Buying an Online Business | Closing Guide

<H4>Congratulations!</h4> If you are reading this article you're in the process of selling your business, seriously considering it OR you are buying an online business. Selling and buying a business has been described as an intense emotional experience comparable to sending your children off to college. You know the timing is right and the choice to part was good for all parties involved but you are parting with “your baby” that you have started and grown with ample doses of “blood, sweat and tears.” <br><br> The purpose of this article is to even the playing field so that the buyer and seller are both prepared for the transfer process resulting from a successful auction and sale on venforo. The information contained herein has normally been the purview of business brokers. With a successful business auction and sale on venforo, dealings will normally be carried out between the online business owner and the successful auction bidder. We are providing a checklist so the process from the close of a successful auction to the final transfer of assets is smooth. We want the sale to have minimal misunderstandings regardless of whether this is your first or fifth business you are selling or buying. By consciously considering all the aspects of this checklist it will encourage both parties to minimize the emotion related to a business sale. An uninformed buyer and/or business owner is not an opportunity to take advantage but rather an area of potential concern. <br><br> For post-sale success, level the playing field! <br><br> <h4>First, a Word about Business Brokers</h4> Business brokers play a very important role in the sale of established businesses. Complex deals involving significant parts to a business deal and asset transfer demand the services of a qualified internet business broker. So brokers can bring buyers and sellers together and that service will continue to be crucial to many business owners and buyers. <br><br> But if you have taken the significant step of buying or listing an internet business for sale on venforo and have had a successful auction you have determined it was in your best interest to buy or sell the web property directly. At venforo, we believe that self-actualized entrepreneurs who have developed an online business or are buying one recognize that using an auction marketplace enables them to mutually optimize return on investment by dealing directly. This may require more time and effort on the part of the buyer and seller but the return on investment by saving broker’s commission and dealing direct is significant. Experts say the selling process typically takes 6 to 12 months to complete. With the venforo marketplace and following the following post sale checklist, both buyer and seller working together should shorten this estimate significantly. <br><br> <h4>No Keeping Secrets – the Non-Disclosure Agreement & Personal Financial Statement</h4> If you have completed a successful auction and have not yet exchanged a signed Non-Disclosure or Confidentiality Agreement (NDA), we recommend doing so immediately upon completion of the venforo auction or BuyNow sale. A standard NDA agreement can be modified simply to meet the needs of both buyer and seller. It is important to have it in place for the upcoming desired free flow of information between the business owner and buyer. The Agreement should protect the confidentiality of all non-publicly disclosed information on the business from dissemination beyond the appointed agent and advisors of the 2 parties. <br><br> Depending on the size and nature of the deal, the buyer should be prepared to provide a verifiable personal financial statement at this time. It is a justifiable concern by the business owner that the buyer has the financial wherewithal to meet the obligation of the winning bid and complete negotiations for the sale of the business. <br><br> <h4>Don’t go it alone - Hire Qualified Advisors</h4> If this the first time you have bought or sold an online business you may not have developed a relationship with a lawyer. It is very important to have legal assistance in the development and final negotiations of the Business Purchase Agreement and other legal documents. <br><br> We recommend finding a lawyer who has experience in small business contracts preferably with previous experience with online businesses. Lawyers like to talk to each other and if both parties attorney’s are experienced at small business contracts this will facilitate a smooth contract negotiation and closing. Qualified attorneys with experience in this space will build in protections into the legal documents for their respective clients. This is very important for both the buyer and business owner during the negotiation and post-sale. <br><br> Although we at venforo are very much in favor of saving costs related to the post sale process, you should not just hire your “brother-in-law” attorney who helped you with your home sale to save money regardless the size of the deal. Control total legal costs by being prepared. During the vetting process of finding an attorney don’t be bashful about getting an estimate from the prospects on what the total costs should be for the negotiation and closing. Explain as much as possible about the nature of the prospective deal. If a lawyer prospect balks at providing at least a range of estimated of costs move on. Ask other business owners or your accountant for some recommendations for qualified lawyers in your area. <br><br> One last word on attorney’s – their invaluable utility in the post sale process comes from their legal advice. Many small business attorney’s are very comfortable offering business advice which should be certainly considered. But on business decisions, the buyer and seller should consider this advice as vital input but not the decisive opinion on non-legal matters. Business decisions are the purview of the business owner and buyer. <br><br> Most online business owners have an accountant they meet with at least once a year at tax time. During the due diligence process the need may arise to tap their expertise inn preparing support documentation to satisfy the requests of the buyer or advisors. As a buyer if you are not confident in evaluating financial documents or the tax implications of certain aspects of the proposed deal, consult with a CPA or other qualified financial advisor. <br><br> With your professional team in place you are now ready to proceed to the next aspect of the post-sale process… <br><br> <h4>Getting Real – The Letter of Intent</h4> A successful auction or BuyNow sale is a demonstrative measure of the buyer’s commitment to purchase the listed business. In accordance with the venforo Terms of Use Agreement , the buyer has a contracted obligation to purchase the web property at the winning bid price and enter into a good faith effort to develop a mutually agreeable Final Purchase Agreement. This obligation should be formalized with a signed Letter of Intent (LOI) issued by the buyer as soon after the close of the auction as possible. The LOI will take the business off the market and provide the buyer exclusivity, officially. <br><br> The LOI should include a reasonable time frame to complete the final sale and depending on the size and nature of the deal, a refundable deposit (Earnest Money) held by a third party in an escrow arrangement. Besides the preceding points, the parties should consider including the following terms in the LOI- <br> <ul class="bulletList"> <li>Description of organization/corporation to be purchased</li> <li>Winning bid/Purchase price</li> <li>Contingencies including financing</li> <li>Preliminary terms of the deal (i.e. down payment, buyer financing terms, required post-sale seller training, etc.)</li> <li>Specific but mutually amendable dates for - signing/returning the LOI;<br> - delivery of buyer and seller requested pertinent business/financial documentation;<br> - completion of due diligence;<br> - Date of closing<br></li> </ul> <br> Although there is an agreed obligation to pay the bid amount and transfer of business assets at the end of a successful auction, the LOI should include an instruction that the business owner continue to carry out business in accordance with previous practices. This acts as formal reminder to both parties that nothing is finalized until money exchanges hands and assets are transferred at closing. <br><br> <h4>Questions, Questions, & More Questions – the Due Diligence Process</h4> A successful auction and sale normally indicates that the pertinent information for the business has been provided on the venforo listing. This initial information may have been supplemented by responses to buyer requested questions. As a business owner you may be under the false assumption that all the buyer’s questions may have been addressed. Guess what? You are wrong and you should be happy to be wrong as the onslaught of buyer questions post-sale is a positive indication that the deal will be consummated at closing. <br><br> During due diligence the business owner should be prepared to provide (and the buyer should be ready to review) all pertinent information and documentation supporting the business data posted in your listing including: <br><br> <ul class="bulletList"> <li>Copies of up to past years P&L statements, Balance Sheets preferably complied by a CPA;</li> <li>Copies of most recent signed Federal & State tax returns and submissions;</li> <li>Access to all general ledger transactions and supporting documents like customer and vendor invoices;</li> <li>Vendor pricing/drop ship arrangements both formal and informal;</li> <li>Customer pricing/shipping arrangements both formal and informal;</li> <li>Full web-based access to all traffic analytics to confirm stated web site metrics;</li> <li>Customer and Vendor lists <strong><i>(see below)</i></strong></li> <li>PayPal, Adsense, Affiliate & Merchant bank credit card statements and agreements;</li> <li>Fulfillment company statements and agreement;</li> <li>Staffing and Management requirements</li> <li>Continuity of vendor and customer relationships</li> <li>List of all assets included in the sale, tangible and non-tangible including - Intellectual property like domain names and trademarks<br> - Furniture and equipment<br> - Inventory (on site and at fulfillment companies)<br> - Facility and/or equipment leases<br> - Employee contracts.</li> </ul> <br><br> Finally, there will (and should be) several confidential questions related to growth potential, operational procedures and marketing programs. Be prepared to open your books <strong><i>and doors</i></strong> to the buyer and their authorized agents during this process. <br><br> One question that should be asked and prepared to be answered is “Why is the business being sold”? If the business is struggling this might be obvious but if the web-based business is established (ie. > 2-3 years old) and has positive cashflow the business owner better be prepared with a valid and sincere response. The reasons can be varied as the reasons for starting or buying a business in the first place - <br><br> <ul class="bulletList"> <li>Personal or family illness</li> <li>Partnership disagreements</li> <li>Owner burn-out</li> <li>Another unrelated opportunity arising</li> </ul> <br><br> The answer to this question should not be filtered by a third party. The business owner should explain to the buyer the reasons for selling the business directly. If the buyer senses insincere or inconsistent responses to this question consider this a red flag disserving of more investigation. Honest disclosure is the best policy to avoid potential problems in the post-sale process. <br><br> <h4>The End Game – The Business Purchase Agreement</h4> If both business owner and seller have followed the above checklist (exchanged an LOI and hired qualified attorneys) the development of the final Purchase Agreement should be progressing during the due diligence process. With the LOI as an effective guide, the Agreement can be developed with some additions and enhancements to ensure binding conditions on both parties. If due diligence has not found any discrepancies or areas of concern for either buyer or business owner, the target closing date should be determined. <br><br> Qualified attorney’s will provide the myriad legal intricacies required for the specific business sale. As buyers and sellers, the following matters in the Purchase Agreement should be considered: <br><br> <ul class="bulletList"> <li>Clear definition of who or what is buying and who or what is selling the business</li> <li>Purchase Price and how the amount is to be paid (all cash- cashiers check or wire transfer, promissory note, future consulting fees, buyout calculations, etc.)</li> <li>A precise listing of what is being sold. Asset sales should have a complete listing of all items being sold including intellectual property, like domain names and brands. Stock or LLC membership interest transfers need to clearly state same. How adjustments for any inventory posted in your venforo listing and other variable assets are handled at closing needs to be clarified.</li> <li>No compete clause – The length of time the seller is willing to agree not to participate in similar business activities/markets should be negotiated early during the due diligence process and formalized in the Agreement.</li> <li>If any post close training is included, the time, location and responsibility for travel expenses will need to be agreed and formalized.</li> <li>Tax treatment of ownership and asset transfer</li> <li>Interstate and international transfers require agreement as to which country or state’s laws will be interpreted and enforced. This matter is important if future misunderstandings between parties require legal interpretation by a court of law.</li> </ul> <br><br> <h4>Closing the Deal – Business transfer time</h4> Prior to the date of closing and after the Purchase Agreement has been finalized a checklist for the business transfer needs to be developed by the owner and reviewed with the buyer. A determination of when the information is to be shared pre-closing and during post-closing training should be mutually agreed at this time. The following is a list of matters that should be included on the checklist - <br><br> <ul class="bulletList"> <li>Integration of shopping cart or payment processing with buyer’s credit card processor, Paypal account and/or bank account for deposits</li> <li>Toll free number ownership transfer</li> <li>Domain name(s), software and other intellectual property ownership transfer</li> <li>Key Customer and Vendor books @</li> <li>Email server, website administrative and third party access passwords, such as Google, Facebook, Twitter, Amazon Seller Central, affiliate.</li> <li>Physical count, value and transfer of inventory, arrange for shipping (?)</li> <li>Verify any furniture, electronics and fixtures, arrange for shipping (?)</li> <li>Familiarize buyer with customer and vendor order processing and invoicing, payment processing.</li> <li>Familiarize buyer with website administrative functionality</li> <li>Familiarize buyer with SEO, PPC, advertising, social media and marketing programs</li> <li>Revise any copy on website that is impacted by the ownership change</li> <li>Vendor and key customer ownership transfer announcement, if applicable</li> </ul> <br><br> NOTE! Some of these transfer matters are more problematic then apparent so make sure sufficient time is set aside for the set up of new accounts and the transfer. <br><br> @ An often overlooked aspect of the business ownership transfer process is the key customer and vendor books. This is particularly important for ecommerce or web-based businesses as this information can be in variety of online and offline locations, including inside the business owners head. <br><br> The vendor book should include a list of all vendors from office supplies, shipping companies to web hosting company and SEO consultants. The information contained in the book is one of the most important assets of your business and should be organized in a manner that is indicative of its value. Likewise, the key or recurring customer book should contain similar information for major customers. An actual hard copy is recommended but posting in a secure, accessible location online will also suffice. <br><br> Included in these books should be the following: <br><br> <ul class="bulletList"> <li>Contact name(s), address and phone number</li> <li>Product or service categories and items customer regularly purchases or vendor supplies.</li> <li>Pricing/discount program</li> <li>Credit terms (net 30? early payment discount?)</li> <li>Order processing procedures (online? offline?)</li> <li>Any special arrangements (pricing contract, shipping minimums, etc.)</li> </ul> <br><br> Having this information readily available during due diligence and ownership transfer should enable a smooth transition to the new ownership. <br><br> Depending on the size and complexity of the deal, the buyer’s and/or seller’s attorney’s may need to be present at the time of closing. Any adjustments to the total price called for in the Purchase Agreement like changes in inventory value since the due diligence review can be agreed and calculated at closing. Final legal documents are signed signifying the transfer of assets or ownership and payments are made in accordance with the Agreement. <br><br> <h4>Passing the Torch - Post closing considerations</h4> Congratulations! The buyer is now the hyped up new owner of the web business and the seller has transformed previously shed blood, sweat and tears into cash and ready for a new world. Your jobs are over… well not quite. <br><br> Besides any agreed post-closing training, seller financing or consulting arrangement, communication between the seller and the new owner may be ongoing for quite some time. Most business sellers want the new owners to be successful and see the business flourish. The new owners will have many questions for weeks and months after closing to fill in some areas that may not have been covered in training. There may continue to be unforeseen pre-closing vendor invoices to be settled, return credits to be agreed upon and tax considerations discussed. Both parties should be prepared to be responsive and transparent post-closing regardless of the payment arrangements to avoid both buyer and seller remorse. <br><br> Following the preceding checklist will not eliminate hiccups in the post-sale process. But with both parties working together on a level playing field, emotions should be minimized and the transfer of business ownership smooth and relatively problem-free. <br><br>