EP05: There are Many Ways to Make Profits When Buying Online Businesses, But Only One Way to Lose Money – Domain Magnate

EP05: There are Many Ways to Make Profits When Buying Online Businesses, But Only One Way to Lose Money

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On the fifth episode of The Domain Magnate Show, Michael shared his tips from over a decade of experience in buying and selling profitable online businesses. Michael discussed what’s the top reason why buyers are losing money on their first deal.

GUEST BIO:

Michael Bereslavsky is the founder and CEO of Domain Magnate. He’s been involved in various internet-based businesses since 2004 and quickly graduated from building, promoting, and monetizing websites to buying and selling them. With over a decade of experience, Michael and Domain Magnate has managed 300+ successful deals. 

SKIP TO THE GOOD PARTS:

00:15 – 01:26 – Why do most people lose money in their first deal?

05:14 – 8:50 – Things to look into when buying an online business.

8:50 – 16:03 – Assessing the risks

18:20 – 19:44 – Thinking ahead

SHOW TRANSCRIPT:

Michael Bereslavsky 0:15 This episode is called, there are many ways to make profits when buying online businesses, but only one way to lose money.

Michael Bereslavsky 0:28 So, let me explain first what that means. Nowadays if you want to buy an online business, you can generally buy a business for less than three years of profits.

Michael Bereslavsky 0:43 So, you can go and buy a content business for an average something like two and a half years of profits or you can buy a SaaS business or an e-commerce business for around a similar rate a little more, a little less. So that means that you are supposed to get about 30% or even more than that in annual returns. And that’s amazing compared to any other investment, that’s an amazing return. 

Michael Bereslavsky 1:14 And now if you are good at managing businesses, you can improve some things. You can monetize it better; you can improve conversions. You can make some better deals, or you can find a cheaper deal. And you can potentially get an even higher return like 40% or 50%. So, it’s not that difficult to find good returns, it’s not that difficult to find profits that comes to making deals or buying online businesses.

Michael Bereslavsky 1:49 So then, here’s a question. Why do most people lose money, especially in their first deal when buying an online business? And this all comes down to one thing and one thing only, miss understanding or underestimating risks. So, it’s all about risks. People lose money because traffic goes down, revenue goes down, or something happens that just kills the business. And there are many, many different types of risks, many, many different bad things could happen. So being good, being good at buying businesses, being good at due diligence, is really all about understanding and evaluating those risks.

Michael Bereslavsky 2:45 And here’s an example, I recently saw, someone I was talking to, acquired a SaaS business in six figures. And they’ve done all the due diligence, they bought it for a broker, they looked at all the data, they checked the screenshots, they checked the revenues, the graphs, and the numbers look good. And everything matched up. They spoke to the seller. They verified all the details and financials. And they’ve negotiated for a bit. And they even had the short inspection period. So that after they’ve acquired it, they’ve set up their own accounts, and the revenue was pouring in. And it seemed like a really good deal. Because there are some things that they’re planning to improve and grow further. But then suddenly, something happened. And just about two months later, they lost everything, the business became pretty much worthless overnight.

Michael Bereslavsky 3:53 So, you might ask, what happened? How is it possible? And that’s the thing with online businesses. The biggest risks are the ones that you just don’t know what you don’t know like you don’t know that they exist. And so, with this one specifically, it was a SAS based around Facebook, it was using the Facebook API. And around that time, a few months ago, Facebook changed the API, and some of the functions that were previously available, they just decided to disable that. So that you could no longer get that information from Facebook. So, the entire sales business, the whole service was pretty much completely dependent on that data. And it’s no longer available so there’s just nothing they could do, that pretty much had to shut down the business and write it off as a loss. And that happens more often than you might think. So that’s what it’s all about, risks, and the buyer of the business, they did not have much experience with this SAS or with Vader before. So, Vader did not accept, they didn’t consider that that could be a possibility.

 Michael Bereslavsky 5:14 Now, as an experienced buyer, I would, of course, know that one of the first things to do if you have a SaaS is to check the API’s, to check how reliable they are, how difficult it is to diminish them, you know, what are some potential updates and all those things. But this is the kind of knowledge that only comes from experience. So many people might just not even consider that. So the most common question that beginners ask about buying or investing in online businesses, is just this, like, how is it possible that you can buy a business for less than three years revenue, and you can get such high returns compared to any other type of investments like real estate or stocks? And this is the answer, the risks, like the risks, are so much higher. The risks are so different as well. Buying a business is a business, you cannot compare it to buying real estate, you cannot compare it to stock investment. It is, first of all, a business. And you have to look at it as a business.

Michael Bereslavsky 6:22 Imagine if you’re buying an offline business, like a convenience store. How would you buy it? You’re probably going to look at where do you get your products from? Who is your supplier? Who are some employees who manage it? What is your marketing? How do things work? What are the logistics? What are some potential regulations you need to be aware of? And there is a lot of different things to keep in mind if you’re buying a grocery store. And it’s the same when you are buying an online business as if you’re looking at an offline business. And that is really the framework that you should be considering, that you should be using. Rather than thinking of a content website as a real estate, as an investment. It’s, first of all, a business, even if it’s an online business.

Michael Bereslavsky 7:16 And as an example, I saw recently, a friend of mine had an FBA business. And they were doing millions of dollars in sales per year and was doing quite well. And they had a really popular product. And it’s been running for many years with consistent growth. But recently, they had some trouble because it became so popular, they had trouble fulfilling orders. So, they weren’t shipping fast enough. And they also had a slightly higher return rate than allowed in Amazon, because the product quality was a little bit lower than before. So, Amazon just decided to shut them down, and that’s it. If you have an FBA business and Amazon shuts you down, you pretty much just lose everything overnight. You lose your inventory, you lose your cash, you lose the business, everything is just open. And they’ve tried to appeal to contact but didn’t have any success. And it turns out there are quite a few companies, lawyers, that actually specialize in suing Amazon. So that is what they’re doing now. They’re employed one of those law firms and trying to get their money and their business back. But my guess is that suing Amazon is probably not the most promising thing to do.

Michael Bereslavsky 8:50 So, you might be thinking now, if risks are so important, how do you get better at assessing risk properly? How do you analyze risk, and how to really understand the risks on a deeper level?

 Michael Bereslavsky 9:07 Well, there are two different things, but you have to keep in mind when it comes to doing due diligence. When it comes to evaluating risks. The first part of it is looking at data, looking at numbers. So that means collecting data. And it could be all kinds of data, screenshots, graphs, numbers, analytics, traffic, revenue, and data about the business about the history, data about the seller, about the previous owners, data about the market, data about everything. So, you collect all the data and you analyze it. And it’s not only the data that the seller-provided to you, it’s also the data that you can get from external sources. And the data also depends on what type of business this is, we have to collect all the data. And the more the better. And of course, check it, compare it, verify it. And that’s what most people do. So, most people, what they would do is they would look at the screenshots, they would make sure that everything is legitimate, that the numbers are legitimate, that the numbers match up. Because somehow kind of most buyers, especially first-time buyers, believe that the biggest risk is having the seller fake numbers. But in reality, that happens very rarely and it’s usually quite easy to support.

Michael Bereslavsky 10:40 The biggest risk comes from something much more elaborate, from some things that are a lot more complicated rather than just fake numbers. And I can tell you from personal experience, we get quite a lot of deals, quite a lot of leads coming to us. And the last time I saw some fake numbers was many months ago. I remember it was a content website. And I was just looking at the data, looking at the numbers that had Google AdSense and Google Analytics. And something just doesn’t seem right. Something just didn’t feel right about it. I couldn’t quite place it right away. I didn’t know right away what it was. But I said that something is wrong, with the numbers, with the website, with the way that the seller presented it, something just seems strange. And this is, you know, this is the feeling that comes from looking at thousands and thousands of different websites and expecting data. It’s like that, that neuro network that, in my brain, it’s just kind of trained on recognizing those numbers.

Michael Bereslavsky 11:55 And as I started looking more into it, I realized that the numbers just don’t look natural, like there was one day 2319 visitors. The next day 2317, and the next day like 2316, or something like that. And it’s a little bit of randomness also. So, you do expect randomness, but you also expect a pattern, for example, you would usually see the weekend traffic is lower, or it’s higher. And that’s something that repeats more or less every week. And on that website, there was no pattern and the numbers were to close so it just didn’t seem natural. And then once I started looking at the numbers more closely, I realized that they also don’t match up, like with the daily numbers, the monthly numbers, the actual screenshot numbers they’ve used, and the Google Analytics numbers like all just don’t match up together. So, it was easy to see that it was all fake. And by the way, you can fake Google Analytics data as well.

Michael Bereslavsky 13:06 However, that’s not something that many people do. It’s only something that those who I would call professional scammers do. And they don’t usually come to us because, you know, if you’re trying to scam someone, it doesn’t make sense to go and, you know, try to fraud people that they buy sites professional him. So, they would usually target beginners. But it’s quite rare. They’re not that many of those kinds of cases, as you might think. And anyone who has a little bit of experience will be able to recognize those quite quickly. Like there is a major line to cross between just, you know, like maybe not telling all the data and just going and actually making fake screenshots or reporting fake data. So very few people do that.

Michael Bereslavsky 14:03 So, the main part of due diligence is not as much about like looking at the data that you are provided. But also looking at the data, that the seller does not tell you, that the seller does not reveal you. And that comes from collecting other data, of course from your research, from different outside tools. Like if it’s an SEO website with SEO traffic, you would look at HRF, you would look at backlinks and all kinds of things like that. But the second part, and it’s actually the most important part of due diligence, that comes from experience like that comes from knowing where to look. 

Michael Bereslavsky 14:49 So, after I’ve seen thousands and thousands of affiliate websites, like Amazon affiliate websites, and have done hundreds of deals and those, I would look at a website, and I would just know right away, like what are the main risks. So, I know right away, what are some things we’ll have to go and check in order to evaluate those risks. And if you’re doing it for the first time, if this is the first time you see an Amazon affiliate website for sale, you might not know what to do about it like you might have this long checklist. And you would go and check about your list, and most of them might not even make sense in that context. And you might miss the most important part. So, for example, I wouldn’t know just the world to check that the upside is not breaking any Amazon Terms of Service. And then I would check if it’s organic SEO traffic, I would check the rankings, I would check the backlinks, I would check the competition, I would check the frequency updates, the quality of content, and a bunch of other things that are most important. And often I will just look at a website and immediately can know what could be a problem, what could be an issue.

Michael Bereslavsky 16:03 Like just recently, I saw a website for sale that we had in our database from the client. And I immediately knew that even though he was asking for a lower price, like lower than the market range, I knew that that’s going to be like much, much lower than that. Because it was a website on a not evergreen niche, not an evergreen topic. It was something to do with technology, things like laptops. And when you have a topic like that, you have to update constantly, because we’re on new laptops all the time, new devices that you have to add and it just requires extra effort. So, it means there’s going to be a lot of effort, a lot of expenses involved in updating it. And that also means that the content you have right now might not be relevant like next year. So that makes literally less valuable. So, sites like that, join yourself for a low multiple. And it’s really important to kind of know where to look. Because we’ve seen in the previous example, with the SaaS business, for Facebook app, you might have a long checklist and you might check everything. But if you don’t know to consider the API’s, if you don’t know to check about the API about the longevity of that. If you don’t know how to figure out what are some potential, you know, business killers, what are some potential things that could completely kill the business, you just wouldn’t look for them. And if you don’t know what to look for, you will find it. Even by accident, it’s unlikely.

Michael Bereslavsky 17:51 So, again, to summarize that there are two parts to due diligence. The first part is looking at data, collecting, reviewing, and looking at data. And that also includes, you know, interviewing the seller, talking to the seller and all that. And the second part is really knowing where to look. The second part is that experience that tells you what are some of those potential issues you should be aware of, in that specific business. 

Michael Bereslavsky 18:20 So, if there is one thing that you get from this episode, I want you to remember to think about risks as the main, really the main thing, when it comes to evaluating a business that you might buy. And one way you can look at it is to ask yourself this question. If you buy this business right now, and let’s say six months later, the revenue drops down like way down, like 80% or something like that, what could have caused it? So, if you buy a business, and six months later, the revenue dropped way down, what could have caused it? And then you can come up with some potential things that might happen. And you can evaluate those things and go from there and kind of figure out what are your main risks. And also, of course, try to learn as much as you can about your niche, about your industry. Look at case studies, analyze many deals, and also make some deals. And quite quickly, you’ll be able to pinpoint some of those main risks when it comes to the websites with your reviewing in your industry.

Michael Bereslavsky 19:44 And so, make sure that you’re paying enough attention to risks. And remember that there are many ways to make profits when buying online businesses but only one way to lose money. If you found this episode useful, please share it, at least one person might benefit from it. And thank you for listening.

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