Financial Wealth is in Buying & Selling Websites, Not Operating Websites
Cash-flow is the lifeblood of every business. As with every business, website cash-flow is extremely important for the health of a website.
Cash-flow is proof that your product or service provides real value to people. Customers are willing to give you their time and, more importantly, their hard-earned money in exchange for the product you deliver to them.
In web-based businesses, there are essentially 2 ways to generate cash-flow: e-commerce and online advertising.
E-commerce is selling products on your website. E-commerce websites usually have product listings to choose from and online shopping carts to handle the fulfillment process.
Online advertising is selling advertising space on your website. Ad space can be sold directly to advertisers or indirectly via third-party ad networks like Google AdSense.
Selling a Business
Cash-flow is the lifeblood of a business because it pays the bills and provides financial compensation to the owners and employees. However, business owners make real money when they sell the business.
Regardless of whether you run a traditional business or an Internet business, the big money is created when you sell your business. This is where real financial wealth lies.
A website that produces $100,000 in cash-flow per year could sell for up to $300,000. Let’s assume that the business has no other tangible or intangible assets that would add to its value. Other assets that sometimes add to a website’s value are exclusive licenses of copyrighted material, a premium domain name, inventory, or proprietary technology.
$100,000 cash-flow per year is not $100,000 in cash
A website that produces $100,000 per year has operating expenses. As such, this dollar amount is never actually physically seen by the website owners at any given time in the fiscal year.
Let’s assume in our analysis that the business generates $100,000 per year as a stable $8,333 per month. Some of this cash goes to cover monthly expenses such as website hosting and advertising. Let’s say by the end of the month, the business is left with $4,000 to pay its employees.
As mentioned above, we note here how the owners never physically see $100,000.
But during the sale of the business for $300,000, the owner will receive a big cheque of full or partial payment of the purchase price.
As a general rule of thumb, website deals over $100,000 generally involve some form of seller financing. So an all-cash deal usually applies to deals under $100,000. In this website transaction over $100,000, the owner will probably receive some down-payment.
Buying a Business
The most important task in website investing is buying correctly. You make money when you buy a website, not when you sell it. This may sound counter-intuitive because you are giving money as a buyer and receiving money as a seller.
However, your big profit is earned when you buy the website. You are looking to receive more value from the seller than the dollar amount you are giving to the seller. If you do that correctly during the purchase process, you’ve already made money.
You’re looking to acquire undervalued assets in the website business for bargain prices.
How to identify undervalued website assets
Internet businesses are unique in that they usually contain intangible assets that website owners themselves undervalue when they seek to sell their websites. This creates a ton of opportunities for sophisticated website buyers to acquire valuable website assets at bargain prices.
Every website business is unique but these are a few assets that are routinely undervalued during the sale of websites:
1. Subscribers or Registered Users
It costs time and money to attract visitors to a website. It costs even more time and money to convert these visitors into paid or unpaid users or subscribers.
The product offering must be enticing, entertaining, or useful enough to cause an individual to choose to pay for the product or simply offer their contact information to stay in touch with the product.
This database of users’ contact information is extremely valuable.
Let’s assume that the seller has compiled a list of 100,000 users. Let’s further assume that the website conversion rate is 1%. This means that the website had to attract 10,000,000 visitors through paid and unpaid marketing methods such as SEO and advertising to sign up 100,000 users.
As a buyer, it would require at least that much time (usually years) and money to start from scratch and compile 100,000 users. If it costs less in time and money to simply buy the business and its user base, then it’s a great deal for the buyer. He saves time and money. He acquires a user base of 100,000 users for a bargain price.
2. Proprietary Website Infrastructure
Most websites are built with standard templates and WordPress themes that are used under paid or unpaid non-exclusive software licenses.
However, some websites are built on proprietary website infrastructure. Generally, this infrastructure is given little to no value during a website sale.
The primary reason for this is either the seller doesn’t promote the infrastructure value in his Prospectus or buyers decide that it’s no longer worth as much money today as it did when it was built.
It’s difficult to assess the value of website infrastructure. But if it is very unique in its design and is relatively new because it is constantly upgraded, it is worth something. After all, it probably cost the seller a pretty penny to have it built.
This is another asset that a buyer can pick up for pennies on the dollar. The seller may have spent $10,000 to develop it. In many cases, a buyer can acquire it for free.
3. Website Unique Content
Website content is the key asset that drives traffic and revenues in information websites such as AdSense websites.
Content theft is a big problem on the Internet. A lot of websites copy content from other websites. As such, well-written unique content is rare and valuable. It often costs website owners a lot of time and money to create this content themselves or outsource content creation to third-party providers.
Just like website infrastructure, this is another valuable asset that buyers often acquire for free when they purchase a website.
Look beyond the purchase price paid to the total asset value received
By acquiring valuable assets like these for bargain prices, as a website buyer, you have already made a great investment.
You never want to overpay for a website. It’s important to be careful about the price you pay for a website. But don’t get so caught up on the dollar value that you forget to assess what you receive in return for your money.
If you buy a website’s assets for bargain prices and simply maintain the level of cash-flow produced by the website, you can build financial wealth.
Re-package and re-sell your acquired website
Financial wealth is built by how you structure your deal when you buy the website. Not in how you operate the website after you buy it. By buying correctly, you can “re-package” the website in the near future and re-sell it for profit.
Re-packaging a website simply means that you present the website to buyers in a manner that’s better than how the previous owner presented the website during your purchase.
You can spotlight those assets (subscribers, unique content, website infrastructure, etc.) that you acquired for bargain prices as you present the website to potential buyers. You can highlight their real value to buyers. You can promote the value that the previous owner failed to promote to you when you acquired the website.
This simple process is how financial wealth is generated by sophisticated website buyers & sellers every single day.
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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