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What Buyers Should Look for When Purchasing a Digital Business, Including Technology, Online, eCommerce and Internet Companies

In 2021, retail eCommerce sales amounted to approximately $4.9 Trillion worldwide. This figure is forecast to grow by 50 percent over the next four years, reaching about $7.4 Trillion by 2025. In a world where more and more people are making money and shopping online, it has become easier than ever to excel with an online business and even easier to buy an online company that is already well established and profitable.

As a result, if you’re looking to take the next step in your life as an entrepreneur, buying a profitable online business might be the best decision for you. It is much easier to purchase a business that has already gone through the trials and tribulations that are ever-present in a start-up environment. From gaining market share to acquiring reviews and rank, starting up a Tech or Internet business is hard stuff — in fact — about 90% of startups fail. If the company already exists and has gotten through this difficult time, you leap over all the things that cause start-ups to fail and start right off on day one with an existing business … and you scale it from there. However, before rushing out to buy a company, let’s consider a few factors around buying an established Technology or Internet Business.

Technology & Internet Companies, or companies generally in the digital space, are wide and varied. While not an exhaustive list, here are many of the types of companies we represent at Website Closers:

  • eCommerce (website)
  • eCommerce (Amazon FBA and/or FBM)
  • eCommerce (Amazon Vendor Central)
  • eCommerce (B2B)
  • eCommerce (Etsy)
  • Any company that sells products over the Internet in any way
  • Software Companies (SaaS, IaaS, PaaS)
  • Inventory Management Systems
  • CRM, ERPs and similar Systems
  • Managed Service Providers
  • National IT Companies
  • Telephonics Companies
  • Any kind of Online Service Provider
  • Online Marketplaces
  • 3PL Warehouses
  • Online Gaming or Gambling Company
  • Adult Companies (Video, Services or Products)
  • Subscription Model Business
  • Blogs
  • Cloud Computing Companies
  • Mobile Apps
  • Mobile Games & Gaming Companies
  • Internet of Things business
  • Tech Enabled Business
  • Web Security Company
  • Email Marketing Firm
  • Video Creation Firms
  • Podcast Companies
  • Masterminds (for digital businesses)
  • Online Communities
  • Facebook Groups
  • Data Management Company
  • APIs & API Developers
  • Cloud Connector Companies
  • Marketing Automation
  • Databases & Database Managers
  • Internet Service Providers
  • Hosting (Web, Email
  • Web & App Design & Development Firms
  • Digital Marketing Firms
  • SEM/SMO Firms (Search & Social Ads)
  • Affiliate Networks
  • Affiliates
  • Influencer-related companies
  • eLearning (platforms and systems)
  • Education Tech
  • Financial Tech Companies
  • Medical Tech
  • Medical Companies of just about any kind
  • Online Classes & Education
  • Manufacturing Companies (many of our clients can take the products manufactured and sell them online
  • AI (artificial intelligence) companies
  • Robotics Companies
  • Space Tech

 

These businesses cover a wide range of products and services and each one of them have their own attributes as it relates to market size, competition, scalability, and much more.

What Are the Potential Benefits of Buying a Technology, Internet or eCommerce Business?

If you’d rather leave the creativity, start-up woes and ideation to others, buying a thriving business can have plenty of benefits. These include:

  • Time and Effort: Startups generally take thousands of hours of non-stop work to be successful. But if you purchase a current operation, the grunt work has been done by the original founders or current management, and the often-excruciating work of starting a business from scratch is negated.
  • Past the Startup Failure Period: Since 90% of all startups fail, buying a going concern that now has a foundation of business can make the risk profile much more acceptable.
  • Financing: It is much easier to secure financing for a business with a proven track record. An SBA Loan is the best option for companies with an Enterprise Value under $7M (with $5M set as the loan value cap). The SBA opportunity would allow a Qualified Buyer to put down as little as 10% as a down payment, with a 10-year amortization period at highly competitive interest rates. The extra cash flow after debt service allows a buyer to take a salary and scale the business while allowing the business to pay for itself (since debt service is paid for by ongoing cash flow). Average Return on Investment (Down Payments) for Internet Companies is less than 1 year. For over $7M Transaction, the capital markets are a great resource, but only certain lenders/equity providers work in the Tech & Internet Sector — you want a firm like Website Closers to help you navigate that landscape.
  • Multiple Diligence Resources: When you buy a going concern, you normally use leverage. Whomever is providing that leverage is going to want their own set of diligence performed. Oftentimes you will have layers upon layers of people reviewing the business to ensure it is something that they want to provide lending for. This should give a buyer more comfort knowing that they aren’t on their own when buying a company – there are many eyeballs on the prize.
  • Existing Customer Base: A startup has no customers, no users, no followers. A current business has all of these things and they aren’t easy to get. Even more exciting is a business that has repeat customers, a highly valuable aspect of many companies in the tech-enabled world. And those past customers can all be leveraged to offer new products and services to – and they have friends that can be referred in as well.
  • Brand recognition: Building a brand’s reputation generally takes time and is fundamental to successful businesses. Having a strong brand is invaluable. So buying a company that already has this in place can make life as an entrepreneur much easier.
  • Established team: Buying an existing business means that you don’t have to start from scratch – you’ll have a team in place that can continue operations as they were prior to close.
  • Reliable income: Every buyer wants to see a return on their investment as quickly as possible. When purchasing at a high multiple, this can take years if the business is not growing in profitability. A company with consistent year-on-year growth provides a relatively safe acquisition opportunity.

What To Look for When Buying a Tech or Internet Business? There are thousands of things – but here’s a few quick picks:

  • Financials: Unless you’re a big company or wealthy individual buying a company from a strategic standpoint, the financials are important. The first step in the review of a business should be its financials. You want to understand the company’s Last Twelve Months Sales and Profit and how it compares to prior full years. You want to see trending in the most recent months – this includes sales, profit and places in the P/L where there might be margin erosion or growth. You want to understand if they are reporting on a cash or accrual basis. You want to compare financial statements to all of their books and records, tax returns and reports from the carts, marketplaces and payment processors they use to sell their products and services.
  • Online Reputation: A brand with a positive reputation is essential for scalability. You will want to see all of the reviews placed on the business, from product reviews, specifically, to overall companies reviews, more generally. The better the reviews, the more solid the company’s reputation and value.
  • Ranking: Whether it’s a goods or services company, where and how they rank is important. Understanding their use of paid media vs organic traffic is important. Also – do they use influencers, social media, affiliates or any other resources to generate traffic? How will these resources impact the business when you own it?
  • Current Operations: Take a look at the business’s current operations. If they look rusty or outdated, it could spell a problem – or it could be a huge opportunity. If they have been successful with outdated systems and work product, imagine the opportunity if it’s updated? Highly automated or systemized businesses allow the owner to focus on growing the company or other ventures while enjoying healthy profits, but many founders don’t have expertise in these systems – this is where a savvy buyer can come in and scale rapidly.
  • Traffic Stats: Many companies in the Tech & Internet space live or die by these metrics. Receiving traffic from potential users or clients is paramount. Conversions are vital. A Digital Business that generates traffic should have an analytics tracking system installed, such as Google Analytics, that shows a detailed overview of the site’s traffic. This data should show how many visitors the site receives and how many visitors convert to leads. The data should also show how traffic is generated. For example, is it mainly through paid advertising or another media channel, such as email or social?
  • Scalability: a company’s ability to scale is important when buying a company – not just for purposes of Enterprise Valuation for the current sale, but also for an understanding of where the company’s likely to grow over time so that when it is sold down the road, there’s a higher value placed on the deal. The more likely the company can scale aggressively, the more value that can be placed on a company.
  • Recurring Revenue: You’ll want to take a look at a company’s repeat business, whether a SaaS company and it’s Customer Acquisition Cost versus Lifetime Value, or an eCommerce Company and its subscribers or repeat buyers. Recurring Revenue can really change the valuation of a company and should be given heightened scrutiny when reviewing a company.

There are hundreds of other metrics that buyers should be looking for when examining a company – a broker that understands the space can be a great partner in this process.

What Does the Due Diligence Process Entail?

Due diligence is the process of investigating whether an asset is worth investing in or not. Therefore, it’s vital to have a comprehensive business overview before purchasing it to avoid surprises later.

A few things are also crucial to consider when purchasing an online business. Knowing if what’s being offered is even worth the time and money can be challenging. Therefore, due diligence into the business and financials is critical before making an offer and creating a final scope of your risk tolerance.

It’s also worth considering the risks before taking a big step. For example, while it may seem easy to guarantee success, buying someone else’s business does not warrant prosperity for your own ventures. It might even slow down the process, and you may not make as much money when you open shop. In addition, if the business is not showing steep growth and profitability, purchasing at a high multiple may take years to see a return on investment.

Where To Buy a Tech or Internet Business?

Be careful. Many that do not understand the sector are trying to sell these companies due to the heightened demand in the marketplace. And they have very little understanding of their valuations, operations, etc. While many private brokers and marketplaces exist to offer a wide variety of these companies for sale, you should focus on working with a firm, like WebsiteClosers.com, that understands the sector, has sold thousands of companies in this space, and has the background necessary to help get the deal done on your terms.

What Is the Overall View of the eCommerce & Tech Sector right now?

Many investors with enormous financial portfolios have been acquiring Tech & Internet businesses en masse recently. As a result, the acquisition rate of these companies has been soaring. As more and more people make money online and through technology, the market grows and becomes even more ripe for expansion. The sector is coming off of massive highs from the Pandemic, and while a normalization is occurring in the private and public markets right now for Technology Companies, there is no question that this sector will continue to grow in both size and valuations. Every sector has highs and lows, and it was very difficult to predict how tech companies would be impacted during a Pandemic, after this normalization of earnings occurs in 2022, we expect very big things from the sector in the coming quarters and years.

Is a Tech or Internet Business Right for you?

Some are fearful of this sector because they aren’t “tech geeks”, they can’t code or otherwise don’t fully understand how digital marketing works. While some things should be left to professionals, an entrepreneur can’t know all of these things as well as others. A smart entrepreneur will buy a company with a current team of inhouse and out of house staff members to ensure continuity of business after closing. Much of what you need to learn on the marketing side can be trained prior to close, and after close, the founder(s) and their team will help educate you on 90% of everything you need to know during the transition. The last 10% comes over time. But a background in these companies is not needed – just like a newly appointed CEO of a large enterprise is not going to know everything they should the first day they walk in the door. What is needed is a willingness to work long and hard to build the company and learn everything you can about the sector – this is the secret to success – not prior knowledge.

It’s worth considering how much you’re willing to spend on the business. Talk to a broker about your needs in a business – what you look for – and then try to get pre-approved for lending before starting to look at deals. Everybody takes you more seriously when you’re pre-approved.

Finally, prepare yourself for the pros and cons involved when buying a Tech or Internet Company. Since you’re an entrepreneur, normally the cash flow you make from the business is what you use in life. Figure out these needs before hand and make sure while you go through the diligence process that the company will be able to support you after considering taxes, cost of growth (buying additional inventory, etc.) and debt service. A smart entrepreneur will have spreadsheets created on every company they look at to truly understand cash flow for the company and what the expectations are for what they can pull out of the company. Being a business owner is great, but you don’t want to be homeless too. Both can be managed, but must be taken seriously early on in the process. A broker can help you with this exercise.

 

 

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