Why seller financing makes sense

Why seller financing makes sense

Why Seller Financing might make sense for you when selling your business

Many buyers of businesses are looking to invest in businesses which they can afford to purchase outright, even if this involves short-term Earn-out agreements, which typically are not arranged primarily for finance shortfall reasons. (The many advantages of Earn-outs are covered in a recent Flippa Blog article). However many of those looking to build a portfolio of businesses or to acquire a seriously high-value business may need to source finance.

Traditional business loans from banks and other major lenders are difficult to obtain for business investment. Currently banks are highly risk-averse and even when lending for more conventional business purchases they will be restricting lending to home equity based loans. Amazingly, after all these years of online business progress, the major banks still tend to be out of their lending comfort zones in the business website world, not really understanding or being confident about the way it operates. One of their main reasons for securing the loan with home equity is that banks cannot secure the loan against the physical assets of an online business and they are reluctant to place a value on ‘goodwill’ or business profitability potential.

We’ll cover SBA loans in a future blog post where the situation is entirely different again.

Unsecured loans from small business loan specialists, including online lenders, are more readily available but generally come with unattractively high interest rates and often quite burdening fee structures. Private equity firms which finance online business acquisitions tend to be interested only at high-value levels, and with lots of strings attached including an intrusive degree of business control or oversight.

Why you should consider seller financing

Whether you are a buyer or a seller, give serious thought to the mutual benefits of vendor financing. As a seller, if you are definitely in need of the full purchase amount immediately then of course this arrangement is out of the question. However, you will greatly increase the pool of potential buyers and the purchase price achieved if you are able to offer vendor finance for an agreed proportion of the purchase price. Unlike an Earn-out agreement which is usually limited to a minor proportion of the cost of purchase, does not entail interest payments, and is generally paid out in full within an agreed number of months, seller finance funds a proportion of the purchase with a longer-term payout period and with interest charged on the remaining balance until final settlement.

To illustrate, the owner of the business (owned outright and with no existing mortgages or liens attaching to the business) agrees to a sale price of $100,000. The buyer who has only $40,000 available as deposit, after judiciously retaining sufficient funds for immediate operating expenses and contingencies, has been enticed to pay a premium price because of the availability of seller finance. A reasonable interest rate to be applied to the outstanding monthly balance is agreed and a repayment period of typically around 5 years is determined.

The interest rate can be fixed, or floating and indexed to the official rate. In reasonable fairness to both parties, because the loan remains essentially unsecured the rate is initially set commensurately higher than major bank lending rates for business loans. In the simple illustration above, given the current interest rates and the buyer paying the seller a monthly instalment of $1000 plus the applicable monthly interest, the vendor would receive an income stream averaging around $15,000 annually for the five years. The bottom line for a seller who is in a position to defer full settlement is effectively a significantly higher final sale price, while the buyer is able to afford an acquisition which otherwise would have been out of reach.

It goes without saying that a legally binding contract is necessary for this kind of vendor financing arrangement, whereas Earn-out agreements typically rely on a less formal memorandum unless they are particularly complex or involve six or seven figure sums.

The mutual advantages of seller finance

While for the buyer the obvious advantage as already stated is the capacity to access an business business purchase which could not be afforded if the entire amount was required up-front, there is an additional benefit in the continued interest of the seller in the success of the business. Further, the willingness to provide vendor finance confirms the seller’s confidence in the business model and its ongoing viability and profitability.

For the seller, provided access to 100% of the funds from the sale is not required immediately for other purposes, then the regular income stream with an interest rate which is fair and reasonable but actually quite favourable to the seller is a great advantage and effectively raises the actual sale price achieved. Because the pool of prospective buyers has been increased by the availability of vendor financing, the agreed purchase price is more likely to be at a premium level also. Additionally in some circumstances, there may also be taxation advantages in the delayed payment of the full sale proceeds; this is a complex matter and as a seller you will need professional tax advice on this aspect, but it’s something further to consider.

A win-win solution to a business purchase arrangement

While this will not suit all sellers or buyers, seller finance is certainly an option which should be considered. In fact, it’s such a mutually beneficial situation that a rapidly increasing proportion of online business acquisitions are now financed on this way. For most vendors, offering seller finance is a sure-fire way to seal a deal.

Overall 2019 is emerging as a highly promising year for business investment, and we can expect to see exponential growth in seller financing arrangements.

How does Broker Matching work on Flippa?

How does Broker Matching work on Flippa?

Flippa’s business broker network

Flippa partners with a world-leading network of business brokers. Each of these brokers has been reviewed by Flippa and hand-picked to represent our ecosystem of high-value business owners. We’ve chosen them because we believe they can help you better prepare your business for a sale, liaise with buyers and ensure you get the most out of the Flippa platform. When you join and choose to list your business for sale on Flippa we offer two options; either ‘Self Service’ or ‘Broker Matching’. The big difference between the two relates to the value of your business. Businesses over a certain value will tend to require a little more time and effort to sell and a broker is there to help. They’ll take on the process. They will work review your valuation, work with potential buyers, help prepare critical paperwork including the necessary prospectus, field offers and manage the DD process which can often be time-consuming and cumbersome.

So how does Broker Matching work? 

If you choose Broker Matching Flippa will:

1. Review and categorise your business Flippa will ensure your business meets the relevant criteria, request some additional detail including a current accountant verified P&L and ultimately categorise your business by size.

2. Match you up with up to three business broker This part of the process involves us reviewing our broker profiles and ultimately picking the most relevant broker for you. We’ll tell them a little bit about the business and review their fit.

3. Invite brokers to review your business and register their interest Once they’ve been assessed for fit we’ll invite them to formally review your business. They’ll sign an NDA and be given access to some key data.

4. Set up a ‘Meet the broker’ call Finally, it’s your chance. Talk with up to three brokers and make your decision. Once you have decided your listing will be converted to a ‘Broker Managed’ listing. Your success fees are fixed unless they have otherwise been negotiated, and from there, brokers will handle the Flippa marketplace and associated services.

If at anytime prior to your listing being converted you wish to opt for self-service instead simply contact [email protected]. Good luck. It’s a big decision to sell your business and regardless of the service you select Flippa will be with you every step of the way.

Build it and they will come: A myth busting guide to starting a business

Build it and they will come: A myth busting guide to starting a business

Today’s post is by Matt of Aussie Domainer, a web designer and blogger from Melbourne, Australia. Find him on Twitter: @ace_sites

Sometimes when you get a great idea for a business or website, you can’t help but think “If I can just build out this quality idea, people will surely flood to the site by the thousands!”

It seems logical. Why wouldn’t people be rushing to take a look at your wonderful, innovative idea?

Unfortunately for some, it’s not 1999 anymore. Back then (if you believe what we hear from early Internet veterans who were active at the time), all you had to do was throw up some content and you’d have people finding it all on their own. If you have much experience in 2013, though, you know how that doesn’t work anymore. There is so much content and so many distractions fighting for everyone’s attention online that it simply doesn’t cut it to build a project and hope that it will market itself.

You will have to put in the hard yards to get your project off the ground.

The web is estimated to consist of about 50 billion indexed pages. As you can imagine, it’s hard to stand out in a crowd that big. Just building the idea will rarely be enough. “Build it and they will come” simply doesn’t work online.

What does that mean? It means it’s time to roll up your sleeves and begin the hard work that it takes to build up a steady flow of traffic.

So what can you do to get the traffic flowing? You have to pace yourself, avoid distractions, and invest in your project.

Keep a realistic timeline

In my experience, slow and steady really does win the race when it comes to building a website. Take traffic for example: when I first started my blog, traffic was literally non-existent. I’m still pretty sure there were exactly zero readers for my first couple of posts. Over time, a couple of visitors showed up (I have no idea how they found the site), and as the months went on a small but steady flow of readers started showing up.

Imagine your new blog or website as a remote city in the middle of the desert. There’s only one road going into the city, and it’s called the “Direct Traffic Highway.” The only way people can find their way to your content is if they happen to type the exact domain name in to see what’s there. Unless you own a truly amazing domain name that receives heaps of type-in traffic, you probably won’t get too many hits this way. So you have to build new roads into your city so people have different ways of finding it. As you create new content for your site that content begins to get indexed by the search engines. Every time some content of yours is indexed, it’s like a new road is built leading from “Googletown” to your website.

If people enjoy your site, they might write about it elsewhere or create links from their site, these are like roads too. Over time the flow of traffic to your site increases which means the amount of people talking about your site and spreading the word becomes greater and greater until what started as a deserted site with no visitors snowballs into a site with a regular audience.

It takes time and commitment to keep creating content for your site, especially during the early phases when you feel as though you aren’t getting many results.

In order to stay focused on your business for the time it takes to reach a more successful place you are going to have to:

Avoid Shiny Object Syndrome.

Shiny thingsImage Credit: Ken Douglas

Oh, so many months I have been a victim to the horrors of shiny object syndrome!

Shiny object syndrome is when you can never focus on one project because you are constantly getting new ideas and trying to do everything at once. You end up getting pulled in so many different directions and splitting your focus on so many different projects that you actually end up getting nothing done- even though you feel like you’ve worked super hard!

For me this manifests itself in the form of development ideas. Every few days I check the domain name aftermarkets to see if anything interesting is dropping. When I do this I often see a domain name that sparks an idea. Maybe I’ll see a domain name ending in “forums” and I’ll think “I could build a forum on that domain name!”

So I’ll buy the domain name and start building the forum. Maybe I’ll get the forum running and looking nice and I’ll be ready to start marketing it so that it can gather users.

But then I’ll see another domain name for sale… Maybe it’s a domain name ending in “blog”. Suddenly the furthest thing from my mind is the forum I’ve been working on for a couple of days. All I can think about now is the new blog idea which I simply must get started on right away!

Of course, before I get the chance to really get that blog going, I’ll have seen a couple more domain names that I’ll be chasing after and the blog site will be left abandoned.

If you have no idea what I’m talking about, consider yourself very blessed! Living without “shiny object syndrome” means you’re the type of person who probably gets stuff done. You come up with one great idea, put the pedal to the metal and stick with it week in week out until you’ve built an empire!

On the other hand, if you’re one of those people whose mind feels like it can’t focus on any one project for more than a few days, you probably have Shiny object syndrome. Welcome to the club.

I have found that an effective way to counter this problem is to create a list of priorities. Put your most important tasks at the top of the list and go down from there. The rule is that you are not allowed to work on something until all the tasks above it are complete. This way you will be forced to focus on the most important tasks first.

When I feel myself trying to focus on too many things at once, I open Wordpad and write down all the things I have to do, then I rearrange them in order of importance. That’s how I channel extra enthusiasm. This has also helped me to stop procrastinating: it’s so much easier to get off Youtube and start working when you have a defined task written down.

Whenever that exciting new idea comes into your mind and starts demanding your full attention simply write it on the list- now instead of pulling you away from more important things, it will inspire you to get those other things done so you can be free to try the new idea.

Unfortunately, sometimes you simply have to decline some very good ideas because they would take up too much time that would be better spent on your flagship project. Remember the concept of opportunity cost: you can only spend time one way. Wouldn’t you rather spend it on your main project and get ahead?

Invest in your idea.

If you believe in your idea, there is no reason you shouldn’t invest in it.

I remember hearing of people who had a great idea, but they were so desperate to cut costs that they didn’t even want to pay for hosting, opting instead for shoddy free hosting and ads they don’t benefit from. Doesn’t a good idea deserve better?

In my town there is a fairly high turnover of retail shops. New coffee shops and other boutique stores pop up all the time. Sometimes they last, sometimes they are gone within half a year.

The costs of “having a go” with a real life brick and mortar shop are massive! Let’s take a simple coffee shop as an example. Let’s say you decided to start your own coffee shop in your town. Some of the costs involved with giving your business a shot might include:

  • Renting a property
  • Buying thousands of dollars of equipment and furniture
  • Buying all the coffee stock, mugs etc.
  • Paying staff an hourly rate to man the shop

And that’s all before you sell your first cup of coffee!

ed hardy & splash one IImage Credit: Thomas

Imagine you treated your online business venture the same way you would have to treat a brick and mortar venture. That would mean saving up and actually investing in your business idea’s success: Investing in a quality domain name even if it costs more, paying to market your business properly, being meticulous about the quality of your content (after all, if a coffee shop serves bad coffee, who will return or recommend the place to their friends? Your website’s content IS the coffee: if it tastes bad no-one will return) and being willing to take some risks to build your business.

In other words, avoid the “spare all costs” mentality. That alone will separate you from the vast majority of online businesses.

When I first started buying domain names, I was a pretty cheap buyer! I was still new to the whole concept and the thought of spending a lot of money on a domain name wasn’t very attractive. That limited thinking probably caused me to miss some great deals at the time!

When I had an idea for a website, I would only look to hand register an available name rather than purchase one off a domainer or try bidding for one in an auction. For some reason, even though I’d be willing to spend money on real life items that were not assets (like tickets to football games, video games, and so on) I wasn’t willing to spend much on something that could actually appreciate in value like a domain name!

So I ended up with many average quality domain names for my sites. When I would sell the sites they would do okay- sometimes making a profit, but they weren’t particularly special.

Over time though I started spending a little more… I still remember the first time I bought a domain name for a few hundred dollars at auction, I had originally told myself “I’ll spend $100 max”, but at the end of the auction things got heated and I ended up spending a few hundred to win it. When the auction closed I thought “What have I done?! How could I spend hundreds of dollars on A DOMAIN NAME?!” At the time I was simply not used to spending money on something so intangible, but it was necessary to do so in order to have higher quality sites. Who else here can relate to this mild panic when buying a mid-end domain for the first time?

Have fun

It seems counterintuitive, but realistically it’s the best way to give your business a chance at long term success. Sometimes you might be tempted to start a business idea because you think it would be wildly profitable, even though you are not passionate about the idea itself. This might not work out for you though.

If you don’t like cars, don’t start a blog about luxury cars. Maybe it is a profitable area of business, but the odds that you will be around to build it up are not likely. You will get so bored after the first week that there’s virtually 0% chance you will continue posting to that blog with passionate, quality insights about cars. If however you are a total motor head who loves cars, then a car site is right up your alley! Due to the fact that you love cars so much, even when things seem slow and you go through some rough patches with the project, your love for the subject matter will keep you writing and persisting until you have built something great.

So do something that you personally love and enjoy, something you’d probably do just for fun, even if it didn’t have the prospect of being a great business.

Image credit: Professor Bop

Future Profit: The #1 Factor in Buying a Business

Future Profit: The #1 Factor in Buying a Business

Today’s post is by David Gass 

Experts will debate what the most important factor is when buying a web business.  Some may say it’s the niche, while others argue it’s the traffic or monetization method.

There are several factors to look at when buying a website and all should be considered.  Factors such as:

  • Niche
  • Type of Website
  • Number of Unique Visitors
  • Monthly Revenue and Profit Numbers
  • Page Authority
  • Page Rank
  • Traffic Value Based on SEMRush Reports
  • Page Views Per Visit / Bounce Rate
  • Organic Traffic or Paid Traffic

You know the drill. If you’re a regular reading of the Flippa blog, you’ll know that website valuation is discussed very frequently.

However, all of these factors are based on the history of the website.  Although the history does help with due diligence, it is not how a website buyer will make their money after purchasing the website.

A website buyer’s most important factor in buying a website is future profit.

What Really Matters

Future Profit is the total of the monthly profit from the site’s activities while the buyer owns the site, plus or minus the profit from selling the website at some point in the future.

If a website currently generates $600 in monthly revenue, but you have the knowledge, skills and time to improve the conversion rate of visitors in order to generate $900 per month, your Future Profit will be higher than the site’s historical earnings would indicate.

Although many website buyers’ strategy is to buy, hold and grow with no intention of selling, the future profit must include the value of the website in addition to monthly profits.  The value of the website is not truly realized until the website is sold at some point in the future.

What’s your site’s future profit?

Knowing the future profit of a website is impossible, unless a buyer finds a crystal ball that can see into the future.

For now, the best indicator of Future Profit is still past performance.  However, by basing a decision to purchase a website on past performance alone, with the many outside factors that can change a website’s traffic flow and monetization, it’s very difficult to be 100% on target.

All the factors mentioned above such as niche, type of website, page authority, etc. are important to look at, but they don’t tell you exactly what a website’s performance will be next month or next year.

In my opinion, the best indication of future performance is the experience of buying, running and selling a website with similar characteristics to the site a buyer is looking to purchase.

There are two ways to gather this experience:

#1 – Buy a smaller website in a growing niche and use the experience for future purchases

Obviously, this provides a dilemma.  There is still the first website that needs to be purchased on blind faith and any time a buyer wants to purchase a site in a new niche, they need to start over by buying another small site with no experience in that niche.

Based on my experience, I would guess this is what 99% of buyers are currently doing.  They buy their first, second or even tenth website in a new niche.  Each time they do this, they’re starting over with gaining experience in that niche to help determine future profits of any new website they want to buy.

#2 – Use the experience of others

Find others willing to share their experience of buying a website and the results they’ve had with the site.  In this case, a buyer is learning from the experience of another website buyer.

Where are these buyers?  Right on Flippa!

Flippa lists all previous auctions with the sale price and all data for the sold website at the time of the purchase.  A website buyer can contact the current owners of these websites and ask if they have an interest in selling the site they bought.  This works best when approaching someone who purchased a site at least 6 months prior.

If the seller has an interest in selling, ask them if they will provide the necessary due diligence data to purchase the site.  All the data will help in determining what the website’s traffic and profits were after the initial purchase on Flippa.

The future profit indicators are easy to determine now. Simply compare the new stats since the sale with the initial stats from the Flippa auction.  If a deal is put together, great.  The website seller can list the site on Flippa as a private sale and have the buyer make an offer on the listing to win it.

Putting it all together

By buying a website in a similar niche, with similar traffic and monetization methods, this comparison will help dramatically in determining the future value of a potential website purchase.

After researching a niche, building some experience in it and seeing where your strengths can help grow revenue, you should have a much better idea of how long it will take you to recuperate your investment. This helps explain why different investors will have such different valuations of a same website.

5 Must-Listen Podcasts For Entrepreneurs

I don’t divide the world into the weak and the strong, or the successes and the failures…I divide the world into the learners and the non-learners.” – Benjamin Barber

Most successful entrepreneurs seem to share a curiosity about the world and an interest in finding out as much information as possible. While books and blog posts are helpful, there’s a ton of value to be found in listening to podcasts.

Why Podcasts?

They’re effectively internet talk radio shows that are highly targeted to specific niches. They’re easily downloadable to your phone/laptop/tablet and provide an excellent source of entertainment, mindset development, and strategies that you can apply to your business.

I’ve only been listening to podcasts for a few years, but I’m able to fill some of my “downtime” in the car, at the gym, etc with awesome information. When you’re struggling with procrastination, knocking out a podcast episode can often help you focus and bring yourself back to grinding through the work you need to complete. It can also help with that spark needed for some of your more creative work.

I wanted to share with you five of the podcasts I listen to regularly that can help you develop the right mindset, focus on proven strategies, turbo-charge your motivation, and more!

#1 Mixergy – Andrew Warner

Mixergy Podcast

Details: Mixergy is a high-impact, cut-to-the-chase interview show where Andrew sits down with successful entrepreneurs to help and teach ambitious upstarts. He’s had high profile guests on his show like Seth Godin, Paul Graham, Matt Mullenweg, and more.

Why You Should Listen: Andrew’s the master at getting right to the heart of the issue and telling a great story. He doesn’t shy away from tough questions for his guests and there’s something new to learn and implement in just about every episode. The show is extremely well produced and he takes his mission of providing helpful information to other entrepreneurs very seriously.

Favorite Episodes:

Maids In Black – Interesting interview where a guy copied an idea from others to bring a traditionally offline business model online.

Pat From SmartPassiveIncome – Hard-hitting and fascinating interview with a very successful online blogger and affiliate marketer.

Max Simon – What right does a failed entrepreneur have teaching others? This interview featured a bunch of tough questions the show is known for!

#2 Lifestyle Business Podcast – Dan Andrews and Ian Schoen

 

Lifestyle Business Podcast

Details: Dan and Ian have built an honest-to-goodness eCommerce business while traveling the globe. They freely share business ideas, entrepreneurial hacks, and give a glimpse into a lifestyle business that strives to be and do more.

Why You Should Listen: The hosts have charisma and clearly recognizable business chops. They share the nuts-and-bolts of building a bootstrapped business that doesn’t require Angels, VC funding, or $1M+ in the bank. Real-world strategies, tactics, and business philosophy for adventurous entrepreneurs.

Favorite Episodes:

Rip, Pivot, And Jam…how to start a business – Hosts cover their best method for breaking into a new industry. Updated episode here

Business Partnerships Are Like Marriages – The upsides and downsides of being in a business partnership (My business partner and I are on this episode as well!)

7 Habits Of Highly Effective Lifestyle Business Owners – What habits are important? Which can you emulate?

#3 Foolish Adventure Podcast – Tim Conley

Foolish Adventure Podcast

Details: Tim’s show provides a laser-like focus on helping new entrepreneurs find more Time, Income, and Mobility. Show episodes cover just about everything having to do with online business and Tim’s breadth of knowledge in the industry is a welcome break from the fake-it-till-you-make-it crowd.

Why You Should Listen: Tim hones in on the “business” approach to marketing rather than focusing on scammy, get-rich-quick schemes. He discusses real life experiences and strategies he’s applied to make offline businesses successful online.

Favorite Episodes:

Transition To New Industry Without Risking Everything – Balancing family and business concerns.

Building Your Content Marketing Playbook – Getting your marketing right before your business gets rolling.

Turning Your Business Into An Asset – An interview with James Schramko on building a systems-based business.

#4 Web Domination Podcast – Dan Norris

Web Domination Podcast

Details: Dan runs a no-fluff podcast that cuts through the noise to deliver highly-impactful insights and strategies related to content marketing. His focus on business metrics help track exactly where your best efforts are applied and he gives transparent and detailed information on his own journey through his episodes and the blog.

Why You Should Listen: I don’t use this word lightly, but Dan is an expert at content marketing. His in-depth and well-polished blog posts at Inform.ly always get a ton of traction and he’s a go-to for his peers and industry insiders. He shares all of his secrets, tactics, and strategies in his no-fluff episodes.

Favorite Episodes:

Strategic Content Marketing – Dan sits down with Joe Pulizzi of the Content Marketing Institute to discuss creating compelling content

Bloggers Vs. Content Marketers – Interview with Tim Conley and a great episode on why so many bloggers fail to make money

Making Your Content Actionable – How to get your readers/listeners/viewers to DO something

#5 Entrepreneur On Fire – John Lee Dumas

Entrepreneur on fire podcast

Details: A relative newcomer to the space having only launched in September, 2012, John bring a high-energy show every single day of the week! He’s interviewed high-profile guests such as Gary Vaynerchuk, Barbara Corcoran, Tim Ferriss, and more. He asks the same questions of every guest and many of the answers are insightful.

Why You Should Listen: John’s a great example of someone dedicating themselves to the craft and absolutely crushing it just a few months later. He brings a curiosity and interest to all of the interviews that’s infectious and I really enjoy the energy he brings to the show.

Favorite Episodes:

Rand Fishkin from SEOMoz – Whitehat SEO with the best in the biz.

Drawbacks Of Trading Time For Dollars – The benefits of building a business.

Neil Patel from KISSmetrics – Solving the problems of others and giving them what they want.

Honorable Mentions:

There’s only so much time in the day, but here are a few of the other podcasts I have queued up in my (Android) Doggcatcher podcast player:

Internet Business Mastery – “Old School” internet business podcast with Jeremy and Jason.

Bright Ideas Podcast – Trent Dyrsmid with bright ideas for SMB’s and marketing agencies.

MultiMedia Marketing Show – Jake Hower showing you how to crush it with multimedia online.

Build My Online Store – Have or want an eCommerce business? Terry Lin’s your host – great stuff here.

The Awesome Podcast – Newcomer Tim Paige brings a ton of energy and enthusiasm – an up-and-coming show thatís definitely worth a listen!

Now…over to you! What shows do you have queued up in iTunes that you love? Did I miss any of your favorite shows or episodes? Let us know in the comments below – We’d love to check them out!

Photo credit: Nick Southall