Getting a great deal when purchasing an internet business is not an easy thing to do.
On one side you a have seller hell bent on maximizing the return on their effort and finding someone who will take their business to the next level with passion and commitment
And on the other side, you have buyers who are looking to find a great deal in order to maximize return on investment but don’t want to buy themselves a job. They are looking for a passive investment.
As a buyer you want to land that perfect unicorn:
- A motivated seller
- A growing profitable passive business with low overhead and high potential
The challenge is that everyone is looking for that. But believe it or not, these unicorns do exist
The approach is simple:
- Cast a wide Net
- Rate opportunities quickly
- Work the funnel
Cast a Wide Net
It’s impossible to know when a great deal will manifest itself. It’s really a function of timing, awareness, creativity, and a bit of luck. We can however stack the cards in our favor so that the deals will come to us vs someone else.
By casting a wide net and having multiple systems in place to drive deal flow, we increase the likelihood that when a motivated seller appears they reach you with their opportunity. Here are a few of those deal flow systems:
- Friends and Family– let everyone know that you are looking to purchase a business
- Online communities – Reddit and Facebook have many groups tailored to online businesses. Becoming engaged in those groups and letting the group know that you are looking for acquisitions will allow them to connect with you when they have a site to sell.
- Social Networking – Add on your LinkedIn profile that you are looking to acquire an online business and have them connect with you.
- Brokers – brokers are constantly growing a database of potential buyers so can they help their customer quickly sell their business. Call the largest brokers, set up a profile with them and let them know exactly what you’re looking for
- Searching – Search through online listings of internet businesses for sale
- Classified Ads – Look at online classified ads like Craigslist and Kijiji
- Website – create your own website that illustrates you buy online businesses and create content to help drive traffic and positioning on google
- PayPerClick – pay for ads on google and facebook offering to purchase online businesses.
- Investor groups – look for small private equity and angel investor groups and let them know that you are interested in whatever they don’t want. Offer a finder’s fee.
These are just some ideas. As you can see we want to go wide as we never know when and where the next deal will come.
Rate Opportunities Quickly
Deal flow is the most critical step in finding great deals however tied to this is having a rating system in place to quickly weed out the sites that don’t fit in your investment goals.
For example, if you need a passive business because you have a full time job, then maybe an online service based business or a business heavy in customer service is not right for you. A digital download or adsense business might be a better fit.
Rating opportunities allows us to quickly see which business are not worth our time and which business have potential.
I rate my business through a simple process of scoring. You can find a detail post on the scoring methodology here . Essentially each of the follow gets a score of -1, 0 or 1 based on how they perform:
- Price of the business
- Multiple (compared to similar monetization methods)
- Cashflow
- Age of the business
- Hours needed by seller
- Why Selling (Urgency / Motivated seller)
- Growth potential
- etc
When added all up, the top sites go through the funnel (see below). For other sites, I’ll think through if there’s any way to increase the score (are there growth opportunities I haven’t thought of, can I get more information about one of the elements that will change my score, is there something else that the business has that I haven’t considered).
If I can justify it, I’ll add it to the funnel, if not, the opportunity is dead to me.
Work the Funnel
The goal of the funnel is to put high scoring deals through a vetting process to get the best possible deal while minimizing the risk of acquisition.
First if you are not familiar with the buying process read this post here:
Once you understand the buying process, then all deals that come to you need to go through the funnel.
The Funnel
Negotiation Funnel for Deals
The funnel is a numbers game.
As you’ll see, you want to get as many deals in the funnel as possible in order to find a great deal at the bottom.
I have spoken to a few folks in the field and a typical rule of thumb is that you need:
- 100 listings to review
- To then speak to 75 – 80 brokers or sign NDAs
- To get 50 Prospectus
- To engage in 10 seller calls
- To put together 5 Letter of Intent
- To negotiate 1 deal
Only 1-3% of the deals you look at will turn into a potential offer. Now that is ok if you are looking to find a good deal, but we don’t want good deals. We want great deals.
You need to be negotiating at least 3 deals at any given time in order be able to find a great deal.
As you negotiate those deals, you then get to decide which is the best deal out of those 3 negotiated deal and close on that one
That’s a “great deal”.
This is what we do here at MadX Capital to ensure that we’re only finding the deals that rise to the top and provide investors with the highest return at the lowest risk.