Here we are moving into day 3 of Continuing Financial Education week. Sometimes I read a book (and review it on this site) because I think it would be a great book for you, my loyal readers, to read. Other times I read a book because I want to learn something myself. I read a lot of non-fiction, both for pleasure and for business purposes. Over the years I've taught myself a ton about personal finance, investing, writing, publishing books, and internet entrepreneurship. So when I found this book about investing in websites, I actually paid good money for it ($10 on Kindle) and read it. My main interest, to be honest, was to try to determine the value of my own internet business. But the more I got into the book, the more interested I became in investing in (buying) websites built by other people as a source of semi-passive income.
In the same way that some people buy franchises and other people buy real estate, one can buy a portfolio or quiver of websites. At the end of the day, there are really only three investments. The first is something that you hope will appreciate in value, such as gold but which has no business value. The second is a loan, where you give someone or something money and they pay you interest for it, such as CDs or bonds. The third is an equity investment, where you are a full owner or a part owner of a business, and as the business succeeds, you reap the rewards. The stock market, at its most elementary level, is simply a place where you can buy and sell portions of successful businesses. But lots of people dislike the fact that those businesses are revalued all day long as it makes them feel like their money is in a casino, even if they don't actually go into the “casino” for years at a time. So they prefer to invest in something they have a little more control over. The most hard-core of these folks denigrate stocks and bonds as “paper assets” and prefer “hard assets” like real estate, despite the fact that owning part of an apartment complex is just as much a “paper asset” or “hard asset” as owning part of Amazon. They're both just businesses. One you may have more control of than the other, but over the long run you're going to do as well as the business does.
Enter The Website Investor: The Guide To Buying An Online Website Business for Passive Income. Real estate people like investing in real estate because they know real estate. Now I know a little about the real estate business, although I'm no guru. One thing I have discovered is that while I appreciate the returns and low correlations of real estate, I don't actually enjoy buying, selling, and managing real estate. Nor am I particularly good at it. But you know what also has good returns and low correlation with the stock market that I know well, am good at, and actually enjoy? Internet entrepreneurship. So while it makes sense that a real estate guy would have a little higher allocation to real estate in his portfolio, it also makes sense that I would have a higher allocation to websites!
How to Invest in Websites
So how do you invest in websites? Well, like any other new activity you want to do, it is probably a good idea to read a book about it. And this book, by serial entrepreneur and full-time website investor Jeff Hunt, is a great place to start. Like any other business, a website has product, customers, profits, and expenses. It can also be valued using standard business principles. However, there are lots of unique aspects to an internet business that don't apply so much to other businesses, like search engine optimization, whether it qualifies as a Google News site, domains, and hosting. It is also open all the time to the entire world and extremely scalable, aspects that I absolutely love about these types of businesses.
The book begins with some introductory content to get you excited about the concept. It is a bit like real estate books that way, because like real estate, and unlike index funds, investing in websites is going to take at least a little work and the amount of work you put in will have real effects on your return. Then the first chapter discusses why buying websites may be right for you, and just how passive the income might be for you.
The second chapter goes through the various websites and brokers where you can buy or sell a website. Chapter three helps you narrow down your search and consider the niches and purposes of the sites you are interested in. The fourth chapter gets into the various business models of websites. This is old hat to those of us working in this world for years, but could be new to you. But consider the ways this website makes money- we sell a product (the book), we sell ads to people who want you to know about their business, and do affiliate marketing (for example if you refinance your student loans through links on this site, not only do you get the specially negotiated WCI deal [usually something like $300 in cash back,] but we also get paid for “making the sale.” Or if you buy this book from links on this page, Amazon gives us 70 cents.) In addition, the website allows me to line up other related work, such as being paid to speak or write.
How to Evaluate a Website
Chapter five is the reason I bought the book. It is all about evaluating the website. I wanted to see what the book said about what my website was worth. I've basically tracked it the last few years as being worth 2 times the passive income it generates in a year. According to Mr. Hunt, that was reasonable, but there is a huge range. Obviously, something is only worth what someone else is willing to pay for it, and every website, like every piece of real estate, is unique and an appropriate level of due diligence should be done.
Since websites have a passive and an active component, it is important that you are a good fit for the active component. Hunt suggests you ask these questions:
Am I willing to do the work this website requires to maintain or grow its earnings?
Am I interested in the subject area of this website?
Do I have the right skills and desire to do the kind of work required? If it requires marketing, copywriting, programming, cold selling, administration, design, email writing, analysis, or research, can I do those things? Do I want to?
Am I comfortable with the level of risk inherent in this website? Do I even know what those risks are?
Is there anything objectionable about the website, its products, its customers, its suppliers, or the seller?
Do I completely understand how this website gets its traffic and earns its revenue?
When it comes to valuing a website, Hunt says that “sites with long, consistent revenue streams are more valuable than those with short sales histories.” He also notes that “depending on what kind of website you are evaluating, estimating the cost of time investment may be critical or may be unimportant. Website owners are notorious for underreporting the amount of time they invest in their websites.”
He discusses how to do a mini-audit of the financials of a website, as well as its traffic sources. This entire chapter is packed with “how-to” information for those serious about buying a website.
Chapter six talks briefly about evaluating the potential to increase the traffic and revenue of the site. Chapter seven talks about buying websites in other countries, and the unique challenges and opportunities available there. Chapter eight talks about flipping websites.
How Much to Pay
Chapter nine is all about valuation, i.e. how much you should pay, or expect to be paid, depending on which side of the transaction you're on. Hunt explains his method:
I determine the price I'm willing to pay for a website business based on three factors:
- The risk profile. This is a high, medium, low risk assessment that reflects the stability of the business and probably life span
- The average monthly net income. Revenue minus expense equals net income. For very seasonal businesses, this needs to be averaged over a full year…
- The future potential. Future potential includes every change I might make to the website that has the potential to increase revenues or reduce risk.
Website valuation is almost always expressed in net income earnings multiples, so if a site nets $1,000 per month and sells for $24,000, it is said to have sold for 24X earnings. If it continues to earn $1,000 per month, then the payback period on the investment is twenty-four months….Admittedly, I have aggressively pursued the purchase of sites at low multiples. I've often tried to get my money back in less than a year, and I have succeeded on many occasions. But the truth is that it is increasingly difficult to do this. The vast majority of sites sold at low multiples have a high-risk profile.
Hunt then gives you the two most important charts in the book. The first teaches you how to determine whether the site is high, medium, or low risk. A high risk site depends on organic search and social media for traffic. A low risk site uses paid ads and a proven email list. A high risk site requires highly specialized staff. A low risk site can use low cost, easy to find and train staff. A high risk site sells a single product that is easy to duplicate and unproven. A low risk site sells multiple, difficult to duplicate products to a proven market. A high risk site has no formally tracked financials, but a low risk site has a fully controlled process. And of course, there is some risk that depends on the buyer. If you are inexperienced in the niche, the site is higher risk than if you are experienced.
The second chart says a high risk site is worth a multiple of 6X-14X monthly earnings, a medium risk site is 12X-24X, and a low risk site is 18X-48X. So at most, you shouldn't expect your site to be worth more than 4 times your annual earnings, and no less than 1/2 of your most reliable, passive, annual earnings. So what is WCI worth? I have no idea, and neither does anyone else, but somewhere between $250K and $2.6 Million. So if someone wants to offer me $3 Million, I'd probably take it. In some aspects, it is a high to medium risk site (most traffic is organic search and direct traffic and the staff is awfully specialized and the product is readily duplicated.) In other aspects, it is a low risk site- multiple products, proven market, and a fully controlled financial process. One would also have to replace my labor. I can't imagine finding someone willing and able to do what I'm doing on this site for less than $100K a year. So let's call it $200K. So if I bake it all in, subtract out my costs, and call it a medium risk site, it is probably worth something like $700K, and I'm not willing to sell it for anything near that.
Chapter ten discusses the auction (most sites are bought in an auction) and negotiation. Chapter eleven talks about the handoff, and chapter twelve discusses what to do when you first acquire a new site. Chapter thirteen finishes the book talking about how our world is becoming increasingly more mobile (i.e. people access the internet more and more from mobile devices and that creates serious risks and opportunities for an online business.)
Overall, this is definitely a niche book. Most WCI readers aren't going to be interested. But if you have even a little bit of interest in online entrepreneurship, this book is for you. If nothing else, it will help you to realize that you can be a business owner and an online entrepreneur without having to start and build your own website. And if you've got $3 Million laying around, I know of a great site for sale.
What do you think? Would you consider investing in a quiver of websites? How much active work would you be willing to put in? What do you think of Hunt's valuation method? Comment below!