Buying a small online business: what to know before you bid

By The Investing Fox · General information, not investment advice

Small online businesses such as software tools, newsletters, content sites and ecommerce stores change hands every day on online marketplaces. For buyers, it is a way to own cash flow directly instead of a share of someone else's company.

How they are priced

Small businesses are usually priced as a multiple of yearly profit (often called seller's discretionary earnings) or, for software with recurring revenue, a multiple of yearly revenue. Multiples rise with growth, low churn, diversified traffic and low owner time; they fall when one channel, one client or the founder does all the work.

Due diligence checklist

• Verify the numbers directly in the payment processor, bank and analytics, not in screenshots.
• Revenue quality: recurring versus one-off, churn, refunds and concentration in a few customers.
• Traffic risk: how dependent the business is on one search engine, one app store or one ad platform.
• Owner time: how many hours a week it really takes, and what only the seller knows.
• Transfer: what assets, accounts, code and contracts move to you, and the seller's transition support.

Deal structure

Use an escrow service, agree a handover period, and consider tying part of the price to performance after the sale (an earn-out). Asset purchases are often simpler and safer than buying the legal entity.

The catch

A small business is a job as much as an investment. Growth usually depends on what you add after buying it, and a single algorithm change can cut revenue overnight.