Building a new Marketplace

**Andy** · 26 July 2010, 6:48 am

Some wild and not so wild thoughts here...

Speaking from my offline experience as a long-time participant in offline auctions, a former real estate agent and part owner in an auction/business brokerage (unsuccessful, I"m afraid), I wonder if any of this can offer a different perspective.

Business brokers - in the re and business brokering market offline - brokers typically work for the seller. Since most brokers and agents work on a commission basis - they make money by listing and selling. In the re market, a broker usually has an equity stake in the business whereas an agent is a commissioned salesperson. Brokers are always agents but agents are not always brokers even though the term is used interchangeably. That said, I'll use the term "broker" from here out but understand, I am not referring to someone who necessarily has an equity portion of the company.

Again in RE there are listing brokers and selling brokers. A listing broker earns a percentage of a sold property as does the selling broker - any broker can list and sell the same property so he does not have to split the commission with anyone. I'll deviate here to offer an example to include a breakdown in commission with two brokerages, with the listing and sale generated by agents.

Broker Able employs Agent Alice. Broker Baker employs Agent Bob. Alice and Bob are both commissioned agents for their brokerages. Alice lists a property. She markets it via several avenues available to her. Bob has a client looking for just the property Alice has listed. The client likes the property and buys it.

The commission is 10% (high for ease of demonstration). Broker Able gets 5% and Broker Baker gets 5%. Both brokers offer a 60/40 split with their agents thus Broker Able and Broker Baker - receive 3% of the sale while Agents Alice and Bob end up with 2%. Notice the commission is derived by the selling price and is paid for by the seller. Even though Bob never meets the seller - he technically works for the seller and NOT for his buyer.

In recent years "buyers brokers" have become more in vogue - these brokers do not participate in the above commission at all but are paid for entirely by the buyer to represent the buyer. This does not mean that a good broker won't try to negotiate a lower price by pointing out the commission savings - but he works for the buyer -- NOT the seller.

Why bring all this up? Obviously, in offline business brokering, this same structure often still exists. I also believe it to exist online as well. Please correct me if I'm wrong.

The other reason is, as I've mentioned before, I think there might be an opportunity to provide a kind of "multiple listing service" (MLS) for online brokers. Such MLS animals already exist but these are often an offshoot of listing services geared toward brick and mortar businesses. As such, we stand to run into similar problems as the offline RE/BB market does - they don't always understand the nature of different beasts.

Many RE brokers sell businesses. The problem is many of them treat these businesses for sale as real estate listings. They often pay close attention to the property/lease involved and mere lip service to the business itself. This is the primary reason my partner and I entered the BB arena to begin with.

Granted there are a lot more similarities between online and offline businesses than between a building that used to house a restaurant and a going restaurant but there are also many differences to consider. And I think these should be considered.

As far as the online BB brokerage industry is concerned, I have no clue whether they have similar commission-sharing schemes in place, but it might be a good idea if they did. Something to think about.

Now about auctions - while I can see certain advantages to how auctions on ebay and flippa are done - do we HAVE to follow that model? What if someone broke from that mold to offer a more "conventional" model online? Here's how it might work:

A business decides to sell at auction. Rather than listing for a live auction to end on a certain day, The business lists with the auction house and the details are gathered. Once the mandatory info is collected, an auction date is set and a listing published online and sent to participating brokers. Interested buyers register and are then given the complete prospectus. On auction day, the bidding is opened to the registered buyers and the highest bidder wins.

Now imagine the power of both concepts combined.

Andy

**Clinton** · 27 July 2010, 5:03 am

Good post, Andy, thanks for bringing your business brokerage/RE experience to this. That's an interesting idea you've presented with regards conducting of the auction. I would love to hear what others think about it.

Business brokers - in the re and business brokering market offline - brokers typically work for the seller.

I often have to remind buyers of this.

Given Flippa's advance fee and the relationship Flippa has with the frequent sellers - sops, free credits, prizes, encouragement for repeat listing - to what extent is Flippa aligned with the seller and in a broker type relationship with him?

This is a serious question. The similarities between Flippa and a seller's broker are
1. Both have interest is in making the sale, not the viability of the business, the accuracy of information or anything else.
2. Both get paid by the seller. Even the success fees in Flippa's case are in the hands of the seller.
3. Neither have any incentive to help the buyer, but both have an incentive to not compromise themselves in a way that will attract lawsuits from buyers
4. Brokers get paid either a flat agreed fee (some in advance) or a commission on successful sale. Flippa gets paid a flat fee and a commission on successful sale.

Differences
1. With a broker, the seller is a one-off customer. With Flippa, the seller is usually a repeat customer and the buyer is a one-off
2. In Flippa's case the seller can decide to pass some of the "commission" to the buyer (but that happens in some business broker sales too).
3. Flippa's commission is a percentage with a maximum of $500, brokers work on a percentage, they tend to have no dollar ceiling.

To what extent is Flippa a broker for the seller? Does the marketplace getting involved in anything outside of listing put them in broker/advisor territory and comprise their neutrality?

**benitez17** · 27 July 2010, 5:47 am

Andy, those are some interesting thoughts, and I think it will require someone taking a different approach like one of these if they want to take on Flippa.

Aren't FlipFilter and its competition acting like an MLS in a way already? A true MLS would require co-operation between the brokers, and I don't see that happening any time soon, but a site that aggregates all of the listings seems functionally similar to me. However, I have only used it to search for houses, so there might be more going on behind the scenes. Are there any other advantages to the MLS for brokers besides being a centralized database?

**Andy** · 28 July 2010, 7:53 am

Clinton,

Good points about Flippa, though I see no reason why a buyer needs to be a one-off.

It seems to me an auction house should be more neutral. No matter how few or many transactions take place with one buyer or seller, Flippa is there to stay. Every sale puts their reputation on the line, therefore it is in their best interest to promote an even-handed deal every time.

Since ideals rarely materialize in the real world, I'd say the balance will tend to tilt in favor of the seller. Funny that, considering it is always the buyer who supplies the funds.

Benetiz, where I came from there was no MLS - the backwoods brokers couldn't agree long enough to co-operate to that extent. Hence, it was a free-for-all with some brokers working with this one but not with that one. So on this matter, I can only guess about the behind the scenes part.

Compare that with a private outfit like homesdatabase.com - it covers D.C. and the surrounding area. In order to participate, brokers had to follow certain strict rules - they HAD to list EVERY listing within 24 hours among other things. What was the draw? Why not just use Realtor.com and be done with it?

Well a lot of people simply like HD beter. You also have access to non-Realtor (trademarked term) brokers. As a broker you gain access to many more potential home buyers you otherwise would not. The draw is pure self-interest.

This same self-interest is why brokers split commissions. In the B&M world - most listings go unsold. However online, I think we are looking at a totally different situation. Now that I think about it - I'm not sure WHY it would be necessary to split commissions as most people don't go to a broker to buy a business like they would a house. Surely if someone invented a buyer's broker for online businesses, the need might come up. But for now - just a place to aggregate listings might suffice.

There are already quite of few business listing sites but none that I know of that caters specifically to online businesses.

For something like this to work I think establishing a certain criteria for listings might be in order. Maybe it should be limited to brokers but I think it would be a mistake. A better way might be to offer an intermediate level - some sort of professional level for multiple sellers like Thomas who are not brokers but are also not casual sellers either.

As far as flipfilter acting as an mls, yes, in a way - but none that I know of are a member-based system - something I think may be key to providing a trusted marketplace. If a marketplace could be established that requires high standards to participate and no tolerance for scammers, I think it could grow into something where nearly any buyer would want to look first for quality offerings.

I would also think sellers could realize prices closer to the true value they offer. This may or may not be advantageous to all :-) but to sellers desiring a fair price for their sites with a streamlined sales process, it could be very attractive to them as well.

Andy

**benitez17** · 28 July 2010, 9:22 am

Andy, thanks for the explanation. I think you might be onto something with your suggestions for a trusted marketplace.

**Clinton** · 28 July 2010, 9:57 am

I've just made a comment on the flipfilter blog, it's awaiting moderation.

I'm not sure WHY it would be necessary to split commissions as most people don't go to a broker to buy a business like they would a house.

WSYSBroker, who's a member here, has a database of buyers looking for businesses. I'd be surprised if any major broker doesn't have such a list.

A better way might be to offer an intermediate level - some sort of professional level for multiple sellers like Thomas who are not brokers but are also not casual sellers either.

It's strange how every other business puts the paying customer first, tries to do what's in his best interest, builds their reputation around catering well for people who spend money ...but not so with selling web businesses. I don't think any different principles apply here. The marketplace needs to understand what ticks the boxes for vastly different customers

1. The customer who is looking for a cheap way of getting into online business
2. The customer who has $50K to a few hundred thousand wanting to buy his first online businesss, but lacking the technical skills
3. The customers like benitez17, peterdavis and me - who have budgets all the way from a few hundred to a few million - who just want to be put in touch with people looking to sell established businesses of a particular type - peter with forums, me with finance sites etc.
4. The customer looking for acquisitions to add to their existing portfolio - perhaps to shore up their link building, add some synergies, or buy up and close a competitor (the site doesn't have to be generating profit)
5. Others

Flippa marked out very clearly that they are targeting the first type. That's it. It seems to me there's a gap in the market to cater for the others.

**Andy** · 28 July 2010, 11:01 am

Originally Posted by Clinton

I've just made a comment on the flipfilter blog, it's awaiting moderation.

WSYSBroker, who's a member here, has a database of buyers looking for businesses. I'd be surprised if any major broker doesn't have such a list.

It's strange how every other business puts the paying customer first, tries to do what's in his best interest, builds their reputation around catering well for people who spend money ...but not so with selling web businesses. I don't think any different principles apply here. The marketplace needs to understand what ticks the boxes for vastly different customers

1. The customer who is looking for a cheap way of getting into online business
2. The customer who has $50K to a few hundred thousand wanting to buy his first online businesss, but lacking the technical skills
3. The customers like benitez17, peterdavis and me - who have budgets all the way from a few hundred to a few million - who just want to be put in touch with people looking to sell established businesses of a particular type - peter with forums, me with finance sites etc.
4. The customer looking for acquisitions to add to their existing portfolio - perhaps to shore up their link building, add some synergies, or buy up and close a competitor (the site doesn't have to be generating profit)
5. Others

Flippa marked out very clearly that they are targeting the first type. That's it. It seems to me there's a gap in the market to cater for the others.

Good point about buyer's lists Clinton. I also agree about the need to fill the gap in the market.

I'm not sure why you quoted my statement about intermediate sellers like Thomas but maybe what I was saying wasn't clear. Part of my own vision for a marketplace includes accommodations for three categories of sellers - as they are the ones who decide to sell something and list properties for sale, whether for their own sake or for that of a client, in the case of a broker. Each type of seller generally appeals to a different class of buyer. Yes there is some overlap, but I think it is better to identify and qualify a "professional owner/seller" than to lump everyone together.

Most marketplaces need to first attract sellers if they are going to be attractive to buyers. To quote an old employer of mine as an example of an attitude that does NOT work "I'll start advertising when people start coming in here and buying".

I see no way around catering to sellers in one way or another because people won't come to an empty store.

Andy

**Clinton** · 29 July 2010, 9:19 am

I quoted your statement because it seemed to reflect current thinking in marketplaces where the structure and operation is built around the types of sellers they are catering for ...when it's buyers who should be the focus. If any attention is paid to the sellers it should be to mark out the repeat sellers as people in the business of selling sites. The purpose should be to forewarn buyers - those looking to buy an established business would likely prefer to avoid these sellers whereas a certain type of buyer may prefer to buy from someone who has the experience in setting up a newbie with a site and helping him through the early days.

I don't believe markets need to attract sellers first, neither do I believe it's a chicken and egg situation. In my mind, you need buyers first. If you have a vast database of buyers you will attract sellers looking to target them, but having a large number of sellers won't necessarily attract buyers (except in an eBay type marketplace where it's about getting something for cheap).

**Andy** · 29 July 2010, 9:43 am

Originally Posted by Clinton

I quoted your statement because it seemed to reflect current thinking in marketplaces where the structure and operation is built around the types of sellers they are catering for ...when it's buyers who should be the focus. If any attention is paid to the sellers it should be to mark out the repeat sellers as people in the business of selling sites. The purpose should be to forewarn buyers - those looking to buy an established business would likely prefer to avoid these sellers whereas a certain type of buyer may prefer to buy from someone who has the experience in setting up a newbie with a site and helping him through the early days.

I don't believe markets need to attract sellers first, neither do I believe it's a chicken and egg situation. In my mind, you need buyers first. If you have a vast database of buyers you will attract sellers looking to target them, but having a large number of sellers won't necessarily attract buyers (except in an eBay type marketplace where it's about getting something for cheap).

Funny, the need to mark out professional seller/owners is exactly why I presented this structure.

As for the seller/buyer issue, I'll stick to my guns. Unless you are targeting professional buyers who are in the market for the long run, you're going to need something to sell. I can offer all sorts of anecdotes for this:

A bar (pub) with a slow night can expect things to stay slow. People want to go where the action is.

A classified ad section of a website stands little chance of becoming active unless there is stuff to look at. Nobody want's to wait around for what's "coming soon".

A forum with little or no activity will have a hard time growing.

When a home buyer is looking for a house - they want to see listings, not promises.

Thus: someone who is thinking about buying a business - online or offline - is going to look where he can see what's for sale. That's what my latest blog post is about - how to find businesses FOR SALE - not how to get on waiting lists in case something comes up. Even those extensive lists of ready buyers - again, unless you're talking about people building portfolios of web properties - will have to do something to find businesses for sale because I'll guarantee you very few are sitting by the phone waiting for someone to call with an opportunity. They are actively seeking something or they are not serious about buying.

All that said, I think any marketplace must necessarily attract sellers before it attracts buyers in any significant numbers.

Andy

**Clinton** · 29 July 2010, 10:10 am

A bar (pub) with a slow night can expect things to stay slow. People want to go where the action is.

That proves buyers want to go where there are a lot of other buyers (not a lot of pubs)

But we'll have to agree to disagree

What we probably agree on is that the market will eventually need a good mix of both buyers and sellers. Justin has posted part 2 of his series, but I must admit I'm losing him a bit. I have difficult accepting some of the premises on which he bases his arguments. For example, I don't believe "internet marketing" describes all online money making opportunities - from domaining to virtual assistants working by the hour to forex trading to making a living from poker/gaming. And I don't subscribe to the belief that a rise in demand for template sites is inevitable. I see the demand rising only to the extent that these are promoted convincingly by the marketplaces and others as a good way to make money online/enter the world of online business.