Just like the online shopping experience differs from in-store shopping, so does buying a physical business differ from acquiring an online one. Well, not that kind of different, but they entail different negotiation techniques. Regardless, three things are almost certain for both types of businesses: the price is the main focus during negotiations, the seller views a good deal as one where they sell at a higher price while the buyer’s version of a good deal is settling for the cheapest price point.
Despite these, one good thing about buying an online business is price flexibility. As a buyer, you need to come to a compromise so the sale process feels like a win-win for both sides.
This guide will show you how to be a power negotiator. Before we go into how to negotiate the best deal possible, here are some tips to keep at the back of your pocket.
From preparation to closing the sale, here are ways you can tip the scale in your favor when acquiring an online business.
On our marketplace, sellers provide information about their online businesses, which isn’t enough to strike a deal. So before beginning the negotiation process, the first thing is to prepare a list of criteria. Your criteria shouldn’t be set in stone: there should be room for bargaining. Regardless of its flexibility, making a list of criteria will ensure you’re buying a business that’s right for you.
You should keep a record of the minimum cash flow needed to sustain your lifestyle before negotiating an offer that won’t break the bank. Some of the elements you can consider when creating your criteria are;
These are just a few criteria to give you a bit of an idea. Of all these elements, one of the most important ones is the spending limit.
When negotiating your offer, don’t lowball the seller as it could be a turnoff. You, also, don’t want to present your best offer at the beginning as you may not have wiggle room to negotiate a better price.
Unlike buying a brick-and-mortar business, buying an online business takes a shorter time but is more competitive, especially when it’s listed on a marketplace like Microns’s.
Also, there are several times when negotiations can be exhausting and result in an impasse due to the lack of physical contact as most deals are done online. This is where building a trustworthy relationship with the seller and creating goodwill with them can influence the sale. In all fairness, relationship building doesn’t guarantee the seller will accept your price, but they’ll be more willing to come to a compromise if the rapport’s good.
Learn more about the seller’s story and their motivation for putting the small online business up for sale. Aside from chatting with them, you can follow them on social media and engage with their content. This can help you verify their legitimacy and that of their business.
Another benefit of building an honest relationship with the seller is that both of you will learn to treat each other respectfully. You’ll also develop a genuine interest in the business and appreciate the seller’s effort in building it: this will influence the way you negotiate the offer.
However, building a buyer-seller relationship doesn’t mean you can’t be assertive at times when you feel exploited. So keep that in mind. Nonetheless, good rapport provides a solid foundation for getting the best deal.
After making contact with the seller, and they’ve presented you with basic details, now’s the time to carry out due diligence.
Real quick, you want to verify the financials and value the business by yourself. Request the balance sheet and check the cash flow, profits, and losses. Also, try to find out the selling price of other businesses in that category or industry – while you may find bigger businesses compared to what you’re buying, the research will give you an idea of what businesses in that category’s worth.
Here’s how to find a business’s valuation;
Listing price = annual net profit x multiple (3x to 5x)
Consider the assets such as email list, intellectual property, number of paid and unpaid customers, marketing channels, etc. You also want to know about the tech stack and perform customer research. If it’s an ecommerce business, you also want to get a bit of information on how the seller gets their supplies and keeps inventory.
We’ve written an in-depth guide on buyer due diligence checklist for buying small online businesses.
A couple of other factors go into negotiating the terms for an online business. You don’t only have to negotiate on price. If you can’t get the seller to make concessions to make on price, you can create some sort of deal where they can agree on other terms.
We don’t see this often but it may work in cases where you’re spending large sums of money. Typically, businesses listed on Microns are micro-startups valued at under $100,000. When paying such hefty amounts, you may want to use an earn-out structure where you pay a portion of the purchase price upfront and the other in the future.
You can negotiate a contingent payout with the seller to accept 80% of the asking price upfront and the remaining 20% over the next 3 months. There’s no guarantee the seller will agree to this structure, but it’s worth trying out. This is one of the benefits of building a strong relationship with them.
While we boast a platform with no scammers, you want to be careful making payments. We recommend you use a reliable escrow service for payment. That’s why we created our own service – Transfer by Microns – to foster successful deals as members of our community have complained about many of the other escrow services.
Last-minute changes can be frustrating for the seller. You want to respect the seller and not be a tyre kicker.
Your time’s important, and so is the seller’s. It won’t make much sense to renegotiate the deal after initially agreeing to the terms – No one wants prolonged back-and-forth negotiations.
You may discover you’re overpaying for the micro-business or may need longer support than the free 1 month the seller’s providing. In this case, the seller may refuse to agree to your new terms. To avoid this, carry out thorough due diligence and create your checklist (to know your desires and deal breakers). Also, strike a deal with the seller to support you beyond a month before sealing the deal.
Now you’re ready to begin negotiations, there are scenarios where it’s not worth entering into talks with the seller. Let’s explore them.
We already know how to calculate a business’s valuation. However, a couple of reasons can cause a seller to put up his small online business for sale at a market value less than what’s obtainable on the market;
It’s your duty to find out why, as that’ll inform your decision to continue negotiations or not. You don’t want to end up with a penalized business.
When you’re buying an online company, you’ll need everything about the business to be transferred to you. Things like intellectual property, clients (both the biggest paying ones and the ones using the free service/product), and list of suppliers if it’s an ecommerce business like Amazon FBA or a Shopify store. Also, the seller has to sign a non-compete agreement (not to run a similar business and be your competitor).
Cases like these mostly happen when you’re doing private deals with the seller. If the seller’s not committed to these terms, it may be best to look elsewhere.
One way to overcome such a situation is by acquiring the business on a marketplace like Microns’s. We’ve laid down rules to manage these situations: this way, when you meet a non-committal seller, you can report them, and we’ll take the necessary action to ensure they release everything to you.
Now we’ve ruled out scenarios where you shouldn’t waste your time continuing talks, let’s look at when and how to get the best deal from your negotiations.
Just like a business can be undervalued, a business can be overpriced – this is probably the case in most scenarios. Most businesses that are valued using 30x multiples are often overvalued – emphasis on ‘most,’ – some businesses deserve this kind of valuation. But if you’re buying an online business on Microns, most listings use a multiple of less than 10x.
Here are a few reasons why a business can be overvalued;
When the buyer presents you with their ‘exorbitant’ offer, you shouldn’t respond with an unrealistically low offer as we mentioned earlier. Since you’ve done your due diligence and personally evaluated the business, present what you consider to be a good offer and tell them your reason for the counter offer. If the seller doesn’t budge and you think you’re presenting a fair offer, you may want to contact us to explain the situation.
There are lots of pre-revenue (businesses with users but no paying customers) listings on our marketplace. Pre-revenue businesses are totally fine to run but have no established income source. They’re typically new and priced the least but you may want to negotiate the deal. The kind of business that poses the most risk is a new one that started less than 6 months ago – we usually advise our buyers to consider buying small businesses that are around 2 years old. That doesn’t mean pre-revenue and new businesses are bad deals.
Here are a couple of reasons to negotiate a good deal if you’re interested in any of these businesses;
For these businesses, you may want to present your offer by stating these challenges and how you can lose traffic in the event of an update.
Some deals are straightforward. For others, not so much due to many moving parts. This is obtainable in businesses like micro-SaaS startups and ecommerce businesses where you may need training or consider sourcing and storing the products.
Now, after price negotiations, you may negotiate a deal where the seller will support you beyond the mandatory 1 month.
Now using PBNs (Private Blog Networks) isn’t bad practice. This is when website owners buy other websites and load them with content to link to the main website – the goal is to get more backlinks and improve the main site’s ranking. While this practice is safe, you want to be cautious for the following reasons;
For these reasons, you’ll want to include the PBN in the deal. This way, you can apply best practices that won’t hurt your site’s traffic. Also, the seller won’t be able to remove the links after the purchase.
In the event that the seller won’t part with the PBN, you’ve got a good reason to negotiate the businesses at a lower price. Plus you can strike a deal for the seller to never remove the links.
As stated earlier, buying an online business listed on a marketplace has a lot of benefits. Negotiations are smoother and the sales cycle is shorter. We have loads of pre-vetted profitable businesses looking for new owners on our platform. Sign up today to begin exploring them.
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