Future Profit: The #1 Factor in Buying a Business

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Today’s post is by David Gass of InternetInvestmentSummit.com.  David is co-founder of the Internet Investment Summit, happening on October 18-20th, 2013 in Boise, Idaho.

Experts will debate what the most important factor is when buying a web business.  Some may say it’s the niche, while others argue it’s the traffic or monetization method.

There are several factors to look at when buying a website and all should be considered.  Factors such as:

  • Niche
  • Type of Website
  • Number of Unique Visitors
  • Monthly Revenue and Profit Numbers
  • Page Authority
  • Page Rank
  • Traffic Value Based on SEMRush Reports
  • Page Views Per Visit / Bounce Rate
  • Organic Traffic or Paid Traffic

You know the drill. If you’re a regular reading of the Flippa blog, you’ll know that website valuation is discussed very frequently.

However, all of these factors are based on the history of the website.  Although the history does help with due diligence, it is not how a website buyer will make their money after purchasing the website.

A website buyer’s most important factor in buying a website is future profit.

What Really Matters

Future Profit is the total of the monthly profit from the site’s activities while the buyer owns the site, plus or minus the profit from selling the website at some point in the future.

If a website currently generates $600 in monthly revenue, but you have the knowledge, skills and time to improve the conversion rate of visitors in order to generate $900 per month, your Future Profit will be higher than the site’s historical earnings would indicate.

Although many website buyers’ strategy is to buy, hold and grow with no intention of selling, the future profit must include the value of the website in addition to monthly profits.  The value of the website is not truly realized until the website is sold at some point in the future.

What’s your site’s future profit?

Knowing the future profit of a website is impossible, unless a buyer finds a crystal ball that can see into the future.

For now, the best indicator of Future Profit is still past performance.  However, by basing a decision to purchase a website on past performance alone, with the many outside factors that can change a website’s traffic flow and monetization, it’s very difficult to be 100% on target.

All the factors mentioned above such as niche, type of website, page authority, etc. are important to look at, but they don’t tell you exactly what a website’s performance will be next month or next year.

In my opinion, the best indication of future performance is the experience of buying, running and selling a website with similar characteristics to the site a buyer is looking to purchase.

There are two ways to gather this experience:

#1 – Buy a smaller website in a growing niche and use the experience for future purchases

Obviously, this provides a dilemma.  There is still the first website that needs to be purchased on blind faith and any time a buyer wants to purchase a site in a new niche, they need to start over by buying another small site with no experience in that niche.

Based on my experience, I would guess this is what 99% of buyers are currently doing.  They buy their first, second or even tenth website in a new niche.  Each time they do this, they’re starting over with gaining experience in that niche to help determine future profits of any new website they want to buy.

 

#2 – Use the experience of others

Find others willing to share their experience of buying a website and the results they’ve had with the site.  In this case, a buyer is learning from the experience of another website buyer.

Where are these buyers?  Right on Flippa!

Flippa lists all previous auctions with the sale price and all data for the sold website at the time of the purchase.  A website buyer can contact the current owners of these websites and ask if they have an interest in selling the site they bought.  This works best when approaching someone who purchased a site at least 6 months prior.

If the seller has an interest in selling, ask them if they will provide the necessary due diligence data to purchase the site.  All the data will help in determining what the website’s traffic and profits were after the initial purchase on Flippa.

The future profit indicators are easy to determine now. Simply compare the new stats since the sale with the initial stats from the Flippa auction.  If a deal is put together, great.  The website seller can list the site on Flippa as a private sale and have the buyer make an offer on the listing to win it.

Putting it all together

By buying a website in a similar niche, with similar traffic and monetization methods, this comparison will help dramatically in determining the future value of a potential website purchase.

I put together a case study on a website purchased two years ago on Flippa, showing how future profit was determined and what the actual outcome was. Take a look!

After researching a niche, building some experience in it and seeing where your strengths can help grow revenue, you should have a much better idea of how long it will take you to recuperate your investment. This helps explain why different investors will have such different valuations of a same website.

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  • July

    Very Good Informative Post! Thanks! Looking Forward to Learning more From Your Future Posts!!!

  • Guest

    Buying potential online business is like a virtual real Estate Businesses, it’s all depends on the Market trend :)

  • http://www.sharanyan.com/ Sharanyan Sharma

    Buying potential online business is like a virtual real Estate Businesses, it’s all depends on the Market trend :)

  • JakubHanke

    My first website I bought on Flippa for about A$2700 including fees has been earning $40 a month. After few tweaks my break even was only 4 months away and now it generates return of 400% pa with 1-2 hours work each month. So I fully agree that future profit is n.1 factor :) And yes, I have no intention to sell winners like that, ever.

    • ChillOutBro

      How did you do it ?

  • Aussie Domainer

    Great post. Definitely handy to acquire a website that’s already in the same field as a website/business you already have, they might compliment each other well and even boost each other’s profits.

  • karen

    I bought a site for 10,000 with claims of big sales – since I’ve owned it next to no sales. What can I do?

    • ChillOutBro

      Holy shit.. can you tell me how it worked out for you ?