Buy Distressed Websites to Build Financial Wealth
What are distressed websites? A distressed website is a website that has suffered a decline in traffic or revenues for one or more reasons. This is similar to a distressed real estate property or business that is facing financial difficulties. Other examples of distressed assets include stocks of publicly-traded companies that have dropped in price.
Distressed assets offer opportunities for very high profits when they can be acquired at cheap prices and turned around. Many a fortune has been built on distressed assets. When the asset increases in value again, the financial rewards and ROI can be astounding.
Generally, traditional assets such as businesses and real estate require the investor to invest in large capital expenditures (capex) to turn these assets around. Websites are a unique case. They can be very cheap to acquire and improve because the most important capital needed in a website turnaround is knowledge. With a little money and a lot of knowledge, people build wealth by investing in distressed websites, and you can too.
What qualifies as a distressed website?
Now, before we get into the specifics of distressed website investments, we have to establish what type of websites we’re talking about here. We’re not talking about new websites that were built a few months ago and have very little financial or operational history.
Those are not distressed websites. Those are new websites that don’t have enough history to be categorized as distressed. They haven’t been successful long enough to fail.
We’re not talking about acquiring a young website for a few hundred dollars, making some minor changes to it, and attempting to flip it to the next person.
We’re not talking about flipping websites. We’re talking about investing in established websites with long financial and operational history that have fallen on hard times.
The ideal distressed website has at least 3 years of history. Why? Because the most important task you will perform as an investor is to study the historical data of the website to answer one key question. You need as much history as possible to do this. You want to be able to analyze multiple years of operation and compare one year to the next. You must have reference points for your comparative analyses.
For example, you want to be able to compare the same month’s data in Year 0 to Year 1 and to Year 2. This gives you the ability to assess the positive or negative growth rates. But even more importantly, it enables you to answer the most important question in distressed website investing:
“Why is this website now in this distressed situation?”
This is the key to successful distressed website investing. If you can pinpoint why the website now finds itself in this precarious financial situation, you’ve done more than half the work. Don’t blindly believe what the previous owner tells you is the reason for the decline. Perform your own in-depth research to find out for sure. Then, you can attempt to fix it and revive the business.
There are usually 3 general reasons why a website becomes distressed:
1. The website owner lost interest in the website.
2. The website owner ran out of money.
3. The website suffered a drop in search engine ranking.
Let’s look at all 3 reasons below.
1. The website owner lost interest in the website.
This is the most common reason why websites are sold everyday. It is the absolute ideal scenario for a website buyer. The preferred reason for any distressed website investor is that the website seller lost interest in the website.
Unlike traditional businesses like a retail store, websites are very cheap to set up. For this reason, people register tons of domain names at a domain registrar, and set up websites in niches they know little about, and care little for. Millions of domain names are registered every year. People set up website businesses on some of these domains in niches that they have zero passion for.
Someone looking to open a retail store or invest in real estate will never approach it like a website investor because it involves too much financial risk. He carefully assesses his passions and strengths relative to the business opportunity in order to establish whether it’s the right fit for him before he invests his hard-earned money in it.
Website owners have much lower financial risks. If the website business fails, website owners often lose only a few thousand dollars at most.
Eventually, many owners inevitably lose interest in the website and decide to sell it. This is why distressed investing in websites is especially unique. There are always tons of great opportunities to take over a distressed website from a bored owner.
Bored website owners are a distressed website investor’s gold mine. Why? Because once people lose interest in a website, they stop adding new content to it or promoting it.
A search engine hates idle websites that don’t deliver new web pages to its index regularly. The search engine indexes fewer pages and gives the website lower ranking. All a new owner has to do is check the website’s sitemap to see how frequently the website is updated with new content. By simply increasing this frequency, the new website owner can increase the website’s ranking with search engines. Higher ranking means higher traffic and higher revenues.
Distressed website investors acquire valuable assets for nothing
If you’re always looking for distressed websites with at least 3 years of history, the seller has done at least 3 years of hard work on the website for you. This is work that you’ll never have to do.
Everyone looks at the most popular numbers in a website: Traffic and Financials.
They are the 2 key data that drive the website business so they should enjoy top billing. But there are certain other valuable assets that are always overlooked or undervalued in buying and selling distressed websites. These include backlinks, indexed pages, and age.
An investor who is purchasing a distressed retail store will never overlook inventory in the transaction. The seller will appraise the inventory and add it to the transaction price. But in website sales, many assets like backlinks, indexed pages and age are overlooked in favor of traffic and financials. This is what makes distressed website investing uniquely profitable. In fairness to buyers, how do you value backlinks or indexed pages or a website’s age?
Let’s look at these often-undervalued assets.
Backlinks are an interesting asset. Very often website sellers have worked very hard on a website and have generated backlinks that they don’t even know exist. This is especially true if the website contains long, high-quality unique content. People generally provide backlinks to a website without ever telling the website owner.
These backlinks are valuable. They give the website its search engine ranking and traffic. But in a distressed website sale, backlinks are given little value because the focus is on the declining revenues.
Who cares about backlinks if the website has declining revenues every month?
This is a valid argument. Backlinks mean nothing if the website is not producing results. But you must remember that these backlinks are one less important task for a new owner. The new owner’s job is to get more backlinks by adding new content. Old backlinks have age. The old backlinks and new backlinks together are important to search engines. This inherent value can be acquired for almost nothing by a distressed website investor.
Backlinks can be checked from various sources including Google Webmaster Tools, Alexa, Majestic SEO, and Open Site Explorer. Each resource provides different numbers. But overall, they give a good picture of the website’s backlink portfolio.
As a distressed website investor, you will be acquiring this backlink portfolio that may never be discussed or valued in the transaction. It’s like legal stealing because it would normally take you years to build up the backlink portfolio from scratch. You basically get it for free since the focus is on the declining traffic and revenues of the website.
Indexed pages are the website’s web pages that have been indexed by search engines over the years. Once pages are indexed, they can be delivered to users who perform relevant keyword searches at the search engines.
Website owners can manually submit pages to search engines to have them indexed. Or they can wait for the search engine’s spiders (such as Googlebot) to crawl their websites and index the pages. Either way, over 3 years, lots of pages will be indexed for delivery to hungry search engine users.
Like backlinks, indexed pages are overlooked when a website is in decline. A distressed investor can acquire years of indexed pages for little to nothing.
Age
This brings us to age. No human being can buy age, which is a very important factor that search engines use to rank websites. The rule of thumb is that the older the website, the higher it will rank for relevant keywords.
Nobody knows the exact value of a website’s age so it’s almost always undervalued. By acquiring the distressed website, the investor “buys” what cannot be bought. For very little money, the investor buys this extremely valuable asset called age.
2. The website owner ran out of money.
Sometimes website owners simply run out of money. They underestimated the cost of a website project and no longer have the funds to operate the website effectively. This lack of funds may have caused the website’s fortunes to go south.
This is not the distressed investor’s ideal scenario because it may involve capital expenditures to turn the website around. It’s worth looking very closely at the website to establish whether this claim of inadequate funds is accurate.
In my experience, in most cases, it’s never capital needed for essential functions like creating the website. It’s almost always capital needed to promote the website. It’s advertising money that the seller believes he needs. This creates a unique opportunity for a distressed website investor.
Website businesses are very unique in that advertising money can be replaced by knowledge and sweat.
With some creativity and hard work, a website can be successful with very little money spent on promotion. This is significantly more difficult to achieve in a traditional business. But it is very common in website businesses. Successful websites don’t buy all their traffic. They receive free organic traffic from search engines, type-in traffic from users, or traffic from referrers in exchange for providing valuable content.
Instead of spending money on advertising, websites can often be turned around by creating and distributing quality content to interested people. This includes posting content on social media, guest blogging, or creating software and offering it for free to boost traffic.
The number 1 reason why people go online is to get information.
If you give them information, they give you traffic. Experienced distressed website investors replace advertising budgets with smaller content creation budgets. They create content and give it to Internet users. In return, they receive higher traffic and higher revenues.
As such, a website owner running out of money can be a blessing to a distressed website investor.
3. The website suffered a drop in search engine ranking.
The final reason for a website becoming distressed is the dreaded nightmare of being penalized or deindexed by search engines. This is the distressed website investor’s worst scenario because it’s out of his control.
As a website buyer, unless you can clearly pinpoint why the search engine penalized the website, and know exactly how to remedy the situation, my advice is to walk away.
Search engines don’t normally state why they penalized a specific website so it’s difficult to deduce. If you’re not sure why, don’t buy the website. It’s not worth the hassle. However, if you can uncover the reason why and you know how to fix it, you will uncover unlimited profits. You can buy the website for pennies on the dollar and turn it around.
As mentioned in Reason #1, the website may have dropped in ranking, not because it was penalized, but because it is no longer updated regularly.
As a distressed website investor, you make money when you buy… not when you sell
This may sound counter-intuitive but you actually make money as a distressed investor at the moment you acquire the assets for cheap. The cheaper, the better.
The question is “How cheap?” How much should you pay for a distressed website?
Often website sellers are so bored or fed up with the website that they want out at very low prices. As low as 1x Annual Profit. This means sellers sometimes agree to let go of websites for the profit they made over just 1 year. In some very rare cases, the multiple can be less than 1x.
The exact multiple depends on the decline rate year-on-year. The steeper the decline, the cheaper the purchase price.
Negotiate down to the last dollar. You make your money when you buy. Buy cheap enough and you could recoup your entire cash investment within a year.
Have a plan before you buy
During due diligence, dig through everything. Dig deep into the Google Analytics data, the financial statements, backlinks, sitemap, indexed pages, etc. Go beyond the popular financials.
Dig, dig, dig for one simple reason: Find out why the website is in the distressed situation. If you uncover this, you uncover the gold mine. Fix it and you’ll have a large stream of cash flowing to you.
If you can’t figure it out, don’t buy the website. Walk away.
If you can figure it out, create a 12-month plan for how you intend to turn it around, acquire the website, and get to work.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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