How to Generate 150% ROI Buying an Online Business
Most established web businesses tend to sell for anywhere between 2x and 4x of their yearly cash flow, but for many buyers having to wait 4 years to recoup their investment seems long, especially if there are significant risks involved.
Here are 6 “rules” from my own acquisition strategy, along with some case studies, showing you how I look beyond the “profit multiple” when completing acquisitions and usually achieve a far better ROI.
Don’t look for “hands off” or “passive” businesses
One of the biggest mistakes that I constantly see buyers make is looking for “hands off” businesses. I do of course understand how attractive it is to own a “passive money making machine”, but not only is the reality usually quite different, but you’re also competing with thousands of other buyers who are looking for the exact same thing.
This of course means that the prices of those few truly passive properties are never going to be low.
Instead, you should focus on sites that aren’t passive now, but have the possibility of becoming passive with the right action plan.Case Study In December 2014 I facilitated the sale of a business that, at the time, was more than a full time job for its owner. With the owner spending up to 70 hours a week (yes, 70 hours!!) on running the day to day ops of the business, it was needless to say not a very attractive purchase opportunity and ended up selling at a multiple of just over 1 year. What most buyers didn’t realise was the business was so poorly run that that majority of the time that the owner spent on it was taken up by tasks that could be easily eliminated, automated, or outsourced. All that was needed was some good organisational skills – which the seller lacked. Within the following 3 months, the new owner turned it into a business that is being ran by a part-time employee, and the salary of this employee is less than 7% of the site’s gross profit.
Always be on the lookout for synergies
When it comes to my own acquisition strategy, the very first thing that I look at when evaluating whether an opportunity is a good fit for me or not is how well does it go together with my existing portfolio.
I’m not of course saying that you should only buy businesses that are operating in exactly the same vertical as your existing ones, as this advice would be quite counter-productive considering the small size of the industry, but there should always be at least *some* synergies in place.
As an example, the sites that I own are across a number of different verticals and three (very) different business models, but there are several things “behind the scenes” that link them all up, such as:
- Staff – employee wages are my second-biggest expense, next to advertising. Because of this, I always try to look for properties that my existing team can handle, as hiring someone new would significantly decrease the bottom line of the new property.
- Payment channels – it’s much easier to manage your finances and to get discounted rates if most of your properties are able to utilise the same payment processing account.
- Platform – this goes hand in hand with staff, but it’s worth bringing it out separately. I always make sure that the technical side of the sites that I buy aligns with my own and my developer’s competence, unless it’s a simple site that I can re-build from scratch.
- Marketing – myself and my team are good at certain types of marketing. As such, I try to make sure that any business that I get involved in would benefit from those marketing channels, as it’s essentially a cheap and easy way to increase traffic right away.
But your synergies could be virtually anything. Some buyers prefer acquiring businesses that align with their own interests to avoid getting demotivated, others tend to stick to a particular business model to cut management time and costs – it’s largely down to your personal taste.
Identify easy growth opportunities and “quick wins”
If you’re like most of us, you’d probably quite enjoy buying a $5,000 per month business and having it generate $9,000 per month from the moment you take it over.
The good news – in many cases it’s completely doable.
A large percentage of established businesses that end up for sale are “under-managed” in one way or another, and it’s quite often possible to trigger near-instant growth by making only a few changes.
There’s of course no “secret sauce” that I can offer here, as all businesses are different, but to get you thinking in the right direction, here are a few questions that I personally tend to ask myself every time I assess a site that’s for sale:
1) If the site is running ads, can I increase its ad spend and thereby increase the bottom line?
2) Is the site’s layout such that a simple re-design would be likely to result in a significantly higher conversion rate (5 times out of 10 it is!)
3) If a subscription business, what changes can I make to increase retention and make people stay subscribed for longer?
4) Are there any obvious (paid) marketing channels (e.g. Google AdWords, Facebook Ads, banners on related sites) that the site would be likely to benefit from?
5) What’s the competition like and is there any room for increasing prices?
6) Does the site have social media presence? If not then there could be a lot of money left on the table.Case Study The best example here is probably one of my most recent acquisitions. Long story short – the site that I bought was generating very little revenue (in the vicinity of $500 a month), but had been tremendously mismanaged and came with significant opportunities for “quick wins”. The result? Two months and the site’s net profit had increased by 5 *times*. And all of that was the result of some simple changes that took me not more than one weekend to implement. I changed the site’s pricing from day 1 (it didn’t have any competitors and the pricing was extremely low), introduced a new advertising channel, put in place two simple A-B tests for conversion optimisation, and fired the super-expensive freelancer that the previous owner was using, replacing him with one who’s several times cheaper but provides similar quality.
Don’t be afraid to spend money
If I would have come up with the main reason why most people are never able to grow their web businesses beyond the “parents’ basement” point, it’s that they don’t understand the concept of re-investing profits.
Because of the fact that the majority of sites in the <$250k price range have been started by their current owners as hobby projects, most of those sellers aren’t treating their sites as proper businesses.
This means that whatever the site makes, those sellers tend to consider it ‘their salary’, rather than business income.
Needless to say, this approach severely hinders any growth, as there’s only so much growth to be had without reinvesting.
I’m of course not telling you to open up your wallet and start throwing your $100 bills around everywhere – absolutely not. But you should always allow a generous “testing budget” to play around with your new business and see what works. Often times there’s a hidden marketing channel or a UI change that can do wonders to the site’s profits.
When the time is right, HIRE!
The fact that the majority of online businesses in the sub-$250k range are owner-operated doesn’t mean that they have to be.
Quite the contrary, really. If your goal is to own a portfolio of multiple properties, then managing them all on your own is simply not feasible. And as I mentioned above, looking for “hands off” sites is not the correct solution either, for multiple reasons that I’ve covered previously.
The correct course of action is most of the times to either hire, or alternatively outsource. Personally, I prefer hiring to outsourcing as having a person working for me 20-40 hours a week, rather than doing odd jobs here and there, almost always results in a lot higher quality. I also appreciate the fact that I can control my team and that they grow together with the business.
Don’t rush into the hiring decision though – some of the worst hires of my life have been those that I’ve rushed into, ending up in situations where I’ve hired a full time person but only had enough work for them to cover 2 hours of their day.
If you do this then you’ll soon find yourself spending more time on trying to come up with “filler tasks” for your employee than you would spend on getting the work done yourself.
I also avoid hiring people who are only useful for one project, and instead try to identify the areas that would apply across my whole portfolio and hire there.
Look for distressed assets
That’s the first time you’ve heard that, RIGHT? 🙂
It seems like everyone and their grandmothers are going around suggesting people to “purchase distressed assets” – mostly the types that charge high amounts for coaching but have no or very little first hand buying experience.
The trouble with this approach is that even though it sounds nice, simple and straightforward on the paper, in the real life it’s anything but.
The reason for this is two-fold:
1) There simply aren’t enough distressed assets out there to make it your primary purchase criteria.
Similarly to “passive businesses”, nearly every buyer out there wants to buy “under-monetised”, “mismanaged” and otherwise distressed assets, but the supply is naturally quite limited. What this means is that you need to employ a smarter approach and look beyond the blatantly obvious, and you’ll discover sites that others think aren’t worth the money.
2) Distressed assets are not nearly as easy to identify as ‘coaches’ tend to lead you to believe.
This means that often enough it’s extremely easy to get burnt and stumble on a ‘destined to fail’ business, rather than on a distressed asset, or on the opposite end of the spectrum – mistakenly identify a truly distressed asset as a ‘destined to fail’ business and pass on it.
When it comes to distressed assets, a good example is always sites that have declining revenue. Sellers often tend to claim that their lack of time/energy/resources is behind the decline, leading buyers to believe that with a bit of work and a cash injection they can turn things around.
It’s not nearly as simple, though. Before looking any further, you want to try and identify what are the true reasons behind the declining numbers – and establishing that “back in 2013 the seller worked on the site 10 hours a week and it made $100,000 whereas in 2014 the time investment was near-zero and it made $10,000” isn’t nearly enough – as even though it may sound plausible on the surface, the reasons behind a business declining are often far more complex.
My “checklist” in case of declining revenue is typically as follows:
- Market trends check (Google Trends is a good resource). Revenue decline is often the result of an overall decline in demand – bad news.
- How many competitors does the business have, has this changed recently, and can this be the true reason behind the decline?
- What exact activities were performed before that aren’t performed today?
- Is it plausible to expect a direct correlation between such activities and the site’s revenue?
- Do said activities influence revenue directly (e.g. sales calls – good) or indirectly (e.g. search engine rankings – bad)?
- Is it reasonable to believe that restarting said activities will have a significant effect on the site’s bottom line in less than 3 months?
- How much ‘infrastructure’ does the site have, e.g. how much would it cost me to simply build a new business, rather than investing into the one that I’m looking at, and how different would the result potentially be?
In all honesty, some of my best acquisitions to date have been businesses that have shown a steady month on month decline, but I also pass on 99 out of every 100 properties that I look at.
Budget allowing, diversify!
When writing this, I spent a good 15 minutes trying to find a quote by some VC or an Angel Investor who talks about investing into 30 startups, most of which being destined for failure, in the hopes that 1 out of 30 is going to be the next Facebook – but I failed.
Things aren’t nearly as bad in our industry, where most businesses are sold based on their existing cash flow, rather than potential, but I drew the VC/Angel parallel in reference to my earlier promise of a 150% ROI.
Simply put – and whoever tells you otherwise should pack their bags and leave the industry – it’s impossible for every single one of your acquisitions to generate a 150%+ ROI. If someone tells you that they can show this kind of results on an on-going basis then they’re either lying or have suffered a serious case of amnesia.
It IS possible to show an average ROI of 150%, though.
Whilst you would never expect to complete 10 acquisitions and have all 10 of them create a return in 9 months, with the right strategy it’s perfectly feasible to have 2 of the 10 create a return in only a few months, another 6 in 18 months, and the remaining two not at all.
But when it comes to diversification it’s important to be careful not to fall into the trap of splitting your already low budget up into 10 even smaller junks, as whilst it may appear to be the sensible option, not only does it often take as much time to manage a $10k per year property than it does to manage a $100k per year property, the supply at the ultra-low-end (<$40k acquisition price) is extremely limited and both scams and super-high valuations are common.
Thus, my advice to those who have a $100,000 budget is never going to be to purchase ten assets for $10k each, but rather to make one extremely careful purchase in the $50k range, another one when the time is right, and then re-invest the venture’s profits into more acquisitions.
If you have any tricks of your own that you use to maximise the ROI of your acquisitions or any questions for me then do let me know in the comments below!