When people hear about an individual purchasing a business with the help of, amongst others, their commercial lawyers, the assumption that is usually made is that it is a so-called brick and mortar business. In other words, it is a physical business such as a retail store, a service such as an accountancy firm, or a manufacturing company that produces physical products.
What does not normally spring to mind is that the business being purchased is an online business. When the words “online business” are used, another assumption is that what is being purchased is a website, and whilst a website may be one of the assets of that online business, there is almost certainly more to it than that.
If are considering buying an online business, our first advice is to have the same analytical and cautious mindset that you would have if you were buying an offline business. We would argue that you need to take even more steps to evaluate and validate the performance and the value of an online business.
We would certainly advise you to seek the advice of those professionals who ensure you avoid major issues such as an accountant, your commercial lawyers, and your financial advisors, especially if the value of the online business and thus its purchase price, is high.
One of the first facts you need to establish is what assets the online business has. Unlike an online business where the vast majority of its assets are physical and can thus be viewed, an online business may have no physical assets unless it is an eCommerce business selling physical goods. Given the nature of how most businesses operate on the internet, it may be that most assets of the business are digital. Examples include:
- Physical Stock – e.g. held in amazon warehouses, or third party warehouses
- Intellectual Property – e.g. patents, copyrights, domain names, content on websites
- Software and Apps – e.g. coding and programming
- Digital Products – e.g. online courses, eBooks
- Clients/Prospects Database – e.g. lists of customers, email subscribers
The nature of the business will influence the value of each of these, and if you have never owned an online business before, do not be surprised if one of the highest values is placed on the database of customers or email subscribers, for example.
Having the means to communicate with projects online can generate huge amounts of revenue. For this reason, online businesses are often purchased and many of their assets such as intellectual property are discarded. Instead, they are purchased for that precious database of contacts. This scenario was at play when Facebook purchased Instagram. The website, app, and software that run Instagram had a far lower value than the contact details of millions of Instagram users.
Other checks and steps you should complete when purchasing an online business include:
- Negotiating the purchase including the price
- Ensuring you are aware of financial matters including payment processors such as PayPal
- Drawing up the purchase contract which should be done with the help of a commercial lawyer
- Establishing the transfer of assets process
- Finalising and signing the contract
Owning an online business is the dream of many, but unfortunately, lots of people try but never achieve that dream. By purchasing an online business, you accelerate the whole process, but only if you use due diligence beforehand to ensure what you are purchasing can fulfil your dream of owning an online business, not crush it.