In this week’s episode of Freedom Fast Lane, Ryan Daniel Moran interviews Thomas Smale, who specializes in buying and selling online businesses. If you’re an entrepreneur who wants to take the option to ‘jump the curve’ and buy an established online business that is producing regular cash flow, then this podcast is for you.
Main Questions Asked:
- What are you looking for when you are acquiring or selling a business?
- What makes a purchase viable to a legitimate investor?
- What are buyers looking for from a return basis to invest in an online business?
- What elements make for a good site purchase, and what should someone expect to pay as far as multiples go on their investment?
- What is your insight on deals that are most attractive to aggregate investors?
- What are high-end deals you are seeing transacted from a cash flow perspective?
- What are the types of cash flow that will attract a larger investor?
- What types of profit are these businesses bought and sold producing?
- How would someone evaluate if they could take on a site that is producing an income?
- Where does the traffic come from, and what kind of sites can be taken over by someone who might not be tech savvy?
- Are you seeing product sites being transacted too?
- Comment on intentionally overpaying for businesses.
- What does someone need to have in place to make their business or website to make it attractive to a high level buyer?
- Where do people find deals for profitable businesses that have been vetted?
Key Lessons Learned:
- Buyers are looking for a legitimate business model that isn’t going to die out.
- The business needs to be something that is going to grow over the long term, be in your skillset, and a business you want to be in.
- This is model where you don’t have to do all the grind work up front.
- The primary driver of value when it comes to selling an online business is the revenue or profitability and sustainability.
- Sustainability: traffic, revenue, profit, legalities, business model.
- You average buyer will want to see a 35-50% return, which works out at a 2-3 multiple on net income.
- You could buy a site at 50% ROI, but you have to count in your time to run the business (depends on how you value your time) which will reduce your ROI?
- Mature investors are entering the market, and are able to handle a portfolio of web businesses that their teams are running.
- Portfolio buyers buy consistently across a niche or one business model, and have synergies across group of sites.
- The key for successful portfolio buyers is building a team that specializing in a particular niche, business model, or some sort of connections across portfolios.
- Large investment firms are now seeing web business as legitimate cash flow businesses, and paying a lot more than they would have a few years ago.
- Firms are holding onto these websites for the income.
- Years ago, it was deemed as selling a ‘website’ but today it’s selling a ‘business.’
- Thomas sells sites from $10-20K to a couple of million for asking price.
- Most investors are looking in the 6 and 7-figure range.
- Most formal investors are looking $200K and up.
- One of Thomas’s recent sales was a site for $1.025M that makes $340K annually. It takes the owners 10 hours a week to run, is a 3 multiple with a 35% ROI.
Types of Sites
- Almost anyone can run a content-based site; however, Pay Per Click and paid traffic is more difficult for first time online business owners.
- Organic traffic is the most desirable (free traffic from Google). As is anything that involves users sharing content.
- A lot of traditional offline investors like buying ecommerce businesses with physical products.
- Software and SASS businesses are popular with more experienced buyers.
Intentionally Overpaying on Market Value
- If you are only willing to pay market value or just below, you aren’t going to get many deals done.
- Thomas’s approach is if he sees improvement, to pay more than someone else. E.g. He purchased a site for 5 times its annual income and overpaid, but didn’t run the risk of other buyers looking at it. Thomas quadrupled revenue within a month, and sold it a year later for profit.
The Sellers Perspective
- Buyers want a business that is easy to take over with no current deals in place or payment process they can’t take over.
- E.g. if using Stripe as a payment process, you want to make sure the buyer can continue with that process.
- In small businesses, a lot of deals are made with suppliers on handshakes so as a buyer you need paper agreements in place that can be passed along to buyers.
- If you have freelance staff, get agreements in place.
- Build a business with the future in mind. If you want to sell, you need to be able to explain to the buyer how it will grow and be sustainable.
- Build an email list of any sort, and send out an email once a month.
- Email lists are a good value add from a buyer’s perspective, as it shows clients base and sustainability.
- If you can find a site with an underutilized list, you can immediately make the business infinitely more profitable.
- If a Broker has been around 3-4 years and has a good reputation, then that is a good sign.
- When selling your business, a broker will look at the websites financials, gather data, traffic, and trends, then make an evaluation.
- Thomas charges sellers a 15%commison on deals, which tiers down on bigger deals.
Thank you for listening! If you enjoyed this podcast, please subscribe and leave a 5 star rating and review in iTunes!
Links to Resources Mentioned
Perfectly Passive Income
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