Friday, April 9, 2010

A Few Warnings When Selling Online Business Websites -- the counter argument

I'm never a big fan of people who know they're wrong so they use underhanded methods to try to hide other people's opinions verses facing the challenge face-to-face.  For those that think I'm copying Aaron's article, I'm not, I'm only using it to show point-by-point why his argument is flawed.

Original article that was removed from Google Search here, but summary below.

Because of how offensive it is to have someone talk nonsense about your field of business, I am actually dedicating several posts to this article written by Aaron. I don't attempt to make money by telling people how to improve their site's SEO rankings (which frankly, in itself is trying to game the Google Algorithm). We each have our expertise in this field and I feel it is better to nip this in the butt now than to have it become a bigger issue.

I will address Aaron's article paragraph-by-paragraph and point how where he is wrong. A lot of the items I will be pointing out will be very similar to the message I have preached in the past. Sections in italics are what he wrote. 

"if you have a high growth site in a high growth field and there is only one company trying to buy your site then transparency is the opposite of leverage. It can only work against you."

I think it is very obvious that he knows very little about doing a business. Being transparent is the most efficient way of matching supply and demand. A very valuable site will naturally garner a lot of demand for the product, and it will translate to a higher price. If you are very opaque about your data, that will only work against you as it immediately sets off "red flags" for the Buyer. This is only human nature, how suspicious have you been when you have gone to buy something and the car salesmen was evasive answering the questions you asked or information you asked for(i.e. Carfax review, mechanic review, test driving). Even though looking under the hood of the car nowadays don't really reveal much on the condition of the car, many of us still go through the ritual to make ourselves more comfortable. 

"The guy said "if that sounds good to you I will get a Letter of Intent over to you." I said sure, and in return they were like "ok now we need access to all your stats for our due diligence document to fill out the LOI."

In this scenario, the Buyer should have been more upfront that he will require the data in order to verify his assumptions before signing and closing the deal. He may have misrepresented what the individual said. You do not need access to all of the site's stats to fill out the LOI. The LOI ("Letter of Intent") is just a word document that lays out the structure, price, and the process both parties will agree to going forward on the deal. Most LOI are non-binding. This means even though both parties sign the document, you can back out of the agreement at any time. The only binding portion of the LOI is exclusivity. Many companies request this because they are at any one time looking at dozens of deals to pursue. For them to mobilize their greater team and use all of their resources for only one deal, they need some sort of guarantee that the deal won't be pulled from under them in the middle of the process. In short, the Buyer is looking for the Seller to agree that both parties will negotiate in good faith towards a final binding agreement ("Purchase Agreement"). It is impossible to infer enough data through only the site's search results to make an accurate offer. 

"If they make and offer they make an offer. If they want to steal you data they want to steal you data. But if they already make an offer based on their observations there is no need to grab all the data to reposition the offer - in short it is a scam."

Agreed. Data is valuable, which is why once a price is agreed upon, a Buyer would need the data in order to verify the assumptions they used to justify their offer. Analytics offer no insight to the Seller beyond the overall volume of visitors and page views to the site, the keyword that drives the visitors to the site, as well as who links to your site. Here is a great example of what could go wrong if we all lived in his world. For example, an mortgage company can see that one of his sites rank really well for "mortgage refinance" and reach out to him to buy the site. Let's just say that the company was ignorant enough to buy the site only based on the search results.

Here is what can go wrong for the Buyer if they do not do their diligence.
  1. When they close the deal, they realize that only a handful of the keywords were mortgage related, the rest of the 80% of visitors to the site actually arrive on keywords like "cute puppies for free". Now the Buyer realized they should have only paid 20% of what they did for the site.
  2. They never looked at the traffic trend and didn't realize there was a steep decline in traffic from a year ago. Projected forward, it looks like the site will be near worthless in 2-years time. Again, the Buyer got screwed.
  3. Lastly, the back links that provide the site the necessary rankings were completely irrelevant and paid. This is a huge SEO risk and even he should realize this.
The Seller, can care less at this point in the process because they have their money. You don't need to be a SEO or Deal expert to realize that's just a poor way of doing business. Being selfish and conniving is in general not an advisable way of being a good corporate citizen.

End of the day, there is something wrong if the seller isn't willing to share information. Large corporations do not like wasting their time and would rather move on than try to work with you to get the data they need to verify their assumptions. Lastly, good, established companies have a "China wall" installed between their acquisitions group and the rest of the company. The information you share with their acquisition group is only for the purpose of evaluation your site. This is why even when deals don't go through, the company isn't immediately implementing the "lessons learned" though diligence on other sites in their portfolio. 

"NDA Contracts Are Garbage"

I think this pretty much applies to anything legal. The NDA is generally provided to give general comfort for both the Seller and the Buyer over the acquisition process. You can very well say the same thing about anything you do. You can burn yourself on a hot cup of McDonalds or Starbucks coffee, wouldn't you then have to sue a "large corporation" to get justice? Even with Toyota (just look at the recent debacle), what could the consumers of their vehicles really do when their gas pedal get stuck? End of the day, you just have to trust the party you are dealing with is legitimate. All the legal language in the world, no matter what you are doing, whether buying a new car, signing up for a phone plan, refinancing your mortgage, or even getting a cup of coffee, will not and can not anticipate all of the fringe scenarios. The goal of having legal language both parties agree to is to put in place incentives for both the Buyer and the Seller to behave in the appropriate way.

In general, corporations, especially public ones, are run by attorneys who mitigate risk whenever they can. This means if you have agreed to and signed a NDA with a reputable Buyer, and the deal didn't not go through, the Buyer will follow the terms of the NDA to the "t". They will delete all materials received and wouldn't take any risk of trying to "bend the rules" of their own agreement. The last thing they want is for the Seller to have a "smoking gun" to use against the company. A corporation isn't a "big bad monster", it is run by people. These people would rather follow the rules and not blow any money on any litigation, big or small. 

"The point being very few people buy a business based on thinking they can/will keep it exactly the same. Rarely do you buy a raw domain name based on its buy it based on the potential for what you can develop on it, and the growth + opportunity you see in that market."

Aaron comparing his website portfolio to WebMD, Amazon, and other full fledged corporations is just a joke. I mean, how big can your head get? Valuations are simply based on the historical performance of the site + any additional synergies the company can attribute to the media going forward. Why would large, public corporations want to take unnecessary risks if they can easily acquire the information from the seller? Would you, as a consumer, go into an used car dealership and purchase a car sight unseen without review the Carfax, acquire a warranty, or at the very least have an expert in the field (your trusted mechanic) look over the car? 

"If a company trading at a 30x P/E multiple offers to buy your site for an 6x multiple, then they get a higher revenue cut due to their market position suddenly they have purchased your website for something like a 3x multiple... about 1/10th of what the market is valuing their enterprise at.  If they hold back some of the payout for a year then they are paying for a portion of the site out of future earnings, and the real multiple being paid is even less - maybe only 2!!!!"

I'm not even sure where to start here, there is so many holes with Aaron's argument that it's pretty obvious he has never worked in a real corporate environment or really understands the world beyond the comfort of the LCD screen of his computer. Buyers of every single deal, no matter how big or small, look at historical data as an indicator of future potential. If your site has been declining in revenue and traffic month-over-month for the past 2-years, it will likely warrant a smaller valuation than a company doing the opposite, even though as of today both sites generate the same revenue and traffic.

It is also both unrealistic and plain cockiness to think that a website deserves a 30x multiple compared to a full fledged corporation. Does Aaron really think his website portfolio deserves the same P/E multiple of Google? Valuations take into account many variables including growth, synergies, additional investment and adjusted to risk. For better or worse, most websites like the ones Aaron owns are not game changers like or They are just websites.

If you want to base your purchase price on some real life multiple, how about the acquisition of Volvo from Ford by Geely for $1.8 Billion? Ford bought Volvo in the late 1990s for over $8 Billion. So based on that metric, you should actually pay us to buy your site? Picking only scenarios that are advantageous to your cause is human nature, but not really a good argument point.

What ultimately gets a deal done is when both the Buyer and the Seller have realistic expectations. If everyone listened to Aaron, we will just have a bunch of mom and pop shops owning websites while the rest of Corporate America moved on. 

"But lots of people are stupid enough to give up the data. In the past I was one of them. A person who I mistook as a friend in our industry named a price for a partnership on one project, got as much data as he could, and then pulled out of the deal *at the price he named*!!! They claimed they lacked liquid capital, but at the same time they went on to make offers for other sites we owned (without knowing who owned them)."

Unfortunately, shit happens. I'm sorry to hear about what happened to Aaron in that scenario. In many cases a few bad apples ruins it for the rest of us. What Aaron should have done is ask for a LOI which will obligate the seller to move forward with the deal if the diligence checks out. In addition, if Aaron wasn't so paranoid and actually shared the necessary data with the seller (visitors, page views, keywords, back links), he may not of had this bad experience to begin with. 

"If someone tries to tell you that looting your data is part of their due diligence or purchase process send them a link to this post & tell them Aaron says hi.  Ask them how they disagree with it. And if they don't disagree with anything in this post, then tell them to give you all their business data. Fair is fair."

The Buyer is asking for access to your analytics because he/she needs to do his/her diligence and make sure you didn't lie to him/her about what you are selling. The Buyer of the site is paying you cash for your portfolio, so the same request doesn't really make sense. If they are paying you Monopoly money, then it is reasonable for you to ask for more diligence. When they are a public company, there is even less reason for you to be fearful. They ultimately have to report their findings to the public, and their filings are readily available for everyone to see. The only real diligence the Seller should do is review the Buyer's financials to make sure they can comfortably afford the agreed upon purchase price.

Having done hundreds of deals, I can tell you what Aaron suggested is completely unreasonable, to the point where I may suggest he wears a tin foil hat to sleep at night. You don't ask your lawyer about a cancerous growth you may have, and you don't ask your doctor for legal advice. I wouldn't ask Aaron for acquisition/ deal advice. Aaron should really stick to what he knows best, SEO. I have pretty much addressed Aaron's article point-by-point. I would love to hear what he has to say.

There will always be suckers who will agree to Aaron's terms, but it is not likely they will be around for long. I have a recent story about a new competitor (who was previously a mortgage prodigy) that entered the online marketing space and bought a site we were negotiating with for a cool three-quarters of a million dollars. I was annoyed because the Seller dragged us along and wasted a lot of our time and resources before jumping ship. Unfortunately for the Buyer, he did not have enough deal experience to really know what he was getting into. The Buyer quickly realized after writing the check that he overpaid for the site. Three-quarters of a million dollars is a lot of money to loose. In all honestly, the Seller should have been a better corporate citizen that to have hung the Buyer out to dry.

Having a methodical, diligent process is what will prevail in the long run. In this case it is very similar to SEO, black hat and gray hat tactics can only get you so far in the short term.

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