Estimated reading time: 6 minutes, 52 seconds
I was inspired to start a series titled "Would I Buy It?" after hearing about an 89 year old lady who bought an ice cream shop near my hometown 50 years ago. She appears to be doing quite well for herself. I don't need to keep lecturing on why I think it's important to have something else going on besides your job (linear income). If you have been reading for any length of time, then you know all about it.
Her story was interesting. She wanted the freedom to do what she wanted and the money to do it with. So what did she do? She worked at a bank for many years and saved enough cash to buy a business. Fast forward 50 years and she is teaching her 30 something year old grandson on how to run it. It's nice to know you can leave a legacy to the people that you care about, isn't it? You can't really do that with a job.. but you certainly can with a business.
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I started comparing her story as if happened in modern day America. Why couldn't you do the same thing, but virtually? Buy a virtual business, a website? Once you buy one, why couldn't you buy many and just keep buying them? When you couldn't buy one, why couldn't you just build it? Warren Buffet and many others do just that... they buy businesses. My goal is to do the same thing, but virtually. I called this project Virtual Warren. I have done extensive research on what to look for when buying a virtual business. Below are some links that serve as a primer before I dive into whether I would buy the above website or not.
So here we go, I'm going to walk you through Immortal.org
Some initial questions I ask myself after skimming through the listing and their answers.
Can I build this site myself (with ease) and monetize it in a short amount of time? Yes, it looks like the site is only two years old and it's experiencing a healthy cash flow already. I would have to do the math to see if it warrants a minimum 25K investment... keep in mind there is an unknown reserve.
Does the owner accept or discourage escrow? When buying a website, it's important you have recourse, especially when this much money is at stake. You wouldn't buy a house without a proper title search and closing, would you? The same goes here. An escrow company makes sure you got what you paid for and he seller doesn't run for the hills after they get your money. If they refuse escrow (even after I offer to pay for it) then I walk away, no exceptions. There is NO valid reason for NOT accepting the use of an escrow service.
Can the site be moved to a host of my choosing and is it dependent on proprietary scripts that keep you tied to the seller? I won't get tied down and become dependent on a seller to maintain scripts they built or that I have to purchase. Actually, if I have to purchase them, it's more desirable, but I ALWAYS research the company to see if the scripts can be easily replaced or rebuilt. You want a clean break from the seller, if I can't move to my own host or need scripts they built to run the business, I get concerned.
Is Google Analytics installed? I don't trust anything else.
Are they willing to give you a tour of the backend? Screenshots can be manipulated, it's much harder to do it online where you can keep track of the URL paths.
Are there any copyright or legal issues? You don't want to inherit anyone else's problems. Looks like it's not a problem with this site.
How long will it take to run the website, can you outsource it? In this case, he/she spends 1k or so on writers... could you write the news stories yourself and save some cash? Like I advise to real estate investors, never assume that you will be running the business all by yourself. You don' want to trade in one job for another. Build the management and outsourcing expense into your calculations.
Will the owner consider fractional ownership? It can be complicated, but if the owner will entertain it, it is definitely a plus!
So after I ask these initial questions, I dive into the math. Of course, this is an initial review. For a more in depth review of how I analyze a website, visit myMarketingExperiment.com post.
You are basically buying the future cash flow of the business and the digital assets, assuming the latter are worth anything in and of themselves. For example, an app may not have any earnings per se (it's just an idea and a bunch of code) but how you market it could make it more valuable, so in that case you do not have numbers to go by on the future cash flow.
When I consider a website for purchase I like to use a Risk Adjustment. I adjust my numbers by the percentage likelihood that it will lose it's earnings substantially at any given time, thus the risk adjustment.
I also use a discount rate. This will tell us what the future cash flow is in today's dollars. There are a few ways to determine this number based on what you are doing. If you are borrowing the money, then the discount rate will be the interest rate you are paying. If you are paying cash, it is the rate of return you would expect to receive in something else (I'm conservative here). If all else fails, I put in what the cash is worth to me, is it worth at least 15%, 10%?? It will be different for each person, but these two numbers are VERY important.
Combining the numbers above we get the Risk Adjusted Discount Rate. I'll plug them in later, but first I want to discuss revenue, expenses then perpetuity valuation.
As with with any investment, you need to be concerned with the revenue and expenses. In the case of buying a website you need to get confirmation of the earnings, not just screenshots. You can do this easily if they use Google Adsense... if they use other networks (such as a CPA network) ask to speak to their affiliate manager to confirm. I usually focus on the first three years of revenue and expenses.
Finally, after crunching all the above numbers I get a perpetuity valuation. This is the MAXIMUM I will pay for a website, with rare exceptions. This evaluation is different based on whether I want to sell the digital asset or keep it. If my intentions are to keep it long term, I will add the numbers beyond 3 years...
So for the website in question, this is what we have:
Purchase Price: 35,000
Risk Adjustment: 30% (the % risk that the site will zero out and die)
Discount Rate: 16% (personal loan)
Risk Adj Discount Rate: 26%
Year 1 Cash Flow: $23,412; Discounted: $18,580.95
The value I came up with is $90,046.15. So at 35K it is a GOOD deal... though I'm not sure what the reserve is. This assumes you plan on keeping the website and not flipping it... there are a lot of other factors, but this is definitely one I'd take a deeper look into.
Interested in seeing the formulas I use? Find them at Doing the Math on a Virtual Investment.
If you want to see other "Would I Buy It?" valuations, be sure to sign up for my email list to get notified when I post.
You can also see a valuation I did in 2014 below:
Would be interesting to do some follow up research on the above website.. such as current traffic, backlinks, monetization, etc. I may just do that.. stay in touch, get notified when I post by signing up below. I don't sell or rent your information.
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