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Fields Notes For Crafting Your Online Business Acquisition Deal Structure

In a market of unforeseen risk and lack of liquidity (you can't just sell your business like you would a stock), crafting a deal structure that works for you (the buyer) and compensates the seller for fair market value is a necessary for small business ownership transactions.

I write this as I have just completed due diligence for an online business acquisition and gone back and for

Start with a fair valuation of the business.

What is the business likely to sell for based on businesses of the current model and income trend, assuming no changes? I like to start with this, because this is what the seller largely focuses on. Yes, risks and opportunities matters in a valuation to YOU as the buyer, but quite frankly the seller doesn't care. They see the business as risk free, and probably question your ability to capitalize on opportunity. It's important to negotiate the deal from the perspective of 'this is the valuation'.

Understand The Sellers Value Of ‘not selling’.

The seller doesn’t have to sell their business.

As a seller of a business I have been hit with offers that are simply ridiculous, like a 80% seller note. That's a waste of time. In that case the seller is assuming the risk of the buyer operating the business. Under those terms, I'd rather sell to an employee or just mentally check out and take whatever trickles out from the business.

Assess your risks/upside of acquiring the business.

Deal structure is in my opinion is largely to offset the risks associated with buying the business. The valuation, in the seller eyes at least, generally assumes that things will go on -- but maybe they won't. As a buyer it is nice to have protection from these things.

Consider an ecommerce business that generates 50% of the revenue from Amazon FBA. That could represent major risk if Amazon increases their 15% commission fee, or their storage/inventory fees. Or if Amazon just decides to start white labeling a competition product and driving users to that product. There could be a major whack in income.

On the flip side, the established Amazon Channel may give a great opportunity to grow revenue quickly and easily with new products.

This lends itself to an earn out, where by the seller is discounted if the amazon channel tanks, participates in the upside as you got it, and gets compensated for fair valuation of the ecom business if all things continue normally.

Note all of these things out as they become points for an earn out.

Consider your future cash (and taxes) needs going forward.

This one generally applies to earn outs.

It’s very easy to see cashflow vs fixed debt payments, but things can get murky with earn outs. In some cases I have seen earn outs based on revenue hinder a businesses ability to make tax payments and reinvest in growth.

Consider an earn out that is equal to 75% of the revenue sold on 'Amazon’ up until $1,000,000 is paid. That works well in protecting you from the down side of selling on Amazon, but what if it growth on amazon takes off and becomes 80% of the business and suddenly you’re paying so much to the earn out you can’t fund the inventory needs.

Keep The Structure relative to the deal size.

Don’t coming out swing with seller financing and 3 seperate earnouts combined into one for a deal sub 1mm. While I do like earn-outs as a buyer, on sub 1mm it often represents to much work from an auditing/compliance and tax perspective to hash out these details every quarter and sellers will just turn a cold shoulder. Instead look for one key risk factor that can hinge an earn out.

Present A Range of Offers To The Seller.

This is a strategy to keep negotiation concise and show that their is quantitive reasoning behind your methods.

I believe it helps.

The highest cash at close reflects the offer lowest potential total value.

Lower cash at close reflects the high total potential value.

Example

An ecom business deriving 50% of it’s revenue from Amazon FBA. apprx 750k websites sales, 750k Amazon sales.

$500,000 cash at close with 50% of Amazon revenue for 3 years up to $1,000,000.

$600,000 cash at close with 50% of Amazon revenue for 3 years up to $500,000.

$700,000 cash at close with 25% of Amazon revenue for 2 years up to $500,000.

The first deal gives the seller the potential for up to $1.5 million total valuation, while the higher cash at close caps its 1,200,000.

On That Note:

Deal structure is crucial to maximizing your IRR and mitigating risk. There is a place for it in small business acquisitions, but don’t think you’re going to ‘structure’ a seller into selling for nothing. A successful deal structure mitigates the risk, minimizes cash outlay, and fairly compensates the seller.

Upcoming posts:

- Examples of to Use Earn Out In Online Business Acquisition

- When Rolling Equity Works In Online Business Acquisition

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