Interview: Thomas Smale from FE International

The market has evolved significantly over the last 5 years. Both buyers and sellers are becoming more sophisticated and knowledgeable, which has resulted in:

  • Sellers having a better understanding of valuation
  • Buyers being more confident in making acquisitions quickly
  • Buyers being more confident in paying cash (vs. seller financing) for a deal

Through FE International, deal structures have only gotten better for sellers, as the majority in recent years have been all cash. In deals over $1m it is more common to have a “reps and warranties” holdback, which is 10% of the sales price held back to protect against minor issues with the business that may be unknown upfront.

Sellers work with M&A firms in order to get out of the business and take as much cash as possible. There has been a recent rise of “funds” buying privately, but many will not pay cash and look to tie sellers in to the long term performance of the business. Generally, the smaller the investment firm you work with, the worse of a deal you’ll get when it comes to cash upfront vs. seller financing.

2. What are the most common kinds of deal structures? Full cash deals? Earn outs?

When financing is involved (usually for 10-20% of the total deal value), it can vary quite a bit in structure, and often gets very creative.

Some businesses will be more likely to be financed than others. For example, where an owner works full time on the business, a holdback (i.e. a deferred payment made after X days) is very common.

This means the owner is incentivized to help the buyer learn the business, as they get an additional payment at the end of it. If the deal was all cash, this would not necessarily be the case, even with the best intentions.

3.Who is buying sites these days and why?

Buyers generally fall into three main brackets:

1) Private Investors

These could be individuals, partnerships and small teams.

At the lower level these buyers could be looking for extra income to supplement a job, a business to replace (even if eventually) a job, or a way to make more money in general.

These are the buyers who vary most in their criteria. Financial performance is not always their key metric, and often businesses will be acquired based on personal interests and they could be happy to do work to improve a business.

2) Private Equity/Funds

These funds have been entering the market at a consistent pace over the last 5 years and are becoming more and more sophisticated.

While the funds vary in their setup, they are generally founded on the principle that they will raise money from private investors, pool the money, buy a business, run it and deliver a return to investors.

As such, financial performance is usually their most important metric. Additionally, funds tend to specialize, so it would be rare to find a fund that buys businesses of varying sizes with entirely different business models.

3) Strategic Buyers

Strategic buyers generally have an existing business/investment in the same or complementary niche. They may view an acquisition as a bolt-on to their existing assets and will look to benefit from synergies and economies of scale across the two (or more) businesses.

Strategic buyers often have the most unpredictable criteria as their reasons for buying are not always financial. For example, they may be interested in an email list, SERPs, advertising partners or existing team more than the underlying profitability of the company.

If these buyers have cash, they often work the fastest as they will already be largely familiar with the business and the industry it operates within.

4. Who is selling sites? Why?

People sell sites for a wide variety of reasons. Selling today is much easier than it was 5-10 years ago. Back then, your only option was selling on a marketplace or working with a low-quality broker with a very low success rate.

Anyone with a successful site can sell their business, so you shouldn’t only consider selling if you, say, need the money or your business has started to decline. The best time to sell is actually when you don’t need to.

Some common reasons successful site owners sell:

  • To raise cash for other ventures/bigger sites
  • They are no longer interested in the niche/industry
  • To pay off debt, a mortgage or buy a house
  • A sale gives you cash in your pocket you would otherwise have to wait years for
  • The valuation/market is strong

We’ve seen a number of instances where sellers hold on to a site too long and then try to sell when it starts declining. This is ultimately a suboptimal strategy, as it often results in the seller earning less than they might have if they had sold while the business was growing.

5. What’s the basic process of selling a site

Every M&A firm will have a different process (some will vary considerably depending who you work with) and ours has been defined over nearly a decade of experience closing deals in the space. To approach it from a high level, we break down the process into 6 easy steps:

1) Assessment and valuation 

This is where we get to learn about the business and determine what it is worth, following our methodology of how to value an online business. Assuming a seller is happy to proceed, we sign an engagement agreement.

We do not have any listing fees; we earn a percentage of the sale contingent on a successful sale. This fee covers the following:

  • Preparing sales materials and initial due diligence
  • A dedicated broker to communicate with and a whole team dedicated to your sale
  • All advertising costs related to the sale/finding buyers
  • All negotiation direct with the buyer
  • Drafting the Letter of Intent (the formal offer from a vetted buyer)
  • Facilitation of due diligence through our secure deal room
  • Asset purchase agreement drafting
  • Setup of escrow handover and business transition facilitation

2) Sales material preparation

This is where we prepare a detailed prospectus for buyers, that covers everything they need to know to make an offer on a business. It is usually around 30 pages, depending on the size and complexity of the business.

3) Marketing business for sale

This involves reaching out to our network of tens of thousands of active buyers to pitch the business. We do this in a number of stages, starting with a buyer list we curate by hand who are most likely to be interested.

This gets early interest (and usually offers) before we go out to our wider list. At all stages in the process it is confidential, with buyers required to be pre-vetted and have a signed confidentiality agreement on file.

4) Sale negotiation

At this stage our team will negotiate with buyers to get the best deal possible. This usually involves getting multiple offers and leveraging those against each other to get the best deal structure, as well as someone the seller wants to sell to.

As discussed earlier, a key here is getting a buyer to pay as much cash down as possible. This is something that sellers who try to do deals privately lose out on – they either get a bad deal structure or are stuck with a low cash offer. Once a suitable offer has been agreed, a formal letter of intent (LOI) is signed.

5) Due diligence

We coach sellers throughout the process to be ready for due diligence, and this generally covers 6 main areas: traffic, financial, owner, operational, technical and legal. The general premise of due diligence is to verify anything that has been claimed throughout the process.

This sounds like an intimidating process but should not be. Your advisor will have systems in place to review all documentation, and will help ensure buyer requests are reasonable and navigate the requests accordingly.

Make sure you work with an advisor who uses a secure deal room. Do not share confidential information, such as bank statements, without this.

This is where the asset purchase agreement is negotiated and finalized. We draft this on the seller’s behalf and then work with each party’s legal counsel (if they are using them) to agree final terms. Once signed we help facilitate escrow (always use an independent third party) and the transfer itself.

We have a dedicated transfer team who work to ensure the site is transferred from a technical perspective and both buyer and seller are happy with the handover before funds are released from escrow.

6. What should a seller have in order before selling?

When getting ready for a sale we will request a number of things from a seller. The most important (and most commonly done wrong) is financials. If you keep track of your finances each month then this should not be a problem.

As part of the sales preparation process we send a questionnaire which usually includes around 100 questions. This will be different for each business so there’s not necessarily anything you need to prepare in advance. As long as you understand your business, there are no trick questions! The key is being open and honest as a good advisor will help position your business with both strengths and weaknesses.

Regardless of when you are thinking about selling, it always makes sense to get a valuation in advance so you have an understanding of what your business is worth and areas you could improve before selling. Once you have an understanding of what the business is worth, it’s much easier to plan for an exit. Too many people leave it until the last minute and are then not in a position to make necessary changes.

7. What should a buyer have in order before making an offer?

As a buyer, before making an offer you should do any due diligence you can upfront. Quite often buyers will leave basic checks until after their offer – such as looking at link profile or traffic growth.

You should also ensure you can provide proof of funds. If you are not able to prove you have the ability (and cash) to buy a business, you will not be successful and your offer will be declined.

The key beyond this is to be friendly and easy to work with for a seller. Sellers generally have numerous options when it comes to buyers so being someone they like always helps. No-one wants to sell their business to a buyer who is not well organized, hard to deal with and constantly asking questions that could have been known in advance.

The best buyers have a balance of a strong offer, speed of execution and are easy to get along with. This does not mean you cannot ask questions or do due diligence, but always think of it from the seller’s perspective and remember that the best deals are a win-win for both parties, not just the buyer (or vice versa).

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