What You Should Know About Buying Online Businesses

10/26/2017 08:54 am ET

By Justin Cooke

It is no secret that the internet has changed everything. Entire industries are being disrupted at a fast-paced rate. Investors see the amazing return on investment (ROI) potential of online businesses, but the savviest investors are not only looking at startups: They're buying established businesses because they get a better ROI from a profitable business instead of starting a business from scratch.

Many online businesses have matured into real assets, and the sector as a whole continues to grow. You only need to look at the sale of the Wirecutter, an Amazon affiliate content site, to see that buyers are hungry for these kinds of businesses. You don’t need $30 million to become an investor: Having a war chest of $100,000-200,000 is often enough to buy several online businesses.

Recently, a study my company did on the Amazon FBA marketplace (FBA is Amazon’s program for e-commerce business owners) showed that we’re in a buyer’s market. That trend holds for other types of affiliate marketing sites, too. To better understand this buyer’s market, let’s look at how prices are set for these businesses, the potential to grow a business if you buy it, and how to find the right opportunity.

A Quick Explanation Of How To Price An Online Business

You’re probably familiar with how prices are set for companies like Twitter and Snapchat, where the value is largely based on the number of users, marketshare and potential. But most of us aren’t able to find or pick companies to invest in the next Snapchat.

Outside of Silicon Valley, most online businesses are valued on how much net profit they bring in. This method uses a multiple of the monthly net profit to determine the valuation, and these multiples can range anywhere between 20-50 times of monthly net profit, depending on a number of factors. A solid e-commerce business with a $17,000 average net profit over a trailing 12 months might get a multiple of 31 times, which means the e-commerce business is roughly worth $527,000. Several additional factors go into assigning the actual multiple, like the age of the website and the company’s track record of profitability and the trajectory of the business over the last few years.

A Quiet Investment With Big Returns

One of the most attractive qualities of investing in an online business is that they are often hands-off. Much of the work on these types of businesses is done up front, so they need less hands-on management if all you want to do is maintain that level of profit.

But if you’re looking to grow a business, buying a profitable online business gives you a unique advantage. It is harder for a new business to go from nothing to $3,000-5,000 per month in revenue than it is for an established business making $4,000 to jump to $8,000 in revenue per month.

An investor can use conversion rate optimization (CRO), which is the practice of turning more of a website's traffic into paying customers without increasing traffic to optimize earnings. For example, if you optimized the placement of ads for better clicks, you could boost a site from $2,000 a month to $5,000. There are tools you can use for optimizing ad placement such as Ezoic or AdThrive that will split test which ad placement converts the best. In contrast, a new website has zero traffic and no way for an investor to perform CRO. Because of this, investors like sites that are already profitable and receiving traffic.

How To Find Online Businesses For Sale

There are two methods of finding online businesses for sale. The first method is to source them directly through a private seller without a third party. This can be quite profitable in that there are gems to be had, but finding them can prove challenging for someone just starting out. You can usually contact site owners through a contact form, ask if they would be open to selling their website. Most of them won't, but some will. For those people, make sure you give them a good valuation based on the net profit they say the site is earning. Get on the phone or at least a Skype call as well. This makes the deal much easier to talk through negotiations. When you do find a good opportunity, make sure to use an escrow service to hold the funds. The contract you create should outline when those funds should be released once the agreed upon conditions are met.

The second method uses a brokerage, and your best bet is to find a brokerage that specializes in online businesses. A good brokerage will have deal flow (a regular influx of new businesses for sale) and be able to negotiate with the seller on your behalf to help you get the best deal possible. We run an online business brokerage that lists new businesses every week.

How Long Will This Opportunity Last?

There will always be an opportunity to find good deals. As many online businesses mature, more investment opportunities continue to present themselves. The buyer's market is strong, and you can use this opportunity to find great deals that will strengthen your investment portfolio.

The internet has changed everything, and the smart money is going into assets that take advantages of those changes.

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Justin Cooke is the founder of Empire Flippers, where they help others buy, sell, and invest in profitable and established online businesses.

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