The two questions we get asked most often at conferences and in networking with other entrepreneurs: How much is my business worth? and, who buys these businesses? I’ll attempt to answer the latter of the two questions here.
I’d also like to preface this post by saying that not all buyers fit the molds that I am going to lay out. However, it seems as though about 90% of the buyers fit one of these few archetypes that I’ll outline here.
1. Website Portfolio Companies
Within the larger private equity market there is a smaller market of companies that buy, manage and grow small internet businesses.
Typically these portfolio companies have a staff of 3-7 people and have honed in a skill set at running one particular type of business.
- For example, there are portfolio companies that buy and run internet content sites. These businesses are typically monetized with on-page ads and with affiliate offers. The portfolio company may have one person in charge of valuing and acquiring the business, a second in charge of website architecture and SEO, a third in charge of strategy and finance and a fourth in charge of content creation.
- This company may look to acquire websites that make $100-$150K in annual profit that they believe are under-managed. They will look to buy the website, improve and increase the marketing efforts and get profit to $500k per annum before selling for $1.5M.
- Another example is a growing team of 10 that we have dealt with previously. They solely purchase and grow e-Commerce businesses that sell physical products off of Amazon. They have their own warehouse, fulfillment team and marketing personnel.
- This company looks to acquire reputable e-commerce brands that currently generate over $350K per annum in profit (over $1M in revenue). After acquisition, this portfolio company looks to move all of their product fulfillment to their in-house facility, grow the companies reach on social media and search engines, build new marketing and sales funnels, add additional products etc.
2. Private Equity Firms
The aforementioned portfolio companies are really a smaller subset of the larger market of private equity companies. These larger investment management companies typically (but not always) have outside investors who they report to.
Since these private equity companies are often times dealing with investors money, they have to stick to pre-defined, agreed upon investment criteria. This criteria is typically something along the lines of:
- $5M+ in EBITDA
- In a growing market
- 15%+ net margins
- Must have a business model that the PE firm is comfortable with (typically e-commerce, professional services or software)
- A competitive advantage over its peers
Occasionally, a private equity firm will look to purchase a business that is lower than $5M. This typically happens when they already have one large business in the sector and now they want to add subsequent bolt-on acquisitions.
3. Career Changers
Once people commit themselves to the 9AM – 5PM lifestyle, the stability and reliability can be too much to turn away from. However, some professionals find that building or buying an online business can provide the freedom they have been longing for and often-times be more exciting and provide greater compensation.
Business buyers are notorious for wanting to pick through the numbers and verify every part of the business (as they should). Career changers do this even more. For many of them, they have never been self employed before and their acquisition represents the first business that they have ever owned.
The majority of career changers that find themselves buying digitally native businesses come from quantitative fields, in particular finance. The most common fields we see buyers coming from are:
Instead of being a thorn in their side, they can make you an asset to their business. Competitors acquiring competitors is very popular in niches where there are only a couple of players in the space. By acquiring a competing brand, many companies can decrease their cost by eliminating some of the redundant tasks and therefore driving margin growth.
5. Adjacent Companies
Many digital businesses (especially e-commerce) can make for a great acquisition from one of several companies that provides a supporting service.
- An example of this is the medical device e-commerce company that we are selling that saw interest from one of their suppliers. Since this supplier already knows the industry, stocks and ships the products and has done a small amount of work in retailing the product, purchasing a retail website that had great reviews and a residual book of business made for a great acquisition. This buyer is now vertically integrated in the medical device and testing market.
- Another example is a marketing company that already has an expertise in one type of digital marketing (or perhaps several). Often times these companies will acquire a business that needs their service, grow the business through their marketing expertise and turn around and sell it.