How to Buy an Online Software Business

I believe that the world of buying and selling “online” businesses is in its infancy stage. There are sites such as flippa or more specific brokers such as FE International that are making it a bit easier to do buy and sell online based business such as websites, web applications, mobile apps or even just plain domains. I think that in the next few years, this will only go up and a lot online businesses will be bought and sold.

I did one major transaction as a buyer on flippa a while ago and learned a ton about the types of questions buyers should be asking sellers. I thought to write this up so that you have some guidelines to follow even though there is no right or wrong way of doing this.

Determine what “YOU” want

Let’s say you are looking to buy an online business. You go to one of the broker sites mentioned above and then start going through listings. Or you hear about a “good deal” from a friend or in some online community.

What is the first thing you need to do ? You first need to decide what “you” are looking for and then go check that potential business listed for sale. There is no specific criteria of course but below are some guidelines to decide what you want:

• Do you want a product business only or do you want a business that is a mix of product vs service vs commissions vs ads etc. This will help you weed out the ones you don’t want. For example, if an online business is making $50,000 per month revenue BUT is 100% ad based from google adsense, is that something you want ? Are you good at using google ads/adsense already ? Do you want a business where primary (if not the only) source of revenue is from ads ?
• Do you want an established business vs a less known but high potential business ? Both have their merits and risks. You need to decide which one works for you. My personal rule of thumb ? This will be important for the valuation of the business. For example, a business could be pulling in $50,000 per month BUT if they have only been doing it for 5 months, how confident can you be that the business is indeed sustainable for a long period ? Perhaps the owner got lucky for those 5 months but has no way to keep doing it for a long haul ? So you need to think about this, really hard.
• Determine your approximate budget and stick to it (well sort of). For example, if your budget is \(50,000, there is no point looking at a business that is close to worth \)1,000,000. Of course, businesses overvalue themselves a lot but most likely (I hope) that a business listed for 1M won’t settle for something in the 50K range. Now I said stick to your budget “sort of”. What I meant is that if your budget is 50K BUT you found a really good one that is worth stretching an extra 5K or even 10K, it could be worth it for you. After all, the value of a business is not just about its revenue/profits/potential but also about what it brings for you. Keep this in mind.

Now, if you come across a potential business that is in line with these 3 primary requirements for you , you are now ready to ask more detailed/specific questions to the seller (in no particular order). Note that some of these question categories may seem an overkill for certain smaller online businesses but you should certainly keep them in mind:

Reason for selling

• why are you selling this business ?
• How soon do you want to sell ?
• What happens if you don’t get a deal that you want ?
• If given a choice to partner with someone to take some pressure off, would you rather do that or still want to sell this business ?

“Core” dependency for the business

• Does this business completely depend on any specific individual including the owner ?
• Do you have any full time employees other than the owner ?
• Do you use any contractors for this business ? Are there any who are regular ?
• Who are the key team members in this business ? (relevant if the business has a at least 2 or more employees)
• Does this business primarily depend on a 3rd party service ? E.g. a business built on Linkedin API etc. (Note: You should ask this upfront because this could really make or break a business and could be a major reason why the seller is looking to sell. Even if the business is profitable, it could suddenly die due to core dependencies being un-available)

Age of business

• When did you start this business ? Literally when did you register the domain and started working on this business ?
• Is your business incorporated legally ? Where is it incorporated ?
• When did you get your first paying client ?

What is included/not-included in the sale

• Domain(s)
• Hosting accounts/servers. Will the new owner need to get their own hosting and transfer the hosting or can they take your existing hosting account(s) ?
• social media accounts
• 3rd party services and licenses such as dropbox, vimeo, amazon etc. list all
• Employees
• Contractors
• Payment providers/gateways including stripe, paypal, authorize.net etc
• Are any of these accounts/artifacts listed under the personal name of the owner/partner or are they are all under the business name ?
• Are there any accounts that will be difficult to take over as a new owner ?
• Are there any accounts/artifacts/services that will require the new owner to get a new account instead of taking over existing accounts.

Client retention and attrition

• How many total clients do you have right now ? use this table below to get a detailed percentage of clients (approx is ok but seller must try to give an accurate estimate)

• How many clients do you gain on an average per month ?
• How many clients do you lose on an average per month ?
• Do you offer a trial period ? If yes, how long ?
• What % of clients convert from trial ?
• How long does a client stay with your business on an average ?

Revenue and sources

• Revenue % split between the following:
  • product
  • service
  • commissions via 3rd party like affliate, sponsorships etc
  • ads
• Please share revenue and cost data going back up to last 36 months.

Costs

• Who is the domain registrar ?
• Who is the host for the website/app ?
• What are the various forms of payments that you accept on your site ? credit card ? paypal ? direct debit ? ach ? Which payment gateway do you use for credit card payments? stripe? authorize.net ?
• will you provide ownership of existing payment account or will I need to use my own and then migrate existing clients to my account ?

Client Support

• how do you provide support to clients ? emails ? ticket system ? phone ?
• Do you have a dedicated website for support ? Is that website hosted on same servers as your product ?
• Have you created tutorials, knowledge base or FAQs for your clients to help with common support questions ?
• what is your support SLA with your clients ? 24-7 ? 24-5 ?
• what is the average amount of time spent on support on a daily/weekly basis ?

Intellectual Property

• Does your website/app use code not written by you or only for you ?
  • If yes, what are those types of code ? open source ? third party libraries ? premium plugins ?
• What percentage of the source code is split between proprietary and third party ?

Marketing and Analytics

• How many visitors do you get per month ? Google analytics ?
• How much marketing do you do every month ?
• Is your marketing primarily “inbound” i.e. people find you vs “outbound” (you go find people). What % is inbound vs outbound ?
• Do you do “content marketing” ? How much of that brings you traffic ?
• Do you outsource marketing or do you have in-house team including yourself ?
• Social Media marketing ?
• Do you spend any money on ads to market your business ? google ads ? facebook ads ? what is the conversion rate ?

Reputation and networks

• How well known is your business in the online community ?
• Do you have any backlinks for your business ? Can you share the list of any websites that talk about your business or have backlinked to you ?
• Are there any keywords for which you rank well with google search ? Do you have any pages/URLs hitting the front page of google ?

Previous disputes and litigations

• Did you ever have any legal disputes including litigations in this business that are now closed?
• Do you have any pending/open legal disputes right now including litigations ?
• Do you suspect any upcoming potential legal disputes so far with your business ?

Transition after the sale

• After the sale, will the seller be around to help the new owner ? -If yes to above, how long will the seller be around ? How many approx hours per day can the seller help with transition ? Will this include weekends ?

Trademarks and Patents

• Any registered trademarks ? What jurisdictions ?
• Any patents ? Pending or otherwise ?

Lawyer and Accountant

This can be optional for a small transactions (say a $100 sale for a domain) BUT If you are buying a serious business, don’t do it all by yourself. Have a business lawyer look at anything you sign. Talk to an accountant who can advise about potential tax consequences when you buy a business.

Ok, now off to writing another post on “how to sell an online business”