With the news last month of the internet company Alibaba becoming America’s largest IPO in history and being valued higher than Facebook, Amazon, and Ebay after its first day of trading (see here), it is hard not to get excited about the lucrative internet business space.
As a broker selling close to $4M worth of internet businesses such as e-Commerce stores, SaaS and software products, online services, content sites, etc., I have seen an increase in buyer demand, and consequently valuation multiples, for these types of businesses. This is fueled by the fact that they can be managed from anywhere with an internet connection, typically have no physical inventory and relatively low overhead, and can be improved and expanded quickly.
I hope the following will help those of you with access to internet business listings to 1. Feel more comfortable about the process, 2. Better educate and serve your buyers, and 3. To make more sales!
What’s popular these days?
The most popular internet businesses tend to have the right combination of workload, technical expertise needed, proprietary items, and long term stability and growth potential. Out of the ~80 transactions I’ve been involved with in the last 3 years, here is what has sold from most to least:
- Free content sites with ads (shifting down recently because of Google’s unpredictability)
- Affiliate sites and lead generation
- SaaS and software (shifting up recently for its proprietary nature)
- Paid content membership sites
- Online services
Online tools you should get familiar with
Internet businesses rely on web traffic to make sales. As such, it’s most often the first thing potential buyers look at to determine the growth potential of the business. Here are a few tools that I use to examine traffic sources:
SEMrush.com – one of the best traffic analysis tools on the market. The free version will give you a quick snapshot of the trends and competition of search engine traffic, keyword rankings, and paid traffic sources.
Opensiteexplorer.org – this free tool will give you a quick look into the reputation of the site as determined by who is linking back to it. Backlinks should still be relevant for Google’s search engine algorithm for years to come (see here).
Google trends – with data collected from Google search results, this is a great way to determine the direction of a particular niche, product, topic, etc. Be sure to search multiple keywords surrounding the industry, business model, and in some cases the business name.
Google analytics – this is currently the most trusted analytics tool amongst buyers as it shows valuable data and trends, and more importantly gives insights into how the business can be improved upon. Always check to see if the website has Google analytics installed and ask for user access from the seller so you can save off PDF reports for buyers.
Note: The main sources of web traffic are search engines (keyword rankings), referring sites (links from other sites back to the site), paid (Google Adwords, banner ads, etc.), social media (FB, Twitter, etc.), and direct (user types the URL directly into browser).
Common red flags and scams
It’s tough to convince buyers to spend tens of thousands of dollars on something they can’t physically touch or observe, so it’s critical to provide quality proof of revenue, expenses, business relationships, user data, etc. through screenshots, video conferences, downloadable reports, tax returns, etc.
I’d say the majority of internet business owners are honest, hard-working people, but there are some that try to take advantage and it’s important to be aware for the sake of your buyers.
The most common red flags and scams are:
- Fake revenue screenshots. There are programs that make it easy to switch the numbers directly on a webpage, so it’s important to have the seller login to their merchant accounts live while on a video conference call and have them download and send you the reports. Back these up with tax returns, online shopping cart reports, and bank statements when available.
- Fake traffic. It is possible to blast a website with fake traffic (bots, hired people) for a few months that can actually produce some income, but which usually quickly disappears after the site has been sold. Look for unnatural spikes in traffic and backlinks, and be sure to ask the seller specifically what they’ve done and who they’ve worked with to get traffic.
- Seller unwilling to share all requested DD items. For example, be aware of revenue proof that only show the numbers and not the account name, URL source, and dates.
- Generic reason for the sale. Dig deeper into why someone is selling, even if their stated reason might be true (no time to run it, lack of interest, other projects, etc.).
Quest Author: Ryan Sorensen – Broker Acquisition Station http://acquisitionstation.com