EP39: What is the Ideal Business to Buy? – Domain Magnate

EP39: What is the Ideal Business to Buy?

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In this episode of Domain Magnate, host Michael Bereslavsky speaks about the ideal online businesses to buy and what traits, buyers and investors need to look out for before purchasing.

HOST 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.

LINKS:

SKIP TO THE GOOD PARTS:

  • 00:57 – 04:12 Numbers
  • 04:14 – 5:26 Monetization risks
  • 05:29 – 06:42 Traffic Risks
  • 06:49 – 08:02 Nature/Industry of the Business and legal risks
  • 08:27 – 9:37 Operational risk
  • 10:19 – 14:42 Opportunities

SHOW TRANSCRIPT:

00:13 Hello, and welcome to this episode, today I’m going to talk about what is the ideal online business to buy. And this is a question I get asked very frequently, why buyers and investors. So today, finally, I’m going to give you a good overview of what is my ideal business to acquire and for our more dedicated listeners they might know that we look at businesses through a framework of three parts, numbers, opportunities, and risks. And that’s how we are going to look at this question of the ideal business as well. First of all, we’ll look at numbers, so an ideal business should be stable, that you can see the numbers, revenues are stable, the traffic is stable or growing stable or steadily growing. You should be very careful with businesses that have really sharp trajectory going up or going down because it’s sort of difficult to fix businesses that are plummeting consistently.

01:31 You might be able to buy them cheaper, but it’s often very difficult to reverse was trends, unless you really know what causes them and have pretty good idea of how to improve. It’s also dangerous to acquire businesses that go up rapidly because anything that goes up also comes down. And also keep in mind that it’s actually more likely that it’s going to come down rather than it’s going to go up, because if the revenues have been climbing up and up and up, sellers are usually very smart and strategic. So, they would sell a business at the time they think they are at the peak. No one would want to sell a business, which they believe is going to just keep growing and growing exponentially. They would just keep it and sell it later. So that’s really important to understand.

02:29 Also when it comes to numbers, we should look at the price. The price should be within the reasonable market value range and preferably a little below it, especially for most of our private deals they’re usually a little below the market, because the sellers don’t have to pay a broker commission. Also, it’s important to avoid overpaying unless you get something absolutely amazing, which is very rare. It’s genuinely best to avoid overpaying because the market is right now is pretty high, I would say that the multiples are currently quite high. So, you should always try to acquire businesses at reasonable market values. This also gives you potential to resell for a similar price or slightly higher and when you overpay, you know, that if you want to resell a business, you’d have to really be able to grow it. Otherwise, you will probably have to sell it at loss.

03:38 So to summarize numbers, you want to see something that’s stable and growing and consistent. And also has some reasonable trends. You don’t want to see some numbers that are overly seasonal. Like for example, we’ve seen businesses that are focused on a specific event that happens every year. And that’s a little bit dangerous because you only get your revenues for a short period of time, like site about Christmas.

04:14 So next risks, and the risks are come from several different avenues. First of all, monetization risks, so you want to see a business that has an ideally multiple sources of income. It could be from selling multiple products or services, or it could be for using different payment processors, different affiliate programs, or just different monetization methods. So, you don’t want to see just one monetization method that is somewhat risky because if the business is overly dependent on one affiliate program. If the program was discontinued, for some reason, you could lose the whole business. Also, it’s important to understand the risk of specific monetization methods. So, for example, if you are using a very small affiliate program that is partnered with a small business, that’s generally much higher risk compared to, for example, Amazon associates it’s been around for a while.

05:29 Next, we look at the traffic risks. How did the customers find the business? Where does most of the traffic come from? And we usually look at Google analytics, look at the other different traffic stats to see if most of the traffic coming from one or several smaller pages or is with traffic spread evenly and equally flew out on the site. Also, unless it’s organic SEO traffic, it’s important to understand what other SEO methods that they used. Is it a completely white hat or has it been using more aggressive SEO techniques, which are definitely to be avoided? Also, if there are multiple sources of traffic, that’s generally preferred. So, if it’s, for example, organic Google traffic, and also some social traffic and a little bit of paid traffic as well, that’s much better because, you know, if one of them drops, you’ll still have the others, so you’re not going to lose all your revenue on one thing.

06:46 Next after the traffic, we would look at the nature or industry that the business is in. What is a trend of the industry? Is it growing? Is it stable or is it something that’s going down? So ideally, we want to see an industry that’s very stable or maybe it’s slowly growing up, or maybe it’s an emerging industry. That’s, that’s great too, if it’s emerging and going up, but that can be a little bit higher risk because if it’s emerging and it’s growing rapidly, you might not know whether or not it’s going to last very long. It’s also important that the content of the product is evergreen, that it’s not something seasonal that might not be relevant in a couple of years. For example, we’ve had many websites that focused on a specific model of iPhone or a specific model of laptops or some other technological items. So those kinds of businesses, is going to need a lot of updates because the popularity of those topics drops quite rapidly as new items are released, new versions.

08:04 Next, it’s important that there are no legal risks and that’s very important because that could kill a business quickly. If the business is using some copyrighted or trademarked content to generate revenue that might end up with you getting sued and losing the business and possibly even more.

08:27 And finally, we look at operational risks, how difficult is a business to operate, and is it a good fit for the operator that you are buying the business for or yourself, if you want to operate it yourself. Is it a good fit for your skills? Sometimes businesses can be really great in terms of numbers and opportunities and other risks, but they’re just way too complex to operate. They have dozens of different accounts, dozens of different processes, and you need a whole team to operate them. And if it’s a sizable business and the numbers make sense, that’s good, but for smaller businesses, it’s recommended to avoid those excessive complications. So, while you do want some diversification, you really don’t want to have businesses that too complex to operate because it’s going to be costly and also difficult. So, the Domain Magnate this is a big part of our risk assessment is looking at operational risks. And we also look at if it’s a good fit for our skills.

09:44 And then finally, once we’ve reviewed all the different risks and for an ideal business, we’d want the other risks to be reasonable and mitigated by other factors. So, we don’t want any excessive risks coming from a monetization or traffic. And an example of an excessive risk would be a new website, which is using very aggressive SEO methods and all of its traffic is coming from Google search, so that’s just asking for trouble.

10:19 Next, we look at opportunities. What kind of opportunities do we expect from an ideal deal? We want to see opportunities to grow the business over a longer period and grow it substantially. So, if it’s a content business, we want to see that is why the niche, where we have a lot of opportunities to, to cover different topics. If it’s a product or a service business, we want to see that we have more products or services we can add. And if it’s selling some affiliate products, we want to see that there are more and better affiliate products, affiliate programs, potentially, which we can work with. The industry can present substantial opportunities. If the industry itself is growing, if the industry is expanding, that’s always preferred. If it’s a software product or SAS business, it’s good to see that there are more features we can add or that we can expand into other similar topics potentially that the users would be interested in so that we can add some add on products or services.

11:42 Also another item which is often missed is reseller opportunities. How easy is it to resell this business? And for an ideal deal, you want the business, which is easy to resell for example, and content website about cats, which is like three years old, it’s very easy to resell this market. If you listed for sale in the marketplace or anywhere it could get sold in days or even hours, while a business that’s about some very specific medical term or disease could be quite difficult to resell because medical site can be difficult to operate, difficult to maintain. You need a very qualified writer. And it’s also high risk. So, most people might not want to buy it, or if it’s an adult business most buyers just don’t want to deal with that. So, you have to keep in mind also how difficult is it to buy or sell. And we currently only acquire businesses and websites in English, so they only, they only targeting English speaking audience. So, if the business is in another language also that’s, and that’s a different story. And most buyers usually don’t want to buy those businesses either.

13:12 Additionally, in a great deal, you want to have opportunities for resale to strategic buyers or end users, because there is a lot of money is potentially available. If you acquire a business at the three X, multiple of profits, and then you can resell to strategic buyer for like 10 X profit, that’s some incredible opportunity for, for profit. Other opportunities might include some partnership opportunities with other companies or some synergy opportunities in your own portfolio. For example, we had, at some point we had a cluster of websites about beauty in our portfolio. And so, we realized that it’s, it’s good for us to buy most similar sites because we now can monetize them better. We have higher CPA rates; higher revenue share offers from affiliate programs. We have a lot of expertise in that niche. We can write good content at lower costs. So, there was quite a lot of synergy in that. And we, we also realized that we can grow his businesses together and sell them together, which is something we did at the end. So, opportunities can come from different sources.

14:43 And finally it, is it the good feet? Is it the good fit for the operator or for you? And so, for us at the Domain magnet, we don’t have as much experience with operating FBA businesses. So, we don’t look at them, but if you do have a good opportunity and we consider it to buy it, we always tell the investors that we don’t have a lot of experience in that, but we plan to mitigate it by, by having connections with other operators, with agencies that can help us if we need to. And also, that it’s a business that’s easy to manage comparatively. So, make sure that the operator that you’re working with has experienced in this specific business. And this on content and SaaS businesses with mainly organic Google traffic. So that’s where most of our expertise are, and this is the type of businesses we generally buy and target.

15:47 And actually the final question is, do you actually like it? Are you actually proud to own this business? Is this a business that you would like to tell your friends about, or is it something that you would rather just no one ever knew that you own it, and that’s actually quite an important factor to consider as well, because it might bring you more joy and pleasure in life. So why not go for that? Thank you for listening. So, to sum it up, we’ve learned what does the ideal business to buy? And the ideal business based on our framework of due diligence is one that has a reasonable trend in numbers so that it trends as stable are going up and that the price is around or below market value. And it has some limited risks and some great opportunities for growth or resale, and also something that fits the operator and fits you so that you like it. Now, if you want to see some ideal or some really great deals, you can sign up for our Buy Managed program. The Buy Manage service allows you access to our network of deals, and you’ll be able to see due diligence, all the best private deals we have currently. And then you can go and acquire them. Thank you. Thanks for watching

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