Ask HN: Any advice for someone looking to buy an existing business?

If it is a large chunk [as you said] of your hard earned money, do not shell it out unless you are really sure. In the worst case, you will still have your money with you. In the other case, you lose your hard-earned money forever, plus time and emotional energy. When in doubt, walk away.

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.

It sounds like you're suggesting owner financing? I think either way there will be financial risk.

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?

(Sorry, just saw this again).

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.

I bought a similar website on transferslot sometime ago for $15000. Later I realized I dont have time between day job, kids and general family life to pursue this business further. I let it die :(

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.

I was looking to go big because I anticipate that I will not be able to do it part time. I am looking for a full time opportunity so that I can leave my job and focus on it, while drawing some income to pay bills.

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?

Well, I was relatively naive but luckily the person was honest. So I did not have issues. But here are some suggestions. 1) Open an escrow account, pay some money for it. 2) Put source code, domain name transfership, any business doducments in that escrow. 3) Ask seller to provider support to you for 1-3 months. This should go into contract. 4) Release money in installmeents. 5) Release from escrow only after you are satisfied!

is 8k revenue or profit ? If profit, 250K is not a stretch considering it is just over 2.5x the profits. Some may argue that 2.5 of revenue is also not a bad thing but usually for revenue under 500K, I don't consider multiples of revenue as it is too small and need to focus on profit.

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.

It's $8k cashflow.

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.

No problem. Happy to help with anything else if you need. Just reach out.

How would I get in touch if I wanted to learn more about your experience and ask follow up questions?

I imagine the process is like any acquisition. From what I've seen so far, basic things people look for: 1. Business Registration (LLC, B corp, C corp, etc) 2. PnL for past 5 years 3. Tax statements 4. Banking statements 5. Inspect codebase, database, and cloud infra.

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.

Just getting started and looking to hear from other people's experiences. I would like to have this finalized by a lawyer, maybe that's not the right person. It seems that going through a broker might be a good first step.

Not what you are looking for, but it may have some hints. This is an old post by patio11 "What I Learned Selling A Software Business" https://training.kalzumeus.com/newsletters/archive/selling_s... HN discussion https://news.ycombinator.com/item?id=11347006 (439 points | March 23, 2016 | 84 comments)

Are the $8K total revenue or the net income?

Learning about both sides of the transaction is valuable info, thanks! I remember this article from way back. I didn't remember that he recommended selling through a broker. I would like to look into his recommend broker some more.

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.

I was part of FE International newsletter. So, I got to see financials of some companies. You always have costs. Like stripe costs, hosting costs, licenses etc.

So profit is never 90%, its typically like 30% of gross

Worry less about the MRR and more about what direction it is heading. $8K/m as a snapshot in time is great, but what was its growth over the last couple years? And why? And are the underlying factors that made it grow still relevant?

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.

Oh, that's a really great point. I should definitely spend some time to figure out what factors will demonstrate continued growth.

My advice. I don't work in your industry but I find the following to be universally true:

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

I'll respond to each number

  1. I am looking through brokers in my area now, would you say this is simliar to home buying where I should find a broker to help me "shop" that would represent me?
  2. Was that hard to find people who were willing to go that route?
  3. Solid advice, I plan to look back 5 years.
  4. Why 1.5 - 2 times cash flow? I was under the impression it can fluctuate up to 4x based on the industry.

Edit: format

1. I'd typically ask your lawyer or financial person (if you have either) for someone they would recommend.

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?

You don’t share terms of the deal. For a win-win for you and the seller, it’s great if you can transition into the business while transitioning them out of it. Creating a financial incentive for them if the transition is successful is key. If they balk at this concept, walk away.

I'm not sure I understood by "you don't share terms of the deal". Judging by the rest of your comment are you suggesting that I try to get them to let me run the business first, then provide payment once I've taken over?

Id buy a more simple business. Online websites are like casinos. Who still uses myspace or altavista? Laundromat, cleaning business or something like that, that almost never goes wrong. Then with the stable income do the risky investments

That sounds like a good idea. Usually I find these businesses cost a lot, which would leave me with nothing for another business. The return is good if it were completely hands off but most businesses never are. Meaning I would have to leave my well paid full time job to run that business. Have you tried this approach, what was your experience?

I tried the other approach, buying some websites. It can be good but can change quickly. I’d invest money in boring business now that generate cash flow, but yes it can be pricey. Maybe there is some middle ground like renting a car, airbnb etc