particularly for the first time, can
be a nervous experience for many buyers. With an online
business, most of the assets are intangible and it can be hard to
connect with the value of the purchase. It is therefore important
as a buyer to understand what makes an online business
valuable and viable for long-term growth to provide the comfort
needed to conclude a business purchase.
This section explores three of the most important aspects for
buyers to look at when buying an online business. Understanding
these will help save time and energy during the search process
and help maximize return on investment, by starting with a strong
foundation from the outset.
'What we see depends mainly
on what we look for.'

John Lubbock
SECTION 2
Traffic is the life blood of most online businesses and buyers should be careful to audit it's sources and trends.
TIPS FOR TRAFFIC
VERIFICATION
Diversity - ensure the
business has a mix of
traffic from the main
sources: search, paid,
referral, social and direct
Backlinks - conduct a
thorough audit of the
backlinks for the site,
especially if it relies
heavily on search traffic
Historic performance -
analyse each traffic
source historically and in
detail. Take care to notice
any spikes and overlay
this with changes in
search engine algorithms
or other events
Traffic
Thousands of people may walk past a
storefront, a few hundred may come in and
browse, and some will purchase an item. Traffic
that reaches a website is the equivalent of
customers walking through the door, that's why
it is the most critical component of a healthy
online business. When looking at the traffic of a
potential online business to purchase, buyers
should pay attention to the following:
Diversity
Typically the most robust online businesses will
have a mix of online traffic from the main
sources: search, paid, referral, social and
direct. Relying too heavily on one source of
traffic is risky, particularly search where sites
leave themselves at risk of algorithm changes
by Google. Make sure if the site has a high
percentage of search traffic that the site is
compliant with Google best practices and be
sure to audit the history against previous
WHAT TO LOOK FOR IN AN ONLINE BUSINESS
28
SECTION 2
Google updates.
Backlinks
Google and other search engines place high value on the quality
and quantity of natural backlinks to a website. Buyers should
take a careful audit of the backlink profile of an online business,
monitoring for any anomalies in links and link-building strategies.
See the section 'Due Diligence' in Chapter 4 for more on this.
Historical Performance
Buyers should take heed to closely examine every source of
traffic and look for trends as well as unexplained spikes. Was the
site affected by a Google update, if so, why? Has referral traffic
been on a decline as of late? Are there traffic sources that the
current owner has yet to pursue? There are a number of useful
sense checking metrics including time on site, pages viewed,
which will help give a sense of the quality of traffic. See the
section 'Due Diligence' in Chapter 4 for more on this.
Financials & Growth
Just like any business acquisition, buyers should take care to
review the financials of the business in depth. For online
specifically, investors should look for the following:
Trends
Check for trends in the revenue over the lifetime of the business.
Did it peak after its first year and has been trailing off over the
last 6 months? Is it a seasonal business that sees higher revenue
during the holidays and slower elsewhere? Always ask to see
financial data in monthly increments to clearly see the direction
the business is heading. If it's moving downward, fully
understand what would be required to revive it.
Expenses
Every online business has expenses such as hosting, domain
renewals, web content, and marketing, but not every online
business owner spends intelligently. Look for overspend in
stated expenses that could by cut or reallocated right away to
increase profit. The biggest culprits are usually hosting and
marketing. It's also important to look for expenses that seem
unreasonably low or the owner failed to mention for the business
model, such as payment processor fees, refunds for software
products or on-going writing requirements for content sites.
Growth Potential
It should be a priority for buyers to develop a strong growth
strategy for the business they are acquiring unless it is a
purposely passive investment. There are numerous ways to
increase revenue from existing traffic as well as build new traffic
channels. Examples include hiring a Conversion Rate
Optimization (CRO) service to audit the site for improvements in
the conversion process, starting or increasing expenditure on
paid traffic or starting a social media marketing campaign.
WHAT TO LOOK FOR IN AN ONLINE BUSINESS
29
SECTION 2
Personal Fit
Its very important for buyers of all backgrounds to be sure about
taking a business on that they have the time to properly manage
and the confidence or experience to take it to the next
level. Even if making an acquisition of a passive investment, it
should still ideally align with a buyer's personal strengths,
interests and investment strategy.
A useful exercise to run through is to envision working on the
site considering the skills and experience required for the
business model and the niche. Consider the after sale training
and support and whether this as well as any third parties can fill
in the gaps. Most importantly, does the business generate
excitement and interest.
Time
No matter how passive an online business is, there is still some
level of planning involved to maintain stability or growth in the
dynamic online environment. Buyers should determine a realistic
amount of time they are willing to spend per week running a
business and allow for additional time in the weeks following an
acquisition to embrace the inevitable learning curve.
Budget
As with any other investment, it is always good advice for buyers
to only invest an amount which they are comfortable with.
Investing too much from the outset can cloud a buyer's
judgement post-sale and also potentially leave to little working
capital if required to grow the business.
Conclusion
With strong conviction on the traffic, financial and personal
perspectives of a business opportunity, it is time to turn attention
to the process of actually buying an online business.
WHAT TO LOOK FOR IN AN ONLINE BUSINESS
30
Chapter 3
How To Buy
An Online
Business
'Knowledge is power.'
Kofi Annan
The Buying Process
The process of acquiring an online business is similar to a
traditional offline M&A process. A potential business buyer
should be sure to follow the steps closely to ensure success
at each stage. It also pays to understand some of the subtle
differences to procedure that accompany an online business
purchase.
As a general rule, it is advisable to work with a well-
established online business broker when making a business
purchase. A quality broker will help guide buyers through the
process and invariably represents the best quality businesses
in the marketplace.
This section outlines the process of working with a broker
through the acquisition process, discussing the steps from
business identification through to making an offer, conducting
due diligence and closing the sale.
'Perfection has to do with the
end product, but excellence has
to do with the process.'

Jerry Moran
SECTION 1
The business acquisition process should follow a set of discrete steps that help buyers methodically identify,
evaluate, value, due diligence and ultimately purchase a business successfully.
BUYING PROCESS
1.
Identify acquisitions
opportunities through a
variety of qualified
channels
2.
Review each
opportunity
methodically against
specific criteria
3.
Learn more about the
business and
formulate an offer
4.
Conduct extensive due
diligence on all
aspects of the
business
5.
Seek professional
counsel for drafting
and reviewing the
contract
6.
Use a secure payment
service for the transfer
7.
Arrange for training
and post sale support
Identifying the Opportunity
It is important to only use high quality channels
for sourcing acquisition opportunities. Buyers
should spend time researching brokers that
have a multi-year track record and a good
reputation online. Once established, review the
broker's business listings and contact them
directly to discuss criteria and interests.
If it is first time enquiry, most of the time a
buyer will be asked to complete a non-
disclosure agreement (NDA). This protects the
seller's information and allows a broker to
share information on all future listings. In some
cases, buyers may be asked to further qualify
eligibility for information, including documented
proof of funds or experience acquiring
businesses.
THE BUYING PROCESS
33
SECTION 1
A professional broker will prepare a very detailed prospectus for buyers to examine the business. The document typically includes information on
business operations, growth opportunities, market trends, traffic, financial performance and continuing obligations.
Reviewing the Business
A professional broker will prepare a very detailed prospectus for
buyers to examine the business. Transparency is very important
so if the prospectus is light in detail or confusing, be sure to
investigate further. The document typically includes information
on business operations, growth opportunities, market trends,
traffic, financial performance and continuing obligations.
The prospectus also usually includes a detailed seller
questionnaire covering a number of topics including day-to-day
operations, sale rationale, customer base, products/services and
marketing etc.
Having reviewed the marketing materials it is wise to ask
questions of the broker and arrange a call to discuss the
business with the seller before proceeding forward with offer
discussions.
THE BUYING PROCESS
34
CREATING AN OFFER
1. Consideration Describe explicitly what the offer
structure is. What is the split between upfront
consideration vs. holdback and/or seller financing?
What are the conditions attached?
2. Owner financing Does a portion of consideration
need to be financed by the seller? On what terms?
3. Non-compete Make sure to ask for a market
standard non-compete agreement of 1-3 years.
4. Exclusivity A period of no marketing may be
agreed to by the seller if the terms of the offer are
very competitive, the business is very complex or the
seller has a high level of confidence in the buyer's
ability to execute.
5. Timetable Buyers that can proceed through due
diligence into closing in a timely manner will be more
likely to have their offer accepted from the outset.
Making an Offer
Once satisfied with their research into the business, the buyer
should be ready to make an offer. Investors formalise this with a
letter of interest (LOI), which is a standard-form non-binding
agreement between buyer and seller to proceed forward with
certain offer terms on a good-faith basis. Note, it is not legally
binding but changes to its terms later in the process without
reason or mutual agreement is heavily frowned upon. There are
a number of things to think about when writing an LOI (see
right).
Due Diligence
If the offer is accepted, the transaction proceeds into due
diligence (DD). Due diligence of an online business is slightly
different from a brick-and-mortar company. Naturally, the
principle of fact-checking is still the same but without significant
tangible assets and a very different customer acquisition
process, due diligence is usually focused on 3 main areas:
Traffic
Buyers should focus on checking the traffic sources, the
backlink profile and metrics for visits to make sure everything
looks appropriate (see more 'Due Diligence' section in Chapter
4). Most established brokers will provide access to Google
Analytics (or another service) to enable the buyer to carry this
out.
SECTION 1
THE BUYING PROCESS
35
SECTION 1
Financials
Traditional investors often expect to see audited books or tax
returns for the business during the sale process. In reality, the
majority of online businesses are owner-managed and having
audited statements is quite rare. A good broker will
perform extensive pre-listing due diligence on the financials and
then provide all the supporting documentation (merchant
statements, invoices, credit card statements etc.) to the buyer
during due diligence. As a second step of verification, buyers
should arrange for a live screen-share with the seller to walk
through the back-end of the website and associated payment
platform(s). This will authenticate ownership and verify the
financials further.
Maintenance
Many online businesses (even relatively large ones) have grown
out from hobby websites or family businesses, and as such are
very often owner-run. As such it's important for investors to
analyse the business owner's daily, weekly, and monthly tasks to
be able to properly account with the cost and effort of
outsourcing or taking on those work streams. It's particularly
important to evaluate and understand the difficulty of the tasks
that the current owner is performing if they are going to be kept
in house.
With comparatively few physical assets to examine or a large
amount of audited statements to review, due diligence for online
businesses usually takes 1-2 weeks depending on the size and
complexity of the business.
Legals
In tandem with the due diligence process, the broker will usually
prepare the Asset Purchase Agreement (APA) for the transaction.
This typically works from a standard-form template and is then
tailored to suit the specifics of each transaction. Within the
contract, buyer and seller formalise amongst other things: the
consideration terms, the assets to be transferred, the breadth of
the non-compete and the training and support for the buyer
post-sale.
Both buyer and seller should always have their legal counsel
independently review the contract before signing.
Transfer & Escrow
Most well established brokers will use Escrow to facilitate the
funding of the transaction and transfer of assets. Buyers should
be extremely cautious about transferring funds outside of an
Escrow service. Reputable brokers will be officially partnered
with an independent Escrow service.
The Escrow process typically moves in the steps described in
the box overleaf.
THE BUYING PROCESS
36
Many first-time buyers often ask what protection is afforded to
them during this process. Its important to point out that at no
point are buyer funds released to the seller without the buyer's
consent. In the very rare case that assets have been
misrepresented or not transferred in entirety, the buyer can notify
Escrow during the inspection period. Generally speaking though,
disputes pertaining to misrepresentation are rare. In the 160+
transactions completed by FEI since 2010, only one has been
disputed.
Using a dedicated Escrow service gives buyer and seller a formal
process for mediation and remedies. Escrow.com will conduct
their owner internal domain checks before funds are released
and in the case of a disagreement, will seek remediation through
the America Arbitration Association which is a relatively quick
and cost effective dispute resolution service.
Training & Support
After the transaction has closed, there is typically a four-week
period of training and support where the seller helps the buyer
learn the day-to-day operations of the business. Occasionally, in
the case of transactions with contingent consideration or seller
financing, the seller will maintain a high level of involvement in
order to meet mutually-agreed performance or training goals.
Buyers should make sure that the level of post-sale support is
agreed beforehand and included in the signed APA.
Summary
The process can be a lot to take in the first time but a good
broker will guide a buyer through each stage and explain what
needs to happen. It is often a good idea to seek counsel from
previous business acquirers to benefit from their experience in
the same process.
SECTION 1
ESCROW: STEP-BY-STEP
1.
Escrow transaction terms agreed by Buyer and Seller
2.
Buyer transfers funds securely into Escrow, funds are
secured but not released
3.
Seller transfers the assets to Buyer
4. Buyer acknowledges receipt of assets and initiates
Inspection Period
5.
Inspection Period used to confirm correct representation
of the assets
6. Buyer confirms satisfaction and releases funds to Seller
THE BUYING PROCESS
37
'You are never strong enough
that you don't need help.'
Cesar Chavez
FOUR REASONS TO WORK
WITH AN ONLINE BROKER
Brokers typically have the largest supply of pre-vetted
businesses for sale
They can be a useful and expert source of information,
advice and support
Oftentimes a much needed conduit between buyer and
seller, particularly during delicate negotiations.
There is a significant paper trail attached to a business
purchase which the broker will help support
Working With A Broker
Business brokers almost always represent the seller or the deal in a
transactional role. The seller pays their commission and even if they
are assisting the buyer in the process, they have a fiduciary duty to
the seller. This is not to say that they won't provide a buyer with
helpful advice. Why then, should a buyer use a broker?
This section discusses the role of the business broker and highlights
some of the key advantages to the buyer of working with one in the
process of purchasing an online business.
WORKING WITH A BROKER
39
SECTION 2
Most business brokers work on behalf of the seller but nonetheless can be a valuable source of information and guidance to buyers.
Finding the best business
Compared to the offline world, the industry of buying and selling
online businesses is still in its relative infancy which presents
buyers with opportunities as well as some challenges. One in
particular is the quality and quantity of businesses available for
purchase.
Regulatory oversight of the industry is still some way off and as a
unfortunate consequence, fraudulent sales activity is high.
Unregulated marketplaces and some internet forums are
common candidates for the sale of misrepresented or fraudulent
web businesses and so buyers should be cautious about making
purchases through these channels. Likewise, brokerage firms
with little or no track record can in some cases list businesses of
dubious quality either through inexperience or to build profile.
Working with an established online business broker will ensure
that the listings being reviewed are of good quality. Most brokers
operate on a success-fee only so are incentivised to ensure the
listings they take on will pass through due diligence and close
successfully. Serious brokers will vet the businesses before
WORKIG WITH A BROKER
40
SECTION 2
agreeing to take them on and also independently verify the
business' financial and operational performance before listing.
Education and advice
Whilst they are vested in the sale of the site, a good broker
should be able to provide valuable advice to the buyer
throughout the transaction process. A serious brokerage will be
on hand to educate and support the buyer through the process,
highlight due diligence areas of interest, provide relevant
business referrals and nurture a good relationship with the seller.
In other words, a good broker will make the business purchase
process a smooth, secure and enjoyable experience for any
buyer.
Buffer between buyer and seller
Brokers can be a useful conduit between buyer and seller,
particularly during delicate negotiations. There may be instances
where a buyer has to retract or modify an offer and times where
an aggressive negotiating position is needed. It's important to
maintain a good relationship with the seller, not just to secure the
sale but for ongoing training and support post-closing, and so an
intermediary can be beneficial to harbouring good relations
through this tricky stage.
WORKIG WITH A BROKER
41
SECTION 2
Paperwork? Most brokers will take care of collecting the due diligence
materials, drafting the contract and co-ordinating communication
Paperwork and process
A business purchase, no matter how small, requires a
significant amount of coordination and document chasing. The
data needed from a seller to evaluate a business, the
documentation required to close a deal and the overall chasing
that must be done between buyer/seller and their professional
advisors, can be overwhelming. A good broker will be a huge
help putting all of it together.
Picking the right online business broker
Finding and working with the right broker is an important step for a
business purchase. Buyers should do some research before
working with any firm. Below are some of the questions to ask of a
professional brokerage:
How experienced are they?
How many transactions have they been involved with?
Have they ever owned their own business?
Do they specialize in a particular business type?
How many clients are they working with presently?
How many agents work in their office?
Building a good broker relationship
After establishing reputation, a buyer should look to foster a strong
working relationship with the broker. Reaching out with information
on investment criteria and budget is a good start. It's also
important to demonstrate serious intention and ability to move
quickly if the right opportunity comes along. Investors should try to
maintain regular contact with their broker and keep them apprised
of their investment situation.
WORKIG WITH A BROKER
42
How Do You Value An
Online Business?
Accurately valuing a business for sale can often be the most
challenging part of the business purchase process. In the case of
online businesses, the relative infancy of cash flows and small or
absent physical asset base can complicate the task further.
Buyers can navigate these obstacles with a clear understanding of
the uses and limitations of the methods available. Gathering the
right information on the most important valuation drivers and
applying this correctly will lead to a sound investment decision.
This section discusses some common approaches to valuing online
businesses, identifies the most widely adopted methodology and
offers some practical guidance on how to apply it using empirical
evidence for support.
'Price is what you pay.
Value is what you get.'

Warren Buffet
43
SECTION 3
There is a wide variety of approaches to valuing online business with the earnings multiple methodology being
the most prevalent in the marketplace.
SPOTLIGHT ON
VALUATION
The earnings-multiple
valuation approach is the
most widely adopted
across the market
Automated valuation tools
generally undervalue
online businesses
There are a number of
adjustments or 'add
backs' to calculate seller
discretionary cash flow
Businesses with a
recurring revenue model
tend to sell at a premium
multiple to one-time sales
Third party research
suggests multiples of
online businesses have
increased 30% since
2010
Approaches To Valuation
As with offline businesses there are a number of
ways to value an online business. Exploring
each of these in detail, buyers should take note
that a flexible and pragmatic approach is usually
required, taking account of the data available
and the profile of the business being valued.
Discounted Cashflow Analysis
One of the most detailed ways to value a
business is through a discounted cashflow
analysis (DCF) which involves forecasting the
free cash flows of the acquisition target and
discounting them with a predetermined discount
rate, usually the weighted average cost of
capital (WACC) for the business in question. The
model's theoretical underpinning is based on the
time value of money, which stipulates that a
dollar today is worth more than a dollar
HOW TO VALUE AN ONLINE BUSINESS
44
SECTION 3
than a dollar tomorrow.
A DCF should be a serious consideration for investors appraising
mature, stable businesses with predictable cashflows.
Unfortunately, those prerequisites are not often satisfied, even
with the most established and consistent online businesses. The
variance in monthly cashflow, immaturity of business model and
quality of financial data available typically make a DCF at best a
useful data point for comparison and at worst, redundant. As
such it's something of a 'nice-to-have' in the online business
environment.
Precedent Transactions
Looking for precedent acquisitions of similar companies is
another traditional approach to benchmarking the valuation for a
business. It is typically used as a frame of reference or sanity
check against a DCF (or other method) rather than being the
foundation of a valuation. With the comparable transactions
method, investors must look for comparable metrics, usually
multiples of earnings or revenue. It is important to identify the
key valuation parameter for each deal. That is, were the
companies in those transactions valued as a multiple
of EBIT, EBITDA, revenue, or some other parameter? Once the
key valuation parameter is defined, the buyer can examine at
what multiples of those parameters the comparable companies
were valued and apply the average of these to value the
company being considered.
The main prerequisite for a useful and accurate precedent
transactions analysis is access to transaction data. In a public
company situation this type of information is abundant but in the
world of private M&A and specifically, the nascent area of online
business M&A, transaction data is mostly privately kept.
There have been a few examples of analysis from Centurica and
Sitepoint, which can provide a helpful starting point for new
investors. For the most part though, precedents analysis is a
tricky technique to work with unless the buyer knows the parties
involved in previous deals. There is scope to analyse deals on
marketplaces but these are often misrepresented or low quality
versus brokered deals.
Earnings-Multiple
The third major valuation method is the use of earnings multiples.
In a public company setting this tends to manifest as P/
E multiples as well as EV/EBITDA and EV/Sales or other
iterations of these core metrics. In the online business world,
investors have increasingly gravitated around the multiple-based
methodology because of its simplicity and robustness in the face
of scant financial or comparable data.
The multiple-led method stipulates the buyer should arrive at a
HOW TO VALUE AN ONLINE BUSINESS
45
SECTION 3
by a multiple that is appropriate for the business. Naturally the
'appropriate' multiple is where all parties seek to formulate their
own opinion and arrive at a consensus before consummating the
deal. Identifying the factors that affect a business multiple is the
key part of the business valuation process. We shall explore
these in detail after considering some other methods.
Traffic Valuation
Another approach to determining the value of a site, specifically
sites that have yet to be monetized but have traffic, is the Traffic
Value Valuation Method. To do this the buyer must research the
top key phrases that drive the majority of search traffic to the
site. Then identify the Cost-Per-Click value of the keywords. For
example, if a site has three key phrases driving over 90% of its
traffic, find the CPC in Google Adwords and multiply that for
each phrase by the number of visitors being driven to the site by
that search term. This will give some sense on the value of the
traffic for the site.
The traffic valuation method can be useful for devising a value
for a non-monetised site (e.g. sites primed for AdSense) but falls
down against other methodologies with its prescriptive approach
to traffic-only evaluation. Online businesses that don't rely on
significant traffic (e.g. software or SaaS businesses) to drive
revenue, will be valued significantly below fair market price using
the traffic valuation method. As such, it should be employed
carefully and only in certain situations.
A Word On Automated Tools
There are a host of automated tools online that aim to simplify
the valuation process. These valuation tools instead usually work
off publicly available traffic statistics (typically Alexa rank) and
apply an estimated CPM to guess advertising revenue. Some
arbitrary discount rates are then applied based on domain age,
number of backlinks and other metrics. Naturally there are some
limitations with to this, for example no accounting for financial
performance and no accounting for different types of
monetisation. Inputting a handful of five recent transactions
completed by FEI into SitePrice's tool shows the valuation deltas
an investor should expect (errors in the magnitude of 5x to 90x
the actual sale price.)
A comparison of valuations offered by automated tools online vs. actual sale prices ($'000s).
Source: FEI (2014).
500
225
160
80
250
46
5
14
18
3
Valuation Tool Price
Actual Sale Price
HOW TO VALUE AN ONLINE BUSINESS
Content-writing
business
Discounts
business
Healthcare
lead generation
Game server
Employment
marketplace
46
'You must look within for value,
but look beyond for perspective'
Dennis Waitley
SECTION 3
DEFINING PROFITABILITY
"The pre-tax earnings of the business before non-cash
expenses, one owner's compensation, interest expense or
income, as well as one-time and non-business related
income and expense items. If there are additional owners
working in the business, their compensation needs to be
adjusted to market rates"
Adopting The Multiple Framework
Earnings multiples are by and large the consensual valuation
approach in small online business M&A. There are two elements
to the method that buyers should become expert in, defining
profitability and identifying the factors that should influence the
multiple.
Defining Profitability
The profit number that is of use in a multiple based valuation for
an owner-operator managed business is the "seller
discretionary cash flow" or SDC. SDC is the earnings left once
all costs of goods sold and critical, non-discretionary operating
expenses have been deducted from gross income.
SDC is subjective in nature and can vary based on each
investor's own interpretation of what is discretionary operating
expenditure (e.g. "we should include/exclude [x]"). Fortunately,
online businesses on the whole enjoy simpler cost structures so
there is less margin for deviation in SDC estimates.
When evaluating the financial statements of an online business,
buyers should sense check the SDC calculation of the broker
and ensure it features only the right add backs such as:
Owner compensation
Depreciation (uncommon but a legitimate add back)
Travel expenses (if unrelated to the business)
Office rent (if the business can be run from home)
There are a number of other valid add backs so it is important to
analyse the financial statements in depth and focus a lot of
questions on the cost structure in particular. This will ensure the
profit number is the cleanest one for multiplication.
Another important point is to ensure the profit figure includes the
personal, buyer-specific costs of replicating the current business.
i.e. any incremental operating expenditure a buyer will incur
taking ownership of the business.
With the SDC clearly defined and calculated, the next step is to
devise a suitable multiple.
HOW TO VALUE AN ONLINE BUSINESS
48
SECTION 3
FINANCIALS
How old is the business?
How has gross and net income been trending for the last 1-3
years? The last few months?
Can a new owner replicate the cost structure? Can they make
any savings?
Are there any anomalies in the financial history of the
business? If so, are they explained?
Can all of the revenue streams be transferred to a new owner?
How stable is the earning power e.g. are CPMs in this niche on
the decline/hard to replace?
Is the owner an influence on the earnings power (i.e. owner-
specific earning relationships)?
Factors That Influence The Multiple
Evaluating a business' strength and competitive position is a
complex task and as such there are many factors that influence
the multiple of a business. Whilst there is no definitive list of
variables there are certainly three key focus areas which are
the transferability, sustainability and scalability of revenue.
Any operational or market factor that directly or indirectly
impacts these core drivers will influence the multiple to attach
to the business.
In the boxes below are some of the most common valuation
drivers to think about when appraising online businesses for
acquisition.
OPERATIONS
How much of the owner's time is required to run the business?
What are the owner's responsibilities? Are there high technical
requirements?
What technical knowledge is required to run or manage the
business?
Are their employees/contractors in the business and how are
they managed?
TRAFFIC
What percentage of traffic comes from search? (i.e. what
percentage is potentially at risk from search engine algorithm
changes)
How secure are the search rankings? What is the mix of short
and long tail?
HOW TO VALUE AN ONLINE BUSINESS
49
SECTION 3
TRAFFIC (CONT'D)
How has traffic between trending for the last year? The last
few months?
Has the site been affected by any Google algorithm changes
or manual penalties?
What is the industry trend (see Google Trends)?
Where does the referral traffic come from? Is it sustainable?
NICHE
How competitive is the niche?
What are the barriers to entry?
Is the niche growing?
What are the recent trends and developments in the niche?
What expansion options are available?
CUSTOMER BASE
Where does the business get customers from?
How much do customers cost to acquire?
If subscription, what is the customer lifetime value and churn
rate?
If one-time, how active is the customer base? Are they re-
ordering?
Is it possible to remarket to the existing customers? Is there a
mailing list
OTHER
Are there physical assets or specific locational responsibilities
with the business?
Are there any licensing requirements in order to run the
business?
Does it infringe in any trademarks?
With a sense of the relevant valuation drivers, an investor can
be much clearer about what to look for when appraising a
business and what to seek information on from the seller. A
good broker will ask the right questions of the seller and weed
out companies before they even come to market.
With answers to the right questions, one can begin to devise a
multiple for the business.
HOW TO VALUE AN ONLINE BUSINESS
50
Naturally some frame of reference is needed to arrive at a
number within a market-accepted range. Typically online
business valuations range from 1x to 5x annual net income with
the vast majority of transactions occurring between 2x to 4x.
To guide further, there have a been a handful of empirical studies
conducted by various industry commentators including
Centurica and SitePoint which detail precedent transaction
data. Both studies are somewhat susceptible to the limitations of
publicly available data but are a useful starting point.
Data from a sample of 60 transactions completed by FEI in
recent years serves to highlight the valuation differential between
different business models. Establishing a mean sale price
multiple across the group as a base (set to 100) and calculating
each business model's variance from the mean highlights some
interesting differences.
Intuitively it makes sense that SaaS and Subscription businesses
are valued at a premium to the average as buyers' pay for the
certainty of recurring income. eCommerce businesses generally
attract wide interest (including the offline community) which
creates a halo of demand around them. Content and Lead
Generation sites can often be high workload and search-
dependent (respectively) so tend to be discounted.
The Market Effect
Whilst a rational investor shouldn't be overly influenced by the
market prices for assets, it pays to keep abreast of changing
trends in online business M&A. Some interesting research by
Centurica suggests that industry-wide, asking price multiples
have increased from an average of 2.4x in 2010 to 3.3x in 2013.
Be mindful that the sale price multiple can vary considerably
though.
SECTION 3
Index of mean sale price multiples for 60 transactions completed by FEI from 2012 - 2014.
Average for group = 100.
Source: FEI.!
Average asking price vs. assumed sale price multiples for online businesses, 2010 - 2013.
Source: Centurica, BizBuySell.
0
30
60
90
120
Lead Gen
Content
Subscription
eCommerce
SaaS
113
106
102
91
88
2010/2011
2011/2012
2012/2013
2.9
2.6
2.2
3.3
2.9
2.4
Asking Price Multiple
Assumed Sale Multiple
HOW TO VALUE AN ONLINE BUSINESS
51
As the industry continues to develop, formalise and mature over
coming years, it is likely that more buyers will be attracted to the
space and consequently demand for online businesses will rise.
Supply of high quality online businesses, particularly in the sub
$1m range, is relatively low and as a result there will likely be
increased competition for listings for the foreseeable future.
It's important though as an investor to stick to an objective,
rational, deductive valuation process and try not to get caught in
market dynamics, instead just be aware of where there may be
high levels of competition for some listings.
The Last Word Due Diligence
A theme that should be implicit in all discussions on business
valuation is the need to be robust, methodical and most
importantly detailed in approach. The real underpinning to a
successful business valuation and indeed online acquisition, is
due diligence. It's vital to gather the right information for the
valuation and verify it thoroughly during due diligence. The key
areas to focus due diligence on are financials, traffic and
operations (see more in the 'Due Diligence' section in Chapter 4).
SECTION 3
'Great riches come from heaven;
small riches come from diligence.'
Anon
HOW TO VALUE AN ONLINE BUSINESS
52
'He who asks a question is a fool
for five minutes; he who does
not ask a question remains a fool
forever.'
Chinese Proverb
What To Ask Before
Making An Offer
Business buyers often go into the acquisition process with an
arsenal of questions for the seller but the questions that really
need answering are the ones they usually don't think to ask.
This short section covers five of the most important questions to
seek answers to before submitting a formal offer for a business.
They cover the seller's intentions, sale rationale, operating
requirements, growth options and post-sale arrangements.
WHAT TO ASK BEFORE MAKING AN OFFER
'The art and science of
asking questions is the source
of all knowledge.'

Thomas Berger
54
SECTION 4
What are the most important questions to ask before making an offer?
1. Why and when is the owner selling the business?
Knowing the seller's rationale for a business sale is vital. Buyers
should look for natural reasons and explore them in depth. If the
seller is moving to another business venture ask in detail about
what the venture is, why they are moving on and what they
intend to use to capital for. An investor should keenly examine
the seller's motivations and look for any evidence in the
information provided that conflicts or confirms the story.
Just as important but asked a lot less often is the 'when'
instead of the 'why'. If the seller's answer to why seems
unconvincing then it is worth analysing the timing of the
decision. Are they selling after a recent growth spurt? What has
contributed to this and will it last? Is the opposite true and sales
are sliding? Has the seller run out of ideas to grow the
business?
A buyer should look for a cohesive sale rationale that provides
an honest message, backed up by the information provided
WHAT TO ASK BEFORE MAKING AN OFFER
55
SECTION 4
during due diligence. E.g. "I've managed this business for many
years now and am moving on to fund a new venture in another
niche." If the business has financial statements for several years,
performance has been solid and the seller has provided
information on the new business plans elsewhere then it makes
sense to proceed.
2. How much time is involved and what is required to run the
business?
Online businesses can vary substantially in the amount and
nature of work associated with them (as discussed in the chapter
'Investment Options'). During the business sale process the
seller will typically declare how much time they spend on the
business and what they do in the day-to-day operations. It's
unlikely there will be any formal record of this as most online
businesses are owner-managed so the buyer is somewhat reliant
on the seller's honesty. It's very important though, especially if a
buyer only has a limited amount of time or specific technical/
management skills, that these claims are confirmed before
making an offer for the business.
The best way to do this is to build a strong understanding of the
workings of the business through the prospectus and Q&A with
the seller. Ask questions like:
How much content is written and uploaded per week?
Who is posting to social media and how often?
How many support requests are there per week?
How much SEO / link-building is being done?
Once a list of work tasks has been established, a buyer should
estimate the time required to carry each one out, then arrange a
call with the seller to go through their version of operations and
see how the two compare. Make sure to be clear on the
technical requirements for each task, which will help clarify
whether to insource or outsource and at what potential cost. This
exercise will give comfort on whether the business can be run
the sale and also more information to factor into the offer for the
business.
3. What would the seller do to grow the business?
Naturally, a common aim for buyers is to grow the business
beyond its current profitability. Unless the buyer has significant
experience in the space, the person who is most qualified to
offer a perspective about the business and its future growth
prospects is usually the current owner. Buyers should carefully
probe the seller's thoughts on potential growth strategies and get
some ideas on how best to execute these.
4. Will the seller agree to a non-compete?
An established business, brand and customer base is a major
reason for buying an existing business versus starting one from
WHAT TO ASK BEFORE MAKING AN OFFER
56
SECTION 4
scratch. That fails to be the case though if the owner plans to sell
the business and compete with the funds raised. Buyers should
be sure to have the seller commit to a non-compete and ensure
this is contractually agreed in the Asset Purchase Agreement. As
always, the devil is in the detail and investors should pay close
attention to the wording of the 'restricted business' as well as the
duration of the agreement. Typically, a three year non-compete is
standard.
5. What does the seller care about?
Before making an offer for the business, buyers should carefully
think about what the owner wants to get from the sale. Although
it's unlikely that the seller will disclose their bottom line before
the negotiation process has started, it's important for the buyer
to make an effort to discover what matters to the seller.
Knowing whether the seller is open to financing or contingency-
based consideration for example is very important and will allow
the buyer to structure a deal that is fairer for both parties from
risk and value perspectives. Equally, non-cash motivations can
be useful to know and potentially a powerful negotiation tool for
buyers. If the seller is entertaining multiple offers for example and
one is differentiated by offering strategic support for a new
business venture, this could be a deciding factor for the deal.
Making an offer with the intention to close
Overall it's important that buyers do a lot of work upfront and
gather enough information to get comfortable before you make
an offer. Pulling out of a deal during due diligence because of a
simple oversight will damage a buyer's reputation with both the
seller and the broker. Asking the right questions early on will help
identify the best opportunities quickly and potentially help get
ahead of the competition in the process to acquire the business.
WHAT TO ASK BEFORE MAKING AN OFFER
57
Chapter 4
Completing
The Deal
'The distance between who you are and
who you might be is closing.'
Jan Chipchase
Financing An
Acquisition
Naturally one of the primary objectives for buyers when pursuing
the acquisition of an online business is to secure the best possible
terms in respect of their funds available and risk appetite. It is
quite common in larger acquisitions to take a creative approach to
financing to manage risk and align both parties' interests. As such,
it is important for investors to have a good understanding of the
funding options for buying an online business.
This section explores some of the financing methods available,
describes the many sources investors can use for cash and
outlines the way in which creative financing solutions can
strengthen a buyer's position, mitigate risk and move up the
purchasing scale.
'It's all about the money.'

Joseph Jackson
59
SECTION 1
Funding Options For Buying An Online Business
For most sellers, an all cash offer is the most preferred, risk free
option, but there are many situations where making an all cash
offer is not the most sensible way for a buyer to proceed. Often,
where the business for sale is based in a foreign jurisdiction, has
complex operations, is relatively new or is very large, creative
financing solutions are required to satisfy the needs of both
parties.
Every buyer is in a unique financial situation and as such, will
benefit by understanding the options available to them.
Cash
Cash forms the primary (and usually largest) tranche of the total
consideration in most business acquisitions. Buyers tend to look
to their liquid assets to meet the cash requirements and many
limit their search to their bank accounts, which can reduce the
ability to make offers on a business. Numerous buyers have seen
success in more unconventional methods of cash raising,
including (but not limited to):

Seller Financing
Seller or owner financing is where the seller allows for a
proportion of the total consideration to be paid off post-sale in
loan installments. For example, in a deal valued at $100,000, the
buyer could agree to pay $80,000 at closing and a further
$20,000 to the seller over a set period of months at an agreed
interest rate. The table overleaf shows an example based over 12
months at an interest rate of 5%.
SOURCES OF CASH
Retirement funds: cashing out a portion or all of retirement
accounts (401k, IRA, etc.);
Borrowing: Borrow from a 401k account (up to $50,000 is
allowed in the US); taking regular IRA pay-outs (must do so for
the next 5 years);
Securities: taking a loan against securities/equities;
Roth Contributions: Taking back a Roth Contribution can be an
option for buyers over the age of 59 in the US;
Small Business Administration (SBA) loans;
Asset based lending / Collateral based lending;
Business partnerships/JVs: Finding someone with cash and/or
experience to partner with; and
Peer-to-peer lending: prosper.com, lendingtree.com, etc.
FINANCING AN ACQUISITION
60
In this case, the buyer would pay the seller the full $20,000 over
12 months, plus $546 in interest. The total consideration of the
acquisition is the sale price of $100,000 plus the $546 in interest
(Total: $100,546).
Owner financing is a popular option as it removes the red tape
and often slow pace of dealing with a bank or other financial
institution, however, a buyer needs to be careful when signing
agreements without proper consideration of future cash flows a
default on a scheduled payment may prove costly and in some
cases can result in the seller taking back possession of the
assets without surrendering any consideration paid up until that
point from the buyer.
Earn-out
An earn-out is where the buyer agrees to pay the seller a
percentage of either the revenue or the profit of the business for a
set period of time. This is used in situations where the business
may be young, have erratic cash flows or an uncertain future, so
the buyer wants to leverage the seller's knowledge and resources
in an attempt to run/grow the business in the period immediately
post-sale.
In this case, the buyer will need to project the future cash flow of
the business based off historic figures, as well as micro and
macro industry data. Most earn-out calculations will be far cruder
than a full detailed valuation analysis (i.e. a Discounted Cash
Flow model) but the buyer and seller must ensure they agree on
what the site is expected to earn over the earn-out period (all
things being equal), to avoid disputes at a later stage.
In an earn-out, the seller is taking some risk that the buyer will
not default on payments or weaken the business. In exchange a
seller may ask for a higher total consideration (say $110,000).
This would usually be achieved by extending the earn-out period
beyond the 12 month period rather than increasing the profit split,
to achieve a total implied price they are happy with.
In an earn-out, a buyer should be mindful that the performance of
the business can go down as well as up, even with the help of the
seller. If the revenues go down over time, the buyer must ensure
they are able to cover any external obligations.
SECTION 1
FINANCING AN ACQUISITION
61
Period Beginning
Balance
Payment Principal
Interest
Cum.
Principal
Cum.
Interest
Ending
Balance
1
$20,000
$1,712
$1,629
$83
$0
$0
$18,371
2
$18,371
$1,712
$1,636
$77
$1,636
$77
$16,736
3
$16,736
$1,712
$1,642
$70
$3,278
$146
$15,093
4
$15,093
$1,712
$1,649
$63
$4,927
$209
$13,444
5
$13,444
$1,712
$1,656
$56
$6,583
$265
$11,788
6
$11,788
$1,712
$1,663
$49
$8,246
$314
$10,125
7
$10,125
$1,712
$1,670
$42
$9,916
$356
$8,455
8
$8,455
$1,712
$1,677
$35
$11,583
$392
$6,778
9
$6,778
$1,712
$1,684
$28
$13,277
$420
$5,094
10
$5,094
$1,712
$1,691
$21
$14,928
$441
$3,403
11
$3,403
$1,712
$1,698
$14
$16,666
$455
$1,705
12
$1,705
$1,712
$1,705
$7
$18,371
$462
$0
Total
-
$20,546
$20,000
$546
-
-
$0
Nearly 30% of online business
acquisitions involve creative financing.
FE International (2014)
SECTION 1
Holdback
A holdback agreement is sometimes used in larger deals where a
business may be reliant on certain arrangements staying in
place, such as long-term service agreements or employees of
the business continuing to work for the firm. Even though online
businesses are often simpler to run than offline businesses, there
can still be many moving parts. A buyer should be aware of the
variable elements and protect against a material change in any of
them in the near future. A holdback might also be used to verify
certain revenues or costs, that cannot be fully explored pre-sale
(i.e. chargebacks, refund rates, etc.)
Although it would not usually be applicable on a $100,000
transaction, in this case the buyer would offer $80,000 in cash
and $20,000 to be paid at the end of a chosen date, held against
milestones such as (but not limited to):
Post sale obligations by the seller being met such as training
a newly hired contractor or help setting up a paid
advertisement campaign
Contractual agreements in place at the time of sale being
fulfilled such as getting a merchant account approved and
setup or verifying income from advertising networks that pay
every 30 days
The business hitting certain targets, i.e. maintaining the LTM
gross revenue averages
A seller may underestimate/understate the value of contractual
or other arrangements and post-sale obligations, so a buyer
should look at case studies of other similar businesses to
ascertain what may and may not affect the future performance of
the business. A full due diligence report on such activities may
highlight some areas of concern in relation to this and areas
which are difficult to verify before the assets swap hands.
Equity
Equity is an uncommon option as most sellers wish to move on
to something else post sale and equity is often offered in
exchange for services (similar to a Service Agreement, but with a
profit share based on equity ownership). In this case the buyer
could offer $80,000 plus 20-30% equity in the business to the
seller. It would be an on-going partnership, with both parties
sharing in the long term success of the business.
This would require additional legal drafting, not only with the
Asset Purchase Agreement, but with a Partnership Agreement
and other legal documents. There is usually a need to come to a
legal arrangement with regard to the entity, whereby both the
buyer and the seller are shareholders in the parent firm.
FINANCING AN ACQUISITION
63
SECTION 1
Service Agreement
In some cases, such as with online businesses that require
regular content updates or product launches, the buyer may offer
the seller a service agreement as part of the total consideration.
This is typically offered by sellers if the buyer is concerned about
the skills and expertise required to run the business, and is not
considered a form of financing.
A buyer would offer the seller a fixed monthly fee in exchange for
a pre-agreed set of defined tasks. The total consideration of the
business would remain the same, but the total value of the
service agreement would be held by the buyer and released
periodically (usually each month) on completion of said tasks.
Using the example, the buyer would pay the seller the cash
consideration of $80,000 and pay the remaining $20,000 on an
equal monthly basis as part of a service agreement. This may be
supplemented by revenue sharing incentives or other bonuses
based on the performance of the business. This differs from
Seller Financing by the fact that the agreement is contingent on a
series of tasks being completed in order to receive payment,
whereas Seller Financing does not require the seller to meet any
requirements.
A buyer should also keep in mind that this agreement may fall
outside of a typical Asset Purchase Agreement, so there could
be increased legal drafting costs incurred.
Financing in Context
Out of the transactions completed by FEI so far in 2014 to date,
we have seen nearly 30% of deals including some element of
creative financing. The distribution is relatively consistent for
acquisitions in the sub-$1m range. Beyond this valuation range,
the balance tends to start to shift depending on the total
business size and its model.
5%
5%
4%
9%
9%
68%
Cash
Seller Financing
Earnout
Holdback
Service Agreement
Equity
Percentage of transactions including some element of creative financing.
Sample of 30 transactions completed by FEI in 2014.
Source: FEI (2014).
FINANCING AN ACQUISITION
64
SECTION 1
The All Cash Deal
Out of the same set of transactions completed by FEI in 2014 so
far, only all cash and seller financed deals saw a discount to the
asking price. Many of the other deals completed under the other
various structures saw the buyer paying above the market price
in exchange for the additional flexibility offered by these
arrangements. This shows the power of an all cash deal.
The numbers above make for a compelling case in favour of all
cash and seller financed deals, but a buyer needs to assess the
situation on an acquisition-by-acquisition basis. There will be
many factors that play a role in the offer structure and there is no
blanket solution that a buyer should apply to all deals.
Summary
There are numerous ways to supplement the cash tranche a
buyer is willing to use or has readily available to purchase an
online business. A buyer can strengthen their position, mitigate
risk and move up the purchasing scale by using a variety of
options outlined in this section.
Investors should be mindful that competition exists and in order
to secure the right acquisition at the right price, the offer that
prevails is often the one that meets the needs of both the buyer
and seller. It is good practice for buyers to ascertain the
objectives of the seller early on to find a structure that is fair for
all parties and mitigates as much risk as possible, on both sides.
0
25
50
75
100
All Cash
Financing
Earnout
Holdback
Serv. Agr
Equity
Percentage of FEI transactions in H1 2014 reaching asking price or higher.
Sample of 30 transactions completed by FEI in 2014.
Source: FEI (2014).
FINANCING AN ACQUISITION
65
Due Diligence
Having made an offer on the business, signed a letter of
interest (LOI) and assuming the offer is accepted by the seller, a
transaction will proceed to due diligence. For larger
acquisitions, depending on relative size and complexity, due
diligence is likely to be the most lengthy aspect of the end-to-
end sales process.
This section explores in detail six key components for
successfully conducting due diligence on an online business
and gives buyers some practical advice on how to conduct a
robust and thorough investigation for their own business
66
'Diligence is the mother of
good luck.'

Benjamin Franklin
SECTION 2
Due diligence is a critical step to be taken by any business or individual prior to making the commitment to
any legally binding contract.
DUE DILIGENCE
1. Traffic - check the
traffic to the website,
observe any anomalies
and ensure the link
profile looks natural
2. Financial - verify the
P&L against
documented evidence
3. Owner - conduct a
background check on
the trustworthiness of
the business owner
4. Technical - look at the
technology platform
underlying the
business' operations
5. Operational - verify
the time commitment
and tasks required to
run the business
6. Legal - seek
independent legal
advice on the legality
of the business'
operations
Why Conduct Due Diligence?
In effect, due diligence in both an offline and
online sense is based on the premise that any
major investment should be examined from a
number of different lenses to unearth any
underlying risks that may not have been duly
duly considered. Due diligence is a critical step
to be taken by any business or individual prior
to making the commitment to a legally binding
contract. Conducted well and with an
appropriate standard of care, due diligence
should bring peace of mind to both buyers and
sellers alike.
Art or Science?
Due diligence should be thought of as an
objective fact-finding exercise (science) used
to inform subjective decision-making (art).
There is no right or wrong way to do it and one
DUE DILIGENCE
67
SECTION 2
person's perspective or interpretation of the information put
forward may differ substantially from another's. Sharp investors
will be thorough when conducting due diligence and will
approach the task with inquisitiveness, using the breadth of
collected data to inform their final go/no go decision. At the end
of the day, if something goes wrong during the course of due
diligence, at least it was picked up before signing.
Due diligence can be conducted in a host of different ways, the
level of detail may depend on the size of investment and
associated risk as well as the nature of the online business. To
conduct a thorough due diligence exercise in the context of
online, there are six key areas to verify for a robust process:
Traffic
Financial
Owner
Operational
Technical
Legal
It is worth mentioning that some parts of the process may be
considered more important by some investors compared to
other. Regardless of this, all aspects should at least be probed to
some extent.
Traffic Assess the Traffic Before Crossing
Traffic verification is a case of analysing the traffic reported to be
coming into the website, checking for anomalies and ensuring
the link profile looks natural.
When assessing traffic (using Google Analytics, for example),
buyers should ensure that any bought traffic appears on the
income statement and reconciles in terms of money spent and
traffic generated. As always, transparency with the seller is key, if
the seller is buying traffic without fully disclosing, there could be
a material misrepresentation.
Even if traffic volumes look legitimate, the traffic sources may still
require validation. It is important for buyers to look for any signs
of paid or sponsored links that may not have necessarily been
declared. For example, a well ranked website that has a number
of links may seem good on paper, but in reality the seller may be
paying (and not disclosing) thousands of dollars a year in
sponsorship for the privilege. It is a good idea to evaluate the link
profile in general (tools for this are outlined on the following
page) and examine how many back links have been added in the
last six to twelve months and what the nature of these additions
are.
DUE DILIGENCE
68
Other things look for include:
Average time on site how long (on average) does each visitor
spend on the site? If this figure is low (<30 seconds), then
website links may be of poor quality or the UX/content is of
poor quality depending on the nature of the website content of
course.
Number of pages visited how many webpages is the visitor
viewing? If high, then the content across these pages is likely
to be appealing and the audience is captivated.
Traffic numbers vs. financials how much is each unique visitor
generating in terms of revenue figures, if they don't correlate, it
is likely that there are alternative sources of traffic (e.g.
inorganic).
Traffic sources where is the traffic coming from? Traffic
sources include search, social media and referral. Is the
website over reliant on one specific traffic source that could be
considered unstable? How have these sources evolved over
time and are their explanations for the changes?
It is best practice for the seller to allow the buyer access to
Google Analytics or whichever 3rd party traffic analytics platform
they use in order to facilitate analysis of the traffic during due
diligence.
Useful Tools:
Google Analytics
SEM Rush
Ahrefs
Financial Assess the Financial Situation
Financial verification is a key stage in both the due diligence and
overall buying process. When acquiring a business, it is critical
that buyers are fully aware of the current and historical financial
status of the venture. In order to do so, buyers should check that
the business has maintained an accurate and detailed financial
record since its inception.
Buyers should start the audit trail by checking monthly affiliate
statements and/or merchant processor statements against the
bank statements provided by the seller. Tax returns are often
requested but less often useful. Most online businesses are
'Diligence is a priceless treasure;
prudence a protective charm.'
Proverb
SECTION 2
DUE DILIGENCE
69
SECTION 2
owner managed and usually part of a larger LLC, so reviewing
the tax returns shows a muddled picture. A combination of
merchant/affiliate statements and bank records is typically
enough to allay any concerns on the financial audit trail.
A document check is the first round of verification, buyers should
also always request a live screen share with the seller to go
through the back end of the website, any affiliate partners and
possibly online banking portals in order to conduct a 2nd stage
of verification of the financials as well as authentication of
ownership.
It is also worth buyers tracing any historic, current or likely future
debts or liabilities associated with the business (credit rating
checks are a good place to start). Doing so, will put the investor
in good stead for assessing whether the business is, from a
financial perspective, in a healthy or unhealthy state.
Useful Tools:
Team Viewer
Google Analytics
Owner Know Who You Are Dealing With
It may seem obvious to some but owner verification is important.
That is, ensuring that the owner is who he or she says they are.
Unlike in the offline world, it is uncommon that buyers will meet
the sellers during the sale process. Ensuring that the seller has a
company, history, a decent reputation and a legitimate audit trail
should be a key step in your verification exercise.
The growth of social media has made this easier, albeit still
relatively subjective. You could try looking the seller up on
LinkedIn, Facebook or Twitter. If they don't exist, there may be a
plausible reason why, either way it is worth exploring. Websites
like Scam are useful ways to quickly check the trustworthiness of
the seller.
Useful Tools:
Facebook
Twitter
LinkedIn
Scam
DUE DILIGENCE
70
'Everything yields to diligence.'
Antiphanes
SECTION 2
Technical Avoid Investing in a Burning Platform
Depending on the business and underpinning technology, it is
important that the buyer is comfortable with the level of technical
risk attached. Investors need to avoid a situation where a future
technical issue does not permanently jeopardise the continuity of
business operations. For example, if a buyer is looking to acquire
an eCommerce business that sits on the Magento platform they
should consider whether custom plug-ins or extensions been
used. If they have, will they have access to clean code that can
be modified quickly and cheaply, if required? If no, can they be
put in touch with in-house programmers if technical issues arise?
For content sites operated on WordPress, buyers should conduct
an audit of the plugins used and ensure they have been paid and
licensed for by the seller. For SaaS and software business,
investors should ensure they are given a sample of the source
code for auditing to ensure authenticity as well as gaining
comfort with the quality and annotation of the code for any future
amendments.
Useful Tools:
Built With
Operational Understanding the Task Ahead
Before making a formal offer, buyers should verify the time
commitment required to successfully run the business. Whilst it
is difficult to know the precise time/effort, the seller should be
able to break down the tasks, responsibilities and an estimation
of the number of hours required to run the business. By
analysing this information, a buyer should be able to gain a good
understanding of the size of the task ahead.
Legal Stick Within the Law
Is the business illegal? It may be legal in a specific country of
origin, but it may be illegal in another. Therefore, opportunities for
growth could be constrained, thus limiting the value placed on
the business. As the deal size increases, the more legal due
diligence will be required. Common litigious issues include
trademark infringement and image licensing, for example.
Useful Tools:
Trademark Search
Content Check
Image Source Accreditation
DUE DILIGENCE
72
Final Thoughts
In summary, conducting due diligence is critical to any major
business transaction; it is the time to pinpoint and discuss any
underlying risks that may influence the purchase decision. Done
correctly it helps to put both buyer and seller at ease.
It can be useful for buyers to seek counsel from other investors
that have bought historically to get a sense of issues that may
have arisen. A recent survey of common issues that arise in the
due diligence of online businesses highlighted that traffic
verification can often be a sticking point for buyers.
Following the six-step process outlined above is a good basis for
commencing online business due diligence, but its important for
buyers to be flexible and not afraid of approaching it in a different
way based on the specifics of a particular transaction.
SECTION 2
DUE DILIGENCE
73
0
25
50
75
100
70
40
30
30
30
Inaccurate owner
responsibilities or
costs
Competing
sites
Poor quality or
insufficient
revenue proof
Backlink
profile
Over reliance on
an unsustainable
traffic source
Survey percentages highlighting most common due diligence issues with online businesses.
Source: Centurica (2013).
Legals and Escrow
Once an offer for a business has been accepted and proceeded
through due diligence successfully then the final stages of the
transaction process are on the horizon. At this point, finalising
the transaction is a matter of review and signing the contract
and then arranging Escrow for the transfer of ownership.
This short section covers the process of drafting the contract
for sale, commonly known as the Asset Purchase Agreement
(APA), and arranging the Escrow transaction.
'Thoroughly read all your
contracts. I really mean
thoroughly.'

Bret Michaels
74
SECTION 3
Typically after due diligence has completed, the broker
representing the transaction will prepare an Asset Purchase
Agreement (APA) for the deal. This is the legal document
underpinning the transaction and the contractual agreement
between buyer and seller. For the most part, APAs are quite
standard in form but they contain a number of clauses that vary
with each deal and that both parties should pay close attention
the drafting of.
Consideration
The size, structure, timing and form of the consideration for the
assets is clearly of high import when drafting the APA. If there is
a seller financing or an earn-out the terms and timing of each
payment should be made explicit in this section. Likewise,
holdback consideration should have very clear conditions
attached to it that are objective and verifiable in the case of
dispute.
Non-Compete
Most online business sales involve a non-compete agreement
between the buyer and seller providing the size of the asset and
its business activities merit it. Both parties should pay close
attention to the exact wording of the "Restricted Business"
definition which encapsulates what the seller is prohibited from
doing post-sale. A good broker will strike a middle ground
between protecting the buyer from competition and the seller
from being able to pursue other non-competing business in the
future.
Assets For Transfer
Both the buyer and seller should be very clear upfront on the
assets for transfer. With larger website sales there can be a
significant amount of content and additional assets to transfer so
it pays to be thorough with the documentation of these in the
APA. Normally a website transfer will include (but by no means
be limited to):


Domain(s)

Website source code, content and related files


Graphics, images, logos etc


Social media accounts; and


Client database (email lists)
Transition Assistance
Agreeing the level of post-sale support given by the seller is
something that should be done upfront and made explicit within
the contract. The number of hours per week/month, response
time and nature of communication should all be recorded. It is
also wise to build in an agreement to make all relevant
introductions to partners of the business.
Naturally both buyer and seller should be comfortable with what
LGALS AND ESCROW
75
is finally drafted for the purposes of the transaction. It is very
important though to seek professional legal counsel before
putting pen to paper.
Escrow and Transfer
With the APA signed it is time to transfer the funds and assets for
the transaction. A reputable broker will typically direct the buyer
and seller to a third party service such as Escrow.com to protect
both parties through the transfer. Escrow is effectively an
independent service that collects, holds and releases funds
online, according to the transaction terms agreed upon by the
buyer and seller. The process typically moves in the steps
outlined to the right.
The Escrow service provides strong protection for the buyer by
allowing inspection of the assets for a pre-agreed period (the
Inspection Period) before releasing the funds. In the unlikely
event there has been misrepresentation, the buyer's funds are
protected and the assets can be returned to the seller. Either
party can seek remediation for a grievance through Escrow's
arbitration service.
Escrow is an invaluable service for the smooth transition of funds
and assets. The service usually charges a fee of c.1% of
transaction value on deals over $25,000. Buyers can calculate
exactly how much it will be using Escrow's fee calculator. The fee
is typically split between buyer and seller.


For transactions including some form of owner or contingency
based financing, it is often best practice to place the domain in
the ownership of an independent third party. This protects both
buyer and seller and ensures each side adheres to the financing
terms agreed in the APA. Escrow offers a domain holding service
for this particular situation and is recommended by most
brokers.
ESCROW TRANSFER PROCESS
1.
Escrow transaction terms agreed by Buyer and Seller
2. Buyer transfers funds securely into Escrow (funds
are secured but not released)
3. Seller transfers assets to Buyer
4. Buyer acknowledges receipt of assets and initiates
the inspection period
5.
Inspection period of 1-3 days used to confirm correct
representation of assets
6. Buyer confirms satisfaction with assets and releases
funds to Seller
SECTION 3
LGALS AND ESCROW
76
Transferring The
Business
TIPS FOR A SUCCESSFUL
TRANSFER OF OWNERSHIP
Set up an account with the same registrar as the seller to expedite the
transfer of domains
Consider inheriting the existing hosting environment instead of
transferring to a new setup
Take an audit of all accounts associated with the business and pre-
apply for accounts as needed
Contact all partners of the business within 48 hours of taking
ownership
Identify critical tasks for the first 72 hours before taking over
Once advanced along the business acquisition process to the point
of contract signing and funding Escrow, then a buyer's attention will
start to focus on the practical challenges of transferring the business'
ownership and operations.
There are many components to an online business and buyers can
often be caught off guard by the logistics when the process begins.
As with many things in business, preparation is key.
This section summarises the key components of an online business
and provides best practice guidance on how to smoothly transfer
each one.
TRANSFERRING THE BUSINESS
77
TRANSFERRING THE BUSINESS
Domains & Hosting
Domain(s)
If the domain is being transferred directly, a buyer should be sure
to set up an account with the same registrar that the seller is
currently registered with. This will significantly expedite the
domain transfer (from days to minutes). If the buyer has a
preferred registrar they can always transfer the domain later. It is
important to ensure the seller chooses the option to 'keep
nameservers the same' to avoid a nameserver reset and
downtime on the website(s) during transfer.
Hosting
All buyers have their own preferences when it comes to hosting
arrangements, the key is to ensure that the planned new hosting
environment has the same or more power than the current setup.
Often it can be easiest to open an account at the same hosting
provider as the seller (to facilitate an intra-host transfer) or take
direct control of the seller's account if they agree to it. If the
seller is facilitating the transfer, make sure they know what the
new hosting arrangements are. In a heavy hosted environment
(e.g. SaaS businesses) it is usually advised that the buyer inherits
the existing infrastructure rather than attempt a migration of
hundreds (or thousands) of users.
78
Email Lists
Most major email management tools (e.g. Aweber, MailChimp)
are very flexible with transferal of email lists so be sure to create
an account with the same provider and get the seller to push the
list(s) over.
Accounts
This is where some buyers fall down in their preparation. In
general it is good practice for the buyer to take an 'account
audit' with the seller before starting the transfer to ascertain all
accounts that the business currently uses. This may include:
Affiliate (e.g. Amazon, Commission Junction)
Lead generation (e.g. QuinStreet, CMN)
Merchant processor (e.g. PayPal, Stripe, BrainTree,
2Checkout)
Advertising (e.g. AdSense, Say Media)
Email (e.g. MailChimp, Aweber)
Social media (e.g. Facebook, Twitter, LinkedIn)
Once a complete audit is made, the buyer should ask the seller
which accounts they can take full control of (i.e. inherit) and
which they need to make copies of and have the existing data
transferred over. Buyers should start making preparations to
open accounts as soon as funds are in Escrow.
Note: On subscription-based businesses with recurring billing
the transfer process can be more involved and will involve the
buyer providing proof of business ownership, photo identification
and proof of address.
Contact Information
Buyers should make sure to get contact information for anyone
associated with the business and its day-to-day operations. It's a
good idea to have the seller make personal introductions within
48 hours of the transfer. Business contacts may include:


Employees / VAs


Advertising and/or affiliate account managers


Third party developers


Fulfillment center and drop shipping partners
TRANSFERRING THE BUSINESS
79
Other Items
Often there are some miscellaneous bits and pieces that can be
forgotten in the transfer. Below are a few that have cropped up in
transactions with FEI that are worth thinking about if relevant:


Toll-free telephone number(s)


Contact information for old business partners


Unreleased products or services (included in the sale)


Details of growth plans (if mentioned)
On eCommerce businesses it is often the case that the buyer will
be inheriting inventory so buyers should take care with details of
storage etc.
Final Thoughts
When taking over an online business of five, six or seven figure
scale then it's very likely there will be tasks to take care of from
day one of ownership. Buyers should make sure they understand
from the seller exactly what tasks are required for the first 72
hours of ownership, how they are done and who has
responsibility for them. This will ensure business continuity
during the transfer process and minimise any disruption to the
business' operations.
TRANSFERRING THE BUSINESS
80
Chapter 5
About Us
'A leader is one who knows the way, goes
the way, and shows the way.'
John C. Maxwell
2010
2011
2012
2013
71
55
40
20
Overview
FE International (formerly Flipping Enterprises) was
founded in 2010 to provide brokerage services for
mid-market online businesses. The company has
become the pre-eminent advisor within the
industry and enjoys a well-earned reputation for
integrity, creativity and delivering results. In 2013
alone, the firm successfully executed an industry-
leading 71 transactions.
The team is comprised of professionals from
investment banking, strategy consulting as well as
online entrepreneurs, all of which have extensive
transaction execution expertise.
Originally established in London, the company
expanded internationally to San Diego in mid-2013
to bring its dedicated brokers closer to the US
client base. An expansion to the East Coast is
planned in early 2015 to broaden coverage in North
America.
82
HIGHLIGHTS
We have the largest team
dedicated to brokering
online businesses
We have a 93% sale
success rate and sell most
businesses in less than 3
months
We have clients spanning
100+ countries
On average we send over
100,000 deal-related
emails per year
We sell more online
businesses per year
(<$5m) than any other
dedicated online broker
Find out more at:
www.feinternational.com
ABOUT US
82
About FEI
Locations
Transaction History
FEI completed transactions.
Source: FEI (2014).
+355%
Coverage
FEI Offices
ABOUT US
83
Management
Thomas Smale
Co-Owner
Ismael Wrixen
Co-Owner
David Newell
Senior Broker
Thomas originally co-founded FE
International in 2010 (previously Flipping
Enterprises) after graduating the University
of Bath with a degree in Business.
Having owned and run several successful
websites in a variety of niches, Thomas is
passionate about entrepreneurship and
online business. He is a respected expert in
the industry with particular experience in
due diligence, online business valuation and
strategic exit planning.
Ismael is co-owner of FE International. With
a background in M&A investment banking,
Ismael has executed high profile deals
across several sectors, namely Technology.
Ismael is fluent in several languages and
graduated from the University of Bath with
1st Class Bsc (Hons) in Business, gaining
the Accenture prize for excellence in the
process.
David joined FE International as a Senior
Broker in October 2013. Prior to this, he
worked for three years in Investment
Banking for Citigroup.
David graduated at the top of his class from
the University of Bath with a 1st Class in
Business, gaining the Accenture prize for
excellence in the process.
Thank You
For Reading
For more information visit:
www.feinternational.com