How I Nearly Botched My Business Sale

Despair-Small“Are you still interested in buying the business?”

The potential buyer had been grappling over the weekend with a few troubling issues he’d discovered in due diligence for TrollingMotors.net.  It was now Monday morning, and we were on a stressful, high-stakes call to see if we could keep the deal moving forward.

On the line: losing a month of progress with a qualified buyer, and all the momentum I’d built with my public $185,000 auction process.

How did things get to this point?

The initial weeks of the diligence process went smoothly.  Logistics for the transition were coming along nicely, we’d built a good working rapport and we’d even started training Clayton (the buyer) on our systems and products.

A week before we hoped to close the deal, I inadvertently hit Clayton with a one-two punch.

 

Problems With Revenue

The first issues arose with Q4 revenues.  Originally, I projected in my auction financials that I anticipated $105,000 in revenues for the last three months of the year.  But the actual figure came in right around $85,000, about 20% less than I’d projected.

While not ideal, this alone probably wouldn’t have been cause for serious alarm.  But there was one other thing …

I received an email from Clayton a few days later asking if I had any ideas about why January 2014 revenues were down from 2013 levels.  Digging into the analytics revealed a troubling picture, especially for a company supposedly experiencing strong growth: Year-over-year revenues for the first half of January were down 20%.  Even more alarming, the conversion rate was 50% lower than it had been the previous year.

Not good.

The combination of a missed Q4 and a very weak start to 2014 made Clayton (justifiably) nervous.  Was he getting ready to buy the eCommerce equivalent of the Titanic?

 

Ecommerce_Overview_-_Google_Analytics-4

 

Damage Control Mode

Fortunately, I was quickly able to come up with an explanation for the missed Q4 revenues.  When the actual Q4 revenues were compared to previous years (as a percent of total revenues for the year), they were well in line with what would be expected in the highly seasonal fishing niche.  I’d just been too cavalier with my estimates.

But the second scenario – the troubling start to 2014 and the gutting of conversion rates – was much harder to explain.  Finally I figured out the problem: The previous January, we’d accidentally had our pricing set extremely low for the first 2-3 weeks of the year, which had artificially inflated our sales for a few weeks.

It wasn’t that this January was off to a bad start.  Rather, last January had been extraordinarily good on the revenue side due to significant discounts we’d been offering.

I did my best to present data-backed explanations to Clayton, and I think for the most part he was convinced that they were legitimate.  But with so much on the line, it was impossible to erase the doubts and hesitations that crept in.  The fears of making an expensive mistake linger in the mind well after a logical explanation has been offered.

Clayton asked for the weekend to think things over, and I happily agreed.  That brings us full circle to our Monday morning call …

 

Coming to a Compromise

“So, are you still interested in buying the business?”

After a weekend of rumination, Clayton decided he was still interested in moving forward.  He still liked the company and believed in the underlying model/story. But he wanted to make one change.

Instead of paying the initially agreed upon 2.84x multiple on 2013 earnings, he countered with a 2.69x multiple.  His rationale was that he was still assuming more risk given the variances and had gone through a bit of a gut-wrenching process.  Also, the business was growing at a slightly lower rate than what he’d believed when making a bid based on my estimations for Q4.

Given the scenarios I’d been contemplating (him walking away, a sub-2.0x offer, etc.), it was difficult to appear disappointed for negotiation’s sake. Anticipating a counter offer, I had written down the lowest multiple I’d be willing to accept prior to the call: 2.5x.  So I felt like I could comfortably move forward at this level without any hard feelings.

I pushed back just a little bit on pricing, and we agreed to a 2.72x multiple.  This put the new deal price at $170,049 when incorporating the new Q4 results.  It wasn’t the original $185,000 I’d been planning on, but I was happy to have the deal back on track.

Four days later, with the wire transfer in my bank account and the deal officially closed, I was able to breathe a huge sigh of relief.  So what did I learn from almost bungling my first business sale?

 

Set Conservative Expectations

This goes for everything in life but is a great guideline for business: Set expectations conservatively and try to under-promise and over-deliver.

I was a complete dolt when setting revenue projections for Q4 2014.  Instead of shooting for the lower end of the range to protect against downside and disappointment, I targeted the upper end of what I thought was reasonable in hopes of presenting the best company possible for the auction.  Bad idea.

I also didn’t consider how much of the revenue from the year historically had come from Q4 in the past.  If I had taken a few minutes to investigate this, I would have presented a more conservative picture and saved my buyer from expectation whiplash.

 

Proactively Address Problems

Getting bad news is never fun.  But it’s usually much less detrimental if it’s proactively brought to you along with an explanation of why it occurred.  As the recipient, you’ll usually appreciate the transparency and up-front behavior from the other party.  It builds trust and lessens the impact, especially if a viable explanation is offered.

But discovering unnerving news on your own and having to probe for an explanation is unnerving.  It makes you wonder what else is out there that you just haven’t found yet.

When I delivered the news of the Q4 miss to Clayton, I did a pretty poor job of explaining WHY the revenues missed.  I didn’t do that until a few days later when I’d had a chance to think it through.  I should have instead waited to deliver the disappointing numbers until I had a solid explanation to offer along with them.

Ditto on the slow start to 2014.  I should have been tracking 2014 progress more closely, realized it seemed slower than the previous year, and reached out accordingly before Clayton had to bring it to me.

 

Don’t Drag Out the Closing Process

The longer a sale takes to close, the more likely something will pop up with the potential to derail the transaction.  This goes double if you’ll be straddling the end of a financial period (like year-end in my case).

I had structured the deal so that the price would be based on the final 2013 numbers  Overall, it took about two months from the bid date to close the transaction.  In the future, I’d like to try to keep that to 30 days tops and price the deal based on past financials instead of relying on future results.

 

Invest in the Working Relationship

A strong working relationship built on rapport and mutual trust was one of the key factors that allowed us to close the deal.  Without it, I’m not sure we would have been able to get through the rocky patch related to revenue misses.

So make sure you invest in any buy/sell relationship to inspire trust from the beginning.  Get to know each other, follow through on what you say you’ll do and be honest.  There’s a good chance you’ll need to lean on that credibility down the road if/when things get a bit hairy.

 

The Final Numbers

With the TrollingMotors.net sale officially closed, here are the final financials, adjustments and purchase price.  The year-end adjustment columns includes a few adjustments for revenues/expenses that were booked in 2013 but didn’t hit the bank account until 2014 and needed to be added back in:

 

Closing Financials
 

Post Sale & Questions for Clayton

It’s been almost a month since we closed the transaction.  After an inevitably crazy first week, Clayton’s settled in nicely and is getting comfortable running the business.  You can check out his new About Us page, which has some pretty legit pictures from his own fishing adventures.  The business is in great hands, and I wish him the best of luck going forward.

Have questions for myself or Clayton?  He’s generously agreed to answer your questions in the comments below, and I’m happy as always to jump in as well.   You can leave your questions / comments via the comment box below.

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Comments

  1. Great post Andrew! I can relate to the relief you felt when the money was finally in your account! Just one question… why did the transaction took so long?

    Ps… there is a typo in the 2nd parapgraph of ‘Set conservative expectations’ – ‘auctions’ is repeated twice.

    • Andrew says:

      Thanks! The transaction took so long because I structured the final price to be based off of the full year 2013 financial results – so we had to wait until January to close the sale. Once those numbers were finalized, we closed in just a few weeks.

      And type fixed, thanks. ;-)

  2. Jesse says:

    Hey Andrew, Great Post!

    Have been really enjoying your candidness with the whole process. It has been very valuable to anyone interested in selling their site.

    One question about the process … It seems like the case study has been a huge success for the eCommerce fuel blog, traffic wise. Did you factor in any extra traffic that the site might have gotten from people reading the case study? Surely this would effect your conversion rate in a negative way too, as I have (like alot of other readers probably) visited the site a couple of times while going through reading the case study, and am not really in the market for a trolling motor! haha.

    Just curious how that was handled, that could have effected your overall conversion rate as well?
    Cheers,
    Jesse

    • Andrew says:

      Thanks Jesse! And great point about the increase in traffic. It certainty did hurt the overall conversion rate, and I believer that’s something we discussed.

      But even with that accounted for, there was still a drop in overall sales (with organic traffic having risen) so we couldn’t attribute it all to that. Fortunately, there was another valid reason for the dip.

  3. Ian says:

    Great post, a little more “high stakes” than where I am for sure :)

    Andrew – Did you ever think you would be doing this size of a deal when you were getting started in eCommerce, or was this always the goal?

    Clayton – What was the single largest factor that interested you in buying the site?

    • Andrew says:

      Hey Ian! Didn’t know of course, but I always hoped so. ;-) Hope all is well with the news business and thanks for applying for the position!

      • Ian says:

        Thanks man, on both fronts. It has been an awesome year so far and I am busting my hump to make sure it stays that way.

        I don’t know if my model could ever scale to something like trollingmotors.com, but the project has been such a great experience I can’t even describe it. The process has changed the way I look at everything.

        Thanks for the opportunity!

        • Andrew says:

          If you work at it long enough, the market is big enough and you’re dedicated to learning/improving/growing than of course it can!

          And even if it doesn’t get big, starting a business like that teaches you so, so much as I imagine you’re finding out.

    • Clayton says:

      Hey Ian – I had followed Andrew and eCommerceFuel for awhile, so I was familiar with trollingmotors.net and had always liked it – the products, the market, the marketing, the content – so when it came up for sale, it just sort of clicked for me on all fronts. I also had a hunch that Andrew would be a reasonable person to do business with on this type of transaction, not an unimportant factor.

      • Ian says:

        That is cool Clayton. Even though it was a totally open book, did you have any concern that things might change for the site after the sale because it would no longer connected with eCommerce Fuel / Andrew? Do you think the conversion rate might actually be higher now that fewer people will potentially bee checking out the site because of the same reason?

        • Clayton says:

          Hey Ian – The thought had crossed my mind, but I really wasn’t too concerned about that. At the end of the day, the site will rank and perform based on the quality and relevancy of its content to its audience. In that department, I know we are THE LEADER and that I can continue to maintain and improve things. I believe the traffic from eCommerceFuel/Andrew is pretty minimal, so I doubt there will be a notable impact on conversion one way or another. That being said, I would like to do some analysis on what could be done to improve the conversion rates – specifically, why would someone come to my site and then end up buying at Amazon or BassPro or elsewhere? Is it simply a function of customer convenience/preference or is there something that I’m missing or that I could improve? Hmmmm…

  4. Mike says:

    Hey Andrew,

    Can you explain the 2.84x multiple? How does that work exactly? Or point me in the right direction?

  5. Glad to hear the ink has dried! I have a question about your Financials chart: are those all of the categories that you normally track, or did you consolidate some to make it easier to view?

    • Andrew says:

      Thanks Carole. It’s a little bit consolidated, but those are most of them – probably 70% or more. I’ll break some of them out (like Misc.) for my own internal accounting to include things like travel, bank fees, etc.

  6. Shabbir says:

    Hey Andrew,

    I really have to applaud your transparency with the whole deal. Your point on proactively addressing issues is spot on. Most people may think addressing a problem up front might turn a buyer off, but as you said people actually appreciate honesty.

    I guess the same thing could be said for products on a store as well. You don’t want to market EVERY product you sell as “the best thing since sliced bread.” Pointing out flaws where appropriate increases your credibility.

    • Andrew says:

      Great point, Shabbir! We’re filming a new round of product videos right now and are incorporating that into the scripts. For each product we’re trying to say what’s NOT ideal about it, both to help the customer make a good decision and to increase credibility. I think it adds a lot.

  7. Chris Wyatt says:

    Andrew,

    Great to hear about this!

    I remember emailing you quite a while back when this site was really starting to get going.

    Few questions:

    1. Why did you get involved with this site with such small margins? (looks like 11-12%)

    2. Because of #1 above is that why PPC/SEO were really low costs throughout the year?

    3. .45% conversions: that seems a bit on the low end? I normally see 1.5-3% for most sites. What do you attribute that to for this niche?

    Again, awesome work!

    • Andrew says:

      Hey Chris! To your questions:

      1. They are definitely on the low side, but the high cost pre item (usually $1,000+) does make it more manageable. If the average price per order was $100, that’d be really hard to make it work.

      2. Yep, exactly. It’s much harder to make paid traffic work with smaller margins. We were experimenting but it can be tricky.

      3. Again, this relates to the price of the item. Overall for eCommerce, it is a lower conversion rate. But the reason why is the high price point. The higher the price, usually the lower the conversion rate.

  8. Patrick Brennan says:

    Very good points of what not & what to do.

    I believe communication – frequent, open, and honest – is key, like you said.

    Another thing when selling your business that not many people understand: attorneys kill more deals than people realize! My advice to new sellers / buyers is this:

    Let the business people make the business decisions. Attorneys are advisers. Listen to their advice, but ultimately direct communication between the parties is the best way to get a deal done! Don’t let attorneys be on the phone together alone. They will rack up billable hours & they love to argue their point, and things often get lost in translation.

    Good read as always, Andrew.

    • Andrew says:

      Thanks Patrick!

      Don’t have a ton of experience with attorneys, but we didn’t have ours talk together. Mine was fantastic and I both Clayton and I were flexible to ensure terms we both were comfortable with. So it worked out well.

      But I can see how having two attorneys talk alone might delay an otherwise on-track close… ;-)

  9. Anthony says:

    Hi Andrew,

    Could you please tell me what is the platform for trollingmotors.net. I am thinking of setting a Ecommerce site and was wondering in your experince, what is the best course of action? Thanks.

  10. Patrick says:

    Good honest story. Think you are lucky to have a reasonable buyer. Wish you both the best of luck.

  11. Todd says:

    My question is for Clayton. What information did you ask for from Andrew beyond what he posted in his blog? What was critical to you and what stands out now as something you wish you would have asked for?

    • Clayton says:

      Hey Todd – Andrew provided me with a full prospectus and financials, which was available to anyone who signed a non-disclosure agreement. Beyond that, I also asked him for access to the merchant account and credit card records so that I could verify the flow of funds through the business. These were all helpful in proving that I was buying what was represented financially, but much of what I learned and which ultimately made me comfortable plunking down the cash was revealed in a dozen or more conversations and as many emails. This is where many details of the business, both positive and negative, were revealed. It’s amazing how much more information there is to learn in any given business than what is presented in a prospectus…and this where thorough questioning and due diligence come in handy. I can’t think of anything I wish I had asked for that I didn’t have access to or that Andrew failed to address from my questioning.

  12. Richard says:

    I think this was a jerk move by the buyer. I would understand ONLY if he suspected 4th quarter projections were inflated primarily to increase the asking price (which doesn’t seem to be the case), but a 2 week price discount increasing sales will only cut into margins, which is what the multiplier was based on in the first place. If the multiplier was based on revenue, a conversation about lowering the multiplier would be justifiable. But as it was based on net income, I don’t think he had a legitimate claim to renegotiate price after it was already agreed upon. If concerns were truly resolved, the right thing for the buyer to do would be to honor his initial offer.

    I probably wouldn’t have negotiated with him. But that would all depend on how bad I wanted to rid myself of the site. Regardless, thank you for being so open and honest about this. Very interesting read. Congratulations on the sell!

  13. Vinil says:

    Andrew, thanks for the candid information on the entire transaction!

    Clayton: Now that you’ve taken over, what kind of opportunities do you see for growing the business further? Do you plan on continuing things as Andrew had set up, or do you envision making drastic changes? If so, what changes? Just curious to understand your thought process, since you are brining an outside perspective.

    • Clayton says:

      Hey Vinil – Great question! Do YOU have any good ideas? I’m all ears at this point! I think my plan is to take a few months, really learn the ropes, understand the market, the customers and the products, and then contemplate any big changes. A lot of what Andrew built is gold, and I don’t want to fix something that isn’t broken. That being said, I have spent a good amount of time to date making small edits, spelling corrections, product fixes, minor content additions – in the aggregate, I hope these fixes/changes will continue to project an even more polished and professional website. I’m further contemplating some homepage changes and possible A/B testing, but again, I’m leery of fixing something that isn’t necessarily broken. I’m also really thinking a lot about how to get the trollingmotors.net brand into my customers’ boats and how to make their experience with us a conversation piece. To that end, I’m continuing to make ENTHUSIASTIC AND DELIGHTFUL customer service a centerpiece of what we do. Almost every customer I speak with remarks at how impressed they are with their experience and how they will in turn be telling all their buddies. That’s PRICELESS and I am going to put the icing on the cake by rewarding that experience with a small giveaway for every motor purchase: Two TrollingMotors.net branded neoprene beer koozies (check out http://www.kustomkoozies.com) – one for the buyer and one for his fishing buddy – along with a personalized and signed letter thanking them for their business and telling them how vital their satisfaction and their referrals are to our success. As a fisherman myself, I know the only thing better than catching fish is drinking beer while catching fish :)

      • Vinil says:

        I think your thought process about new ways of delighting customers is definitely the right direction, and those memorable giveaways are great. I know Andrew set the bar pretty high, but customer service is an art and a science, and there is always room for more innovation. I’m constantly thinking of new ways to WOW clients, and have been toying with some ideas for my e-commerce site that is currently under development. If you like, I’ll be happy to contact you through your website, and we can bounce some ideas off of each other. I will be in an entirely different niche, and we won’t be competing in anyway.

        • Clayton says:

          Hey Vinil – would love to brainstorm! Yep, shoot a message with your email through the contact form on my website and I’ll reach out to you directly. Thanks, Clayton.

  14. David says:

    Thanks for the whole series of posts on your sale, Andrew. It’s been a great opportunity to watch over your shoulder. What tools did you use to track your site’s stats as shown in the capture in today’s post?

  15. TC says:

    Clayton ( & Andrew) ,
    With the drop in revenue did your consider a portion as a hold back as an alternative rather than a drop in multiple. I know buyers prefer to get all the money up front and it is less complicated but a hold back (you can even put it in an escrow account) IMHO a hold back essentially asks the seller to make a vote of confidence in the business going forward. Thoughts?

    • Clayton says:

      Hey TC – The thought crossed my mind, but my preference was to have a simple transaction. Adding in a holdback would have involved an entirely separate negotiation and more things to deal with. For this size transaction and type of business, I’m not sure the effort would have been worth it or practical. Ultimately, I determined the business to be reasonably sound, but perhaps slightly less perfect than presented, and asked for a small consideration to make up the difference. I’ve also had a bad experience as a seller of another business which involved an owed, but unpaid, earn-out. I didn’t have the leverage at the time to structure the transaction any other way, but it was a lesson learned: There is value in a clean break between buyer and seller!

  16. TC says:

    What did the attorneys do,review contract? particiapte in due dilegence and what were their fees ? It sounds like you each had your own attorney. Do you have a good one to recommend?

    • Clayton says:

      Hi TC: I asked my attorney to review the final contract, but I didn’t involve him in any of the due diligence. The business is fairly straightforward and the transaction terms were pretty simple, so I think he billed me for an hour or so? Maybe $400? Andrew had his own attorney.

  17. Terry says:

    Hey Andrew/Clayton -

    How are you guys transitioning customer/supplier relationships? I’m sure a few are used to hearing from Andrew the past couple of years, so curious to hear how to business relationship side of things are being transferred. Thanks!

  18. Hi Andrew,

    Thanks for putting this series of posts together. I’ve been reading this morning with glued interest!

    Can I ask something that I’m studying quite deeply?

    Your multiple was only on net profit and didn’t factor in anything other assets such as brand, reputation, social reach etc. Is there a reason you didn’t go down this route for the site when you started out?

    Many thanks
    Daniel

  19. Paul Nessit says:

    Hi Andrew,

    Quick question: I noticed you did not spend one dollar on SEO. Is that because of the strong brand name your venture had or because you do not see the added value of it?

  20. Tony says:

    Hi Andrew,
    when you install opencart or any other ecommerce software, as you know they come with a lot of default information. Do you get ride of this information first and start fresh and if yes how? or you just change the information. Is just there is so much info that there is a big chance that I can leave some test data behind without realising if I take the second path(changing information). Thank you in advance.

  21. James says:

    Hey Andrew its a very nice post , a lot of quality information is provided especially the discussion part. http://www.mobilyletna.cz/

  22. Tao Wong says:

    Question about the site design / programming work for Clayton. I noticed the amount charged is incredibly low ($350). Are you intending to update the design to increase conversion rates / etc. or did you figure its fine.

  23. htpp says:

    magnificent issues altogether, you just won a new reader.
    What might you suggest about your submit that you simply made some days ago?
    Any positive?

  24. Chris says:

    Andrew,

    I don’t see any insurance expenses, product liability or errors and omissions insurance. How do you get around that without exposing the company to litigation risk?

    Thanks

  25. Tommie says:

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    my site!I assume its good enough to make use of a few of your ideas!!

  26. Joshua says:

    A very detailed conversation, like the whole discussions and article too.

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