Knowing Deal Structures When Buying an Online Businesses

When buying an online business, it’s important to choose a deal structure that satisfies your acquisition goals and strategy. After all, the terms you agree to will greatly influence your experience as the new owner.

Before diving in, it’s important to establish that there isn’t one specific deal structure that is superior to the rest. Rather, the attractiveness of a given deal structure is based entirely on the goals of each party. 

This article will discuss the key elements to consider when establishing a deal structure for a business acquisition. It will also provide actionable tips to help you land the perfect deal.

Let’s start with the basics…

What is a Deal Structure?  

A deal structure establishes the terms and framework by which a business will transfer from one owner to the next. In other words, it sets expectations between both parties about how the deal will take place. 

“A deal structure establishes the terms and framework by which a business will transfer from one owner to the next.”

There are several components that must be addressed when structuring a deal. Some of the more important elements include:

• Asset vs. stock purchase
• Purchase price
• Financing terms
• Down payment amount
• Consulting agreements and employment contracts
• Non-compete agreements

Deal Structure: Asset Purchase Versus Stock Purchase

Business acquisitions can either be an asset purchase or a stock purchase. 

In an asset purchase (aka Asset Sale), the buyer purchases specific business assets as outlined in the Asset Purchase Agreement (APA). In this deal structure, the buyer and seller may decide that certain assets are not included in the transaction.

In a stock sale, the buyer acquires all business assets and liabilities. 

Most online business acquisitions take place as an asset purchase. This provides both buyers and sellers with greater flexibility. For example, a seller may choose to not include a company vehicle in the purchase. 

Deal Structure: Purchase Price

The purchase price is the total monetary value that the buyer pays to the seller. 

In a business acquisition, the purchase price is sometimes paid in one lump sum at the time of closing. When a buyer proposes such a deal, it’s referred to as an “all-cash offer.”

“The purchase price is the total monetary value that the buyer pays to the seller.”

At other times, the buyer may only put down a deposit at the time of closing. Then, they make monthly payments until the full purchase price is paid (see the following section).

Deal Structure: Financing Terms

Financing terms are agreed to when the buyer pays less than the full purchase price at closing. There are a few different scenarios in which financing may take place. 

Seller financing is a common deal structure that allows the buyer to make payments over a period of time. For example, they may put down 70% at closing and then pay the remaining 30% over the next three years.

Seller financing is also referred to as ‘owner financing.’ Not surprisingly, most sellers are resistant to seller-financed deals. Therefore, seller financing often takes place when the business is in distress. 

SBA loans are another financing option that is attractive to both parties. For qualifying deals, the Small Business Association will provide capital to finance a business acquisition. With an SBA loan, the seller is often able to receive the vast majority of the purchase price at closing. Because the buyer doesn’t need to pay the full amount at that time, they can enjoy greater leverage. 

Deal Structure: Down Payment 

All deal structures establish the down payment amount that the buyer pays to the seller upon closing.

The down payment amount can vary greatly. For SBA loans, it can sometimes be as low as 10%. In seller-financed deals, it’s typically significantly higher than that. Budgets, creditworthiness, and business-specific criteria are often used to determine the down payment. 

Deal Structure: Consulting Agreements and Employment Contracts

As a buyer, it’s important to know that the seller will support you after the purchase. Typically, that means they’ll provide training or consulting services for a period of time.

At the minimum, most deals include a 30-day training period. During that time, the seller trains the owner to ensure they’re well-positioned to succeed. 

“A holdback is a portion of the purchase price that the buyer retains until certain conditions are met.”

In some situations, the seller agrees to continue filling an important role for an extended time period. This is especially true for more complicated businesses. Or, when the buyer is completely unfamiliar with the industry.

Deals involving consulting agreements often involve a ‘holdback.” 

A holdback is a portion of the purchase price that the buyer retains until certain conditions are met. For example, let’s say the seller agrees to deliver six months of consulting services after closing. In such a deal, the buyer may only pay 80% at closing, and retain the other 20%. After the seller has completed their consulting duties, the buyer releases the 20% holdback. 

Private equity buyers commonly prefer to keep the seller involved in the business for a specific length of time following the transaction. 

Deal Structure: Non-Compete Agreements

When buying an online business, most buyers want to know that the seller isn’t going to become their competitor. Therefore, most buyers require that the seller sign a non-compete agreement.

Non-compete agreements prevent sellers from using their knowledge ‘against you.’ Remember, if you ever consider selling your business in the future, this will apply to you as well.

How Deal Structuring Works for Buying an Online Business 

Deal structuring is the process by which buyers and sellers arrive at a deal that is agreeable to both parties.

Typically, the process starts with the seller. When a seller lists their business for sale, they list it with an asking purchase price. They also share their goals with their Advisor. In turn, their Advisor uses that information to seek out the right buyer.

“Deal structuring is the process by which buyers and sellers arrive at a deal that is agreeable to both parties.”

As a buyer, it’s your job to pay attention to business listings that might match your investment criteria. When you see one, you can request information to learn more. If everything still looks good, you can move forward with buyer/seller communication.

Communicating with Sellers

Once you’re in communication with sellers, there will be a series of exchanges intended to help you understand the business. It’s also an opportunity for both of you to get to know one another.

Making an Offer

Once you’ve decided that a business is right for you, it’s time to put in an offer. Your offer will include all of the terms that outline your desired deal structure. 

From there, the seller will decide whether they want to accept your offer or come back with a counteroffer. Often, there is a series of back-and-forth negotiations during which the two parties come to an agreement.

Whether you’re buying a small Amazon business or handling mergers and acquisitions for a large equity fund, the process will usually follow a similar framework.  

5 Tips to Determine the Best Deal Structure for Buying an Online Business

Choosing the right deal structure requires establishing your goals. Below, we’ve included five tips that can help guide the process. 

1. Establish your budget
2. Be honest with yourself about how much time you have to run the business
3. Figure out how much support you need from the seller
4. Assess the seller
5. Choose what risks you want to take

Establish Your Budget

Often, your budget will play an important role in determining what deal structure is best for you. 

“Choosing the right deal structure requires establishing your goals.”

If you’re well funded, it might make sense to make an all-cash offer. There are a few key benefits to making an all-cash offer:

• Avoid financing hurdles
• Sellers will love you
• You may be able to negotiate a lower purchase price

When you make an all-cash offer, you don’t need to worry about securing an SBA loan or seller financing. Additionally, sellers love all-cash offers, which means you’ll be in a strong position if competing against other buyers.

Sellers will sometimes accept a slightly lower price if they know they’ll get the full amount at closing. This is not always the case, but it’s definitely something to keep in mind.

On the other hand, if you’re working with a limited budget, you may want to consider your financing options. 

Generally, it’s a good idea to establish your budget, and then examine what deal structure makes the most sense.

How Much Time Do You Have?

Online businesses can certainly offer high leverage, but they often still require active management. Therefore, it’s important to be honest with yourself about your time availability. 

If you’re planning on working full-time in the business, then you may not need the seller to stick around very long. In that situation, you may not need to include a hold-back or earn-out in the agreement.

On the other hand, let’s say that your goal is to have other people manage the business while you sit back and focus on other projects. If that’s the case, you’ll likely want to keep the previous owner onboard for a bit so they can continue running the business and train your staff. In such a situation, a consulting contract and hold-back may be appropriate.

How Much Support Do You Need?

If you’re managing the business yourself, it’s important to determine how much support you’ll need from the previous business owner. 

For businesses that you’re familiar with, your needs may be minimal throughout the transition period. For such deals, it may not be necessary to keep the seller on board for more than a month.

If the business is complicated or unfamiliar to you, you may want to negotiate a consulting agreement and accompanying hold-back.

Assess the Seller

All of the previous sections are dependent on one critical element: trust.

If you’re expecting the seller to provide services following the sale, it’s essential that you feel confident that they will actually deliver those services. 

Hold-backs or earn-outs can provide a certain level of assurance. However, you don’t want to solely rely on contracts. Before entering into an agreement, be sure to assess the seller’s intentions and capabilities. 

“If you’re expecting the seller to provide services following the sale, it’s essential that you feel confident that they will actually deliver those services.”

Try to envision what it will be like to work with the seller through the transition process. If you feel skeptical, it might be best to avoid agreements that depend heavily on the seller’s support following the sale. 

Choose What Risks You Want to Take

What kinds of risks are you willing to take? Different deal structures can expose you to different risks.  

If you buy a business with cash, you’re obviously putting your own skin in the game. While you don’t need to answer to creditors or investors, you do run the risk of losing capital if things don’t go as planned.

With seller financing, you put down less money upfront. However, you’re still responsible for making monthly payments to the previous owner. Therefore, it’s important to consider what the financial impact will be if the business isn’t able to fund the repayment of the loan. 

Essentially, both all-cash and financed deals involve different kinds of risks. Some entrepreneurs avoid taking on debt at all costs. Others prefer to maximize their leverage through financing options. Determining your own preferences will help you appropriately steer the deal structuring process. 

Whatever you choose, just make sure to have enough funds to pay the IRS when taxes are due. 

Tips for Putting Together a Successful Deal Structure to Purchase an Online Business

Once you’ve determined your desired deal structure, it’s time to put it together.

There are few simple tips that can help maximize your success through the deal structuring process.

• Look for business listings that match your criteria
• Understand the seller’s goals
• Make a strong offer
• Be willing to negotiate

First off, it’s always easier to negotiate when both parties have similar desires. If you can find a seller who is seeking the same deal structure as yourself, it won’t be hard to land a great deal. 

Communicating with the Seller

To understand the seller’s goals, you’ll need to ask questions. In addition to asking about their business, try to get a feel for what they’re seeking. Ask them why they’re selling the business, and whether they want to stay involved in operations, or make a ‘clean break.” 

When you make an offer, be sure to take their goals into account. Even if they don’t align perfectly with yours, try to find ways to meet each of your core needs. When you communicate your desired deal structure, be sure to make it clear and simple. Remember, a confused mind typically says “no!” 

Just as there are various approaches to valuing a business, there are different deal structures that sellers prefer. Often, you’ll need to negotiate with the seller to arrive at a deal structure that works for both parties. 

Just as you would speak with an accountant to determine the best tax strategies, a qualified Business Advisor can help you discover what deal structure can most effectively accomplish your business goals.