David will cover the 5 main reasons why you should buy an online business, including a few reasons we never thought about before.
Ameer Rosic- So today’s special guest is David Newel, he’s a brokerage director at the FE International, he started out as an investment banker, he moved online to use his transactional experience for website brokerage. At FE International he spends his time speaking with buyers, executing deals and working on raising industry’s standards to encourage more investments.
Ameer Rosic-In 2014 David closed more than six million dollars in sales and has authored the industry’s leading book on buying Internet businesses for investors.
Ameer Rosic-So in today’s podcast, you’re going to learn exactly the top tips and inside information on what it truly takes to acquire a profitable business. So without further a due, please enjoy today’s podcast with David Newel.
Welcome to the Growth 48 Podcast, where we interview top entrepreneurs and investors, to learn how to master their strategies and tactics.
From sales systems and marketing automations, to how and why they invest in companies.
Ameer Rosic-David I just want to thank you for coming on The Growth 48 podcast. You and I were briefly talking about, actually talking about last week kind of a preliminary to this podcast, on the whole aspect of buying an online asset and you know, its kind of different than just going into real state but there are similarities. So hopefully in today’s podcast we can run through some key elements and key metrics that all buyers out there, should be concentrating on.
David Newel- Yeah absolutely, thank you for inviting me, Ameer
Ameer Rosic- It’s my pleasure.
Ameer Rosic- So let’s kind of like, really cut to, cut to the chase right away. Let’s kind of paint out a scenario over here, say I’m a buyer and I’m looking to purchase an AS online and for the sake of the conversation, lets say the AS is an e-commerce company. What are some key, metrics, or key things that we should be looking at before we actually place a bid?
David Newel- I think the real importance to understand that any online business and particularly with e-commerce, it’s to get a sense on traffic and on the financials.
David Newel- You know, obviously you don’t want to buy anything that’s falling down, so you gotta be looking for consistency, month on month, for at least the last twelve months if not further back and particularly looking at the closest months.
David Newel- So really watching whether you, whether that, whether that top line and bottom line, has been growing and how it’s trending.
David Newel- And I think traffic wise, diversity is very helpful. A lot of people get concerned about businesses that have high organic search and does like great sensitivity to changes in search engines. But you have to dig in into every single channel and if a business has 60% organic search traffic and a lot of businesses do, then you need to dig in and look at what the kind of link profile is, how that’s being develop, what kind of key word ranking its had, how they’ve changed over time and what kind of key word concentration they have.
David Newel- Because you know, there’s a big difference between having a business that’s got 60% search traffic and all of that its coming from 4 keywords that have just come up in the last 6 months or having 60% search traffic and that’s over 500 keywords and the link profile that’s got blue chips in it and so forth.
David Newel- So I think, obviously there’s a lot of things to look at, but once you’ve got traffic and financials kind of iron out, then you know you’ve got the fundamentals of a business that’s worth digging deeper into.
Ameer Rosic- And we you go into the actual Google analytics besides the keywords and everything, are we looking at any kind of past penalties they been hit on, through Google?
David Newel- Yeah, for sure. Actually at FE we have a quite useful penalty tracker indicator, if you just google penalty indicator, you can put in the domain and it maps basically the last 3-5 years of organic search history over where the major google algorithm changes have been.
David Newel- I don’t think, you know, a lot of business they get hit by a panda, a penguin or humming bird, at least smaller in part, and I think its important not to be too binary about businesses that have got damaged by that, if the owner has been proactive and rectified these issues and traffic its consistently growing again.
David Newel- You know, if there hasn’t been and it looks like there’s this gray or black hat SEO techniques going on, then that’s a different story entirely.
Ameer Rosic- And when you are looking at, for example we said e-commerce over here, a physical tangible product from either a drop shipping or warehouse, are you, guys, also looking at how the logistics are built into the company?
David Newel-Yeah, a 100%. So obviously with an e-commerce specific business, if its not drop-ship; if you are doing like partial fulfillment exercise or having like propriety warehousing solutions and you need to be all over the supply chain.
David Newel-You need to be like carefully adverting the supplier agreements, what kind of contracts are embraced, if at all; what kind of terms, whether they are transferred to you.
David Newel- You need to be carefully kind of understanding the communication that’s going on between, the businesses and their suppliers to see what the kind of real of the process is, how they get stored, how they get ship, how they get fulfill.
David Newel- And I think that’s really important, to like to dig into the width of.
David Newel- A lot of buyers can get undone by not having done enough due diligence on the mundane day-to-day stuff and find that when they buy a business its not, you know, a 5 hour week job as the owner was telling you, it’s a 30 hour week job because you’re, you know, relentlessly reordering products and working out shipments and so forth.
David Newel-So its important to like, dig deep on that stuff.
Ameer Rosic- Well you hit on a key element over here, let’s talk about the owner for a second. So any time we are looking on purchasing something from my end, the first question I always ask, its actually two questions.
Ameer Rosic- One question is: A. Why is the founder or the owner selling? and 2. How attached are they in the business? Are they actually the business itself? Like once they sell how much of a role do we have to fill in?
Ameer Rosic- So do you guys take this into consideration before purchasing?
David Newel- Yeah, a 100%, it’s a key man risk, as its like, I guess more dark that it called, and is, you know, a big thing to look into.
David Newel- I would say that on e-commerce businesses, it’s generally speaking, dramatically less of an issue. You don’t intend to see too much key man, unless its just key man from a shear man-hour stand point, were as for example, on a SAS business.
David Newel- If the owner has developed that product for the last 3-5 years and it’s the only person that knows the code base, then you got a total difference type of key man risk attached to that business.
David Newel- And that should certainly be reflected in the, both in the profit of the business. Say when you are thinking about adding back the cost to replace that owner, whether its hours or technical work, should be priced to a premium if that particularly be attached to that, but it should be reflected in the over all multiple of the business.
David Newel- Because if you take out someone that technically important then chances are, you shouldn’t be paying a premium multiple because you are not going to be able to generate the same amount of revenue going forward or as easily as he was.
David Newel- So yeah, it’s something that you should be very hard on. I think, what we recommend to buyers is to establish like, what we call a task matrix.
David Newel- So we get them, we get the owner to write out absolutely everything they are doing in a daily, weekly, monthly basis, assigning the amount of hours next to it, assign the sort of nature of the task. So that you can get an idea, as to whether that’s actually outsourceable or whether you need to bring someone in or what kind of job aspect that you need to do.
Ameer Rosic- Quickly touching based on this, when you are looking at, for example the whole scope of the company, and lets say we did a google analytics and everything checks out.
Ameer Rosic- Their, you know, ranking for XY key words, there’s no black hat stuff, back linking its great, the historical data is there, they haven’t been really, you know, penalized for anything.
Ameer Rosic- We are looking at a month-to-month turn rate, for example for SAS. Its fine, maybe you know, they are doing an industry average of 15% per month turn rate, which is great. Revenue it’s pretty steady for the last twelve months.
Ameer Rosic– Let me ask you this, what, do you have a formula? or what is it the determining factor to figure out what that monthly multiple would be?
David Newel-So there’s about a 120 other factors that we look at and they spit up…
Ameer Rosic- We’ll, we’ll only, we’ll talk about one multiple thing for today.
David Newel- Ah and still than that, and I would say the multiple that’s most sensitive to 3 things. ONE, the age of the business, which essentially sets out the track record and demonstrates you know, the sustainability of the monetisation model that they are doing. So a three, like a five year old business its already at a premium to one year old business, lets say. So age of the business its important to buyers.
David Newel- The SECOND it’s the Monetisation Method. So recurring revenue its more valuable than one time revenue. So SAS business it’s always going to be a multiple premium set to its purpose to a content business that’s monetize through Adsense for example.
David Newel-And the THIRD is the amount of owner time spent in the business in the nature of the work that they are doing, so this is what’s named a passivity premium. So the less work that’s required in the business the most valuable it is.
David Newel- So if you have a SAS business that’s 30 hours a week, then its probably not going to be a 3 X business but ifs an SAS business that’s one hour a week its going to start pushing to 3 and half X because of, that kind of passivity premium.
David Newel- So those 3 are like the real things that need the most to look around and everything else just kind of tease it up.
Ameer Rosic- You briefly mention Adsense. It’s that a leverage play that the seller can implement? Or would that be more or less of a disadvantage when it comes to selling? Kind of like double as saying Oh we have an x amount of Adsense per month.
David Newel- What do you mean leverage play?
Ameer Rosic- Well you know, for example some people say producing 6,000 or 12,000 recurring revenue from Adsense and they consider that as an asset. But more or less it’s too variable, they are not really owning a product or owning a service or owning any intellectual property, they are just at the mercy of Google.
David Newel- Yeah, no, it’s like Adsense it’s just priced as any other one-time revenue stream basically. It becomes premium when its on very large, very well established businesses.
David Newel- So you can get like, Adsense revenue it’s kind of priced at 2.2 to 2.7 X on smaller sites. But on like 7 figure sites Adsense revenue can be priced 3 X and above if that business is, you know, 5 plus, 10 plus, years old, it’s a complete major authority in the niche, then it’s a different kind of risk profile for buyers.
Ameer Rosic- Cool, let me ask you this, when it comes to scanning their back end, how much does tech play a role into in? Say they have like, really really, heh, 1.0 type attack and then, you end up doing an upgrade.
David Newel- Yeah, yeah.
Ameer Rosic- How much is that a role that’s actually buying into?
David Newel- It happens, it happens very rarely. It happens very rarely to people that are running on really poor like text facts or like very very old architecture. For the most part, most people are running on the latest WordPress or OpenSource platforms.
David Newel- Most people running SAS businesses are very good at keeping everything up to date, at updating, running unit tasks and so forth. You’ll find that’s a very like technologically advance type community that’s working with the best of the best type things.
David Newel-So for sure, it’s a factor why, that I should like, look into and just take off. But for the most part it’s not an exercise that brings up anything that’s a deal killer.
Ameer Rosic- What would you say are deal killers? Like that’s it, that’s a killer.
David Newel- Deal killers is misrepresentation by the seller for the most part, it happens less in broker sales, it happens more in direct sells. Anything that points toward fraudulent misrepresentation of financials, say some people like, you know, have misrepresented affiliate income.
David Newel- Quite common for example it’s quite difficult if you have, Amazon Affiliate revenue on a site and you have an account that has multiple amazon sites linking into it while using the same Amazon Affiliate ID.
David Newel- It’s almost impossible to track the revenue via URL, so there’s been an instances in the past, where people with poor affiliate sites claiming like 8 grand a month but actually they are doing 4 and the seller had 3 other sites topping at the other 4, but you couldn’t see in the parent level account till you’d sort the IDs out.
David Newel- Really, a real way to guard against something like that, is to do a back of the envelop traffic analysis, where you got to price what you think a typical usage should be worth, and sense check the amount of visitors that site’s getting per month, that’s just what the state of revenues are.
David Newel- If the revenue piece is coming out widely higher, then chances are they are fudging the absent numbers.
David Newel- So yeah, its actually is financial misrepresentation that kills deals, its trust thing for the most part.
Ameer Rosic- And this is where obviously, a broker comes into play.
David Newel- Well, its very useful because we do very aggressive prelisting dd (due dilegence) or at least we do it, and so like 7 times out of 10 we probably done more d.d (due diligence) out front than the buyer ends up doing after they’ve made an offer.
Ameer Rosic- So lets get off, lets flip the gear over here a little bit.
Ameer Rosic- Obviously you know, you spend your time, you do your due diligence, you check everything out, email list is great, convergence are great, turn rate its great, revenue is great, everything checks out.
Ameer Rosic- What is the key metrics or the key elements that we need to look out for when the transferring process comes into play?
David Newel- Yeah, I think, it’s not too complex in most of our deals, like for kind of best in class and ease of use. We try and have the buyer pour into everything the seller’s already using to minimize the risk of down time.
David Newel- So they’ll take over the hosting environment, domain name that needs to swap and keep the name service in place. All of like, the billing subscription accounts are assigned quite easily.
David Newel- So really, you know, the only major kind of transfer headaches come with merger processes and hosting; and if the hosting account it’s being swap straight in and out, that’s easy enough.
David Newel- Merger process it varies case to case, for the most part they are all transferable, just the case of aggressively chasing their usually very poor support teams to push things over. But there’s certainly no like the all linking accounts. Other than…
Ameer Rosic- Wouldn’t you, wouldn’t you put the money on escrow though? Say we purchase something for a 100k, and they we have the money, would you just put the money on escrow before the final transfer?
David Newel- Correct, you sign the APA, the Asset Purchase Agreement, you put funds in escrow and once the funds are secured, the seller transfers everything to you, and then you usually have like 1-3 business day inspection period to order everything you’ve got, make sure their revenue’s its coming through the accounts, make sure traffic its coming into the site, make sure you know, the contents are properly and then once you are happy and satisfied you release through the inspection period and the sums go to the seller.
Ameer Rosic- So in your experience Dave, where do you think, or where do you see this industry doing in the next couple of few years?
David Newel-Yeah I think, it’s going to become the hobby, hobby income of increasing number of like middle class, middle aged people. So I would say, that they’re the largest and fastest growing demographic out there at the moment, are baby bombers looking to buy online businesses to tack on to their retirement portfolio or to accelerate their retirement from business
David Newel-So its starting to become very fashionable for like 40 or 50 year old doctors, bankers, accountants to buy, an up contents SAS businesses, bring in some tech expertise from outside and run those for 30 plus percent years, year on year.
David Newel-So I think demand side, its going only to explode, like we quadrupled that list of buyers in the last 12 months of that end.
David Newel- Supply side, you already had seen the effects of that, it’s simply not the same parity increase in quality supply businesses.
David Newel- So you know, multiples have gone up, noticeably in the last 12 months and probably more in the next 24 months and until, you know, more of that comes to market, I don’t see that changing and I think that’s really a kind of consciousness expansion exercise that industry participants need to do.
David Newel- So they basically are going around telling people that there’s a liquid market to buy and sell sites. Because you’d be surprise and amazed at how many people that are at 5-10 years in the instant marketing space that don’t know that they can sell their 500 grand, you know, block or whatever.
Ameer Rosic– Why, its also quality you know. Its not that easy to even create a 500k server…
David Newel- Very true. Very true, very true indeed.
Ameer Rosic- Interesting about, let me ask you this, so you are talking about doctors, lawyers who are buying that, that’s their portfolio, it’s a better deal than a return in real estate.
Ameer Rosic-But they are not running it, so they are putting like a president in the place or are they putting somebody that’s actually running the business for them?
David Newel- Yeah I mean, it depends very much on the type the business, of those people are obviously attracted to, assets that are coming with content writers in place, that are coming with VA’s in place, coming with developers in place and then realistically, all they have to bring it is some marketing and institutive smarts.
David Newel- Which generally speaking if they’ve got, you know, half a million bucks to spend they are pretty good in that camp.
David Newel- They are not buying stuff that’s you know, it’s very intense or requires technical ability because they simply don’t have that.
Ameer Rosic- So more or less they are buying content generation businesses, that’s going to come with a VA (Virtual Assistance), more or less they’d hired a couple of content writers or freelancers. Maybe project managers to over see that, plug and play and see you later.
David Newel-Exactly, and a lot of the time all of those people are coming already with the business, so we are almost buying a package solution.
David Newel-You know certainly a lot of the businesses we sell are less than 15-10 hours a week and almost of all the day to day work it’s outsourced to VAs (Virtual Assistants), content writers reliably in, for a long time.
Ameer Rosic- Beautiful. Well David, I just want to thank you so much for coming on The Growth48 Podcast. Let’s wrap this up. Do you have any final tips for anybody who wants to buy or sell out there?
David Newel- Yeah I think buy wise, do as much d.d (due diligence) on the people you are buying from, as the business itself, because there’s not a lot of quality representation out there.
David Newel-So make sure the people you are buying from, you know, have been in the game for a while, they got experience, impressing deals.
David Newel-A team, you know, you can call them up, feel them out.
David Newel-And I think, my best tip for buying, it’s not always about the price; like get on the phone with the seller and work out what’s important to them. Like if they want a deal done fast or they have a specific personal condition to get out of it, you can often find that doing a quick deal or selling a personal thing can save you a significant amount of value. So worth exploring every avenue you can on those deals.
Ameer Rosic- Awesome, well thank you so much David, and have an amazing day.
David Newel-Cool, thanks buddy.
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For more information on business sales contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
Article LINK
For more information on business sales contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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