Why seller financing makes sense

Why seller financing makes sense

Why Seller Financing might make sense for you when selling your business

Many buyers of businesses are looking to invest in businesses which they can afford to purchase outright, even if this involves short-term Earn-out agreements, which typically are not arranged primarily for finance shortfall reasons. (The many advantages of Earn-outs are covered in a recent Flippa Blog article). However many of those looking to build a portfolio of businesses or to acquire a seriously high-value business may need to source finance.

Traditional business loans from banks and other major lenders are difficult to obtain for business investment. Currently banks are highly risk-averse and even when lending for more conventional business purchases they will be restricting lending to home equity based loans. Amazingly, after all these years of online business progress, the major banks still tend to be out of their lending comfort zones in the business website world, not really understanding or being confident about the way it operates. One of their main reasons for securing the loan with home equity is that banks cannot secure the loan against the physical assets of an online business and they are reluctant to place a value on ‘goodwill’ or business profitability potential.

We’ll cover SBA loans in a future blog post where the situation is entirely different again.

Unsecured loans from small business loan specialists, including online lenders, are more readily available but generally come with unattractively high interest rates and often quite burdening fee structures. Private equity firms which finance online business acquisitions tend to be interested only at high-value levels, and with lots of strings attached including an intrusive degree of business control or oversight.

Why you should consider seller financing

Whether you are a buyer or a seller, give serious thought to the mutual benefits of vendor financing. As a seller, if you are definitely in need of the full purchase amount immediately then of course this arrangement is out of the question. However, you will greatly increase the pool of potential buyers and the purchase price achieved if you are able to offer vendor finance for an agreed proportion of the purchase price. Unlike an Earn-out agreement which is usually limited to a minor proportion of the cost of purchase, does not entail interest payments, and is generally paid out in full within an agreed number of months, seller finance funds a proportion of the purchase with a longer-term payout period and with interest charged on the remaining balance until final settlement.

To illustrate, the owner of the business (owned outright and with no existing mortgages or liens attaching to the business) agrees to a sale price of $100,000. The buyer who has only $40,000 available as deposit, after judiciously retaining sufficient funds for immediate operating expenses and contingencies, has been enticed to pay a premium price because of the availability of seller finance. A reasonable interest rate to be applied to the outstanding monthly balance is agreed and a repayment period of typically around 5 years is determined.

The interest rate can be fixed, or floating and indexed to the official rate. In reasonable fairness to both parties, because the loan remains essentially unsecured the rate is initially set commensurately higher than major bank lending rates for business loans. In the simple illustration above, given the current interest rates and the buyer paying the seller a monthly instalment of $1000 plus the applicable monthly interest, the vendor would receive an income stream averaging around $15,000 annually for the five years. The bottom line for a seller who is in a position to defer full settlement is effectively a significantly higher final sale price, while the buyer is able to afford an acquisition which otherwise would have been out of reach.

It goes without saying that a legally binding contract is necessary for this kind of vendor financing arrangement, whereas Earn-out agreements typically rely on a less formal memorandum unless they are particularly complex or involve six or seven figure sums.

The mutual advantages of seller finance

While for the buyer the obvious advantage as already stated is the capacity to access an business business purchase which could not be afforded if the entire amount was required up-front, there is an additional benefit in the continued interest of the seller in the success of the business. Further, the willingness to provide vendor finance confirms the seller’s confidence in the business model and its ongoing viability and profitability.

For the seller, provided access to 100% of the funds from the sale is not required immediately for other purposes, then the regular income stream with an interest rate which is fair and reasonable but actually quite favourable to the seller is a great advantage and effectively raises the actual sale price achieved. Because the pool of prospective buyers has been increased by the availability of vendor financing, the agreed purchase price is more likely to be at a premium level also. Additionally in some circumstances, there may also be taxation advantages in the delayed payment of the full sale proceeds; this is a complex matter and as a seller you will need professional tax advice on this aspect, but it’s something further to consider.

A win-win solution to a business purchase arrangement

While this will not suit all sellers or buyers, seller finance is certainly an option which should be considered. In fact, it’s such a mutually beneficial situation that a rapidly increasing proportion of online business acquisitions are now financed on this way. For most vendors, offering seller finance is a sure-fire way to seal a deal.

Overall 2019 is emerging as a highly promising year for business investment, and we can expect to see exponential growth in seller financing arrangements.

An earn-out arrangement and what it means

An earn-out arrangement and what it means

Most people get a thrill out of buying a business whether it be to expand their existing empires or as a stand-alone operation. Thrills aside it’s an investment so like any other, whether real estate, shares or traditional business, it is never totally risk-free. That said, our experience says it’s unwise to be tentative and overly risk-averse. Instead, go for the business you want and offer to buy the business on ‘creative terms’.

Deal Structuring

So, you have finally settled on an online business you’re really interested in acquiring. You’ve done your due diligence, meticulously analysed the net profit figures, and thought through the rightness of the ‘fit’. It all seems good and you’re ready to go ahead. Now it’s a matter of negotiating and deal structuring. This is the most critical part. How many times have you seen institutional investments and acquisitions go wrong? Even the most seasoned make mistakes so while it’s a time for excitement it’s not a time to become overly emotionally-invested in the acquisition. Be crystal clear on the value you are placing on the business…this should be on the basis of its analysed profitability and potential.

Get to know the seller

Good negotiation produces a win-win settlement in which both you and the seller come away with what you need. Understanding what the seller wants, including the reasons for selling at the present time, the seller’s valuation and reasons underpinning it, and the payment timeline wanted by the seller, are all critical to your effective negotiation.

Building trust with the seller is vital. Assuming you are acquiring an established business with a record of profitability and on a growth trajectory (and, if not, why are you buying it?), then the seller will have authentic reasons for the sale which are important to understand. Assuming, also, that you are looking at a high six or seven-figure purchase price, then the way the deal is structured is vitally important to its success and you should go to the negotiating table fully understanding what you want to achieve.

For obvious reasons it will almost certainly be in your interests to negotiate only a partial up-front payment. It would be unusual for a seller to agree to a 40% delayed payment, but withholding up to 30% until an agreed final settlement date is common. This is technically a form of balloon payment ‘loan’ as the seller continues their equity investment during an agreed period, characteristically only a few months, during which the seller continues to provide expertise, advice and training. It also enables testing of external relationships and links on which the business depends and which are supposedly being transferred with the business.

The Earn-out Agreement

A more complex form of temporary ‘seller retained equity’ is an Earn-out agreement. For substantial businesses with a high six-figure or higher purchase price, this form of arrangement may be essential to negotiate. (Ongoing seller retained equity arrangements are different altogether and are used to enable a mutually desired continued involvement of the seller in the business over the long term.)

So, what is an Earn-out and how does it work? Essentially it involves a partial upfront payment at the time of transfer to the buyer. The proportion of upfront compared to delayed payment is subject to negotiation, but around 70% is a general guide. The remaining 30% is then paid in instalments according to negotiated performance criteria such as achieving the seller’s predicted milestones, or minimum monthly profit projections.
To illustrate with a simplified example. You have agreed to purchase an online business for $300,000, based on an audited net profit averaging $10,000 per month. In real terms the monthly profit figure could be seasonal rather than regular, and this would be factored in to the agreement. But for simplicity here let’s assume a regular monthly net profit. It has been agreed that the upfront settlement payment will be $210,000. The remaining $90,000 will be settled on the basis that each month $15,000 will be paid, but entirely contingent on achieving the projected $10,000 net profit in that month. There are any number of possible intricacies, such as no payment being made in a ‘shortfall month’ or more commonly payment on a sliding scale reflecting the percentage of the projected profit actually attained. This entails a higher repayment in a higher performance month.

This may sound complex, particularly if we factor in that the total purchase amount in this scenario could be finalised earlier or later than the approximately 6-months timeframe envisaged for the Earn-out period in the situation described above. In a nifty variation on this approach, some Earn-out agreements fix the time frame itself rather than the instalment amounts, with the effect that if the business fails to perform fully to expectations the final price paid is somewhat lower than initially envisaged and conversely if it performs better then the buyer finally pays a little more in total than initially anticipated. Few buyers would be concerned about this as it is a win-win situation all-round.

Given the complexity of the Earn-out detail to be negotiated, why do it? The advantages for the buyer are immense. Firstly, the obvious one of delaying full payment and the interest costs of investing 100% from settlement day. But more important is securing the self-interest of the seller in actively ensuring that all goes to plan, the projections are achieved or exceeded, and there is a smoothing of any potential bumps created in the transition process while migrating service provider accounts and supplier and client relationships.

While a six-figure or higher business acquisition will always involve a legally binding agreement, at the end of the day if there has been a 100% purchase payment made at the time of transfer then it will be close to impossible in practice to achieve compensation for any shortfall in predicted performance or for any unanticipated hurdles in migrating accounts. Retaining a proportion of the final payout figure provides real leverage to engage the interest of the seller in ensuring the smoothest transition. Leverage beats lawyers hands down.

Finally, honest relationships are the key to success. If the seller won’t agree to an Earn-out provision find out why. There may be a compelling reason for the seller’s position. If so, then that loss of leverage at the very least justifies you offering a somewhat lower purchase amount to offset the downside of settling in full at the time of transfer.

Negotiation needn’t be stressful. It’s a matter of understanding the seller, while remaining crystal clear about your own needs as a potential buyer.

Just a toe in the water or dive straight in? Buying an eCommerce business

Just a toe in the water or dive straight in? Buying an eCommerce business

The new favoured investment of many busy professionals is the acquisition of online businesses, because of the generally higher yield than real estate or share portfolios. Additionally, in view of their own demanding time commitments, one of their key selection criteria when deciding on an e-commerce business for purchase is that once the deal is done the website on which the business is founded, along with the revenue stream it produces, can be largely self-managing.

On the other hand, many retired or semi-retired ‘baby boomer’ investors like me achieve a great sense of engagement from acquiring online businesses where they can see a potential for growth and improvement, drawing on their own active involvement in the development of the business.

So, fully understanding the level of ongoing time investment which will be needed over the long-term, whether minimal or fully actively engaged, is a critically important consideration in buying any online business.

We all understand the process of buying real estate for investment, or a conventional goods or services business. We have a good sense of the selection criteria to apply in choosing an investment, and the due diligence needed before making a final decision. However for many investors, e-commerce businesses are unknown territory so there is an understandable tendency to play safe and avoid risk by beginning with only a low-cost entry investment to test the waters.

Yet, an overly cautious entry is not necessarily the wisest strategy. The lowest prices are obviously attached to lower-performing and lower-yield businesses, which may or may not have strong growth potential. If the potential is genuinely there, then a corollary of the very modest financial investment will be the need for a high buyer engagement level and ongoing time commitment.

So let’s look at how it all works

Essentially the success of the online business you are considering purchasing depends on the traction gained by the website itself. Generally it is high quality, engaging content that drives regular and growing traffic to the site. Many highly successful e-commerce businesses largely outsource the content to paid freelance content writers. Good content writers are readily available in virtually any field and constitute a very affordable operating expense if the website is established and running effectively.  Of course, many business owners either write or edit the content themselves, and often find this direct involvement essential to their sense of engagement with the business. This discretionary control over the level of the buyer’s personal time investment is one of the most appealing aspects of online business acquisition.

There are different types of revenue streams which a successful web-based business can produce, assuming that it is not seeking to sell its own unique product inventory. (Inventory-based businesses which develop and sell their own products in an online environment, or hold the rights as a franchise or official reseller, are in a different category and are not considered in this article.)

The balance of content compared to product marketing varies, and it is important to understand how your potential e-commerce acquisition currently profiles itself. Most commonly the niche content area, just for example boating and fishing or health and wellbeing, is the ‘shopfront’ and the interest generated by high value and continually updated content is what draws the potential purchasers to the site. Encouraging visitors to subscribe to a regular email bulletin is a good strategy to build regular follower numbers. In this profile, the marketing of products is presented as a sideline service and it is essential that promoted products are tightly linked to the niche content, which is the drawcard.

At the other end of the spectrum are the e-commerce sites which directly foreground a vast range of products within an identified interest area, for example skin care products. Again, none of the inventory is owned or handled by the seller. Profits come from the margin between the price paid by the customer and the wholesale price charged to the seller. Alternatively, the profit may be in the form of a commission paid by the manufacturer or, more often, the wholesaler. It is important to understand that profit margins are characteristically small and this e-commerce model generally depends on large volumes of sales.

Using Dropshipping, the visitor/customer purchases directly from the website. The business then purchases the product from a third party (wholesaler or manufacturer) and has it shipped to the customer without ever handling the product itself. Customised product labelling, packaging and delivery branding enables the selling of items which are presented as part of an in-house brand with their own SKUs or Stock Keeping Unit numbers unique to the business.

Even in this model it is generally crucial to success that the customer experience is enhanced with substantial blog content, outsourced to freelance content writers, and often with other incentives such as online product advice when a customer submits a query. Commonly in this model the business will be competing with other sites selling the same products and because there is no viability in competing on price, success depends largely on competing on the basis of providing a highly positive customer experience. Search engine optimisation (SEO) is also crucial here for building customer traffic, but this again is a skill set which is outsourced and not particularly expensive to obtain. Cross-promotion is often established, whereby advertising material such as ‘gift cards’ for another business in an unrelated niche is included in your product packaging, on a reciprocal or even paid basis.

If your online business is geared up to sell items with your own branding, even though the same item is marketed by other e-commerce businesses, then each item will carry its own SKU or barcoded stock keeping unit unique to your own site. Often but not always, e-commerce businesses which use this model for branding and delivery still have an interest-based website which is heavily dependent on quality niche content. There are some highly profitable sites with only a small number of SKUs while others, for example in the apparel and accessories niche, may have hundreds of SKUs.

So how do I choose my investment business?

Clearly the current profitability, or the potential profitability you can see, is the Number 1 criterion. Revenue is not the issue. Net profit is. Ensure the seller is fully transparent about all costs, including all outsourced services. Accurately knowing absolutely all of the business costs which are entailed is crucially important. You can buy e-commerce websites even on eBay, but that would leave you completely exposed to unscrupulous sellers, of which there are many.

As a guide, expect to pay around 24-30 times the audited monthly profit (or 2+ times the annual profit) for most e-commerce businesses, although there are many variables affecting this figure. Check what expertise, for example experienced outsourced content writers, are coming with the business. Factor in a ‘passivity premium’. That is, if it’s unnecessary for you to invest an enormous amount of your own time managing the business in an ongoing way, then it’s worth more financially than if your own time and expertise is a major investment cost.

Generally, it is wise to consider only businesses with an established record of consistency and growth. Ideally, be assiduous in trying to understand why the seller is selling. There are many possible reasons for the sale, beyond profit-taking. Knowing the background to this may be important in your final decision. Has the business already ‘peaked’ perhaps? Having a precise task-matrix of the current owner’s involvement is a key to assessing the cost of replacing the owner’s time and expertise. If you don’t want to take this on yourself, is it outsourceable and if so at what cost?

It is vital to know what exactly is being transferred with the purchase. Will existing product supplier agreements and merchant processes transfer with the business or do they remain with the current owner personally? If so, that is a potential deal killer.

Approaching this whole investment evaluation process in a positive way, it’s actually pretty engaging and energising. It’s been kind of fun for me. In my case I’m looking for active involvement in a niche content-based e-commerce website where I can personally do much of the writing and editing, while outsourcing the website optimisation to others. Looking at the some of the offerings on Flippa and imagining their potential and their ‘fit’ with my personal interests is exciting. 

Survey the surroundings, but finally it’s best to dive straight in

Invest just a small amount too over-cautiously and the outcome isn’t likely to be all that spectacular. I’m going to be responsible with the investment amount I’ve set aside – but no toes in the water for me. I’m ready to jump in now. Good luck with your own investment journey!

 

Flippa adjusts pricing and adds key services as it evolves to service high value digital businesses

Flippa adjusts pricing and adds key services as it evolves to service high value digital businesses

At Flippa, we are always looking for ways to add value and we will always add new features to support our growing ecosystem of business owners, buyers and the brokers who often support them.

 

Over the last few months we’ve been working on several ways to improve our seller and buyer experience. This has included the introduction of Flippa Escrow, high value business sales, dedicated account management for both sellers and buyers and the introduction of a broker program. Moving forward, we’ll also be investing for efficiency and to protect the integrity of the marketplace. This will include:

  • ID verification to assure buyers and sellers
  • Seller declarations to pre-qualify business inclusions
  • In-platform buyer / seller messaging services
  • An easy to use profile creator

And today, we are announcing new pricing plans designed to better suit our three core services. The new plans take effect effective immediately – Monday 5th November 2018 and are as follows:

  • Asset Sales including the sale of a domain, app or starter site, i.e. something not generating any revenue, can be sold for a listing fee of $25 and success fee of 10%.
  • Self Service Business Sales  is best suited to profitable businesses with a minimum six month trading history. Sell for a listing fee of $200 and a success fee of 10%.
  • Broker Supported Business Sales will match you with a specialist broker. Best for those with annual profits of 200k+. Sell for a listing fee of $200 and a success fee of 15%.

The 10% success fee on Asset Sales and Self Service Business Sales is a reduction. This was previously 15% for Credit Card payments and 12% when using Flippa’s escrow service. Flippa still absorbs the escrow transaction cost.  

 

Note: Pricing and fees are in USD. Your sell price should always be in USD.

New Services – Buyer and Seller Management

We’re pleased to announce that Flippa has introduced Buyer and Seller Management services. These services are free and designed to streamline the sales process for you.

  • Buyer Management takes the hard work out of the search. If you are looking to buy a business over $50k, simply schedule a call with one of our buyer managers here. They’ll learn about your needs and explain the matching process. They’ll then search for businesses on your behalf and will act as matchmakers.
  • Seller Management takes the hard work out of the matching process. This service is designed for businesses priced over $50k. You’ll be matched to an account manager post listing and your account manager will ensure your profile is optimised and that buyers are verified before they are put in touch. They’ll be by your side every step of the way.  

Coming Soon

We’re excited to announce that we will soon introduce two new services designed to improve the integrity of the Flippa platform – we take the security of our customers very seriously:

  • ID Verification. Flippa has partnered with the award-winning Jumio to ensure that both buyers and sellers are verified before listing or making an offer for a business. This service will be released in November 2018.
  • Platform Messaging / Negotiation. Flippa is working on improvements to the existing messaging functionality. This will enable in-platform messaging and negotiation to ensure buyers and seller private contact details remain confidential and that all communications are confidentially and securely stored. This service will be released in January 2018.

Helping to support the thriving business sales ecosystem

We’re excited by the progress we’ve made in recent months. We are proud of our history as an asset marketplace but we have evolved. Our vision is now to service buyers and sellers of businesses globally by connecting all parties, key services, and facilitating the end-to-end business exchange in a trusted and efficient environment.

 

Is it time your business jumped onto Amazon FBA?

Is it time your business jumped onto Amazon FBA?

If you already have, or you’re contemplating, a start-up with an actual physical product to sell, then you have probably heard of Amazon FBA – but what is it exactly and what are its advantages and any potential drawbacks you need to know about?

Well, as a budding mature-age entrepreneur myself I’ve been very interested to follow the progress of one of my friends, Georgina, who has been steadily building a very successful business in high quality skin care products, emulating the well-known and pricey Aesop’s range, but with some extremely creative additions as well.

Like so many other successful start-up businesses, Georgina’s was initiated in her garage, where she worked hard to experiment with bases and herbal ingredients (some of them very expensive) and the mixing, matching and blending processes to create not just practical but alluring fragranced skin products – from hand-wash, to body wash, to nourishing body oils, and later on perfumed candles and aroma diffusers.

The design of packaging (again very expensive) was a major challenge. Logos and branding took time and creativity. The initial sales (obviously on a loss basis for quite a while given the development costs) were to family and a network of friends. But there was a vision. The vision held firm and the viability grew. Finally there was proof of concept as the sales took hold online and some great exposure was achieved when a major Melbourne homewares brand with several suburban stores agreed to stock some of the range.

By now the garage was completely outgrown. It was time to lease a bigger space just for the production itself, and the rental was a significant expense. Georgina took on a couple of university student casuals to help her – but by now the real problem was storage, managing inventory and delivery. Packaging and posting individual orders and hand delivering the store orders had become unmanageable and Georgina was completely out of storage and handling room.

Amazon FBA (Fulfilled by Amazon) entered the Australian market space just 12 months ago – at exactly the right time for Georgina. As a great example if IaaS (Infrastructure as a Service), Amazon FBA manages every aspect of the pick-up, storage, inventory management, order shipping and even customer returns.

It’s useful to clarify that your product does not need to be sold on Amazon itself (although of course it can be). The winning point of differentiation for Amazon FBA is that it’s an end-of-the-line system which saves your business time and money because Amazon stores your products and manages their delivery in your direction. The fulfilment fees are extremely competitive, given Amazon’s vast network of storage, delivery and inventory management systems. Their advanced data management systems allow you to monitor and track all inventory, orders and deliveries as they are happening.

The fulfilment fees include all packing of orders, inner packaging and delivery, even including the management and accounting for any returns. Separately there is a monthly storage fee, based essentially on your cubic metres of stored product. It would be impossible for a small start-up company to access its own rented storage facility in an equally cost-effective way.

All of Georgina’s products are classified by Amazon FBA as ‘standard-size’, but companies with large physical products such as craftsman-made tables and furniture are also accommodated on a different storage fee schedule. One potential financial hiccup to be aware of, is that Amazon FBA storage fees have a price hike (literally tripled) in October-December because of the premium on space in the lead-up to Christmas, but this applies to the storage fee only, not to processing and delivery fees.

Obviously, costs will depend on the kinds of products being handled, but as an indication in Georgina’s case, her typical $30-$40 product has a per-item cost of under $3 for picking up, packing and shipping, plus around $30 each month per cubic metre of stored products. In the case of her business, that’s a lot of product she doesn’t need to store, package and handle for shipping, allowing her and her couple of part-time assistants to concentrate on what they find more interesting and enjoyable – developing and actually making their product range.

For a small business, there are really very few drawbacks in using Amazon FBA. Initial account set-up, including business and individual identity verification, and learning the system for preparing product for FBA collection is a bit complex initially, but once managed it’s plain sailing. It’s also sensible to check out the very large number of order fulfilment alternatives to FBA offered by many companies now for Australian-based businesses. Few can rival the economies of scale of Amazon, but the best deal for your business may depend on exactly what it is you’re selling and your own production or sourcing processes.

In this article, I’ve concentrated on Amazon FBA for Australian-based businesses creating physical products for sale. However, it’s important to remember that there is a massive growing global enterprise in third-party selling. This is where the trader sources products from an original supplier literally anywhere in the world, and then markets it with a price markup, often at a huge margin. Using Amazon FBA the third-party seller can create a highly profitable business without ever actually handling the physical merchandise at any point at all.

A variation on this, and one that is often highly successful is the ‘Private Label’ approach. This is where an already existing product is sourced, usually from a low-cost producer overseas, and branded with the third-party seller’s own logo and brand name.

Now that’s a completely different scenario from Georgina’s business, but a very interesting one to explore in a separate discussion another time along our journey.

 

Interview with Online Investment Expert Jeff Hunt

Interview with Online Investment Expert Jeff Hunt

We caught up with website investor and internet marketer Jeff Hunt this week. In the interview below, Jeff shares his experiences around becoming an entrepreneur, his favourite monetization methods and growing his own website portfolio.

What was your background before you started operating in the website/online business space and how did you make the switch to being your own boss?

I worked for IBM as a Project Executive, operating 9-figure outsourcing deals for Fortune 100 companies. Then I took a totally opposite direction moving my family to a small central Asian country where we served students and families in a humanitarian role.

While overseas I started some small businesses that needed websites, so I got my feet wet in the internet world for the first time. Soon I discovered that websites were not just marketing channels for brick and mortar businesses but could actually be income-generating businesses in their own right.

Seven years later when we moved back to the United States I had started generating cash flow from my websites. I decided not to reenter the corporate world, and instead to grow my online portfolio primarily through buying websites.

What prompted you to make the jump?

When I bought my first successful website – Note: my first website purchase was NOT successful – I discovered I could make a couple of thousand dollars a month from a relatively simple online business.

I didn’t know exactly how to do it at the time, but I knew that if I could make $2K per month, I could probably grow that to $10K per month. That was the magic moment that convinced me it was possible to do this full time.

What does a typical day look like for an online business investor?

I think it is different for everyone but I start every day at Panera Bread which is a coffee shop/bakery about a mile from my home.  I work from my laptop and sometimes I stay there all day, but usually, I hang out in the morning and work from my home office in the afternoon.

I don’t have an official office because I use freelancers to do all the day-to-day operational tasks. Although I’ve had websites using almost every business model, I tend to focus on content websites that are more passive.

Depending on the phase, there can be plenty of work to do, but it is almost never urgent. That gives me the flexibility to take days or even weeks off to do non-business projects. It also lets me meet with friends, family and other entrepreneurs any time during the day that they are available.

When did you first discover Flippa?

My Flippa profile says I made a purchase 9 years ago. I probably had an account before that.

What is your favourite monetization method?

I love non-transactional monetization because it doesn’t require customer service or personal selling. Display ads, lead generation and affiliate monetization methods fit these criteria.

I’ve done dropship, FBA, SaaS, eCommerce for digital products and straight services business. All have pros and cons.

What are the first three things you look for on a website?

I start with the fundamentals.

Traffic and income graphs should be flat or going up. If there are peaks and valleys, there should be good explanations for those. Age and consistency are important.

I look for inappropriate concentrations. Too much traffic from one source, too high a percentage of traffic landing on one page, too much traffic from the wrong geographies, an unusual mix of device types, concentrations of expense or revenue – all of these are potential negative signals.

There needs to be a well defined and understandable process for customer acquisition. If I don’t understand a repeatable process for getting traffic or customers, I back away.

Why do you buy websites?

I try to identify opportunities that have the potential to be held for the long term. Occasionally something will turn up that is riskier but has some strong upside potential. These deals have to come at a lower multiple to offset the risk. They typically either do well and lend themselves toward a flip, or don’t do well and hopefully at least pay for themselves before going to zero.

What are the steps you take to grow websites that you’ve recently purchased?

The quickest wins are usually in the financial realm. On the revenue side, adding entirely new monetization sources using existing traffic usually increases revenue by more than it cannibalizes. A classic example is adding display ads to a site that is monetized only with affiliate links.

You can also easily increase revenue by patching holes in the funnel. Adding upsells and downsells, optimizing conversion rates, making additional touch points to prospects and following up with existing customers can all yield revenue growth.

Another financial move is eliminating or reducing expenses. Business owners often spend money on non-critical functions or overspend on basics like webhosting or freelancer support.

Traffic improvements often take more time. Basic on-site SEO improvements can sometimes result in substantial traffic growth. Things like site speed, title optimization, heading optimization, and content updates make a difference.

How did you learn how to run and operate a website?

I learn from anywhere I can. The basics of WordPress and setting up a website were all self-taught. But I’ve taken many courses over the years to learn methods and systems. I’ve also hired coaches along the way and pay for membership in high-level mastermind groups. Spending money on mentoring and networking can help you focus and speed up success.

You’ve been focusing a lot more on teaching and coaching recently, even writing a few articles for us talking about website multiples and another discussing how to make one of your website investments passive. Do you still actively buy and sell websites or is most of your time spent helping others acquire and grow their own portfolios?

The vast majority of my time, energy and resources is spent on growing my own website portfolio. I negotiated the sale of two of my sites this morning. While I really enjoying teaching and coaching, my main focus is on growing the value of my website assets for an eventual exit.

You also have several courses and webinars over at FlipMinds. Can you tell us more about what Flipminds is?

Flipminds is a community of entrepreneurs that Sunil Jaiswal has developed over a period of more than 10 years. They are investors in property, traditional business and online businesses.

In the early days, most of the group were property investors. As online real estate became more compelling, I joined the Flipminds team to help train entrepreneurs on how to develop cash flowing assets in the world of web businesses.

Now we have an active member community, mentoring resources and training in topics like paths to Financial Freedom, Website Investing, Property Investing, Online Business and Content Website creation.

When it comes to making mistakes when buying websites, what’s one thing you wish you knew sooner?

It is natural to think that putting less capital at risk is safer than putting more capital at risk. That would be true if all businesses had the same intrinsic risk profile.

But the truth is that older, more established, higher quality online businesses are much safer investments than their less expensive but lower quality counterparts. So I would have avoided many mistakes simply by focusing on businesses with better fundamentals.

That is not to say that it is impossible to find good websites at lower price points. It is also not to say that all, or even most, larger online businesses are low risk. That isn’t true. Even very high-income sites can have attributes that make them bad bets. Websites generally have high ROIs and with those ROIs come risks that have to be accounted for and mitigated.

Compared to 5 years ago, is it easier or more difficult to find a deal when looking for a website? How does the future look for this?

It is more challenging to find underpriced deals today than it was 5 years ago. There are more buyers now and the buyer community is better educated and has more resources for making informed investment decisions.

Additionally, price levels are going up. Multiples are growing not only because more buyers are entering the market but also because website assets have attracted the interest of private equity groups, larger private investors and institutional investors.

Despite the fact that big-money investors have entered the fray, there will continue to be opportunities for buyers and sellers at every price point because there is a market for websites at every stage of size and maturity.

As technology evolves, online apps take on different forms, adapting to a variety of devices and platforms. This creates new business models, new niches and new ways to deliver online solutions that will continue to create opportunities for anyone willing to master a little corner of the market.

I am very optimistic about the marketplace for online business. Economies grow by increasing the productivity of their workforces and websites and internet technologies are key elements of that productivity growth.

 

If you want to learn more about buying an online business, you can sign up for Jeff’s free training course via Flippa here.

Jeff Hunt is an internet investor,  marketer and website owner. He actively buys and grows websites with the intent of creating multiple passive income streams, and enjoys capitalizing on internet opportunities to help others to do the same. You can learn more about Jeff and his courses here.