How to buy or sell an online lifestyle business with expert broker Mark Daoust

Capital Gains - Capitalism.com

In 2006, a year after selling his first successful internet business, Mark Daoust was on the verge of going broke. No savings, no rainy day funds, nothing for retirement.

Since successfully exiting his first venture, a content-based website called Site Reference, his next projects had not been working out and was hemorrhaging money.

It was at this point, on the brink of pennilessness, that the sale of his friend’s web hosting business was closed - a deal he had brokered after the experience of selling his own company the previous year.

With the commission he made from the sale, Mark went on to start Quiet Light Brokerage, Inc., a marketplace for buyers and sellers of internet businesses, which has conducted over $100million in business transactions over the last 10 years.

Mark discusses the returns available to buyers of existing internet businesses, as well as the risk that comes with buying them. He also shares some very important guidelines for both buyers and sellers of online companies.

Listen in for Marks’ stories and advice after his 10 years in the business. They include a lawsuit and some of his favorite deals that Quiet Light Brokerage has put together.

Lessons learned in the early days

When selling online businesses, finding buyers is the easy part, says Mark. Investors are always looking for new opportunities, so building up that side of Quiet Light Brokerage was less of a challenge.

The more difficult part in the early days was preparing a business for sale. It’s an area that business owners looking to exit often don’t get right. This was one of the most important things Mark learned early on - understanding what motivates buyers to buy and what information they need to make an acquisition.

Sellers are often very proud of the products and systems they have built and focus on these areas during the sale. However, buyers are interested in making a return on their investment and so the information sellers present needs to be shown through that lens.

So Mark and his team set to work making more compelling cases for their clients. That meant showing more than a simple P&L statement. It meant monthly reports going back three years, dissecting the accounting and financial sides of the business.

It also meant highlighting the growth potential and analyzing the threats that the company faced.

And finally, it was about communicating what the asset was and why it was worth investing in. Online businesses are all cash flow based -- there is no physical asset that you can sell if the business fails -- and so presenting it correctly is vital.

They also learned pretty quickly the processes needed for keeping clients’ information safe while providing proper access to potential buyers.

Preparing to sell

Mark breaks down the process of preparing a business for sale into four categories:

1. Get into the buyer mindset -- buyers buy for ROI. This return comes in two parts:
   1. The financial return. Online businesses typically sell for multiples of 2.5-3.5 times earnings so buyers are looking at around a 33% annual return.
   2. The lifestyle associated with owning an internet-based business. Being able to work from home with a very light team is a big draw for investors.

So when buyers are evaluating the ROI, what do they want to see? Firstly, they want to see that it is not a risky investment. Online businesses are inherently risky and buyers need to be aware of that, but from the seller’s perspective, it is about clearly identifying and mitigating areas of risk.

What are the areas of risk? Are there any factors of dependency in terms of a technology or platform, e.g. is the business dependant on Google rankings or is it entirely based on Amazon? Changes to these platforms could have huge implications on the profitability of a company that is dependant upon them.

Once these risks and dependencies are identified, the seller must come up with systems to mitigate those risks.

1. Growth

Buyers want growing businesses, not declining ones, so is it growing currently?

Outside of that, what areas of future growth have not yet been explored? Using tangible, tested experiments and examples is much better than hypotheticals here.

1. Transition

How easy is it for the business to transition to a new owner? This often comes down to ‘key man’ dependencies -- if the success of the business is tied to a personal brand or a key partnership between the owner and a supplier, then that complicates the process of purchasing a business.

1. Documentation

Clean financial records and documentation of the business is the easiest area to control, and often the lowest hanging fruit for sellers to look at to increase the value of their business.

What are you getting when you buy an online business?

Most of what you’re buying is good will, says Mark. Often buyers will ask, ‘should I build this instead of buying it?’

In some cases, it does make more sense to build, but by purchasing an existing business, you are buying the brand, the reputation, the relationships and partnerships that come with it.

You’re also buying all the decisions that went into getting it to where it is today. What worked and didn’t work along the way. And the systems and automation that has been built to run a lean online business.

Generally the more staff a company has and the more systems and procedures that are in place, the higher the value is likely to be. It’s worth noting that the more staff members there are, the more friction is created in the transfer of ownership. And the more processes that are in place and well documented, the more attractive an acquisition is.

What online business a good fit for you?

Outside of the risks within the business you’re buying, is there anything you should know about yourself to identify what sort of business you should purchase?

Firstly, it’s important to understand if you want to buy a big or a small online business. After his first exit, Mark bought two businesses for low five-figure sums and it became clear that the work he needed to put into them was not worth it for the money they were returning. So it’s important to match the scale of the acquisition with what is worth your time and effort.

Secondly, know what your strengths are and invest in something where those strengths are an asset. For example, if you’re great at negotiating deals with vendors, look for an e-commerce company where that skill is valuable. Don’t enter the world of a software as a service company where you’ll have to become good at working with developers creating new product features, which may not be a skill you already have.

Online businesses as passive income sources

It’s true that many online business owners have created companies that create mid-six figure bottom lines that take just 10 hours of work per week to maintain.

In Mark’s case, for instance, he was able to take his entire family out to Europe for a month while working remotely from his phone without impacting his businesses at all.

Mark does stress that it takes a lot of work to get to that passive level, with a lot of automation, good people, and strong processes in place to allow it to run seamlessly. A buyer shouldn’t expect to be able to walk into an acquisition that is immediately passive and low maintenance, some ground work is always necessary.

But it is possible to get there relatively quickly -- and doing that is all about systems and procedures.

You can reach Mark and his team at www.quietlightbrokerage.com