Much of business as we know it has moved online, and numerous entities operate entirely over the internet. This impacts how business transactions work, especially since most of these companies are smaller in size. The way risk is assessed and transactions are structured will reflect this, and there are a number of items to consider when negotiating a deal.
As with any business acquisition, the first item to consider is the matter of risk. This incorporates the following factors:
- Consistency of traffic and customers
- Sustainability of growth
- Concentration of revenue, such as through affiliates, income channels, or online traffic
- Survivability of the business’s concentration
These are each important to the transaction’s structure because they tell you what you’ll need to maintain in order to keep up the business’s profitability. For instance, if much of the company’s revenue comes through their affiliates, you’ll need to structure the contract in a way that keeps them around.
In addition, as you consider all of these factors together, you’ll get an overall feel for how much risk will be involved in the deal. If it turns out to be high risk, you’ll need to account for that in the way the transaction is handled.
Understand the Seller
The way you structure this transaction will be informed not only by the level of risk involved, but also by the seller’s preferences. These may involve the following:
- The seller’s willingness to continue being involved in the business after the sale
- Preferences about timing and payment structure
- Willingness to take on risk themselves
- Additional benefits that the seller may find valuable
While you may try to mitigate the risk to yourself, the structure you choose on that basis alone may not necessarily benefit the seller, so these factors are well worth taking into account. If you keep the seller’s preferences in mind, you’ll be able to make competitive offers worth their consideration, even when they have other offers with higher total worth.
Once you have a good sense for the risks and the seller’s preferences, you’ll be able to structure a transaction that will make sense for both of you. Online business acquisitions are typically handled as asset purchases, and the funding options you choose will need to account for that. Some of these options include:
- Performance based, in which the payout is dependent upon reaching certain marketing goals
- Earnout, in which payment depends upon reaching set financial milestones
- Holding back certain assets such as the domain in order to ensure the business is fully paid for
Each of these can be handled in various ways, so these transactions easily become highly complex. For instance, the milestones used in an earnout structure can vary significantly depending on the risk taken on by both buyer and seller.
Paperwork and Administrative Matters
Once a structure has been decided upon, it’s important to make sure the contracts and paperwork are all handled properly. The assistance of a business lawyer (such as us at Hart David Carson LLP) can make this process much less complicated for you and help keep risk down, so hiring an attorney from the start is your safest bet for a seamless transaction.