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BI 288: How to Buy an Online Business (Or Sell One) with Mark Daoust

On the show with me today is Mark Daoust, founder of Quiet Light Brokerage and in today’s interview, Mark and I spent about an hour discussing how to buy or sell an online Business.

Quiet Light is one of, if not the leading brokerage for online businesses, and Mark and his team have seen it all. Unfortunately, most buyers and sellers haven’t, and as a result, they are often very poorly prepared to engage is such an important transaction.

If you are thinking of buying a business and want to learn the right way to buy an online business – or you are thinking of selling yours – you are going to love all the knowledge bombs that Mark shares in this episode.

Full Transcript

Trent:                  Hey everybody. Welcome back to another episode of the bright ideas e-commerce podcasts. As always, I’m your host Trent Dyrsmid, and I am here to help you discover what is working in e-commerce today by shining a light on the tools, the tactics, and the strategies that are in use by today’s leading entrepreneurs. Now back in episode two 87 you heard how Dave Chesson is helping Kindlepreneurs to master the science of book marketing and in today’s episode number two 88 I’m joined by Mark Doaust. Mark is the founder of quiet light brokerage and M and a advisory firm for online business owners. They work with owners of e-commerce, Amazon, sass and content based businesses to help them plan and execute a successful exit. Their team is made up of entrepreneurs who have all experienced the startup, the exit, and the acquisition. Now, before I welcome Mark to the episode, first a word from today’s sponsor.

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Mark:                  Hey, thanks for having me at, actually I’m a big fan of Ahrefs, so I don’t mind.

Trent:                  Ah, excellent. So we’re going to talk, uh, we’re going to do a kind of a, a three segments interview today. We’re gonna talk a bit about your company, um, and, and the perspective it is of your company for buyers, people who are looking to buy a website. Then we’re also going to talk about, um, negotiation and closing. And then we’re going to round up our interview by talking about it from the seller’s perspective. And by doing so, we’ll have covered pretty much every aspect of the audience that we could want to do. So let’s start off with the basics. Um, why did you start quietly, I would assume there were sites like this when you started years and, and what were you doing before that put you in a position to start this one?

Mark:                  Yeah, there were some companies light, quiet light before, but not a lot. I mean, not compared to what you see in today’s marketplace, right? There’s a lot of businesses today doing what we’re doing. But, um, I started quiet light brokerage, uh, after having the experience of actually selling one of my own online businesses, uh, myself and kind of going through that process and seeing what it was like. Uh, and I, I remember the, the person, the advisor who helped me through that process didn’t know a lot about online businesses and it just seemed from pretty basic, that would be a good thing to know if you’re trying to evaluate these things. Right? And so I thought, well, you know, I can do this, but which is what we say as entrepreneurs that gets us into so much trouble all the time as I do this.

Mark:                  How hard could this be? And so I took a year off after I sold my first business, uh, was trying to start a couple of other things. They were gaining some traction but not a lot, not enough to really be of interest. And then a good friend of mine wanted to sell his web hosting company and asked me to help them. Uh, and that’s really where quietly started was, was helping that friend to sell his web hosting company. Uh, the first time around it was an educational eyeopening, uh, and launched what we have today. Um, today obviously we’re much different than we were back then and we have a lot more, uh, experience just by virtue of the number of deals that we have underneath our belts. But the really big emphasis and the big motor for me going into this and starting up quietly brokerage was um, to be able to provide entrepreneurs in the online world with an advisor to walk them through and step through them, step with people through that process of selling a business or on the buyers side, uh, buying a business with somebody who’s been there before, right?

Mark:                  Somebody who’s actually gone through this process, both on the buy side and on the sell side, and has an experience in deal-making and valuations to be able to really be a good advisor all the way through. And that’s frankly where our name comes comes from, as well as the idea of that look for entrepreneurs out there. You build a business, right? It’s your business. You get to do with it as you want. And we’re here to hopefully be a light and an advisor. We don’t sign the papers. We don’t do, you know, sign your contracts. We don’t tell you what to do, but hopefully give you that, that proper direction. It sounds a little sales pitch and I apologize for that. But the origins really did come from that, right? Trying to help people out through this process of selling because it’s complex and if you’ve started a business on your own, and you know this because you’ve, you’re, you’re a experienced entrepreneur. When you start something, you get emotionally attached to it. A lot of us too, at least, especially in the first few businesses that we start and the process of trying to sell that the first time, it can be really, really confusing. Uh, and then throw in all the other things of you don’t know what you don’t know. It’s good to have somebody there by your side who’s been there before and knows firsthand what they’re talking about.

Trent:                  So I’ve had the opportunity to actually work with your team, uh, in looking at the potential sale of one of my businesses versus when I actually sold my very first business, um, without an advisor. You know, years and years ago, and I will tell you, it was a, a night and day, different experience. There’s a lot of questions that Walker asked me that nobody was asking me when I was selling the first one because I, you know, I didn’t know any better. And in hindsight I would have loved to have had that counsel. So tip of the hat to the team that you’ve assembled. So when you started this, you know, it was because of your, you were helping a friend to sell, I think you said his hosting company. Did you consciously decide way back then that, Hey, I’m going to be focused on online businesses for the founding of quiet light. And if you did, was it just because you had experience there and you knew that there were, there was kind of a gap in the market or was there anything more to it?

Mark:                  No, I, it’s, it’s what I knew and what I know. I mean, I’ve been in the online world since 1998. Uh, [inaudible] and I started quite late brokerage in 2007. Um, at the time, I mean, when I looked at what do I know, I don’t know. Restaurants, I don’t know, gas stations, that’s not anything I was really interested in either. Uh, the online space and how do you assess, especially back then, how do you assess it as the SEO value of a website and how does that play into its future? You know, how do you really judge whether or not this is a business or a website that’s going to continue on in the future? And that’s a big part of this process of does your business have value as determining what is it going to do in the future and how do you critically analyze these things?

Mark:                  Uh, both from a buyer perspective but also as an advisor and also as a business owner yourself if I’m trying to help somebody exit, right? How do you critically analyze that business? So I, I focused on the online space because it’s big enough, right? There’s enough businesses in here to definitely keep us very, very busy and it does keep us very, very busy. Um, and, and be, that’s really what we know, being able to, to evaluate in online businesses is unique. Joe says, you know what, I’ve, I’ve talked to a, an advisor who’s specializes in gas stations and you know what, that is a very specific field as well. You have to understand how to do soil sampling and environmental studies and everything else. So when you get into this world of M and a, uh, you do end up having specializations for that reason because just the way that you look at these business and where to look, um, is, is really important frankly, even within the online space, you know, our, our criteria and how we judge a SAS business versus an eCommerce business built on Shopify versus an eCommerce business built on Amazon versus a content business.

Mark:                  Those are all different types of valuations. And I’m going to ask much different questions for each of those types of businesses. What size of companies do you normally find end up being clients? Yeah, our average deal size, so the actual, uh, sale value, our average deal size is around one point $5 million. Um, the low end of what we would typically transact would be, uh, around a hundred thousand dollars. We see a quick drop off underneath say 200,000, so you don’t see a lot underneath that. Uh, the top end of what we’re doing is in the low to mid eight figure range. Um, we don’t have a ton of volume in there. I w we have decent volume below eight figure range. Um, but again, 1.5 to 2 million is our average deal value right now by perspective for revenue. That’s going to be about one times revenue for a lot of businesses.

Mark:                  Uh, or for your, uh, uh, you’re looking at a EBIT as of 500,000, up to about two or $3 million for most of what we’re working with. Okay. Now let’s, we’re going to put our buyer hat on here for the next little bit of our conversation. Do you think that it is better for someone to build or to buy and what are your reasons for both sides? That argument. Yeah, the build versus buy argument. Yeah. And you get this a lot from a buyer’s perspective, right? Because you’ve taken a look at a business and you see what somebody is doing and you’re thinking, I could do that. Right? There aren’t that many moving parts. The fact is it’s usually a harder than we think. This is what I said when I started quiet light brokerage. I said I could do this. And luckily there weren’t a lot of people in this space.

Mark:                  Um, so is it possible for me to start this and gain some foothold while we were learning? Um, I think buying versus building depends a lot on a, your personality and B, what your goals are. What’s the benefits of buying? Well, the benefit of buying is your, uh, binds with an existing that’s gone through the growth pains initially. You know that there’s going to be a product market fit. You know that there’s clients that are looking for this particular product, whatever it may be. And there’s some level of introduction to the introduction and adoption in the marketplace, right? So you really take out this kind of ramp up period that you see with startups and with a startup business, despite how clear your path may be to getting this started, you’re still making an upfront investment in that startup that you have to wait to be able to get that payback on.

Mark:                  Even let’s sound like a content site and you want to start with let’s say a finance content website that’s going to focus on credit card points. Well, you need to source that content. You need to, you need to have it written. You need to have them addenda did. You need designs. You need all these things in the school to take you six, nine, 12 months to really get to the point where you can see an ROI. So the benefit of buying is immediate ROI. You’re buying something to establish, you’re buying something that somebody else has gone through. Those growth pains, they’ve figured out what works, at least for them. And you can build on top of that. And that’s a really good place to be. Um, I don’t want to say you could also be buying somebody’s sick dog. You could be buying somebody’s sick dog and that’s hopefully part of the process.

Mark:                  Uh, we are going to look at a quiet light, right? Is this a sick dog? I’m not going to list something that’s really sick and bound to die that, that would, that’d be bad. And certainly go against our ethos. Uh, and I think it’s important for, for anyone to even think about buying. Um, what’s one person’s sick dog could be somebody else’s Greyhound, right? And, um, you have to understand what you’re good at, right? Most people sell businesses that have a few words on them here or there. They’re, they’re the Wars that they were comfortable living with. So identify what those are and identify whether or not you can mitigate those. Right? Are those going to be a problem? Um, as with anything, I mean, yeah, there’s risk. The startup startup, you’re trying to bring a dog to life. So, you know, all of this stuff does have a, um, uh, having a risk on a startup side, I think there’s benefits to starting up as well.

Mark:                  Uh, and I wouldn’t want to say don’t do it because first of all, I think your return on investment can be greater. You get to customize a business. I have a business that I’m running right now that I acquired and I’ve been spending the last two years trying to fix it, right. Trying to fix certain things and I haven’t got the same traction that I was hoping to get. Um, right away. You know, it was a little bit more difficult than I thought, um, because a lot of the business wasn’t mine and so I didn’t have the same, uh, ownership of it personally. So I think there’s benefits on both sides of this. A lot depends on personality. A lot depends on what your goals are. If you’re looking for something that you can get into is cash flowing and it’s proven to a certain extent, buying is a great option and frankly, the preferred option.

Mark:                  Um, if you’re trying to be disruptive, you know, starting as a way to go, uh, in my opinion or if you see an opportunity that just is not there yet, obviously starting. That makes a lot of sense.

Trent:                  So if I am your brother, I want to get into the e-commerce, physical products business, you are going to tell me to buy rather than build?

Mark:                  Not necessarily. I mean it depends what you want to do and depends on your skill set. Um, let’s say that you’re a great product designer, right? And that’s, that’s your skillset. It might be better for you to go out and to, to, to do this on your own. Now there’s risk in that and there’s risk that you could design a product, source it, bring it in and then have nobody buy it. Um, eh, I would say explore your options is what I would actually say.

Mark:                  Right? Explore your options. Don’t rule out buying. I think a lot depends on when do you want that ROI? When do you want to start getting paid back? I think that’s one of the strongest arguments to buying versus versus building. And I like me a good ROI. Most of us do.

Trent:                  A beautiful segue to the next thing that I wanted to ask you and that is, um, you know, you guys obviously see a lot of buyers, uh, what are, who may be clients or maybe you know, bought before you came along or what have you. So what are some of the most common mistakes that you see buyers making when they’re searching for their first company to buy?

Mark:                  Boy, I could cover a lot of things here. Um, I’m going to cover a few things. Um, one, first of all, if this isn’t really even about their approach or mistakes that they’re making in terms of how they’re searching, it’s more of their approach to the sellers that we preached this pretty heavily.

Mark:                  I quiet light and that is be likable. Um, Joe, my business partner tells a story when he was selling his business through quiet light. So he was, he was a client before he came on as an advisor now as a business partner. But as he was selling his business, he had a buyer come on and on a call and they were reviewing the business and then the buyer proceeded towards the end of the call to tell him everything that was wrong with the business. And what that buyer was trying to do was explain why he couldn’t pay a premium price, but what he actually they did. And Joe, his mind was just thinking, well, why in the heck do you want to buy this business in the first place? You’re just insulting. But I’ve built in telling me how terrible of a business person I am.

Mark:                  That guy obviously didn’t win that deal. Right? So being likable makes a difference. You mentioned Walker. I use Walker as an example because he bought a business through me before he came on as an advisor with quiet light, uh, and Walker during the process of buying this business behaved in such a manner that won him a deal just based on being a little extra considerate than anybody else. At the end of one of our discovery calls before he put in an offer, you took the time to thank the seller for a their time and be even entertaining his time to potentially buy their business. That made such a difference in that relationship and made my client and that’s tuition want to sell to him because here’s somebody who respected what they built. So first things first, it’s very, very simple, but be a nice person.

Mark:                  Understand what, when you’re going into a transaction, you’re buying something that somebody else has built, right? And put in a lot of time, risked a lot of money in and is probably pretty proud of it and they should be pretty proud of that. Right? So be respectful of that. More practically though, the mistakes that we see would either be being way too generic in what you’re looking for and not having any criteria of what you’re looking for or being too hyper specific in what you’re looking for. Um, on the front side, being too generic, I get calls from people sometimes saying, Hey, I’m thinking about buying and all my business. Do you have any advice? Okay. What type of online business are you thinking about buying? I don’t really know. Okay, well this is a place to start because running the SAS businesses, nothing like running an Amazon business, which is nothing like running a content business.

Mark:                  You know? What are you good at? What are your skills? What makes you scared in the online world versus feeling really comfortable? Are you comfortable working in code? Are you really comfortable running logistics? You know, having a little bit of a self assessment to say, where are my strengths, what am I good at and what do I want to do on a day to day basis? That’s a really good place to start if you’re an operations guy. I had a client who told me once he had a physical products business, he had a warehouse and he moved. He made this big move where he went from an 8,000 square foot warehouse to a 22,000 square foot warehouse and he told me, he said, I had no more fun in my business career that had playing out the move from that, that a smaller warehouse to a larger warehouse.

Mark:                  Me personally, I would rather pluck my eyeballs out. It sounds like I don’t want the logistics of moving a warehouse. No, thank you. He wanted to do it. He liked it. He liked that sort of thing. That was what he enjoyed. Good for him, for him. If he was buying and he’s not, but if he was buying, I would tell him, you want to find something that’s a logistical nightmare, take it and fix it. That’s where you’re going to do really, really well. So that’s one side. The flip side is the two specific type of buyer that the guy that comes in and says, I’m looking for a business in medical equipment space. We don’t want supplements but want medical equipment. The asking price has to be less than 2.8 has to be growing for the past five years, must have intellectual property protection, yada, yada, yada.

Mark:                  I get it. You have your height, your hitless criteria, you should. Uh, but when you get too specific a, you’re not going to find a deal because it’s really, really hard to, to, to uh, get a deal that matches that specific criteria. And B, if your criteria is really specific, especially on price and you’re looking for certain things, understand that when we release a new business for sale, quiet light, we’re getting 150 inquiries within a few days, right? So, uh, there’s a lot of people competing for that. And if your criteria is specifically is something like it’s been growing for the past five years and as a multiple of less than three on the earnings, there’s a lot of people that are going to be wanting that exact same business. And market forces are what market forces are and that’s going to kind to play. So those would be the three things, be nice, know what you want, but don’t be so specific that you can put yourself in a shoe box.

Trent:                  Okay. So now our buyer is one of those 150 people that’s inquiring about a business. So it’s a very competitive situation to a very desirable business. Are there specific tactics aside from what you’ve just explained that that buyer can do to help make themselves stand out from the flock of other buyers?

Mark:                  Well again, I, I’ll, I’ll, I’ll double down on the bean ice. Um, and be considerate and again, you don’t have to sit there and flatter somebody to, you know, like, ah, I love the way you look. That sweater is just awesome. I mean, you don’t have to get to that point, right. But just being considerate them, letting them know what your intentions are. You don’t have to tell them all of your plans, but letting them know your background, trying to connect with them personally to some extent. Um, and then, uh, letting them know what you’re going to do with the business afterwards as well, you know, and letting them know, Hey, you know, I’ve got a, I even if I don’t buy the business where you don’t, uh, decide to sell it for some reason, you know, if you need anything, I’m here to help you out.

Mark:                  That’s something that can go a long, long ways. Um, constructing the offer. That’s another area where you can definitely stand out. Right. Obviously money plays the biggest role on this. The people that offer the most value are 10 tend to get the bet that you know the majority of the deals done, but offer structure makes a big difference, uh, for better or worse. And there’s a definitely an argument to make that this is for worse, but people selling their business don’t want to see a complex deal, right? So sometimes we get these offers where let’s say somebody who’s asking $2 million for the business, a buyer might come in and say, well, I’ll offer $1 million up front and then we’ll do $500,000 and a note with a five year balloon payment of this much, and we’re going to have an earnout component on top of that.

Mark:                  A lot of moving parts that are going on here and the seller is looking at this thinking, I just want to cash out and be done. Okay? That’s the mentality. 95% of sellers have, I want to cash out, I want to be done, I’m ready to move on, right? I’m ready to move on, do something different with my life. They’re entrepreneurs, they want to do something different. That doesn’t mean that you have to completely throw out earnouts. It doesn’t mean you have to completely throw up financing. There’s good reasons from a buyer’s perspective to do those, but do it within reason. Keep it simple and keep it understandable and easily digestible. And also understand that that comes with the cost, right? If you’re going to, um, ask for owner financing, if you’re going to ask for a performance based financing where you know, payouts are dependent on your job, running the business, understand that there should be a little bit of a premium for the seller in that situation.

Trent:                  Sorry to interrupt you, but is it okay to, so let’s say it’s competitive situation. You needed to get an LOI in because you want to get picked to go to B to B, the buyer to go into due diligence. And you basically said, you know, here’s my offering price, but you haven’t spelled out terms. Is it okay to, once you’re in due diligence to say, well, you know, I’d actually like a note or I’d like this, or I’d like that. Or, or will sellers consider that to be a bit deceptive and then turn sour on you because they feel as though you tricked them into getting into due diligence?

Mark:                  Yeah, great question. Great question. A yes, they will completely get considered or that there would be a little bit deceptive a and B, the portable as well. The adviser will as well. And that doesn’t play well. Right. So, uh, going back to the fact that we have a 150, uh, inquiries plus per listing that we put out. If we’re getting multiple offers, our client is asking us, what, do you have any insight on any of these people? And if we’ve closed the deal with somebody and they’ve been good, good actors through due diligence, that place and that, I mean, I’m going to disclose, Hey, I worked with this guy before. He closes deals. He’s very good. You know, we, we trust them. Um, I would, I would give him a approval. This other buyer, it’s a bit of a disadvantage. They’re new, but they’re acting, you know, they’re doing everything right right now.

Mark:                  But they are new. I don’t have as much typical condom. These are sort of some of the realities as a buyer that can be difficult. Breaking in on the LOI. Note, you don’t put in an LOI unless you know you want that business, right? Most advisors, especially at quiet light, we will do everything in our power to make sure that you get all the information you need to make a good decision before placing another lie. I don’t want to know why. If you don’t know what you’re going to do. The purpose of an LLI letter of intent says, my intent is to purchase this business assuming or dependent on due diligence, which means everything is verified, that it’s accurate and complete. If everything’s accurate and complete, the deal should happen. If you’re still in your discovery stage, figuring out, do I want to do this? You shouldn’t be putting in another lie. That means you’re going to miss out on some deals. The best buyers out there know how to move quickly because they know exactly what they want so they can identify that very, very quickly. That comes with experience. So one of the things I advise buyers, take some time, understand that looking for that deal. It’s going to take some time, look at a lot of deals, offer feedback and learn what you want. Okay.

Trent:                  So now we’re going to transition and talk about negotiation and closing. Um, and you’ve already answered my first question. What’s the first buyer find someone they like. What’s the first step? And the first step of course, is an LOI. So once the LOI has been issued and if they’re accepted and they’re going to go into due diligence, what in terms of expectations, typically how long does due diligence last?

Mark:                  Yeah, it depends on the size of the business. Uh, and the nature of the business. 30 days would be kind of the average. Uh, but if it’s a more complex business, 60 days is not unheard of. If you’re looking at a, a high seven, low eight figure business, it getting upwards of 90 days makes sense because you’re, you’re typically have any outside firms come in maybe to do a quality of earnings report or something like that. Right? So the the duration, I think for most people that are looking in the six figure to low seven figure range, you should be looking at the eight 30 day due diligence or approximately a four most most online businesses as far as the, the expectations you want it to.

Trent:                  Yeah. Well, yeah, a little, I’ll just keep running through the questions that I want to cover off. So I’m assuming that for buyers who haven’t bought before, you have some type of due diligence process that you’re going to guide them through.

Mark:                  Well, due-diligence is primarily the responsibility of the buyer. Now I can give some tips, but [inaudible] and let me back up before I put something out to market. Before any of us would put something out to market, we’ve done some level of due diligence at quite like we’re not going to put something out that I don’t think is going to survive due diligence and be a huge waste of time to do so. But it’s not as deep of a due diligence as you need to do as a buyer, right. As a buyer, you need to verify that the books that you’re looking at are accurate and complete, which means getting access to bank statements and credit card statements, merchant statements, et cetera, et cetera. Verifying a lot of, some backing into a lot of the financial statements that you’ve seen. You also have to make sure things are being fully represented.

Mark:                  Sometimes people forget things and it’s honest mistakes when we’ve had that happen. These are important things to be asking. There are companies that will help you through the due diligence process, especially if you’re a first time buyer. And I would highly recommend using some of those companies. [inaudible] comes to mind, a top of mind. They’re a good company. They helped with a lot of the, the, a due diligence processes, but a lot of it is common sense as well. Right? Take a look at what was represented and then just ask as many questions as possible. Uh, we do have some kind of a wrote, uh, due diligence checklist that we can hand over for people as well. But I want to be careful. I don’t want, I don’t want anyone to think that they can rely on this as being, all you need to do. You should really make sure that you’re doing a full and thorough due diligence. Um, and the fact is behind any business, buying any investment is like this is risky. And so you have to do your homework and make sure that you’re looking at everything in depth. And I would, I would hate to find out that somebody missed a step and, and uh, and it worked out poorly for them. So, um,

Trent:                  yeah, yeah, I think it was Walker who shared with me a story of, of someone who bought a business and one of the areas where they made a mistake and due diligence was on payables. Instead of contacting the suppliers of the business to see what the payables balance was. They looked at the financials and the financial showed no payables yet there was a desk drawer filled with unpaid invoices, which the new buyer then had to pay. So that was a $50,000 surprise that came their way.

Mark:                  Yeah, I ran into that when I bought a business. Uh, as well. And uh, it was, it was a situation where the supplier was actually trying to collect from the previous buyer. Right. So I was in this weird situation, I still needed my, uh, my, my seller to continue to train me, so I didn’t want to betray them. It was a bad, bad spot to be in. But yes, I mean that’s a perfect example of, of what you need to do.

Trent:                  So what are some of the other mistakes that you’ve seen buyers make? Um, if you can think of, you know, two or three doozies, those are, those are great stories and great learning opportunities.

Mark:                  Well, it, those are very specific. I don’t have a specific example like that, but the number one mistake I see in due diligence is somebody pitching a asking or requesting a solution to something they want to see and thinking that it has to be that way. Where we see a heads budding would be a buyer coming in and saying, okay, I need you to give me access to this. And the seller saying, no way in Ohio, I’m not giving you access to that. That’s very, very private. And how the buyer’s thinking, well, I need access to this, but no one’s asking why, right? Why do you need access for it? When you ask that question, sometimes you find out why I need access so that I can verify X, right? And then once you hear that, you can say, okay, you need to verify X. That’s totally reasonable.

Mark:                  Here’s another way we can go about doing it, right? So, um, I would say a couple of mistakes. One would be that, right? Don’t lock yourself into a solution. Uh, understand the why for what you’re, you’re asking for. Um, secondly, order your requests in the order of what’s going to be, uh, least sensitive to most sensitive, right? So, uh, this is again to having courtesy and respect for, uh, for that seller and their property. Don’t go in from day one, same line. I need to talk to your clients to make sure that everything’s above board because nobody wants you to talk to their clients until they’re really sure you’re kind of to the deal. Do your financial due diligence first. Maybe give them a heads up and say, look, I will want to be speaking to some of your clients. Totally happy on doing that in week three, once we’ve cleared off, you know, items one through 25 off the due diligence list, we can put that towards the end. So order it in the right way as well. So those are two things that are definitely recommend. Are you familiar with C invested time principle? No,

Trent:                  you probably are just not by that name. So I read it and I wish I could remember the name of the book, um, how to negotiate anything I think is what it was. And I don’t remember the author, but the invested time principle as explained in the book was quite simple. The longer two parties are negotiating for an outcome, the more likely it is that both parties want to achieve that outcome. So they feel as though they got an investment of return on the investment of their time. So as I, the reason that popped into my mind is you’re talking about your scale of least sensitive information that you’re asking for. Ask for that in the beginning when it’s easy, most sensitive information that you’re asking for, ask for that further on down the road because the invested time for principal is then more in your favor and you’re more likely to get the information.

Mark:                  Yeah, and at the end of the day, I, I’ve, I’ve said this for a long time, like offers from a buyer are usually made based off the metrics, but a deal is actually completed based on trust. Right. And the Stu diligence process is about verifying what you’re seeing, but it’s also developing a relationship of trust with the seller and the seller developing trust with you. So on day one, I’ve had so many instances of people saying at the very beginning, there’s no way I’m going to be able to give them this. And then they meet in person, they go over a few things. I have a couple of meetings and then you know, what is a good guy? I’m comfortable with it. Like I’m okay with this now. You know, because they’ve developed a relationship that they’re building that trust. So yeah, absolutely. The invested time principle. I think another aspect of it would be it helps you build that relationship, which is crucial.

Trent:                  So a variation on an earlier question of mine, about what terms and so forth in due diligence, what are some of the items that are okay to try and renegotiate in the due diligence period without coming across as being a Dick or deceptive or what have you.

Mark:                  Yeah, I, you know, for some renegotiations are completely legitimate if you find material misrepresentations or mistakes, right? So, uh, this happens from time to time. Somebody from gets the credit card that they paid for advertising with them that are financial statements and your numbers have swung by $50,000. Totally, totally makes sense to, to renegotiate at that point and to do so in a way that is fair, uh, to, to, to the client. Right? So I’m not saying, Hey, you know, you made this mistake, I’m going to knock off a disproportionate amount of money off the purchase price. That would not be a legitimate to do. Um, there’s a lot of elements that at the LOI stage simply are not negotiated, uh, and can be negotiated or should be negotiated later on such as the scope of a noncompete agreement or the term of a noncompete agreement, you know, so these are things that you can definitely introduce later on as far as here’s what I’m looking for now.

Mark:                  I would just caution you though, if you’re going to be asking for anything extraordinary, have it be set up front, right? The kills deals are surprises and it can be a completely valid surprise. It can be completely valid requests, but if somebody is surprised by it, both on the buy side and on the sell side, uh, it can cause problems on the sell side. I know, you know, non-competes would be great example. Um, if I know that somebody is going to be working in an industry that’s sort of a neighbor to what they’re selling, my advice is always tell them on day one that you’re planning to do this. And when they do, I don’t ever have a problem with it. Where I have a problem with it is when we’re two, two days away from closing and the buyer finds out, Whoa, they’re going to be in this industry. They didn’t tell me that. Why didn’t they tell me that? They should’ve told me that and now it looks like a much different issue to them. So just disclose early, but as far as what can be renegotiated, um, hopefully if not much, um, you know, if you have caused, you know, then that makes sense and a approach that and just understand negotiations depending on how the rest of the deals as gone. It can be, it can be dicey to do so. Do so cautiously.

Trent:                  I had read articles about, um, I don’t know if the term vulture buyers the correct term, but maybe predatory buyer where buyers will make an initial high offer to tie somebody up and due diligence and systematically grind them down over a period of two, three, four, five months. And I w, and I’m guessing this probably is not happening in your space. Maybe it’s happening with bigger deals where there aren’t as many buyers cause you’ve got this flood of buyers. Would that be accurate to say

Mark:                  it doesn’t happen because we protect against that. Um, yes that happens. And I know some buyers do that and this is where, look if if it were to happen with one of our clients, that buyer would not have a very good shot of getting any other deal with us. Um, so I mean that’s just if, if somebody is a bad player during due diligence, we think that they are not acting in good faith. They’re going to have a hard time getting another deal. It’s not an official blacklist or anything like that, but there are notes as to how people behaved and we can look back at that. And I would be not doing my job if I didn’t warn a client, Hey, this guy had in our last deal, we negotiated without reason. And look, we’ve had people renegotiate with reasons Zen and the deals falling apart and we’ve made sure to note he renegotiated but it was completely valid. And if there’s a valid reason to renegotiate, we get it. But if somebody is doing in this kind of predatory practice and yes, people do that, it’s not welcome and you might get a few deals done as a buyer that way and you might save some few bucks. It’s going to, it’s going to come back against you. Your deal flow is going to dry up very, very quickly.

Trent:                  Okay. What percentage of your buyers are Bringing a SBA loans to the table as a part of their financing package and how much less desirable or attractive does that make them as the buyer, given that the SBA takes a little bit of time to fund the loan and that slows them down?

Mark:                  Yeah. Great. Great question. SBA was nonexistent like four years ago, maybe five years ago. You just didn’t see SBA SBA deals being done. Now it’s around 60% of our deals are financed through SBA. Um, we are seeing right now a bit of a tightening in the SBA markets. Um, banks, uh, especially in the eCommerce space. Banks have quotas for types of businesses that they’re going to, uh, uh, provide loans for, especially through SBA. Um, we are seeing a little bit of tightening up some of those criteria that they’re looking for. Um, is it more or less desirable? It depends on the business, right? I mean there are some cases where I would question, um, a businesses, SBA eligibility, obviously the process is not desirable. Uh, SBA lenders will tell you that they can get it done in 30 to 45 days. I’ve never seen it happen that way.

Mark:                  It’s typically 60 to 90 days is what you’re really looking at and it is a lot more paperwork. The flip side of it from a sell side is, um, you can often get more money from it. Uh, it restricts the creativity of the deals. So you can’t do, you can’t like have an employment agreement after you can’t do, um, uh, earnouts and an SBA deals. So from a seller standpoint, you get cash up front, uh, or cash basically a guaranteed. It’s a good deal that way. Um, so is it more or less desirable? I’d say slightly less desirable, but I wouldn’t let that discourage people. Um, I, we have a, a case study in which we had a cash buyer lose out to an SBA buyer, um, on a, a pretty significant size deal. Uh, right. And the offers were not substantially different. In fact, I think they were pretty much the same. The difference between the two. Uh, the buyer was nice connected model. Yeah.

Trent:                  Setting aside SBA then, what would be some other types of common financing vehicles?

Mark:                  Yeah. Uh, there’s really kind of a dearth of it. We need more financing options out there. There are some groups out there that are doing hard money loans or short term, short term sort of bridge loans. I know of a product right now, which is a, a interest only bridge loan with the idea of rolling over to an SBA loan. Within a couple of years we have seen some conventional loans being done. Um, it’s not common, but you need to have a very, very well qualified buyer who has an phenomenal relationship with the bank in order to do that. Um, and then funds would be the last thing that we’re seeing. So these micro funds where people are, uh, building up, you know, uh, funds of five to 10, maybe $15 million, and they’re deploying those funds into a roll up strategy. That’s primarily what we’re seeing. There are some companies at the smaller end, uh, lower end that are doing, um, funding. But, uh, I haven’t, I don’t have any experience with them.

Trent:                  The interest only bridge loan. Is there a company name that comes to mind that I can include in the show notes? Sure. E-commerce Okay. Lending. Sorry, I’m not typing faster folks. Okay. Now I want to, Oh, actually one more question regarding due diligence. So we need to talk about closing and what buyers should expect in the, you know, four to six weeks after closing is, I would imagine there are things there that can go wrong or upset people or what have you.

Mark:                  Yeah, yeah. I mean that’s the stuff that can go wrong with a B sales not are what you’re looking for. I mean, that’s, that’d be an obvious one thing and yeah. Well, you know what, Murphy’s law sort of a sort of plays a role there and I’m often kind of rears its ugly head where you have a horrible sales period after you buy a business. Um, you know, here’s what you should expect after the closing, right? During the closing, you should gain access to all of the assets within that business and you should have them completely under your control after, uh, that sun and the money is flowing in into your accounts. You should have a similar available to train you and be able to ask questions of them and really understand the business and the ins and outs of it. Um, over that, those next 30 days, you should be able to rely on them less than less over that time where people run into problems is they learned something that maybe they didn’t look at before.

Mark:                  Um, the, the example of the payables would obviously be a nasty surprise. Uh, you know, the only other thing that I would bring up would be not understanding how to read financial statements in the buying process and then seeing what a business actually looks like from a cash perspective later on. And I think it just sounds so basic, but just understand that your profit and loss statement is not necessarily a statement of how the cash is flowing in and out of the business, right? It’s a pretty basic thing to understand, understand this with the SAS business, understand this with an eCommerce business and get a sense for what, how is this money actually going to flow in and out of my account? Um, if you feel pretty comfortable with financial statements, they’re gonna hear that and say, well, yes, of course. But there are people out there that are not, they look at a P and L and, and, or an income statement and they think that that is the money that’s flowing in and out. It’s totally up on that. Just a little bit, study up on that and understand what you’re at.

Trent:                  You mean it’s not the balance sheet that shows the money that’s flowing in and out.

Mark:                  There’s, there’s a lot of documents that are not understood by its entrepreneurs and we should understand them. I, I, I say this when I give talks at conferences, right? Because so many online entrepreneurs are dating geeks. We love our data and we’ll pour over it. And then we have this thing called our financial books, which we completely ignore. Yeah. But there’s a whole set of data that has hundreds of years of history and being developed to be really insightful into the health of your business. How many of us actually know how to read a balance sheet or know what a statement of cash flow is compared to an income statement? And when I asked this question at conferences, I asked people, raise your hand if you know the difference between cash basis and accrual basis accounting. And I get maybe about 30% of the hands up, they know it and then maybe you know, 10% kind of way sort of.

Mark:                  And then the rest, I don’t know. It’s a pretty basic difference. Take the time to, to, you know, take the Udemy course or something and learn it. You don’t have to be an accountant. Know the basics of what you’re looking at. Can you tell us the difference in the less than 60 seconds? Sure. Cash basis is P and L’s that are represented based on when money comes in or leaves the business. Accrual is when expenses or income is earned, uh, or incurred. So the example would be, uh, if I paid in advance for my web hosting on a cash basis, uh, book, I would, uh, I would show the expense in one big bottle. All right? The cruel, I would show that over a 12 month period, um, here’s a hint, accrual is the better way, right? And now you might hear that and say, well, I want to know about the cash. They both have value. They’re both useful to look at, but you should be keeping your books on accrual basis. If you’re using software such as zero or QuickBooks, if you’re recording it on accrual basis, you can always switch back to a cash basis and see it from a money flow stamp point. So that’s the trick. Looking at accrual basis is like looking at a three dimensional picture versus a two dimensional picture. All that’s more than 10 seconds.

Trent:                  Oh it was. But that’s fine. All inventory businesses I would imagine need to be on an accrual basis.

Mark:                  Absolutely. And sass businesses as well. Yep. Okay.

Trent:                  All right. We are now going to transition into the last segment of our time together and that is, let’s make it about the seller for change. We’ve been talking about the buyer and there’s a whole lot of stuff that sellers need to consider when they’re looking at exiting their business. Let’s start off with um,

Mark:                  yeah. Seller comes to and says, I’m thinking of selling because they don’t really know when.

Trent:                  How do you help them to make the decision about when is the right time to sell a business? Assuming that, you know, it’s not an external factor, like I’m dying or you know, we got a divorce or you know, something like that, that just is a drop dead.

Mark:                  Right. Right. And those, those actually do come up more often than not. My first question would be, why, you know, why are you sighing? Why do you want to sell? Is it a feather in the cap? If so, okay, let’s find what feather, uh, what number do you want on that feather? Like, is it a a million? Do you want to say I exited at $1 million, uh, or 5 million or 10 million? Um, and then my next question, if it was just that would be rethink it. I don’t think selling just for a feather in the cap is a great reason personally. Um, yeah, owning a business is better than something in a business. And look, I make my money on this, so I know that talking about against my own clients, um, that, that, uh, eventually I hope will, will come over to me. But owning a business is better than selling a business.

Mark:                  If it was the other way around, no one would want to buy your business, right? It’s a Bible asset because it’s desirable to Ireland. Um, financially speaking, it’s just better if you have an income producing property. You have the asset value of the business, which is part of your net worth. Plus you have the income that’s producing so it’s better donut. Uh, so first why are you selling? And then from there you can kind of work backwards, right? To find out. Let’s say the reason is, well, I have this other idea I want to do. I want to get to move on to that. Okay, well then let’s, let’s figure out what you need to do to get to this other idea, right? Do you need a certain amount of cash in the bank? And then we can work backwards again to say, well, what do you need to do to get up to that valuation point?

Mark:                  So these are all things really look at. Um, I’m working with a client right now who told me, look, Mark, I started this business and I said, from day one a day I have to hire somebody or move to a bigger warehouse. I’m signed because I don’t want to do it to me. Totally legit. Right? There are people out there that say, I want to start. I don’t want to have employees. Um, in fact, I have a number of clients where that’s where, where they’re, they’re motivated. They’ve had employees in the past. They don’t want to grow to that size. So then that becomes your exit point. Right. At what point do you think you need to take on an an employee if that’s what you want to avoid or you can call the, you call me the next time you get a deal like that.

Mark:                  Especially if it’s an eCommerce brand I can buy. Yeah, I definitely will. Yeah. We have one that’s on or off right now. That’s exactly that. You know, and it’s great. It’s a great business. And the guy’s like, look, I know I’m leaving money on the table but I just, I don’t want to move warehouses. I want to take some time off and I don’t want to babysit people I met. I’m bad with people. Is there an extension? Is there an accepted LOI and that deal there isn’t accepted? L Y yeah. Okay. Sorry. Sorry. You know I had another situation in the years ago that was the same thing where I, it was a guy who built up a business. I built it up I think something like at 30,000 a year and then when I took it over a representative that was doing about half a million per year and asked him like, why are you signing this thing?

Mark:                  Like you’re working with your son and it’s great. It’s like, because right now I’m fulfilling inventory from my garage with my son. It’s great. We’re continuing to grow. I have no more space in my garage. My son and I are spending all our time doing this. I don’t want to bring somebody else on. Totally, totally legit reason. So yeah, again, figure out the reason first and then we can work backwards from there. If there’s a number that we have to hit, that also would be something we can work backwards from. But I would really discouraged this attitude of, um, when is the right time to sell my business from a financial standpoint, the answer is probably there isn’t, right. From a financial standpoint alone, it’s going to be better for you to own that thing for a long time.

Trent:                  What is the most common reason that you see sellers selling for? Because from the buyer’s perspective, I think a lot of folks might think, well, there’s gotta be something wrong with the business. That’s why they’re selling it. That, you know, it

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BI 288: How to Buy an Online Business (Or Sell One) with Mark Daoust


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