This post is by Victoria Duff, founder and CEO of business consulting firm, aBusinessPlan.com.
My job, brokering web-businesses means I work with a lot of website flippers. I sell them small web businesses and I broker the sale of their completed projects – hopefully, large and profitable ones.
I see a fairly even split between the number of professional flippers looking for their next projects and the inexperienced wannabes who have been lured by tales of huge profits. The number of wannabe website flippers grows yearly. Most have no practical experience in flipping of any kind and need some detailed advice – which is why I am writing this article.
The new investment marketplace
Website flipping has become a popular sector of the young, but thriving, market for web-based businesses because the sale transaction and transfer of the business are often quick and simple. Selling digital assets is much less cumbersome than flipping bricks-and-mortar businesses, or even houses, and the profits can be large with only a modest investment.
We list websites priced at $20,000 all the way to $20 million, with an average size transaction of around $250,000. Some experienced flippers are startup specialists who create businesses for resale. Others tend to buy more valuable web businesses because, in theory, they present less risk. Whichever strategy is employed, successful flippers always recognize the value of doing it the right way.
What is website flipping?
Some of you may not be familiar with the fine art and potential big bucks of website flipping. Essentially, the flipper buys a neglected website-based business, applies a little professional know-how, and transforms it into a high-traffic, high-revenue, high-profit-and-growing online digital enterprise. Then, the flipper puts the whole thing up for sale and buys another “fixer-upper” with the profits.
It’s the same thing that Mitt Romney and Carl Icahn do with big corporations. On a smaller scale, it is similar to house flipping. Like houses, the website might need work on its “kerb appeal” and some UX (user experience) improvements. Marketing and SEO are common areas that can be improved with rewrites of content, the establishment of a newsletter, product promotions, and other traffic-building changes. Sometimes a web-business reorganization involves adding new revenue streams and removing the non-productive elements of the business. All this is done to increase its resale, flip, or exit value.
Until a web-business is profitable, it is only raw potential. Some pro-flippers specialize in turning these shells into profitable businesses by using advanced strategies and tools. The profit potential is high, but so is the risk. Beginners are often drawn to these marginal sites because they are inexpensive to buy, but they pose an even greater risk for those new to the art.
Not all websites are appropriate for a flipping project. For example, a web-based business is not one of those websites that serves primarily as an online brochure. A brochure website does not transact business, makes no money, and is not a web-based business. Brochure sites, no matter how well-designed, are only valuable to the businesses they represent.
The risk of a “flipping mess”
If your improvements produce the desired results, you could reap tens or even hundreds of thousands of dollars in cash-out profits – in addition to your monthly earnings. However, you might also fail.
Even though you try all your tricks and hire consultants to perform their magic, the value of your flipping project might never improve. It might even lose traffic and revenue, diminishing your chances of recovering your investment in an exit deal. There are many things that could go wrong. Flipping is risky, and the sign of a successful website flipper is careful attention to risk management.
Risk management involves:
- Correctly assessing your own resources and capabilities.
- Correctly analyzing the problems and opportunities presented by the web businesses you consider buying.
- Correctly evaluating what changes will produce the greatest exit value.
Note the emphasis on the word “correctly”. Your success in the web-business turn-around game is dependent on how well you keep your own assumptions and emotions out of the decision-making process. The greatest risk to a website flip is a miscalculation by the flipper.
Qualities of a professional website flipper
Website flipping is not without its risks, which is why successful pro-flippers are a serious bunch. They don’t often succumb to emotional decisions because they focus on facts – traffic stats, keywords, backlinks, and online business trends. Before you jump into website flipping, these are some rules most experienced flippers follow:
Stay within your area of expertise
If you like to follow celebrities, then stick with flipping projects involving celebrity gossip websites or, if you are an experienced gamer, focus on game-related web businesses. Many professional flippers are experts on the products and management of the sites they buy to flip. A certain amount of your own practical expertise applied liberally, lessens the expense of renovating the business. For example, if you have the knowledge, you may not need content writers, merchandise buyers, or web developers. There are plenty of multi-million dollar website-businesses that are operated by just one person.
Keep current on what is moving in the marketplace
Knowing what is popular can make a big difference to your final cash-out value. Business models that are in favor as I write this article are SaaS (software as a service), Amazon stores and other similar marketplaces, and independent ecommerce sites. However, not long ago everyone wanted content sites with AdSense revenue, and before that, casual games were hot.
The point is not to get caught with a business model that depends on a declining trend like Pokémon GO. Begin your research with a Google search for “website brokers” and start looking at what listings they have available. Don’t feel you must buy the first attractive web-business you see, particularly if you are new to business-flipping. Take the time to develop a discerning eye for quality. Pay attention to what attracts interested buyers, so you know what will add the most cash-out value to your flip.
Thoroughly research the web-business before you buy
It is important that you carry out “due diligence” before purchasing a web-business to flip. As part of this process you need to:
- Ask for pro-forma P&Ls for the previous three years. Pro-formas are profit and loss statements that only show expenses specific to the operation of the business. You don’t need to know about the car lease or the warehouse if you are not going to buy the car or use a warehouse.
- Check the ownership of all digital assets. Graphics, photos, videos and such must be legally owned and transferable in the sale. It is also worth the effort to require proof of ownership of all domain names. Other things to examine are hosting contracts, employee contracts, template and plugin accounts, advertising contracts, supplier contracts, tax returns, bank statements, and anything else that will prove the Seller’s claims.
Work with professional web-business brokers, accountants, and attorneys
Don’t worry about the cost of bringing professionals onboard. They are worth their fees because the success of your flipping project depends on the quality of the business you buy and the full legal transfer of ownership. A good accountant can spot any financial irregularities and a good attorney can help reduce your legal risk. A good web business broker will watch for online properties that meet your requirements and help you to negotiate a fair deal on purchase or sale.
How the pros find potential acquisitions
Imagine that you are an eagle out hunting for a meal. You start your hunt by soaring above the ground, as high as your sharp eyesight will allow. The higher you climb, the better your view, as it gives you a wider range and a better chance of spotting any small animals in the area. A movement somewhere over there catches your eye and you swoop in to view it a little closer. Ah … a squirrel. But then, another movement off to your left steals your focus… a rabbit! Just what you wanted. You carefully position yourself for a swift and accurate dive and hope your prey can’t escape.
Doesn’t that story make you want to jump out of your chair and flip websites? Well, it should because it is exactly how you will go about finding a web-business to buy, fix, and flip. I suggest you think of yourself as a predator, too. A predator’s attitude can help you to keep your emotions out of the deal, and that is definitely what you want to do.
Longevity is nice
Always go to the Wayback Machine (Archive.com) to see how long the domain of your potential flip has been in active use and whether it has always pointed to the same business. In most cases, the length of time a website has been in operation and producing revenues is important in determining its value. A long period of sustained, if unimpressive, performance adds value. However, its importance varies with the business model.
If you are looking for a “starter business” such as a small Amazon store, the number of years it has been in operation is less important than the quality of its administrative structure (product strategies, marketing, and business management).
If your skills are in SEO and marketing, you might want to look for an independent retailer in a good niche. In this case, a long history of stable performance is a good thing. Stability adds value, even when the business has been neglected or is in need of a redesign and aggressive marketing.
Traffic = Revenue
It is normally true that the greater the number of visitors to your business website, and the longer they spend on your site, the greater your opportunity to sell them something, or at least collect a little advertising revenue. That is why your most important task as a flipper is to build traffic to the site.
The perfect website to buy would be 10+ years old with steady traffic that grew organically, with little or no marketing, SEO, or advertising. It is then reasonable to figure that by adding any of those three improvements (marketing, SEO or advertising) it would result in a significant increase in traffic. If the niche your serving is healthy and the product saleable, building traffic should be your first task.
Revenue = Operating Income
Once you have built traffic through SEO and social media marketing campaigns, the next thing to do is to figure out how best to monetize all this traffic. If you are selling a product, your sales should increase with the additional traffic.
If you don’t sell products, build your revenues by publishing ads on your site. Use advertising networks like Google AdSense, but don’t depend on advertising as your only revenue stream. Other revenue streams to consider are affiliate marketing, charging a membership fee to access exclusive content, collecting leads for other businesses, and so on.
Strong revenues increase the value of your web property, but even more importantly, they provide money to operate and improve the business.
Low Expenses = Higher Profit = Higher Exit Price
While building traffic and revenues, be careful not to increase expenses more than absolutely necessary. Web businesses are priced for sale by taking the EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) and multiplying it by a factor dictated by the current market.
At the time of writing of this article, most web-businesses sell for 2 to 2.5 times their 12-month EBITDA. So if earnings are $100,000 for the year, the website will probably sell for somewhere around $200,000 to $250,000.
Some types of sites, such as SaaS, can command a higher factor. The length of time the site has been operating, high volume of traffic and long-term stable growth add value and could sell for between 3 and 5 times their 12-month EBITDA. This is a rarity though, as only very popular and profitable sites sell for more than 3 times EBITDA.
Create your strategy
Now you know the important elements in adding value to your flipping project, you need to select a site to buy that will respond well to your reorganization efforts. The first thing to do is perform a SWOT analysis on the property to examine the Strengths, Weaknesses, Opportunities, and Threats you will be working with in your reorganization of the business. This will help you form the basis of your turnaround strategy.
Take out a yellow legal pad, or open up your iPad, and start writing notes about the web-business you are considering for your next project. Take each of the four topics listed, and actually write down your notes. If you work with a partner on your projects, each of you should perform your own analysis and then compare notes.
- Strengths – Good market niche, stable performance history, strong traffic, etc.
- Weaknesses – Heavy competition, unreliable suppliers, poor UX, low ranking, etc.
- Opportunities – Marketing and SEO, website redesign, additional revenue streams, etc.
- Threats – Over-served market niche, high COGS, Google algorithm changes, etc.
Remember, you are not selling anything to anyone in this exercise. A SWOT analysis is a great example of how putting serious effort into taking a dispassionate look at the project you are contemplating will produce significant and often surprising rewards.
The necessary skills
It goes without saying that if you intend to get rich by flipping websites, you should have some practical experience, such as having at least attempted to build a website yourself. If you are comfortable working in Amazon’s admin section, you qualify. If you are a savvy computer user, you also qualify. However, if you think AOL is the internet, you might want to do a little more research.
Think about what your SWOT analysis revealed and what skills will be required to implement your strategy. Most likely you will need a web developer to redesign the website. Other skills include SEO, social media marketing, accounting, legal, fulfillment and hosting – if you can do them yourself, you will save money and make more profits. Otherwise, hire people who know about these things. I often see partnerships in the flipping business. One partner is the business manager and the other is the web developer, a good combination.
How to exit
If you are flipping websites to make money, be aware of what makes a web-business attractive to buyers and work to that end goal. If you want to make money via flipping websites, build a quality product that someone will want to buy. For example, if you are working on an ecommerce project and there is no Amazon store, add value by starting, or buying, an Amazon store to go with the ecommerce website. If you are building traffic to the site, focus on building organic traffic rather than buying traffic. Cut expenses, expand revenue streams, clean up your records in preparation for a buyer’s due diligence, and contact a good broker to list your site.
You can learn more about the process of selling a web-business in my previous article Is it Time to Sell Your Ecommerce Business?
One last thing …
Please sit down with a tax accountant and examine how your flipping project will be taxed. You will save yourself headaches, and probably money, if you gain a firm understanding of everything that qualifies as a deduction. Other things to examine are the legal structure of your business and administrative questions such as the various foreign laws and taxes that might be applicable to your expanding online empire.
This post was by Victoria Duff, founder and CEO of business consulting firm, aBusinessPlan.com, specializing in new venture planning and launch for public and private companies under $500 million.