Internet Business Blue Sky Potential

During the initial interview process with a seller, our internet business broker or advisor will delve into the financial details of the seller’s internet or web site business.  Inevitably the conversation will lead to the “ifs”.  Often well thought out results of what the business could be and how much potential it has, if the new buyer were to complete a list of action items.  These items are often excellent selling points that help the internet business broker maximize the value obtained for the business.  However, a hiccup that sometimes occurs is the seller’s desire to capture a bulk of that “blue sky” potential in the asking price.  There is one area in which “blue sky” commands the big bucks and that is the venture capital arena.  Venture capital firms have thousands of businesses cross their desks in various stages of development and those who often have unique concepts that exhibit tremendous potential will receive funds to help grow the business.  In exchange, the owner will have to part with a large percentage of equity.  A price to pay for the owner to possibly realize the potential of the business.  On the other hand a seller looking to exit the business will have to rely on the common methods used to determine what an internet business is worth and then with the help of his/her advisor properly structure a deal in which some of that potential can be realized, often called an earn-out.  An analogy that we at iMerge Advisors often use is the story of two ten story commercial buildings.  Both in outstanding locations within the city.  Both built by the same company 45 years ago and both buildings have been well cared for.  While one has remained in its “dated” past the other has been modernized with all the desirable updates.  The updated building is realizing its potential resulting in higher earnings for its owner and was recently sold for $10 million dollars.  (Lets assume both are debt free)  The dated building also fully rented at lower rental rates is currently still on the market for $10 million dollars, after all it has the potential to be like its twin a few blocks away.  The story helps the seller gain a 30,000 foot vantage point and “see” that buyers have many choices.   In this case the owner of the dated building has a choice to make based on some analysis, either lower the price to one the market will accept or borrow money to upgrade the building and realize its potential value of $10 million.  The building owner may find the costs associated with realizing the potential is not worth it, whether its for financial, timely or emotional reasons.

Internet Business owners must make a choice, plow ahead with action items and convert that “blue sky” to real dollars or sell today at current market rates and try and share in the potential with the new buyer.