If you browse around the web you’ll mostly find people talking about selling websites, and about how profitable it can be. While that is true, the opposite is also true. That is, buying websites can be quite profitable too, and here is why: valuations of websites are still small when compared to offline investments.
The Return On Investment Of A Website
Let’s illustrate this point with some examples. If you buy real estate (e.g., a house or an apartment) as investment, you’ll probably be able to rent it for 1% of the price you paid for it (the percentage will be higher in some regions and smaller in others, but 1% is a good ballpark number). This means that a $200,000 apartment would produce a return of $2,000 monthly, and it also means you would need 8.3 years to recover your investment. The value of the apartment itself might increase over time, but this depends on the region and economic situation, and even then it wouldn’t radically change the returns of this investment.
If you buy a small business, similarly, you should expect to have a return from 20% to 30% yearly. This means that a $200,000 business will produce from $40,000 to $60,000 in annual profits. In this case the pay back period goes from 5 years to 3,3 years.
What about buying a website? Most website owners are willing to let their babies go for 1 or 2 times their annual revenues. For instance, you could probably buy a website that makes $2,000 monthly anywhere from $24,000 up to $48,000. For the sake of simplicity let’s use the middle point and assume you could buy it for $36,000. This means that your annual return would be 66% (compared to 12% on real estate and 20% or 30% with a small business). Additionally your pay back period would be 1 year and a half, compared to 8.3 years with real estate and 5 or 3.3 years with a small business.
Sounds like a good investment to you? You bet it is.
Over Time The ROI Will Be Smaller
Right now is a especially good time to buy websites because, as you saw from the numbers above, the valuations of online assets are still undervalued when compared to offline ones. This won’t last forever, though.
Over time purchasing and owning a website that makes money will become a lot more common, and by then valuations will start increasing. In fact you already have banks and equity funds investing money into large websites, so sooner or later online and offline investments will need to be in balance.
But…. Be Careful!
If you got excited about buying a website, calm down a bit. While buying websites can be quite profitable, you’ll get burned if you don’t have experience in this market and if you are not willing to do your home work (i.e., spend enough time shopping around, very find all the stats before buying and so on).
The strategy I recommend is to start small, and then build your way up. For example, you could start buying a small site that makes $100 monthly (paying around $2,000 for it), and then once you learn the ropes (e.g., website going, how to promote it to increase traffic, how to optimize the monetization strategy to increase revenues) you start considering larger sites to acquire.
Doing Your Home Work Before Buying
Before you consider making and offer and purchasing a website consider the following things:
- Do you know how much traffic the website gets? The best way to assess this is to ask the website owner to install Google Analytics on the website and to give you a user account so you can see the numbers by yourself. If he is reluctant to do this, be skeptical.
- Do you know how much money the website makes? Similarly you need to be 100% of how much money the website makes. Ask for screenshots, and if necessary even video screencasts, and those are harder to fake.
- Is the website solid and established? You want to make sure that the website you’ll be buying has solid roots, else both the traffic and the revenues could vanish after a couple of months. You can verify this by checking the age of the domain name, the number of pages indexed by Google, the number of backlinks pointing to the website, and by the traffic and revenue history (e.g., ask for at least 6 months of data for those metrics).
Where To Find Websites To Buy
At this point you might be wondering where you can go to find websites to buy. The first place you should check is Flippa.com. This is the largest marketplace for websites online. There are many low quality websites being offered, so you’ll need to spend some time filtering the good ones out. One tip you can use is to order the auctions by “Number of Bids”, as the higher the number of bids the higher should be the quality of the site.
There are smaller marketplaces around, and online forums with marketplace sections too, but I don’t recommend using those because the amount of low quality and scam offers there is too large.
The other tool you have is Google. That is, you can search for websites on niches you have an interest in, and then approach the owner to see if he is interested in selling. Most website owners are wiling to sell their sites if the price is right, so this strategy tend to work well. The trick is to contact the owners of websites that have potential but are not there yet, so that you get to buy it for a low price, and then with some work your take to the revenues to higher levels.
How Much To Offer
First of all keep in mind that the value of a website is mainly given by how much it already generates in revenues. Website owners like to make valuations based on “potential”, but that is bs in my opinion. If the website had such great potential the owner would not be selling in the first place.
Sure, website traffic and email/RSS subscribers have some value, and you should include that in your valuation, but the main factor should always be the revenues.
Some website owners also say that they “haven’t had time to monetize the website yet.” In this case say you want to put some AdSense units on it and test the numbers for one month. This will give you a good idea of how much the website would make from day 1 if you were to buy it.
Once you know how much the website makes monthly, how much do you offer? Here is my rule of thumb: 12 times monthly revenues is a great buy, 18 times is an average buy, and 24 times is the maximum I’ll pay.
If you find a website owner that is willing to sell for 12 times the monthly revenues, provided the website is solid, you can buy it on the spot. As long as the numbers are true (refer back to doing your home work), you’ll get a return on investment of 100% annually, and after just one year you’ll have your money back. On top of that you can tweak the website to improve its traffic and earnings, making an even greater profit.
Paying 18 or 24 times the monthly revenues needs more consideration, and I usually I only do it if the website has been online for many years, and has a lot of traffic and subscribers, which means it will be easier to tweak it and increase the revenues.
How To Handle The Transaction
Once you find the right website to buy and reach an agreement with the owner you’ll need to handle the transaction. The first step here is to have a contract signed by both parties. It can be a very simple contract you’ll write yourself (or download a sample contract here). Just make sure you have the full name and address of the other person, and that you insert any clauses you think are necessary to protect yourself (e.g., a non-compete clause).
With the contract signed you’ll need to figure out how to transfer the payment and the website. Usually I give sellers two options:
Option 1: I send 10% of the money as a good faith deposit, and then he transfers the website. Once everything is in my control I send the remaining 90% of the payment.
Option 2: If the price is high, or if I don’t trust the other party, then I prefer to use Escrow.com. It’s a service that will act as a middleman, securing both the seller and the buyer. It charges a fee (around 3%), but the service works like a charm.
Finally, if you are buying a small website consider paying it with PayPal. If things go wrong and the other part doesn’t deliver you can always open a dispute and freeze the payment you sent on PayPal, which adds another layer of security.