Ask HN: Any advice for someone looking to buy an existing business?
I may have found an online website that I would like to buy. It is a social media management company. The website is making around $8k a month and they are asking for $250k for it. Seems like a great deal, but when things are too good to be true, I am convinced it is likely a scam.
I am pretty nervous about forking over a large chunk of my hard earned money, regardless of the deal I find. Any advice for this process so I can avoid being scammed, or loose money? Tips and tricks to validate the legitimacy of the business? Maybe a recommended checklist based on past experience?
A little about my background, I have been a software engineer for the past 10+ years, but I don't love to program anymore. I prefer to think about the business, customers, sales, marketing, etc. and would prefer to pay an employees to do the programming and manage infrastructure with only the occasional need to roll up the sleeves.
If any of you have an existing business that you are looking to sell to an individual, I'd love to have a chat. Ideally it would be something like:
- Actively Managed Business, net income $16k monthly
- Passively Managed Business, net income $2k monthly
- Ran virtually online or located in the DMV if office based
25 comments
[ 2.8 ms ] story [ 59.4 ms ] threadAre the $8K total revenue or the net income?
Cashflow, but since most websites have such a high profit I assumed that's pretty close to their net income. Will have to dig in to find out more. I am just getting started so I wasn't sure what to look for.
So profit is never 90%, its typically like 30% of gross
Also I'm surprised that you'd ask it here. Considering you're about to drop $250k, I imagine you'd hire a lawyer to look over everything.
It is par for the course if everything else checks out. If anything, it is at the higher end of multiples for a business of this size.
THe question you should be asking is if this is a business you can take over and run and more importantly, grow further. How solid are the existing customers ? What is the churn rate ? What is the current growth rate ? What do you know about Social Media Management ?
Also, forget about "Passively Managed business". There is no such thing especially in early days. Even if you are buying an existing business, you have to run it actively no matter how passively managed it was because for you, it is a new thing and like a job the first 2-3 years. Don't fall in that trap thinking it will run itself. It won't.
Source: Bootstrapped business owner for 8+ years and counting. If it matters in this context, I did buy it as a side project but built into a proper company.
Those are great questions, I figure I would get all of those once I reach out to them for more details. Thank you for posting them as I will make sure I don't miss that.
I don't know much about social media management, but I feel confident I can quickly learn just about any business. It is risky to go into a business that I don't specialize in, but I have a lot of experience delving into topics I don't know much about and becoming an expert. I think that being able to market an existing product will be a key skill to master early on, if I want to continue growing any business I take over.
Thanks for the heads up about passively managed business. You're right it would involve taking over and learning a ton. I was mostly thinking from the keeping-my-day-job perspective, but I agree with you, I should probably forget about these "side" projects as it would just be another full time job.
I've found that many web sites for sale are from people who found a niche, built a product, milked it until the writing was on the wall for its downturn, then are trying to sell it at its peak, leaving the next owner to figure out how to recover.
Make sure that isn't what you are buying.
Along with the other questions shared by HNers:
What kind of social media management are they doing? Is it in a fast shrinking area? What has been the CATEGORIZED revenue flow FOR EACH SERVICE CATEGORY for the last three months? How about for six months?
What are the revenues generated from each of the top ten clients? Is it skewed? Or, are there only three or four clients?
Is the revenue based on a (monthly) subscription model? Or do you have to keep selling every month?
What will make the clients to stick with you, post-acquisition? Will the seller do something similar after the sale? Does the seller have any involvement with any similar businesses? Any of his friends or family in the same business?
Why are they really selling? They may or may not tell you that, you will need to infer that.
You pose great questions around making sure the business is doing well and still trending up. Based on the little info I got, it appears that way. What was weird to me is it seemed like an American business with all the text in English but almost all of the clients were from India. I'm not against overseas customers, I just expected the site would be in another language. Maybe English is the common language between their dialects?
Yes, English is the common language. But you need to make sure the customers are comfortable with English while communicating. Do ask the seller about it. Depending on the answer, and your familiarity with the languages, there may be additional expenses for sales and technical support in those languages.
Luckily, for $15000 I figured out I am bad at business.
Lesson for you: Unless you have done some amount of business/customers/sales/marketing before, dont spend such a big amount of money on your first venture.
Is there any info you can share on your acquisition process? Was there any steps that reassured you wouldn't be left with an empty account and no business operation to take over?
1) hire a broker 2) do your damn-dist to have them sell you a good chunk of the business on a promissory note. it will force them to have skin in the game and force them to care about your success moving forward 3) ignore cash flow trends that aren't established for at least 3 years 4) don't ever pay more than 1.5-2 times the cash flow. ever
edited to add point #4
2. If the owners actually believe in their business and think it's not a trend / fluke, they should be willing to play ball with the idea of a seller's note. Big red flag if they won't.
3. 5 is a good number
4. Sure, there are differences for different industries, especially if there is capital or large expenditures, etc. But you have to be able to pay the business back while still looking at growth, expenses, etc. etc. Beware of the "growth" trap and the "endless possibilities." If this business scaled that well or is worth 4x or whatever multiple, and it runs itself why are the owners selling?