I’ve been investing in websites now for a number of years and I always follow Warren Buffet’s rules of investing:
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1
Considering 80% of businesses fail in their first 10 years, before investing in websites we need to look for key success attributes that will maximize our chances of picking a winning web asset.
Nothing is guaranteed in the online world but you can stack the chips heavily in our favor if you understand what to look for!
Key attributes to look for when purchasing a profitable website to reduce your investment risk
The following list will help you understand what attributes to focus your research on when buying a revenue producing internet site. Not every site will rank highly on all these aspects but it is important to consider each one before making an investment.
Only then can you make an educated decision manage risk versus reward.
1. Reasonable Price
The price you pay for an investment is a critical component of any purchase.
The more you pay for a web asset the longer it takes to make a return. At the same time, although everyone is looking for a great deal, many websites sold below market value are often “too good to be true”.
So how do you know what you should be paying for a site or it’s Fair Market Value)?
Calculating Fair Market Value
To keep it simple, the valuation of a site is calculating by taking Seller’s Discretionary Earnings (SDE) which is the amount of money the owner brings home and multiplying it times a certain website multiple range. This website multiple range is generally an accepted valuation based on market demand. So
Site Fair Market Value = (SDE) X (Site Multiple)
Seller’s Discretionary Earning (SDE)
When computing the Seller’s Discretionary Earning you’re looking for how much money the seller takes home from the business. This can be easily calculated:
SDE = (All Revenues) – (All Expenses)
- Start by requesting a Profit and Loss statement from the seller. If they don’t have that then ask for all revenues and all expenses.
- They will often forget a few things, especially on the expense side so depending on the type of business make sure you inquire about pick/pack/ship, advertising, cost of goods, shipping cost, storage costs, legal costs, virtual assistance, banking fees, hosting cost, article writing, technical support, etc
- Then you should be able to easily calculate the net profit or SDE by subtracting all expenses from the revenues.
The value of a website investment is calculated by multiplying the SDE by a monthly multiple based on market ranges. These are the ranges for the various types of web-based businesses that I’m seeing today.
Value Ranges for Web Properties
These are just guidelines. Website values have been growing over the years and change based on supply and demand. Five years ago, it wasn’t uncommon to purchase a site for 12X – 18X SDE but now it is hard to find anything under 24X.
Example of calculating Site value
Let’s say you have an amazon FBA site that you are looking to purchase. Here is the breakdown of the calculation:
- Site type: Affiliate Marketing
- Site Revenue: Bring in $50,000 over the past 12 months from Adwords and Amazon Affiliate
- Expenses: Yearly expenses from hosting, advertising, legal costs, banking, VA, article writing = $26,000
SDE = (All Revenues) – (All Expenses)
- SDE = $50,000 – $26,000 = $24,000 therefore Monthly SDE = $24,000/12 = $2000/month
- Market Value range: For an affiliate site the market value range is 32X – 40X
Site Fair Market Value = (SDE) X (Site Multiple)
- Site Fair Market Value Range: $2000/month X 32 on the low end and $2000 X 40 on the high end
- Site Fair Market Value: $62,000 to $80,000
Most people will assume that price is the most important part of any investment. Sure, you want to pay a fair price and it feels great when you get a good deal but by itself it means little if the site has other challenges and ends up failing in a few months after purchase
There are many other factors that need to be considered below to reduce your risk and maximize your return on investment.
2. Seller Financing
This to me is the most important aspect of purchasing a website. It can reduce your risk drastically and improve your profitability. I could probably create an entire post on the importance of Seller Financing and cover the various forms of financing and its importance. And if I do, I’ll link that here.
But for this post, I’ll keep it straight-forward
Why seller financing is so important and beneficial:
- Low availability of standard financing – banks loans, government grants, and many equity investors still perceive the risk of online businesses as high due to the limited history of the web so it is not easy to get typical financing
- Seller engagement – Financing over a period time keeps the seller engaged and can help a buyer with any issues that may arise
- Higher immediate returns – As you start reaping the profits from the site with a lower upfront investment, your returns become higher. The profits of the business help pay for the purchase
- Diversification – You can diversify your investment capital into more deals by only having to put a smaller amount upfront into each. This offsets risk if one of the site under performs
- Reduce risk – By setting up earn-out terms over time, if the site doesn’t perform as expected, you can walk away without having lost the entire value of the investment
Seller financing can take the shape of a loan, payment terms, earn-outs, balloon payments, success fees, and more. I will create a more indepth blog on this down the road.
A business’ trajectory is one of the most significant predictors of future performance. If a site is growing in revenue, new users, page views, etc, then it is expected to continue to grow. However, a site has been on a steady decline like the chart below from a site I was recently looking at, is not a good sign.
To protect your investment, look for sites that have consistent and continued growth.
Tread cautiously around sites that have sporadic growth as this may be a sign of a seller paying to drive traffic through google adwords or facebook ads. If you see sporadic growth then investigate further using tools like google Analytics and AHREFs.
Some sites have peaks and valleys because they are seasonal or just spike more over the holidays. You still want to make sure that there is growth from seasonal peaks year over year. In the chart below, an eCommerce site spikes around the Christmas holidays but as you can see each year the overall growth continues.
This really bring us to the next important attribute…the age of a business
4. Age of the site
The length of time a site has been active is an important attribute. The longer a site has been active, growing and making money, the more confidence you can have that this trajectory will continue.
Imagine trying to understand seasonality and consistency of the eCommerce site above if the site had only been around for 6 months.
I would highly suggest staying away from any site less than 6 months old as you wouldn’t be able to notice any potential seasonality, inconsistent spikes (due to SEO efforts in such a short period of time) or even growth trajectory.
The numbers are too easy to fudge when such a short time horizon is used.
Sites 3-5+ years have the longevity to show that they can sustain various market fluctuations and economic conditions.
These drastically reduce the risk in your investment but be prepared that they typically command the upper end of the market Value range.
5. Work Effort and Resource required
The amount of work that it takes to manage and grow a web-based asset is probably the most overlooked attribute.
Sellers will always under estimate the amount of time they work on their web property (sometime on purpose but often because they really don’t realize the long hours they put in).
At the same time, most investors are excited about the prospects of buying a site, and don’t think about the required learning curve. Even an expert in the field still have to learn the processes, plugins, and requirements of a specific site they purchase.
In some cases, expertise is needed and must be outsourced, cutting into profits.
I recently purchased a Amazon FBA site. This was my first investment into an Amazon site and although the seller stated the work load was 2 – 4 hours a week, it is significantly more.
This has required us to outsource work and has reduced our profits by 20%. This is a significant impact to our long-term ROI.
So always assume additional work and cost in any purchase. Especially if you are unfamiliar with the platforms, niche or processes as the learning curve can be steep and expensive
At a 15% commission rate, business brokers are expensive, however a really good business broker is worth their weight in gold. A business broker in the mix can also reduce the risk for both the seller and the buyer.
From a buyer’s lens, a business broker can assist you by:
- holding the money and the asset (domain name) in escrow until both parties meet the contract obligation
- helping gather the seller’s information to make it easier for a buyer to understand
- helping the buyer understand what it will take to get the deal done
- managing the negotiations between the parties
- reminding the seller of their obligations for training and support
There’s a lot more that brokers do but these are the critical ones that reduce the risk for you.
It is imperative to realize however that the Broker works for the seller and has fiduciary responsibility to them. Having a broker in the mix does not substitute the need to conduct substantial due diligence before finalizing a purchase (or even transferring any money to the seller).
A good broker will realize that working with strong sellers and creating value for both parties will turn into more business for them in the long run. So the good ones will be fair and transparent.
7. Seller motivation
Similar to real estate, a motivated seller that is desperate for quick cash may be willing to offload a web asset for less than market value. These are very rare but they do come up once in a while.
Motivation typically comes from unfortunately events in one’s life such as a divorce, dispute between partners, health issues, loss of a job, etc. These do offer opportunities for investors who can act quickly. But this is not always the case.
Often, a seller will even tell you that they are motivated! Here’s a title ad I just took off BizQuest
Note, I am not endorsing this ad for purchase, I am simply showing an example that some folks will openly admit they are motivated in order to ensure a quick sale. Due diligence is required regardless.
I recently negotiated a deal with a seller who had both undervalued his site and offered fantastic terms. I was very excited to say the least. When I finally probed to understand why he was selling, it turned out that he was running 2 successful restaurants and was struggling to handle the 2 hours a day of work the site required.
So he was happy to see it go to someone that was excited about it and would commit to growing it. He couldn’t get rid of it fast enough (there’s more to this story, but that will be for another post)
You will also find that many sellers lose interest in their site. And although it may be driving revenue for them, they just don’t have the passion to manage and grow the site. They are willing to sell it for less then market value or with good terms, to someone who can revitalize and infuse some passion into the business.
These are great opportunities out there but it takes time to find them.
8. Opportunity for growth
Buying a website where you see clear opportunities for growth can drastically improve your chances of a high ROI and minimizing your risk.
- if you purchase a site in the same industry where you have experience and contacts, you may be able to leverage your knowledge and network to drive additional sales.
- If you purchase an ecommerce that sells products that can be cross sold on another site you own, you can cross marketing to the customer base.
- If you already have a team and infrastructure in place for other website, adding a new website may allow you reduce your cost and leverage the existing resources
- In some cases, you can see opportunities in the business that the seller didn’t see: selling on other platforms, reducing costs or redundancies, capitalizing on trends.
The more opportunities you see in a business that the seller hasn’t capitalized on or doesn’t notice the move value the business has to you. This can really help drive a great return as you implement these changes.
Analyzing Key Success attributes provides a formula for investment success
Buying an internet-based business is very exciting and can be incredibly lucrative if done properly. However, as with every investment, it is important to analyze all the risks before committing.
I reviewed the 8 key success attributes that I look for when buying an internet business and can help you reduce your investment risk and increases your return on investment.
I’d love to hear from you if you feel there are some additional attributes that I’ve missed that you consider critical. Just comment on this blog below or send me an email!
I hope this was helpful.
And remember, Engineer the Life you want!