To be honest buying and valuing an Internet business can be tough. Obviously when you are just starting out there are so many things to consider.
But above all, you want to make sure you know what you are doing when valuing an Internet business so you don’t get caught riding a sinking ship or, just as bad, bailing the water out yourself!
I personally have been educating myself when it comes to valuing Internet businesses over many years and want to share with you some key points I have picked up along the way. By sticking to these you can ensure that you are not getting yourself into something way up over your head.
- Why is the business being sold?
When it comes time to looking at buying online businesses you need to realise that they are being sold for a good reason. Most of the time those reasons are because the business either sucks or it is riddled with problems that need to be fixed.
However in saying that there are a few businesses out there that are great investments, investments that are really worth buying. Which means it is imperative to your success to do some serious research, due diligence and ponder the real value of the business before proceeding
For example, I personally found an online business that from the outside looked like a good business model, but upon scratching the surface I could see that there was something seriously wrong with their financials.
However I still decided to persist for some strange reason. It could have simply been because I wanted the challenge to carry out some due diligence on a business that would teach me some great lessons. That is since I had no desire to purchase the business.
That was until I wrapped my head around the financials and found why it looked like there was something not quite right. It turned out that the financials were simple very poorly put together. They had expenses and revenue in mixed up spots, there were conversion rates to make it difficult to comprehend. But once wrapping my head around it, the business looked far better on the inside. And since the result of that I worked out a stellar price for the business in which the seller accepted.
The real lesson that I learnt from this was, not those from conducting further due diligence on what looked like a deteriorating business. But that the more work I put in to valuing an Internet business, the more I deserve to get out of it. Whether it be lessons in due diligence or purchasing a great business.
But what does this story say about why the seller wanted to sell the business? The real reason here was because they didn’t want to continue running a business that seemed a lot more complicated than it actually is.
However from other businesses I have looked at, and talking to sellers, there are always good reasons that you can find out about why they want to sell the business. And the real question is, are you comfortable taking over the business whilst knowing the real reason the seller is selling?
- What direction is the business heading?
As I mentioned before, just from scratching the surface on some simple due diligence for a business, will not tell you the whole story. Which means when it comes to understanding in which direction a possible business investment is heading.
You should take the time to do some extensive digging. Nobody wants to buy a business that is heading towards zero in earnings or worse yet, putting the business in debt!
It is a far wiser investment to conduct some research and find that a business is failing first. Rather to invest into the business and find out months later that the business you purchased is sinking faster than the titanic.
- Ask questions!“Our lives begin to end the day we become silent about things that matter” – Martin L King
It is not good enough to simply look at a few documents about the business, because this will not allow you to know the true ins and outs of the business. Instead get yourself a note pad and right down every single little thing that does not make sense to you, or something that may need some more explanation.
Then you want to confront the seller and ask them as many questions about the business as possible. Speak to them about the marketing, the expenses, the time they spend on the business and everything else you need to know to be comfortable to buy the business.
You can really learn a lot about the business from speaking to the seller. It can help you determine if they have anything to hide. And if the seller is completely transparent he will not have a problem talking to you and answering every one of the questions you have. Which is the best way to be valuing and Internet business, by how much information the seller will give to you and also how easily they will give it to you.
For example, if you need to push for the answers, the seller could be hiding something. Don’t be afraid to dig further into that area either. Tip toeing around issues like those can only get you burnt. Be upfront and collect all the data you can.
- What is the real value of the business?
Often sellers will have an insanely high price for how much they can sell their business for. This is because they often believe their business is worth far more than it really is. Which when you break it down yourself, you can really see the true value of the business.
I tell you this because you should certainly not be fooled by the hype that seller will feed you about the massive potential for the future of the business.
For example, the seller may tell you or state in their listing that the business has huge potential, where you can double the earnings in a few months if you do a joint venture with “this certain business”. Or you can make 50% more income if you start advertising on Facebook. Or there are better profit margins to be made by selling different products.
I urge you to not listen to the hype. Because in all honesty if the future of the business had amazing opportunity, why would the seller even be selling? We need to be realistic here.
Which means doing your own research, crunching the numbers yourself and see what the business is really worth. If you are relying on what the seller is selling you, then you may as well deserve to get taken advantage of. I’m sorry but ignorance is not bliss.
- What is the contract for sale? (the terms of sale)
All the rules above are imperative to covering your ass. However this rule is one in which if you should never, EVER leave out.
Dealing with the legalities of buying an online business should mean you always have a contract for sale put in place. This is a contract stating exactly what you will receive by purchasing the business, whether it be inventory, advertising accounts, social media accounts or even the rights to sell some products. You need this even if you are buying a $3,000 business or one in the millions.
Sometimes sellers may like to come to verbal agreements with you over the phone, which is fine. However you need it in writing too. I say this because a verbal agreement is nothing you can use to cover your but legally.
Occasionally for online businesses these days, contracts for sale may not be put in place. Although it is imperative you have confirmation for what you are entitled to receive from the sale whether it be in email, or over any messenger service being skype, Facebook. It doesn’t matter where you have the confirmation, so long as you have it in writing and it in the worst case scenario be used legally to take ownership of what is rightfully yours.
Now there are always many more great ways for valuing Internet business, although these are the key points you shouldn’t EVER forget. If you have some more of your own advice or examples you use when valuing internet businesses before you buy, please be sure to share in the comment box below.
Now that you too know a whole lot about valuing Internet business, there is always more to learn when becoming a professional online business investor.