Are Online Businesses the Secret Gold Rush for Investors?

12/29/2016 05:31 am ET

In 2016 alone, ecommerce businesses are projected to do $1.92 trillion dollars in revenue, and they represent just one type of online business model that digital entrepreneurs have open to them (source).

Every year, some of these entrepreneurs sell off one of their digital businesses and make a small fortune — sometimes tens of thousands of dollars, sometimes hundreds of thousands. As more and more people choose to make a large portion of their purchasing decisions online, the opportunity for people to buy profitable online businesses will only continue to grow.

The question is, how good of an investment can buying an online business actually be?

The Flipping Business Model

Just as there are real estate flippers, there are also people that buy into an online business, “fix it up”, and sell it for a whole lot more. A buyer who acquires a $40,000 business that nets $2,000 per month might increase those earnings to $3,000 per month. A year later, they may decide to sell the business. Because of the changes they have implemented, and a longer historical track record, that $40,000 business could now be worth $72,000 just a short year later.

Because online businesses are so agile in their ability to scale and grow, they hold lucrative potential for the business savvy flipper. The profit from selling, in the above example, doesn’t even include all the money the flipper was earning during the ownership of the actual business.

The biggest piece of advice for people who want to get into the flipping business is to first understand what their criteria are. Every business buyer should have certain things they’re specifically looking for. Part of their criteria should be finding a business model they can really sink their teeth into, and learn the ins and outs of, so they can increase the earnings of any acquired asset.

Justin Cooke, the Chief Marketing Officer from Empire Flippers, which is a business brokerage and Inc. 500 company that helps people buy and sell online businesses, had this advice for potential investors looking to buy online businesses: “People should focus on due diligence as a deselection process. You’re looking for any reason to say no as quick as possible, so you can analyze the next deal.”

A 60% Annualized Return?

Here’s how it works. If you bought an online business at the $40,000 mark, it is likely to be making around $2,000 per month. We can estimate this by knowing that online businesses are often valued by multiplying existing net profits by between 18x all the way up to 36x on the higher end.

If you bought this business you could make an annualized rate of return of 60% in the first year alone ($2,000/month * 12 months = 24,000 and $24,000 income / $40,000 investment = 60% return). The entire business would pay itself off in just under two years from the time of purchase.

These kinds of returns are possible, but investing in an online business doesn’t come without risks.

There are a lot of other factors that come into play outside of monthly earnings:

  • History of the business
  • Type of business model
  • Growth trajectory
  • Other assets, such as proprietary software, email lists and large amounts of website traffic

Many online businesses will face unique risks that could stop the flow of money overnight — such as a Google update that causes the website to loses all of its traffic coming from Google search.

The First Step to Buying an Online Business — Criteria

While the process of buying an online business is beyond the scope of this article, one of the most important steps is understanding what you are looking for.

Since there are many different business models online, it’s best to identify which ones make the most sense for you. Cooke’s company has put together an entire series on the most popular internet business models that are currently seeing great rates of return, from both a seller’s and a buyer’s perspectives.

While some of these business models only require a few hours a week in order to function, others might require full time staff to run efficiently. They all have pros and cons. For example, if someone just wanted a way to travel with minimal work, they might want to buy a business that earns a few thousand a month and requires little maintenance. Someone with more ambitious and aggressive goals might buy a software business that they can overhaul and scale, which would require entire teams of developers and marketing staff.

It all comes down to your criteria — from there, due diligence can begin.

Is Investing in Online Business Right for You?

Investing in online business carries risk, just as any business endeavor does. That means anyone looking to invest in this style of business will need to be able to take the risk. They shouldn’t be throwing their emergency fund into buying a website, and they should definitely do their homework before buying.

If you are looking for aggressive rates of return, investing in an online business might be the exact kind of gold rush you are looking for, provided you do a thorough risk assessment and take the time to understand the business model you are acquiring.

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