Podcast: How to Buy and Sell an Online Business
Learn the basics about buying and selling an online business.
In this podcast, Jock Purtle, owner at Digital Exits, talks about:
- Three things that owners of websites should consider when selling;
- How to properly value a website business;
- Differences between a traditional bricks and mortar company and an online business;
- How an online business can provide higher returns than other asset classes for acquirers; and
- Other helpful resources to learn more about buying and selling an online business.
About the GuestJock Purtle is the owner of digitalexits.com a full service website brokerage. They help online business owners find a buyer when ready to exit their company. Since starting in 2013 after personally exiting his own online business, the brokerage has grown with total sales expected in 2016 of $20,000,000.
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Read the Full Transcript Here:Noah Rosenfarb: Hello and welcome again! It’s Noah Rosenfarb for the Exit Strategy Podcast here today with Jock Purtle who’s the owner of digitalexits.com, a full service website broker firm. They help online business owners find a buyer when they want to exit their company, and not only did he personally exit his online business in 2013, but he is now on track to facilitate over 20 deals in 2014, ranging in size from $100,000 to upwards of $5 million. Today, I’m excited to talk about digital assets and websites.
Jock, thanks so much for coming on the show.
Jock Purtle: Thanks, Noah. It’s a pleasure to be here.
Noah Rosenfarb: Why don’t you start by telling me, you know, based on your experience, what are the three things that owners of websites should do when they’re thinking about selling it?
Jock Purtle: The main three things that online business owners should be thinking about when selling would be to increase profitability, would be to diversify their traffic risk, and the third thing would be to clean up their books.
Noah Rosenfarb: I hear about cleaning up the books all the time. How might that be different for a digital company versus a brick and mortar business? So the books and records typically kept in a certain format, that you like to see?
Jock Purtle: It’s not different but you know, a P&L is a P&L whether it’s online business or an offline business, just the fix and variable cost would be different. When I say clean up the books, it’s easy enough to do add-backs and add-ins when you’re doing evaluation; however, it would be nice if a business owner came to me with 12 months’ worth of financials where they actually paid tax and every expense was at market rate. They did not run any discretionary expenses for the business. It’s yet to happen and they’re going to get a high price. By the way the main reason is just going to make more money.
Noah Rosenfarb: Sometimes, when I talk about add-backs and co-mingling, personal expenses with business expenses with owners. I try to look at it through the lens of valuation, and say, 'If we could substantiate an extra $100,000 that we don’t have to dispute with the next buyer, and as a result, you’re going to pay $40,000 or $50,000 of income tax, but we get $500,000 more value. Then it’s worth paying the government at least for the year or two that you have to do it. In the website business, where are the multiples and where do the economics make sense for the owners to kind of come clean and report things the way the government would really like to see it?
Jock Purtle: Probably starting at a $1 million valuation. Generally you’re smaller online business, let’s say sub-$300,000, is still under-operated so it is generally more of a seller’s discretionary income or earnings valuation whereas the larger businesses, we start using a EBITDA valuation methodology and also the higher in the town, you’re going to get a bigger multiple and the multiple are effect of stripping out $100,000 in expenses, coordinate that difference between getting $200,000 versus $400,000 in extra income or sale price.
Noah Rosenfarb: You were talking about not only cleaning up the P&L but diversifying traffic risk. Tell me what that means in layman’s terms.
Jock Purtle: Just for everyone’s benefit, a web property has a little bit of a different asset clause or asset clauses within the business to make it work. So generally an online business has traffic. In an offline world, you’d call that foot traffic or you’d call that phone calls or you’d call that leads that a salesman has generated. On the online world traffic is visitors from Google, visitors from paid online advertising, so the principle is he same, but how it works out is a little bit different. Now, diversifying traffic means not being reliant on one traffic source that could easily disappear overnight. For example, let’s say your website was 100% reliant on Google traffic and Google decided to update their algorithm or penalize your website and then overnight, from going from 1,000 visitors a day to your website back to 100, automatically that’s going to decrease your income as well. So mitigating the risk for traffic or web traffic by adding more likes to the table, same metaphor is an important step and just also by paying more money for businesses that have diversified traffic sources.
Noah Rosenfarb: I learned this lesson the hard way with one of my digital assets where we were getting what was costing about $4 for an average lead based on our organic traffic from which is primarily being driven by Google and then the algorithm changed and we have lost about, I would say, 80% of the lead flow. So all of a sudden, our cost went up to $20 and our pay-per-click which is at 9 continued to be a good source, but it just totally disrupted our business and our marketing methodology. It took us I would say at least a year to get things back to the kind of balance we wanted which is a balance between organic and paid. Lesson learned the hard way for me at least.
Do you see that with a lot of websites that are coming to you to represent them in a transaction that they have lopsided traffic flow?
Jock Purtle: A lot of businesses are too reliant on Google and that decreases their valuation because it obviously increases the risk and yes I’m seeing a lot of that.
Noah Rosenfarb: Along with the valuation, do you do any consulting for how to actually create the improvements or you just point out the weaknesses?
Jock Purtle: Yes we do. We generally just roll that up into our commission so there’s no actual formal consulting process. So let’s say, you had an e-Commerce store and sold suitcases and you wanted to sell. You came to me with your business and the valuation came out at $750,000. You said, 'Hey listen, I really want $1 million for the business.’ And I said, 'If you want to get to $1 million you need to do this, this, and this in the next 6 month,’ Then basically, we converse over the six months and get the business up to scratch and then list it for sale. Just to let you know, the value in that is I’ve been buying, selling, and running online businesses since 2009. The main thing that I do or I look for in a business is an ability to increase conversion rates or make the marketing more efficient. I’m generally good at increasing sales of businesses.
Noah Rosenfarb: And then you’re rewarded on the back end of the valuation.
Jock Purtle: Yeah.
Noah Rosenfarb: Yeah. That’s great business model. What are the motivations behind most of the owners and properties? Maybe I can then distinguish that between the brick and mortar traditional companies that I deal with and the reasons they are typically selling.
Jock Purtle: Actually I was having a conversation about this last night, typically there’s the entrepreneur syndrome, the 'I’ve been running the business for 3 to 4 years and then I’m bored and I want a new challenge.’ The next thing is the opportunity syndrome which is 'I’ve got this other good opportunity and I want to use the cash.’ Then invest in that next opportunity. Then the third thing is generally the flat-lining or declining problem which is either, "I have taken the business as far as I can’ or 'The business is now declining and I want to jump ship before the shit hits the fan.’
Noah Rosenfarb: I would say that most of the traditional mainline entrepreneurs that I deal with that are in their 50’s, 60’s, and early 70’s that they’re exiting because of health issues, family issues, they’re tired of running the business. It’s not fun for them anymore and they think there’s something more fun for them out there. I would say that that is a really big contrast and when owners are thinking about acquiring web properties because I’ve had a few conversations with owners that I’ve suggested acquire websites as part of their asset allocation, they don’t get why these owners sell. They’re like, 'Wait a minute. These guys are making $350,000. He’s working 4 hours a week on it. Why does he want out?’ They can’t grasp it. How might you describe that to a buyer that they think that the seller is in the cat bird seat why would they get out of it?
Jock Purtle: I’m probably the perfect example for that. I have a network of affiliate sites, that ticked along and made cash, the opportunity cost and my percieved risk is too high. I was basically you know, 'Let’s cash out and let’s redeploy this cash in a better manner.’ That was my perspective and then the guys that are like that sometimes would the guys that are good at building the businesses. They’ll get to a certain point where they can’t build them anymore and they’re like, 'Okay, it’s time to build another business just becasue the barrier to entry is so low'. The barrier to entry is so low in the online business. It’s easy for them to go ahead and build another business or buy another business and scale that whereas it’s a lot harder in the offline world to build a business from scratch.
Noah Rosenfarb: I think a lot of it comes from kind of the baby boomer mentality versus the gen Y mentality around life and opportunities and what third of your life are you in. Is it this the work third? Or is it the relaxing third? I think the gen X and gen Y tend to have a bit of a different blend of those two areas. Tell me about the reasons why maybe a baby boomer would want to own a website and take advantage of this new technology and maybe what I perceive and you could describe as the valuations being low in comparison to other asset classes.
Jock Purtle: Let’s answer the first question first. Most businesses are relocate-able and can be run from anywhere in the world. Generally, they have less fixed costs and less staffing cost although the systems and processes can be automated with software and SOP’s and generally they’re just less of a hassle to run - less moving parts so there’s less friction, and I think that is an added advantage for a baby boomer, that while they still work, still keep their brain active but turn down the amount of work that they’re doing. It’s for their main benefit.
In terms of valuation multiples, online businesses are starting to increase in value. Just last year, they overtook offline businesses in terms of average for sale multiple. So I would say getting now while the multiples are still relatively competitive because they are only going to increase over time as more buyers move into the market. It’s larger capital markets have still yet to wake up to the benefits of acquiring online businesses. They know they’re there but they still don’t understand them enough. They could see a lot of companies spitting off a lot of cash but they think the risk is still too high. I think the next year or two is the best time to acquire to get a good deal. Generally on average, the selling for 2.7 times net earnings and that’s generally a seller’s discretionary earnings multiple. So it probably would be a little bit higher on an EBITDA multiple, but they’re still great cheap compared to other asset classes and you’ll still going to get a hell of a lot better return of investment than keeping the money in the bank or keeping the money in shares or keeping the money in property. I think the best story that I’ve heard was a financial advisor that I know who had an internet client that had the opportunity to buy a property deal that looks to be half the market value and he passed on it for the sole reason that he can get better returns in his internet business than he could in the property market.
Noah Rosenfarb: So talk to me a little bit regarding valuation and your experience in property valuation with internet property as a certain assets class.
Jock Purtle: Generally, your conventional property is going to get a 10% return. Internet properties can anywhere be from 30% return to 100% return. Logically, the return on investment is there. The risk is also inherent. However, like everything, educate yourself on the risk and then the risk mitigates. If you can educate yourself on the process or find someone that can help you acquire an online asset, it is my opinion in that you’re going to get a hell of a lot better return than any traditional asset class with a lot less stress.
Noah Rosenfarb: Who do you say are the main buyers and who are the main sellers? Are you working predominantly with younger entrepreneurs that are still growing their entrepreneurial book of business?
Jock Purtle: To the main buyers, I’ll just give you the rundown based on the price point. So sub-$200,000, there’s a lot of corporate buyers that want to buy a business and they also sprinkle from the internet entrepreneurs. From $200,000 to $1 million valuation is a combination of online entrepreneurs themselves and then also larger high net worth offline entrepreneurs. That also is true for like the $1 million to $5 million valuation range but also in that range you start to get smaller like family offices, little PE firms that are in the tech space and a more higher caliber online/offline entrepreneur. That’s the type of buyer that are acquiring these assets and a lot of baby boomers play in that sub-$200,000 valuation range.
Noah Rosenfarb: On the private equity side, are you seeing any industry trends, any significant movement of capital moving into the space?
Jock Purtle: Not yet. They haven’t woken up to the value of asset yet or if they do know about it, but they still yet to play in the market and take a punch.
Noah Rosenfarb: What have you seen as some of kind of main trends from starting with kind of your own personal ownership of internet assets and now into your brokerage of internet assets? What do you see as some of the main themes that you expect to continue and what do you see as some things that have changed over time but are now leveling out?
Jock Purtle: I’m seeing a greater influx of small e-Commerce stores lately. I have seen a greater movement of capital coming from New York which we’re around at today in terms of buyers. I have seen a greater demand. Actually, the types of phraseology that buyers are using are things like recurring, passive, repeat sales, hands off. So the type of buyer that is looking to acquire an online asset, that’s the mindset that they’re coming in with. I have seen a lower tolerance for higher risk sites maybe 3 or 4 years ago. I’ve seen some consolidation in a few markets so people are starting to roll up a few verticals. I’ve seen their valuation multiples increase as the demands increase. I’ve seen a lot more stock come on the market as well. Like anything, it’s still hard to find the perfect deal. Some of my investors have been sitting on their hands for months where some of them snap up sites a week or two after starting to look. So it really depends on your investment profile and your risk tolerance. For me, these are the main thing that I can think of off the top of my head now in terms of the market in general.
Noah Rosenfarb: How do you see traditional brick and mortar businesses, if you do see it, as part of their core offering of their business to both enhance their revenue stream, enhance their opportunity, and also bring their business into kind of the modern age? Do you see a traditional retail store that sells suitcases wanting to go after and buy that online suitcase retailer?
Jock Purtle: Yeah that would be smart if they did, but a lot of business owners are stuck in their old ways and I’m happy to innovate and it’s the guys that have innovated that are making a lot of the cash. That type of retail business model is what we call click and mortar. Essentially that got an offline presence with their warehouse and distributions but their main marketing channel is online and those types of businesses are I think the business of the future. I think those types of businesses are definitely activating the general retail store just because of the lower fix cost. In terms of if an online entrepreneur wanted to get out with the times, I think that firstly focusing on your online marketing would be step one and getting that up to scratch. I think we need to educate everyone on the benefits of marketing online. What I do think is if there is an integration opportunity, there is an opportunity there for traditional brick and mortar buyer to acquire into online and that can be a fast track to success to quicker returns. So I definitely think there’s an opportunity there for an offline business to acquire an online business that can complement their company.
Noah Rosenfarb: Do you see any of the sellers wanting to sell to what I might refer to as a strategic acquirer, take the brick and mortar and make them click and mortar and then hang around with them and grow both sides of the business together? Do you find that most of the people if they’re selling they want out for one of the reasons that you had suggested before?
Jock Purtle: Nine times out of ten, they want out. It’s the smart guys that keep equity in the acquiring company that make a lot of cash. Best example is business.com. The guy sold out in 2003 I think for about $10 million. He gets 10% equity and then they exited in 2007 or 2008 for about $600 million. He had obviously taken the business to as far as he could personally and then get some equity in the new company to take advantage of that. So the answer is no, they don’t, but there’s a benefit of doing it.
Noah Rosenfarb: Well, one of the things you just mentioned, business.com. That brings up an interesting question that I’m curious about which is what’s the value of the domain name versus the value of the website and how do those two things differ and can someone sell their domain name and yet keep the operating business and give it a new url or vice versa.
Jock Purtle: The domain doesn’t add any extra value to the business. It’s like traditional business valuations where they got some types of assets in the business don’t actually add value to the business. It’s the asset of the business that help generate the cash flow and it’s the cash flow that gets valued. The benefit of having a pedigree domain name like business.com would be it would generally get you a little bit more traffic naturally and then also the conversion rate of prospect to customer would be higher just around the brand value of having a domain like business.com. Probably, a better example would be something like bowlingballs.com or tennisshoes.com. If the site is dedicated for tennis shoes, then there’s a natural affinity that this business is the authority on that product. Very cool.
Noah Rosenfarb: I had heard that the founder of headsets.com I think he paid $2 million for the headsets.com url. After his business was already operational, he said it ended up costing him like $50,000 a month to finance that acquisition price and he said it would be accretive over time in terms of his profitability. He did the calculus and it turned out to be true. Do you try and represent sellers of just domain assets that aren’t monetizing them or are you always selling operating businesses?
Jock Purtle: Always selling operating businesses. I generally have a joint venture with a domain broker who sells the domain name.
Noah Rosenfarb: What’s your take on domain valuations? As you said, if right now they produce some traffic but they’re not selling anything on the site, is it a property worth buying if it’s a category-leading domain?
Jock Purtle: I probably not the best person to talk to regarding domain valuations but I do think there’s a benefit in buying the category domain for your business line.
Noah Rosenfarb: Yeah, at the right price.
Jock Purtle: Of course, everything is at the right price.
Noah Rosenfarb: So, what are some of the other things you’d like to share with our listeners, maybe talk to advisers to business owners first and then start talking directly to the business owners that listen to our call around websites. What are some of the facts that they should be thinking about and considering as they move forward in their own plans for how to run and grow and ultimately transfer their business?
Jock Purtle: If we go with the advisers first, it’s probably an asset class that you haven’t considered. If you go to my site, I published a lot of content on the buying process that you can get up to scratch on and your client and get up to scratch on. You’re definitely getting a lot better returns than your traditional businesses, and when I say returns, you’re probably getting a better return on investment with an offline business, but the scalability and growth potential of an online business outstrips that of an offline business. That’s probably the main thing. It’s the speed of growth just through the ability to buy customers, acquire traffic, and all of the above. In terms of acquisitions, I probably turn this question back on you, what would be the main question that they would have if they’re advising someone on an acquisition for an online business.
Noah Rosenfarb: What would be the main questions that the buyer would have or the owner?
Jock Purtle: No the adviser would have.
Noah Rosenfarb: I think most advisers want to know should they be encouraging clients to look at this asset class. What are the risks in this asset class and how do they differ from what they’re most familiar with which is buying the guy down the street that’s in the same business and taking out a competitor or buying your supplier or buying your customer and doing some vertical integration? Those are the things that most advisers have grown up seeing, doing, and learning about and here we are in this new digital age where there is this whole online business and most people that are over 50, it’s not part of their nature to understand how this is working because they didn’t grow up in this environment and it’s happening fast and the change is rapid and so a lot of them perceive all of the risk factors, 'Hey this thing is changing so quickly. I don’t have domain expertise in the literal sense. I don’t understand online business. How can I get that expertise so I could be competent enough to advise my clients?’
Jock Purtle: Have them talk to me and read my site. That would probably be the main thing. There are a couple of forms out there like experiencedpeople.net that they can get up to scratch on the values, the processes, all of the above of online businesses. I found that to be honest the traditional route of acquiring your competitor etc. is still a good play. I’m not saying 'don't do that'. What I’m saying is if you want to diversify your investments to have to look online. If you want to innovate, have a look at acquiring an online business to either vertically or horizontally integrate your current or your client’s current business.
Noah Rosenfarb: Good advice. How about accessing the opportunities in the online world via the traditional ways capital get to allocate it from indirect ownership? Are there private equity funds that are out there doing this? Are there publicly traded companies that are out there aggregating? Are there bigger players in the space that have more traditional opportunities for high net worth individuals and families to get access?
Jock Purtle: There are. I wrote an article called the Ultimate Website Selling Guide and I have actually listed all the larger publicly listed companies that roll up and acquire online businesses. So that traditional model of roll-up and consolidation has been applied to the online space and reasonablely successfully. So yes, a short answer is yes. There are already larger companies out there that you can take advantage of maybe buying up some shares in their company etc. rather than buying an online business themselves.
Noah Rosenfarb: We’’ll make sure to link up to that in the transcript to the podcast which is on the Divestopedia website. So if you’re listening on iTunes or you’ve downloaded this recording and you want to access Jock’s information, you could go right to his website, digitalexits.com or you could land on Divestopedia and we’ll have a link there where you could download that information.
So, Jock, what else do you want to share before we say goodbye to the audience?
Jock Purtle: You said some great tips on the sell side. I think the main thing is exactly the same or the main tactics are exactly the same as rolling up or getting an offline business great sale. I would just set up the process as probably quicker from the sale side than an offline business and that’s probably the commentary to have in that. In terms of any closing notes, I think if you’re really interested in this topic, start educating yourself about it because it’s only going to grow and I also run a weekly podcast where I interview people on the buying, building, and selling process. That’s called the Digital Exits Podcast. Get yourself educated on the process.
Noah Rosenfarb: For our listeners who want to get in touch with you, Jock, if they want to learn more about acquiring a website, selling a website, or they need help with the valuation, know they could go to digitalexits.com, but any other ways to contact you that you’d like to share?
Jock Purtle: Yeah, hit me up on LinkedIn or you’ll find me through the site. Just send me an email or send a valuation request and I’ll get in touch with you.
Noah Rosenfarb: Well, thanks for coming on the show and sharing all this new information in a new world. I hope our listeners enjoyed the content. Please share your feedback on iTunes. Never hesitate to email me, [email protected]. Let me know what you think of the show. Give me some recommendations for guests if you have them. I always like hearing your questions and comment and hope to have you with us again on another episode of the Divestopedia Exit Strategy Podcast. Have a great day!