07
So you want to do a leveraged buyout (LBO), but you dont have $1B in your pocket and your friendly banker won’t cough up the $10B? Well, we might just be able to help you to achieve your dream, albeit on a smaller scale but with the same sense of pride of ownership of property all of your own. We have done enough of these internet web deals that we feel comfortable giving guidance on how to do them from start to finish. This weeks strategy series is dedicated to the entrepeneurs, big thinkers, savvy traders and other constituents comprising our readership who we feel will get something out of this, perhaps a new hobby or even a new source of income to supplement their day job which exploits their knowledge of technology.
Define your Objectives. Before starting something like this, you need to ask why I am doing this? What is the point? Is this for entertainment? Do I have the technical know how to do this? Is this a serious money making enterprise to supplement my monthly income? As part of this soul searching it is necessary to assess how much you can afford to invest. Generally speaking you will buy a better business for a higher purchase price, but there are exceptions to this rule. You can buy a quality business for $1,000 or for $10,000. I think of a quality website the same way that I think of a stock with heavy dividends, except that with a web business you have full control of the business and the ability to increase your dividends as you improve the underlying business.
How to Identify: The locations with the most inventory of websites for sale are EBay.com, Digital Point Auctions and Sitepoint Auctions. There are other places on the web, but you really need a large marketplace with lots of properties in order to find an undervalued property with the potential for growth. Some of the types of situations that I find promising: 1) undermonetized property, e.g. a property with high traffic that is not monetized effectively, 2) scalable property, e.g. a real estate site with strong back end infrastructure that you can expand into new countries, 3) established property, a property that already has a online presence with an economic moat, e.g. the #2 forum site for a given niche with large membership and corporate sponsors.
Analysis of the Deal: The dealmaker needs to analyze the revenue, expenses, traffic including both uniques and total visitors. Our experience is that you will get slightly different traffic numbers from Webalizer, Mint, Awstats, Google Analytics, etc. Some of these will tend to downwardedly bias the traffic numbers and others may be overly optimistic, but the mean is probably a fair estimate of the true traffic. The page rank and backlinks should be checked since these drive traffic and give value to a site. The source of the traffic merits evaluation as well, you dont want to find that a large percentage of the traffic is paid or that the lions share is all from fickle search engines who could drop your rank from #1 to #200 in the next page rank update.
My experience is that the best deals are asset intensive where the buyer acquires a large list of assets as part of the purchase. For web properties, assets may include domain names, customer mailing lists, mySQL databases with user demographic information, youtube.com promotional videos, vBulletin licenses, etc. The prospective web tycoon should be aware that many of the businesses on offer are sold based on potential revenues assuming the new owner is able to both promote and monetize the site to a level it has not yet achieved in real life. Our advice is to be very wary of paying premium prices for what are essentially lottery tickets.
Buy a Business: We need to be disciplined about the purchase price of a web deal. If we overpay, it will be years before we make our money back let alone make a profit on the deal. Its not a bad idea to look at the valuation estimates from sites such as websiteoutlook.com, although these estimates can inflate or badly underestimate the value of a site. Keep in mind that a fair price for a web property depends on the uniqueness of the business, how difficult it would be to replicate by a new entrepreneur starting from scratch and the length of the operating history. I have seen anywhere from 6 to 50 months revenue for completed transactions, but I am sure there are good deals that are outside of this range. Its a good idea to maintain a transaction spreadsheet with recent deals for the sites you consider to be quality properties. Once you agree on a price, the deal is best done with escrow.com which will protect the buyer and the seller. For a small transaction, e.g. less than $1000, I am comfortable executing the deal with paypal so long as the assets are transferred in stages, e.g. the domain name is transferred over and then a portion of the price is sent to the seller. Make sure that part of the payment is predicated on support. If not, you run the risk that the seller disappears after the transaction which could hurt the business if all the intellectual property is not yet transferred over to the new owner.
Growth / Building your Empire: If you really plan to scale your web businesses and create an empire out of owning and running online properties / websites, we recommend that you diversify your revenue from different unrelated sources, e.g. google adsense, corporate sponsors, premium memberships, software sales, etc. You don’t want all of your revenue to depend on a single source. I have heard stories about owners advertising income dropping 50% overnight for various reasons when they rely soley on Google Adsense, Yahoo Publisher Newtork (YPN) and related programs. I view it as a necessity for an aspiring web tycoon to build a collection of properties and in this manner grow a healthy and diversified income stream.
