Why smart entrepreneurs are selling their money-making websites

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Bigger and better things await

When you scan through the listings of sites for sale, you’ll often see some …. ummm … unique if not downright comical reasons that people give for wanting to sell their site or internet business. In fact, can you remember the last time someone listed their reason for sale as it being the “best strategic move to make”? Neither can I.

This could give the false impression that you need a reason to decide to sell, like something has to go wrong first, but if you’ve owned and operated a site for a long enough then knowing when to sell can actually work massively in your favour.

It all comes down to leverage

Take a look a these two examples:

  • A seller owns a blog which he bought for $10,000 and it generates $800 net profit per month from advertising and affiliate sales to a mailing list.After one year, the seller will have $19,600 assuming the value of the site stays the same ($10,000 site value and $9,600 in earnings). After two years, this figure increases to $29,200 ($10,000 site value and $19,200 in earnings).

What if that seller sold up after the first year and bought a similar but larger blog with more traffic and a bigger list?

  • If they invested $22,000 from year one into buying another blog at roughly the same valuation multiple, $22,000 would buy a site generating $1,760 net profit per month which means at the end of two years they would have $43,120 in total ($22,000 site value and $21,120 in earnings).

The numbers used are simple to illustrate the point, but it remains valid all the same – the second scenario results in more profit overall than the first. It works on the principle of leverage in two places.

Leveraging time

It’s highly unlikely that the second business takes twice as much work as the first. In fact it will probably take a near identical amount of time to manage, create content for and promote the second blog as it would do for the first.

This is something I often see when undertaking due diligence for organisations; there’s a section where you provide an independent estimate of the number of hours of labour that would be required to manage a site / internet business. There’s often little difference between a site valued at $20K versus one valued at $250K, as only some elements (like customer support or order fulfilment), increase proportionately as the business gets bigger. Things like search marketing, buying ads and creating content tends to be similar regardless of the size of the site (to a point), so it makes much more sense to be doing those activities where they will provide the greatest return i.e. the highest value site you can afford.

Leveraging finance

Statistically, based on the rate of small business failure, you’re more likely to be better off paying your money into a savings account than you are being an entrepreneur. I’m sure we all know this, but the reason why we choose the least likely path (other than it being more fun!) is the belief that we can leverage the money to provide a better rate of return through things like business, investments or property.

Going all in, reinvesting the revenue from a purchase and the value of the purchase itself is risky, but relatively safe if you’ve spent the previous months running a similar business and you know both the industry and what to look for in a similar business to guarantee stability. By putting your money to work in a bigger but similar “vehicle”, you ultimately get the same rate of return but on a much larger scale.

It’s not all happy days … or is it?

The increase in value is usually enough to make the decision to sell a no brainer, and that’s before you’ve considered things like

  • The fact you can increase your return significantly if you increase your site value and earnings by increasing traffic or conversions. The same work will have a much better rate of return on a larger site.
  • Most of us love new ideas and opportunities rather than day to day management. The rush of excitement from taking on a new project can often counter the 2 year boredom itch you get with doing the same thing day in, day out.
  • Your past experience will have much greater use this time round. There are certain things you probably did on your current project to increase conversions or drive sales that you can only do once. Playing with Google’s Experiments feature in Analytics is my idea of a good night out, but there’s only so much button colour or menu tweaking that you can do to see a positive change. With a new project you can take all that knowledge and apply it again.

That said, there are still some good reasons why selling isn’t right – at least for the time being. Ramsay from Blog Tyrant provides a great alternative view on knowing your site’s worth to you versus its worth to a buyer. Sometimes the leads or opportunities that you get from being active in a space, especially if that site has your personality attached to it, is worth much more than you could gain from a sale.

Another common reason is knowing that you’ve still got significant value to extract from the business. The example above work on the idea that you’ve bought a site and either have little desire, or little opportunity to make improvements to increase its value. Ironically, this also the reason that prevents many people from selling when they should – they think they’re able to do more than they realistically can, not realising that the site has hit a ceiling or that they’ve taken it as far as they can go.

Another reason, one I personally understand, is simply having a connection with what you’re doing. Business is ultimately about profit, but the greatest part for many tech/web entrepreneurs is really loving what you do. If you’ve stumbled across a project or business that makes you excited to wake up on Monday and get stuck into a new idea or campaign, then you’ve probably found something worth keeping, especially if generates enough income to meet your immediate goals.

Of course, all of this is my opinion but I’d love to hear yours. Do you think there’s another reason not to sell that I’ve forgotten to include? Are you thinking of selling but can’t quite make your mind up? Let me know in the comments below.

Photo credit: gigi62

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  • http://blogtyrant.com Ramsay

    Thanks for the mention, Justin! Great write up.

    It really is a tough decision on whether to sell or not. Personally I’m now of the opinion that unless you build it/plan it with the view to sell you might be better holding on to it (if you can afford it).

    People often lose motivation though and if the site is as good as you can take it then selling is less of a financial decision and more of a personal one.

    Ramsay

    • http://www.flipfilter.com Justin Gilchrist

      Thanks Ramsay.

      Your post was a great help in providing a balanced view whilst writing this.

      I think the issue I always wrestle with is knowing when the site is as good as you can get it (personally).

      As entrepreneurs we tend to be a little on the optimistic side! That often makes it difficult to be rational about your own ability and the likelihood of you taking a site to that next level.

  • Stan

    Over the past few years I sold a number of websites, it’s always been to get some cash up front and pay off some bills or two reinvest it in something else. Also I tend to get bored in running the site after a while. It’s also more exciting to be in that start up phase, which is why I have 70 sites

    • http://www.flipfilter.com Justin Gilchrist

      Hey Stan.

      Wow – you must be super organised to manage so much! I guess having 70 sites is a way to keep the adrenaline flowing though.

      • Stan

        Hi Justin,

        I don’t know if I would considered my self super organized, a lot of the sites I have are pretty dormant, they may be built but I haven’t put much effort into them after that. I often see something or get an idea that I get excited about start and then move on to something else. However I do have about 5-7 that I’m regularly working on.

  • http://brunogo.com Brunogags

    Nice article! Another good reason not to sell would be that the website require very low time or no time at all to manage.

    • http://www.flipfilter.com Justin Gilchrist

      Thanks.

      Very true, and it’s also the reason why I love building web applications.

  • http://ministaffing.com Mini Staffing

    i guess not really though

  • http://www.victorstuff.com Victor

    Great Post! When I tell the story to anybody of how I sold my latest big site (large 5 figure sale), they always ask: “If it was making money, why did you sell it? are you crazy?”

    But I use the same logic as you, and it paid off until now.

    • http://www.flipfilter.com Justin Gilchrist

      Thanks Victor,

      Congrats on the sale. Did you get what you hoped to achieve with the sale price?

  • Kevin Muldoon

    It’s an interesting topic Justin.

    With regards to why someone is selling, it is rarely relevant. Most sellers will use a little poetic license when it comes to the reason or selling. It is therefore the buyers duty to investigate the facts and not let the buyers apparent reason for selling cloud their judgement.

    That being said…

    Generally speaking, at the lower end, sellers do not know how to make their website more profitable, so the chance of getting a small payday is appealing. Particularly as they know how to create another small website and repeat the process.

    For larger, more profitable websites, the reasons are more varied. A common reason is to fund another project. I suspect some sellers will know their market well enough to know when the industry is on the decline, and will seek to go out when the website is on top (to maximise their return).

    Kevin

    • http://www.flipfilter.com Justin Gilchrist

      Hey Kevin,

      The last is a very valid point and one you frequently come across with gadget and tech sites. You also get it with some IM / MMO products that have been flogged like a dead horse on the warrior forum – it’s not that they’re not good products, it’s just that they’ve already been over exposed to the biggest target market and stand little chance of achieving the same success without it.

      Unfortunately with markets that change fairly rapidly, buyers can easily get caught out if they don’t have a realistic view where the market is at.

  • http://www.arewalanre.com arewa lanre”The Grand Master”

    Thanks for this post! Am just a new guy on the block and although I write books and articles,am seriously thinking of building profitable blogs with 18 months and selling it off to start another.
    I think it should be a decision one needs to take evn before starting out.
    Thanks so much.
    Arewa Lanre”The Grand Master”

    • http://www.flipfilter.com Justin Gilchrist

      Hey Arewa,

      Glad you enjoyed it.

  • http://www.websumm.it/ Breaking News Blog

    -

    another option is to invest in premium domains and try to sell them with a profit (maybe, here at Flippa)

    -

    • http://www.flipfilter.com Justin Gilchrist

      It’s always an option but the domain market is a tough one to crack right now.

      Unlike sites (which are already quite random when it comes to valuations), domains have less tangible criteria to hang a solid valuation on, so you sometimes get situations where a domain can sell for 50% less a few months after being purchased, for reasons mostly out of your control.

  • http://www.kcwholdings.com kcwholdings

    Sometimes, just testing the waters is a good reason. Do you have a big site you want to sell sometime in the future but would rather try it first with a smaller site in the portfolio? That way you learn the ropes and perhaps make mistakes on a small site instead of your pride & joy…

    • http://www.flipfilter.com Justin Gilchrist

      Very true, and good advice considering your first listing is likely to be one where you only realise what you should have done after the auction is over!

  • http://www.uraaw.ca Adam

    When I decided to sell some of my larger sites, it was either because I thought they had reached close to their full potential, or simply because I was bored with them and wanted to move on to something fresh.

    • http://www.flipfilter.com Justin Gilchrist

      Hey Adam,

      I guess that’s the reason for many sellers. It’s just a shame that some choose to make up random reasons instead of telling the truth!

  • http://victorstuff.com Victor

    Yap Justin. I always managed to sell for a good multiplier, including that business. I guess that’s what matters, getting the biggest multiplier possible.

  • http://www.expertwebmedia.com/ Oz Dogan

    Justin,

    I had your article open for over day and a half and only got to reading it now. Thank you for an excellent and well timing article (for me anyway).

    You’ve put a spark into my future projects and for that I would like to thank you.

    I did the maths of buying and selling large money making sites that will hold its value over the years and came up with the conclusion as you have.

    As your investment grows it is better to sell that at the end of one year and buy a new money making site with the total value and profits of the original domain. But this is theoretical and markets fluctuate and things are not always as predicted. Nonetheless, it is a much better investment then any other that I know with positive growth.

    Better to look after a few large money making sites than to look after twice that with no time left to live your life.

    disclaimer: One warning that I must mention here is that not all domains will continue the momentum as stated in any auction. One really needs to investigate that which one buys and commits money to it.

    Cheers!

  • http://www.flipfilter.com Justin Gilchrist

    Hey Oz.

    Very true and I guess it’s a lesson in doing full and thorough due diligence before you buy.

    I did a survey a few months back and the most common reason people gave for their investment losing money was a search penalty / drop in rankings.

    In either case, this is something that could usually be avoided by ongoing SEM and content creation, but more importantly, doing research on the site’s backlinks before buying to establish how many were in ‘bad neighbourhoods’.

  • http://www.facebook.com/Dotcup Brett Nelson

    In, say, the real estate market….there is safety in knowing “fair market value”. On the internet, it’s, for the large part, lots of smoke and mirrors. Nice introspection into the subject, and I suppose we’ll never know “why?” people sell their sites, but ultimately the marketplace has to be a place where there is greater trust than distrust. Good luck, Flippa.

    • flipfilter

      Hi Brett,

      The huge advantage the Real Estate or even the offline business market has over online businesses for sale is history – hundreds of years of historical transactions to help investors arrive at their price.

      We’re still a long way away from that in this niche, but with every year valuations tend to become a little more logical and a little easier to predict. I expect in ten or so years, the opportunity to buy good businesses that have just been priced wrong by naive sellers will be as rare as buying a $100K house in the Hamptons.

  • http://de-de.facebook.com/christianfenner Christian Fenner

    Hey Justin, great post, thanks! I just tried to sign up with flipfilter and looked forward to the free pdf – however the link to it is broken: http://www.flipfilter.com/pdf/20-hacks-to-increase-your-website-value.pdf
    Kan you send me the “real” Link please? Cheers! Christian

    • flipfilter

      Hey Christian,

      The PDFs all got moved to AWS in a recent update, but I’ve restored that specific link (as it’s easier than changing the code!) so you should be able to access it now.

  • http://twitter.com/Vince_Stanzione Vince Stanzione

    Good post Justin, of course way before the web I was buying and selling traditional businesses, I talk about this in my New Book the Millionaire Dropout, Fire Your Boss, Do what you Love and reclaim your life. Some years ago I sold a business for £1 that is about $1.50 and a royalty as it was just talking up too much time and the new buyer could give it more time. It will be interesting to see in time if earn out deals catch on for websites i.e the seller gets some cash now and a percentage on second instalment based on the future.

    Regards, Vince Stanzione

    • flipfilter

      Hey Vince,

      That’s an interesting one, and overlaps with what Paul Kennedy bought up.

      I guess it would certainly help weed out those who are only selling because they see impending failure for the site!

  • Paul

    All of your points are very valid for the reason why you want to SELL a website, as there are countless other reasons, but it doesn’t address the reason why you should BUY the same website.

    It is basically a fact that only a business (or website, as I consider them to be the same) is being sold, if the owner either has a problem, has reached the ceiling of profits or is bored.

    Nearly always the reason is reaching the ceiling of profits.

    Of course there are exceptions, but you have to look very hard and be very lucky to find one of those. in most cases buying a website doesn’t make financial sense, unless the previous owner was incredibly inadequate and needs money for other purposes.

    Sellers and buyers are opposites in every way, which makes it very difficult to make the transaction profitable for both.

  • http://www.facebook.com/pauljkwa Paul Kennedy

    Very timely article. I built my web business from scratch in 2008 and without an ounce of marketing it has doubled it’s reach every year since. I sell highly targeted products which range in markup from 150 to 300%. Although I have knowledge of the market and its products, it is not a difficult business to run.
    I have been working full time and occasionally FIFO as well as part of my job and its just getting too time consuming to run anymore.
    I have been toying with the idea of selling 80% of the business to an enthusiastic operator who can implement my plans for future expansion and stay on only as a consultant. What do you consider to be the pitfalls with this approach and can I build in any protection to ensure that if the purchaser fails to run with it, I can do something about it?

    • flipfilter

      Hi Paul,

      That’s a great question. Firstly, congratulations on what you’ve achieved. It’s not easy to run a business whilst working full time.

      Much of this answer is contingent on how you’ve setup the business legally and hence how you can sell it. I’m based in the UK and here things are slightly different to the US, so I would advise speaking to your accountant or someone with more local knowledge first.

      If you sell the 80% by way of voting / controlling shares, then there’s a good possibility that you could be ‘pushed’ out of the business once it really starts to accelerate, and often after the advice you’ve given has been implemented. Even just an informal agreement comes with the problems of working with someone that you don’t necessarily know; you’ll inherit most of the issues that come with failing partnerships like who has final say in a disagreement.

      I’d say there’s little you can (realistically) do in terms of safeguards, especially if the purchaser is paying the capital all upfront and owns the majority of the business. IMO, it’s usually better to make a clean break and move onto another project.

  • http://www.webflipcowboys.com/ Daniele Besana

    Very interesting Justin!
    Personally I like the approach: start small, learn, sell and re-invest in something bigger.
    It’s the only way of learning more and more reducing the risk of burning ones fingers… especially if done in parallel with a portfolio of websites.

    On the other side, I think that there are risks associated with every website acquisition that should not be underestimated.

    What’s the % of “bad” website acquisitions in your experience?
    With bad, I mean underperforming, total scam or with higher hidden costs than expected.
    And does the % reduces as the transaction value goes up?

    Thanks!

    • flipfilter

      Hey Daniele,

      I’ve rarely had a bad purchase (2 or 3 from memory that lost out in the SERPS after algo updates) but then that wouldn’t be a realistic percentage for anyone else as I tend to play it safe by only buying sites that meet quite a strict criteria.

      I would say the % of ‘bad’ purchases decrease as the transaction value goes up. In many cases, the more you spend the more history you tend to have available, and on the whole, good history tends to help guarantee the stability of an asset.

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  • http://victorstuff.com/ Victor Balasa

    I get asked so many times why I’ve sold my businesses. You’ve answered the question precisely with your post. Next time I get asked this stupid, lame-ass, non-entrepreneurial question, I’ll redirect the idiot wanna-be entrepreneur to your post. Thanks man.

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