The Art of Acquiring an Online Business

The startup culture’s arduous demands often pose a formidable challenge for aspiring entrepreneurs. Acquiring funding for their ventures stands as the primary hurdle in the startup realm. Surprisingly, buying an established business, though seemingly more expensive, can yield significant financial benefits and expedite debt recovery. Moreover, purchasing an existing enterprise offers a less stressful entry point into entrepreneurship without the need for groundbreaking, innovative concepts.

Similar to investing in a franchise, numerous turnkey online businesses allow seamless operations without necessitating drastic changes. Countless websites, apps, and software programs, available at minimal costs, possess tremendous potential for remarkable profitability with minimal effort.

Let’s explore the perks of buying an online business and navigate the various channels to secure the best possible deal.

Unleashing the Advantages of Acquiring an Established Online Business

Did you know that 18% of businesses crumble within their inaugural year, and nearly half succumb to failure within five years? Alas, startups harbor inherent risks, dissuading many investors from financing ventures initiated by young entrepreneurs.

Although online businesses possess the flexibility to alleviate certain overhead costs associated with physical stores, no startup can claim absolute invulnerability to risk. Thus, purchasing a thriving, well-established online business substantially diminishes risks, enabling immediate returns on investment while embarking on the entrepreneurial journey.

The merits of acquiring an existing online business encompass:

1. Reduced Risk: Procuring a well-established business built upon a proven model eliminates much of the uncertainty and guesswork associated with formulating a business plan. While no venture is entirely risk-free, a path to profitability has already been paved, awaiting your decisive footsteps.
2. Enhanced Flexibility: One of the remarkable aspects of online businesses is the unparalleled freedom they offer. Operating in the digital realm allows you to establish your business anywhere, work remotely from any location, and employ individuals who possess nothing more than computer and internet access.
3. Global Reach: Online enterprises are not bound by geographical constraints and possess the ability to market their products and services to a global audience through online advertising and traditional SEO strategies.
4. Stable Revenue: Overcoming the daunting challenge of transitioning from debt to profitability stands as a monumental task for any business. Fortunately, acquiring an established enterprise provides access to an existing revenue stream in exchange for an upfront investment. While some businesses may display modest or even zero revenue, possessing data to analyze and improve upon serves as a valuable starting point.
5. Established Brand: Established businesses mitigate risks by offering access to a loyal customer base and a well-crafted branding strategy. This saves considerable time on market research and enables entrepreneurs to tap into proven marketing and branding techniques that yield positive outcomes.
6. Ready-Made Team: Acquiring an established business not only eliminates the need to construct a team from scratch but also grants you a workforce already familiar with the business model and the products or services being offered.
7. Proven Products/Services: Thriving enterprises leverage existing products or services that have proven their value to customers. While certain refinements may be required, substantial time and resources can be saved by bypassing exhaustive market research, costly product development, and time-consuming testing processes.
8. Existing Supplier Relationships: In today’s globalized environment, the significance of established supplier connections cannot be overstated. Amidst consistent supply chain challenges, having reliable suppliers for all your business needs enables a swift takeoff.

Most Lucrative Online Business Types

Having familiarized ourselves with the advantages of purchasing an online business, the crucial question arises: what kind of business should one consider acquiring? While this choice ultimately hinges on personal preferences, we have compiled a list of the most profitable and popular online business categories that cater to a wide range of aspiring entrepreneurs:

• Domain Name Trading: Engage in buying and selling domain names, capitalizing on the demand for valuable web addresses.

• Ecommerce Stores: Tap into the thriving world of online retail by acquiring and managing an e-commerce store, leveraging the convenience and reach of online shopping.

• Online Blogs: Monetize your passion for writing by acquiring an existing blog with an established readership and explore various revenue streams such as advertising and sponsored content. These businesses often generate revenue through display advertising or affiliate marketing, capitalizing on the potential for high-quality content.

• SaaS Companies: Consider acquiring a Software-as-a-Service (SaaS) business, offering subscription-based software solutions, which often enjoy recurring revenue and a loyal customer base.

• Mobile Apps: Explore the vast opportunities in the mobile app market by acquiring a successful app or investing in app development to cater to specific niches or industries.

• Newsletters: Acquire newsletters with a substantial subscriber base and explore monetization strategies such as sponsored content, affiliate partnerships, or premium subscriptions.

• Digital Services: Invest in businesses offering digital services such as graphic design, web development, content creation, or digital marketing, capitalizing on the increasing demand for online expertise.

• Podcasts: Dive into the engaging realm of podcasting by acquiring an established podcast, leveraging its existing audience and exploring revenue streams such as sponsorships and merchandise.

• YouTube Channels: Acquire successful YouTube channels with a dedicated subscriber base and tap into the vast potential of video content monetization through advertising, brand partnerships, and product endorsements.

Where to Find Online Businesses for Sale

While physical stores often display a prominent “For Sale” sign, identifying available online businesses can prove more challenging. To simplify your search, we recommend the following avenues:

• Direct Contact: Reach out directly to business owners whose ventures align with your interests. Express your interest in acquiring their business and initiate direct negotiations.

• Online Marketplaces: Explore specialized online marketplaces like BizCanyon, which provide a platform for buying and selling online businesses, facilitating direct transactions and ensuring a smoother acquisition process.

• Website Outreach: Contact website owners directly through the provided contact information on their sites. Express your interest in purchasing their business or website and initiate discussions regarding a potential sale.

How to Evaluate an Online Business for Purchase

Not all business investments are created equal. To ensure you make a wise investment, consider the following factors when evaluating a potential purchase:

• Business Model: Scrutinize the revenue model and profitability of the target business. Analyze its income streams, stability, payment processing methods, and compliance with regulations in different markets. Gaining a comprehensive understanding of the business’s financial foundation will mitigate uncertainties and pave the way for future success.

• Expenses/Costs: Evaluate the business’s balance sheet to identify potential liabilities or outstanding debts that may impede future growth or profitability.

• SEO Value: Assess the business’s online traffic and examine how effectively it monetizes that traffic. Consider the sustainability and sources of its web traffic, whether it relies heavily on ads or diversified channels. This evaluation will ensure a sound long-term investment.

• Brand Value: Determine the brand value by calculating customer lifetime value (CLV) and marketing return on investment (ROI). These metrics provide a rough estimate of the business’s brand value and potential for future growth.

• Online Sentiment: Gauge the online sentiment and reputation of the business by reviewing customer reviews and employing social listening tools. Perceptions of the brand can indicate its future prospects and value.
• Future Earnings Potential: Assess the growth potential of the online business to determine if it has the capacity to expand and increase profitability over time. This analysis helps you avoid investing in a business operating in a declining sector and enables you to identify underperforming businesses that can be acquired at a discounted price.

• Terms of Purchase: Understand the seller’s terms and conditions early in the process to avoid investing time and effort in evaluating a business that may not be feasible to acquire due to unfavorable terms.

• Reason for Sale: Investigate the reason behind the business owner’s decision to sell. While some reasons may be innocuous, such as retirement or pursuing new ventures, be cautious if there are outstanding liabilities or undisclosed issues that could affect the business’s viability.

Tips for Accurately Pricing an Online Business

Determining the appropriate value for an online business is crucial to making a sound investment. While there may be an element of intuition involved, it’s essential to consider the following quantitative factors:

1. Calculate EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a neutral valuation formula that assesses a business’s cash flow. By analyzing EBITDA, you can gauge the profitability of the business based on its capital structure and cash flow. However, remember that EBITDA should be used in conjunction with other valuation methods and does not replace net income or gross profit calculations.
2. Use the SDE Valuation Method: The Seller’s Discretionary Earnings (SDE) method is a straightforward formula for determining a business’s profitability after accounting for expenses. Calculate SDE by subtracting the cost of goods sold and operating expenses from the revenue while adding owner compensation. This method is particularly useful for businesses with complex internal structures and factors like owner compensation and benefits.
3. Multiply 12-Month Trailing Revenues by a Factor: Many businesses provide their balance sheets or 12-month trailing revenue to showcase their profitability. Sum up the revenue for the past 12 months and multiply it by a factor between 3.5x and 6x, depending on factors like the business’s age, anticipated profitability, and financial metrics. For e-commerce businesses, a factor of 3x is recommended, while content or information-based websites may warrant a factor of 5x or 6x. You can apply this factor to EBITDA and SDE calculations as well for a rough estimate of price/value, with SDE multiples generally lower due to accounting for additional factors like salaries and benefits.
4. Incorporate a Discount Rate: While the aforementioned formulas estimate a business’s value based on earnings, they may not account for other variables such as expenses and marketability. It’s advisable to include a discount rate to reflect the marketability of the business. Businesses that are more challenging to market should have a higher discount rate compared to those with wider appeal. Consider a discount rate of around 3% for established e-commerce stores and up to 17% or 20% for smaller SaaS brands. Additionally, apply a small discount for any annualized expenses that affect revenue, such as administrative and banking fees. The higher the percentage of annualized expenses to revenue, the higher the discount should be.

Key Takeaways

In conclusion, with the vast array of industry verticals and online moneymaking opportunities available, an innovative or unique idea isn’t always necessary. Purchasing an established online business and infusing it with your own vision can be a profitable venture, especially when others are grappling with the challenges of starting from scratch. By following these guidelines, conducting thorough evaluations, and employing sound pricing strategies, you can make informed decisions and position yourself for success in the dynamic world of online entrepreneurship.