Selling a web business on an auction

Why the Auction Model Doesn’t Work for Selling a Website

When selling a website or an online business, you usually have three overall models to choose between:

  1. Run an auction
  2. Set an asking price
  3. Advertise the business without a price

Some time ago, Mark Daoust from Quiet Light wrote a good article on why not setting an asking price is a terrible idea, and as this is by far the least common model, I won’t stop on this any longer.

The asking price and the auction models are both quite popular, though. The asking price model is a clear “winner” in terms of popularity in mid- to high end acquisitions, but the auction model is very common for a lot of low-end website purchases.

While the exact numbers are hard to come by, my estimate is that around 10% of online business acquisitions in the $100,000 – $5M range are the result of an auction. For sites in the <$100,000 range, however, the percentage is likely to be closer to 50%.

Little Bit of History 

If you asked anybody in the online mergers & acquisitions industry 10 years ago what they thought about the concept of selling businesses on a real-time online auction that lasts 7 days, the majority would’ve probably laughed in your face.

Back then, nearly all transactions followed the “traditional” model of setting an asking price and receiving offers. So what happened?

In one word – Flippa (or SitePoint Marketplace – as it was known back then). Love them or hate them – and a lot of people sure do the latter – Flippa managed to successfully shape a big part of the industry by introducing the auction model, based on which they operate till today.

Granted, Flippa’s reach has mostly only affected the very low-end of the industry, with the average sale of their platform likely being in the range of a few thousand dollars, but by successful lobbying and being the only marketplace, they’ve had a significant impact on the industry regardless.

So what’s wrong with the auction model? 

For $500 AdSense sites, absolutely nothing!

I’m not at all blaming Flippa for this ‘disruption’. When Flippa first started, their target market was tiny little websites that don’t have any moving parts. Think of a blog that publishes 1 new article per month, gets its traffic from Google, and generates $50 a month in passive ad revenue.

And for a site like this, running an auction is perfectly fine!

But the moment you move even a little bit further up on the ladder, the model becomes extremely flawed and often results in very poor decisions being made.

A fully functioning business isn’t a loaf of bread 

Looking at most websites sold in the $20,000 – $5M range, very few resemble the “fully passive” example above (Related: Passive Online Businesses – Biggest Myth in the Industry). Far more commonly, there are a number of moving parts, from complex income to non-transparent operations.

This is why it’s virtually impossible to make an informed purchase decision based on a 1-page blurb and a few questions & answers.

Let me put it this way – if you were to buy a supermarket, would you be comfortable putting in your (legally binding) bid after seeing the premises only from the outside and reading a 20-page brochure on why it would be such a good purchase? I’m guessing no.

You’d want to perform proper due diligence, understand how the business works, go through the whole property with a fine tooth comb, and have an accountant make sure that the business’s books are in order.

Flippa, of course, encourages its buyers and sellers to ask any questions they need answers to prior to bidding (and rightly so), but there are four inherent issues with this:

Issue #1 – Seller’s Time 

Having facilitated nearly 150 transactions, varying in as little as $10,000 to as much as $8M in value, I can tell from experience that, on average, due diligence tends to take anywhere from 10 – 100 net hours of the seller’s time.

Sure – a lot of this time is spent gathering the necessary documentation (which doesn’t need to be repeated with multiple buyers), but a big part is answering individual questions.

Therefore, it would be simply unfeasible to me as a seller to spend all this time fulfilling the due diligence requirements of buyers who, for all I know, won’t even step forward with an offer, or make a lowball offer that I’m not prepared to sell my business for.

It makes much more sense to answer preliminary questions that help set the value of the business, get an offer, and only then proceed with due diligence.

Issue #2 – Buyer’s Time

Similarly to the above, buyer’s time is also a significant issue. As a buyer, it takes a lot of time, effort and sometimes money to conduct proper due diligence.

This can include items like going through the company’s books, verifying their traffic sources in detail, conducting a code review, and much more.

With this in mind, it wouldn’t be reasonable to expect a buyer to make a significant commitment like this without even knowing whether their offer (or bid, in this case) is even going to be successful.

Would you be willing to travel three hours from home to test drive a car that you like, but don’t know the price of? I wouldn’t.

Issue #3 – Auction Duration

With the value of time aside, there’s another area where time is often a limitation.

Auctions on Flippa usually tend to last anywhere from 3 to 10 days. Longer auctions do exist, but they’re not overly common.

With this in mind, as an interested buyer, you have only the 3-10 day time frame to ask all of your pre-offer questions AND conduct due diligence. And that’s assuming that someone else doesn’t decide to negotiate a fixed price with the seller behind your back (which happens very often) or simply go for the “Buy It Now” price and leave you high and dry. 

Issue #4 – Confidential Information

Last but not least, there’s the issue of confidential information.

When selling my business, the last thing I want is to grant access to highly confidential information, such as my customer lists, exact financials or internal operating documents to tens (or hundreds) of people who MAY be thinking about buying the business.

I’d much rather provide what’s necessary to determine the value of my business, and reserve the rest for the due diligence period after an offer is placed and accepted.

In reality, it’s actually not so much the sellers who are at a disadvantage here – it’s mostly the eventual buyer of the business. Would you be happy to buy a business, knowing that a large number of people (including competitors, copycats and other “nasties”) have recently enjoyed a complete Doors Open Day into the most sensitive information that the business has to offer?

What’s the alternative?

Innovation is great, but sometimes there’s no point in re-inventing the wheel.

A good alternative that has worked for the last 100 or more years for bricks & mortar businesses, and will likely continue to work for the next 100, is the traditional “asking price > offer > due diligence” model that the majority of website brokers use, but sadly not marketplaces.

The model is simple but allows for the elimination of all of the problems discussed earlier. In the “listing phase”, enough information is made available to buyers for them to make an educated decision on valuation and put forward an offer. If an offer is accepted, an exclusivity period is agreed on, when the buyer and seller can both work on due diligence requests, without any unnecessary time drain or fear that the deal won’t go through.

The auction model may be suitable for small websites that have no or few moving parts, but the moment you go slightly bigger, the model heavily favours gullible buyers who simply don’t know any better, and are happy to flock out their wallet after no or minimal due diligence.

Perhaps this is also one of the reasons why scams are so commonplace on marketplace sites like Flippa?

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50 Comment

  1. Nice article. I don’t understand why the facilitator (Flippa in this case) takes the hits. It’s the buyer who gambles with his money in such auctions with often very limited information available.

    Well brokered deals are hard to find there (Deal flow I liked initially) I think part of their success is accessibility, something what’s not common with the traditional brokers.

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