Verifying that Website Buyers Can Repay Debt
The most common form of debt financing in website deals is seller financing. Traditional lenders almost never lend to website buyers. Sellers generally offer financing terms to buyers.
There are a handful of specialty lenders that do lend to website buyers. However, these deals generally involve premium domain names which are used as collateral for these loans.
A bank verifies a borrower’s income, debt level, and credit history. In the same way, a website seller offering financing is a bank. Therefore, the seller must verify that the buyer can afford to make the scheduled debt payments. The buyer must have the ability to repay.
In a website sale involving seller financing, the borrower is, in fact, the website. Not the buyer. It’s very difficult to place a lien on any assets outside the website deal such as the buyer’s car or house. The domain name and website assets are the collateral secured against the loan. This must be clearly outlined in the website purchase agreement.
The seller has to make sure that the website cash-flow can comfortably cover the debt payments. It is also a good idea to include a margin of safety for any unexpected future decline in cash-flow. For example, assume that the website cash-flow drops by 25%. If this lower cash-flow can still cover the debt payments, then the financing terms are properly structured.
The important thing to remember in a seller-financed deal is that the seller retains a stake in the business. This is not an equity stake. The seller has a vested interest in the future success of the business. Even though he is no longer managing the website full-time, he could be of invaluable help to the buyer if the buyer faces any future business challenges. The buyer should always take advantage of the seller’s wealth of knowledge whenever he can. After all, it’s in the best interest of both parties to have a successful business.
As a seller, always offer financing terms that the website cannot afford. The website is the real borrower.
As a lender, it can be tempting to ask for the biggest monthly payments possible in order to receive the biggest payout possible in the shortest amount of time. However, this could be the worst lending decision you ever make if the website can’t afford it. The borrower could default and the seller/lender has to foreclose on the domain name & website and start all over again. And the foreclosure process is not always very simple.
As a seller and lender, always remember to ask yourself this simple question: Can the website afford to make these debt payments?
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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