5 Facts You Need to Know About Buying an Online Business

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hey what’s up everybody and welcome back to the growth 48 podcast if you missed last week episodes with Tyler Wagner go check it out we talked about how I was able to scale his six-figure publishing company in less than one year so today’s special guest is David new well he’s a brokerage director at the Effie International he started out as an investment banker he moved online to use his transaction experience for website brokerage at Effie International he spends his time speaking with buyers executing deals and working on raising industry standards to encourage more investments in 2014 David closed more than 6 million dollars in sales and has authored the industry-leading book on buying internet businesses for investors so in today’s podcasts you’re gonna learn exactly the top tips and insight information on what it truly takes to acquire a profitable business so without further ado please enjoy today’s podcast with David Newell welcome to the growth 48 podcast where we interview talk entrepreneurs and investors to learn how to master their strategies and tactics from sale systems and marketing automation to how and why please David I just want to thank you for coming on the growth 48 podcast you and I were briefly talking about actually talking last week kind of like a preliminary to this podcast on the whole aspect of buying an online asset and you know it’s kind of different than just going into real estate but there are similarities so hopefully in today’s podcast we can run through some key elements and key metrics that all buyers out there should be concentrating on yeah absolutely thank you for inviting me it’s my pleasure so let’s kind of like really cut to cut to the chase right away is let’s kind of paint out a scenario over here say I’m a buyer and I’m looking to purchase an asset online and for the sake of the conversation let’s say this as an ecommerce company what are some key metrics or key things that we should be looking at before we actually place a bid I think the real importance to understand with any online business and particularly with e-commerce is to get a sense on traffic and on the financials you know obviously you don’t want to buy anything that’s falling down so you’re going to be looking for a consistency month or month for at least the last 12 months if not further back and particularly looking at the closest months so really watching whether you whether that you know top line and bottom line has been growing and how it’s trending living traffic-wise diversity is very helpful a lot of people get concerned about businesses that have high organic search and thus like great sensitivity to changes in search engines but you have to dig in into every single channel and if a business has 60 percent organic search traffic and a lot of businesses do then you need to dig in and look at what the kind of link profile is how that’s been developed what kind of keyword rankings it’s hard how they’ve changed over time and what kind of keyword concentration they have because you know there’s a big difference between having a business that’s got 60% search traffic and all of that is coming from four keywords that have just come up in the last six months or having 60% search traffic and that’s over 500 keywords and the link profile has got blue chips in it and so forth so I think obviously there’s a lot of things to look out but once you’ve got traffic and financials kind of ironed out then you know you’ve got the fundamentals of a business that’s worth digging deeper into and when you go into the actual Google Analytics besides the keywords and everything are we looking at any kind of past penalties that they’ve been hit on through Google yeah for sure agasshi @fe we have a quite useful penalty tracker tools if you just google penalty indicator tool you can put in the domain and it Maps basically the last three five years of organic search history over where the major Google algorithm changes have been I don’t think you know a lot of businesses did get hit by a panda and penguin and hummingbird at least smaller and part and I think it’s important not to be too binary about businesses that have got damaged by that if the owner has been proactive rectify those issues and traffic is consistently growing again you know if it hasn’t been and there looks like there’s gray or black hat SEO techniques going on then that’s a different story entirely and when you’re looking at for example we said ecommerce will be here a physical tangible product from either a drop shipping or a warehouse are your guys also looking at how the logistics are built into the company yeah a hundred percent so obviously with an e-commerce specific business if it’s not dropship if you’re doing like partial fulfillment exercise or having like proprietary warehousing solution then you need to be all over the supply chain you need to be like carefully vetting the supplier agreements what kind of contracts are in place if at all what kind of terms whether they’ll transfer to you you need to be carefully kind of understanding the communication that’s going on between the business and those suppliers to see what the kind of reorder process is how that gets stored how that gets shipped how that gets fulfilled and I think that’s really important to like dig into the weeds on a lot of buyers can get undone by not having done enough due diligence on the mundane day-to-day stuff and find that when they buy a business it’s not you know a five hour a week job as the owner it was ten it’s a thirty hour a week job because you’re you know relentlessly reordering products and working our shipments and so forth so it’s important to like dig deeper on that stuff well you hit on a key element over here let’s talk about the owner for a second so anytime we’re looking at purchasing something from my end the first question I always ask is actually two questions one question is a why is a founder or the owner selling and two how attached are they in the business are they actually the business itself there and they sell how much of a role do we have to fill in so do you guys take to take this into consideration before purchasing yeah a hundred percent so keyman risk as it’s like I guess more jargony called is you know a big thing to look into I would say on e-commerce businesses it’s generally speaking somatically less of an issue you don’t intend to see to much key man unless it’s just key man from a sheer man-hour standpoint whereas for example on a SAS business if the owner has developed that product for last three or five years and is the only person who knows the codebase then you’ve got a very different type of key man risk attached to that business and that should certainly be reflected in the both the profit of the business so when you’re thinking about adding back the cost to replace that owner whether it’s ours or technical work should be priced at a premium if they’re particularly attached to it but it all should also be reflected in the overall multiple at the business because if you take out someone that technically important then chances are you shouldn’t be paying our premium multiple because you’re not going to be able to generate the same amount of revenue going forward or as easily as he was so yeah it’s something that you should be very hot on I think what we recommend to buyers is the established leg what we call their task matrix so we get them we get the owner to write out absolutely everything they’re doing on a daily weekly monthly basis a sign amount of hours next to it assigned the sort of nature of the task so you can get an idea as to whether that’s actually outsource up or or whether you need to bring someone in and what kind of job spec they need to do quickly touching base on this when you’re looking at for example the whole scope of the company and let’s say we did the Google Analytics everything checks out there you know ranking for XY keywords there’s no black hat stuff back linking is great the historical data is there they haven’t been really penalized for anything we’re looking at month-to-month churn rate for example for SAS it’s fine you know maybe they’re doing industry average of fifteen percent per month churn rate which is great the revenue is pretty steady for the last 12 months let me ask you this what do you have a formula or what is a determining factor to figure out what that monthly multiple would be so there’s about a hundred and twenty or so factors that we look at and this one it we’ll talk about today so like and I would say that the multiple is most sensitive to three things one the age of the business which essentially sets out the track record and demonstrates you know the sustainability of the monetization model that they’re doing so a three like a five year old business is already at a premium to a one year old business let’s say so age of the business is important to buyers the second is the monetization method so recurring revenue is more valuable than one-time revenue so SAS business is always going to be at a multiple premium ceteris paribus to a Content business that’s monetized through Adsense for example and the third is the amount of owner time spent in the business and the nature of the work that they’re doing so there’s what’s known as a passivity premium so the less work is required in the business the more valuable it is so if you have a SAS business that’s thirty hours a week then it’s probably not going to be a 3x business but if it’s a SAS business that’s one hour a week it’s going to start pushing towards like three and a half X because of that kind of passivity premium so those three like the the real things that move the multiple around and everything else just kind of tees it up you briefly mention Adsense is that a leveraged play that the seller can implement or would that be more or less a disadvantage when it comes to selling kind of like doubling down saying oh we have X amount Adsense per month what do you mean leveraged play well you know for example some people say we’re producing six thousand or twelve thousand recurring revenue from Adsense and they consider that as an asset but more or less is too variable they’re not really owning a product or owning a service or owning any intellectual property they’re just at the mercy of Google yeah it’s like Adsense is just priced as any other one-time revenue stream basically okay it become it becomes premium when it’s on very large very well established businesses so you can get like Adsense revenue is kind of priced 3.2 to 2.7 X on smaller sites but on like seven-figure sites Adsense revenue can be priced 3x and above if the business is you know 5 plus 10 plus years old it’s a complete major Authority in the niche then it’s a different kind of risk profile for buyers cool let me ask you this when it comes to scanning their back-end how much does the tech play a role into it say they have like really really one point no type of attack and then yeah great how much is that it roll it actually buying it happens happens very rarely it happens very rarely the people are running on really poor like tax tax or like yeah very old architecture for the most part most people are running on the latest WordPress or open-source platforms most people running SAS businesses are very good keeping everything up-to-date annotating running unit tests and so forth you’ll find that that’s a very like technologically advanced community that’s working with like the best of the best type thing say for sure it’s a factor that I should like look into and just tick off but for the most part it’s not a it’s not an exercise that brings up anything that’s a deal-killer what do you say our deal killers like that’s it that’s a killer deal killers misrepresentation by the the seller for the most part which happens less on brokered sales it happens more on direct sales anything that points towards like fraudulent misrepresentation of financials so some people like you know have misrepresented affiliate income quite a common one for example this is quite difficult if you have Amazon affiliate revenue on a site and you have an account that has multiple Amazon sites linking into it and they’re all using the same Amazon affiliate ID it’s almost impossible to track the revenue by URL so there’s been instances in the past where people are bought affiliate sites claiming like a grand a month but actually they’re doing four and the seller had three other sites that were topping up the other four but you couldn’t see in the parent level account until you swap the IDs out the only real way to like guard against something like that is the D back-of-the-envelope traffic analysis where you kind of price what you think a typical user should be worth and cents check the amount of visitors that site’s getting per month versus what the states at revenues are if the revenue per user is coming out widely higher then chances are they’re fudging the amps and numbers so yeah it’s mostly like financial misrepresentation that kills deals it’s trust thing for the most part and this is where obviously a broker comes into play well I just because we do very aggressive pre-listing DD or at least we do at Fe and say like 7 times out of 10 we’re probably done more DD upfront and the buyer ends up doing and after they’ve made an offer so let’s go flip the gear over here a little bit obviously you know you spend your time you do your due diligence you check everything out email us is gray conversions our gray churn rate is gray revenues gray everything checks out what is the key metrics or the key elements that we have to look out for when the transferring process comes into play yeah I think it’s not too complex in most of our deals like for kind of best-in-class and ease of use we try and have the buyer pour into everything the sellers already using to minimize the risk of downtime so they’ll take over the hosting environment domain name that only needs to swap and keep the name servers in place all of like the little subscription accounts are assigned quite easily so really you know the only major kind of transfer headaches come with merchants processes and hosting and if the hosting account is being swapped straight in and out that’s easy enough merchant processor varies case the case for the most part they are all transferable just a case of aggressively chasing they’re usually very poor support teams to to push things over but they’re certainly low like deal killing accounts you put the money what do you put the money in escrow they also say we purchased something for 100k and then we had them we just put the money in escrow before the final transfer correct so you signed the APA the asset purchase agreement you put funds in escrow and once funds are secured the seller transfers everything to you and then you usually have like a one to three business day inspection period to order everything that you’ve got make sure the revenues coming through the accounts Maitre traffic’s coming on to the site make sure you know what the contents are properly and then once you’re happy and satisfied you release through the inspection period and the funds go to the seller so in your experience Dave what do you think or where do you see this industry going in next couple of years yeah I think it’s gonna become the hobby hobby income of increasing number of like middle-class middle aged people so I would say that the largest and fastest growing by a demographic out there at the moment are baby boomers looking to buy online businesses to tack on to their retirement portfolio or to accelerate their retirement from business so it’s starting to become very fashionable for like 40 or 50 year old doctors bankers accountants to buy contents ask businesses bringing a bit of tech expertise from outside and run those for you know 30 plus percent yields a year-on-year so I think demand-side it’s only going to explode like we’ve quadrupled our list of buyers in the last 12 months alone supply side you’re already seeing the effects about is simply not the same parity increase in quality of supply businesses say you know multiples have gone up noticeably in the last five months and probably more in the last 24 months and until you know more that comes the market I don’t see that changing and I think that’s really a kind of consciousness expansion exercise that industry participants need to do so like basically going around telling people that there’s a liquid market to buy and sell sites because you’d be surprised and amazed at how many people that are 5-10 years in the internet marketing space that don’t know that they can sell their 500 grand you know blog or whatever it’s also quality oh it’s not that he’s it even created a 500k very interesting – well let me ask you this so you’re talking about doctors lawyers you’re buying that that’s their portfolio it’s better yield and return the real estate but they’re not running it so they’re putting like a president in the plates are they putting in somebody that’s actually running the business for them yeah I mean it depends very much on the type of the business that those people are obviously attracted to assets that are coming with content writers in place they’re coming with VA is in place coming with developers in place and then okay realistically all they have to bring to it is some marketing and strategic smarts which generally speaking if they’ve got you know half a million bucks to spend they’re pretty good in that camp they’re not buying stuff that’s you know very intense so requires technical ability because they simply don’t have that so more or less or buying content generation businesses that’s going to come with a VA more or less maybe hire a couple of content writers or freelancers maybe a project managers to oversee that plug-and-play and see you later exactly and a lot of the time all of those people are coming already with the business they’re almost buying a package solution you know certainly a lot of the businesses resale are less than fifteen ten hours a week and almost all of the day-to-day work is outsourced to to vias content writers reliably and for a long time beautiful well David I just wanna thank you so much for coming on the growth for the podcast let’s wrap this up do you have any final tips for anybody who wants to sell or buy out there yeah I think by wise do as much didi on the people you’re buying from as the business yourself because it’s not a lot of quality representation out there say make sure the people you’re buying from you know I’ve been in the game for a while they’ve got experience precedent deals a team you know you can call them up feel them out and I think my best tip for buying is it’s not always about the price like get on the phone with a seller and work out what’s important to them like if they want a deal done fast or they have a specific personal condition to get out of it you can often find that doing a quick deal or filling a personal think and save you a significant amount of value so worth exploring every Avenue you can on these deals Allison well thank you so much David and have an amazing day cool thanks buddy right this has been the growth 48 podcast thanks for listening