Of course, what we (as in all of you and me) should really do is pool our resources and create a bank. Then you can create money out of thin air and keep some of it. For instance, HSBC posted a $17,000,000,000 (Billion) loss and still made a profit. Of course, banks have all those pesky paperwork requirements, whereas websites have NONE. Small comfort, but I’m clinging to it.
Buying a business is buying a business, whether on the web or on the ground. Pretty much the same rules apply. You are buying an income. We did plenty of business brokerage during our wild and crazy Key West real estate period. If you are shopping for a business, there are some things you need to know.
And some things you need to have. You need time to shop and some money, of course. But to be really successful, the two critical items are patience and a sense of humor. Because when people are selling a business – brace yourself – THEY LIE about the value. They lie BIG. HUGE. Way bigger than home sellers. Most of them actually believe their lies. But there’s no getting around it and there is no reasoning with an overpriced seller. You can only offer what you think it’s worth, then walk away, ignoring the insults and tears being hurled at your back.
FACT: Four out of five businesses listed for sale never sell. Ever. And half the ones that do are because the seller found a buyer with more money than brains. This is proven by the FACT that most businesses don’t survive their first year, few survive their first five years because the buyer overpaid. If they started the business, they overpaid in bricks and mortar. If they buy the business, they overpay across the board. Mostly in bricks and mortar, but also in value.
Why do sellers ask so much? Because:
A. Sellers always, always, always think their idea, their baby, that they’ve nurtured and watched grow up, watched come to fruition and produce seedlings of its own, is worth way more than the math says it is. And,
B. The #1 thing sellers want you to pay for is their business’ POTENTIAL. A sane business buyer – that would be you – wants to buy the income stream the business is now producing. Today’s income. The seller wants you to pay for today’s income stream, plus some amount to account for all the money the business COULD be making with a little more time and effort. Your time and effort. Be prepared for this. I guarantee 90% of all business sellers expect you to pre-pay them for your future time and effort. Like that makes any sense.
Luckily, there are tried-n-true…
Formulas For Buying A Business
For a micro-businesses (those netting less than $50,000/year)
- If you are paying all cash, pay 1x annual net income. So if the business brings in $10,000/year, you’ll pay $10,000 cash. You want to make your cash back in the first year.
- If the seller is financing, expect to pay up to 2x net spread out over maybe two years.
- The more you put down, the less you’ll pay. So if you put down 50% and finance the rest, you might negotiate a sales price of 1.5x net income.
- We would never pay more than 2x net for any micro-business. For that top dollar, the numbers better be solid and the potential compelling.
For a business netting up to $500,000
- If you are paying all cash, pay 1x annual net.
- If you are putting down around 50%, expect to pay around 2x net.
- If you are putting down less than 50%, expect to pay up to 3x net.
- We would never pay more than 3x net for any business. Again, for that top dollar, the numbers better be solid and the potential compelling.
For businesses netting over $500,000, the rules change. You need a good buyer broker and a really smart accountant.
Hal, my personal biz brokerage guru, recommends this book. It’s an investment at $80, but if you are serious about buying a business, this information is invaluable.
If you stick to our formulas, you won’t go wrong, I promise. Just remember you are going to kiss a lot of frogs and some of them spit back in your face. Try offering a seller $10,000 cash for his business that is netting $10,000 but for which he is asking $50,000. People get offended, then mean. You need patience and a sense of humor. And you can’t take anything personally.
Buy a business you know something about. You don’t have to be a great chef to own a restaurant. You’ll want to know that the chef is the most important person in the room. Next to the person operating the register. You need to know your way around a kitchen. You need to know what good food tastes like. And that knives have to be sharpened everyday. You need to know the devil is in the details.
If you’ve always wanted to be/own a (Insert Dream Business Idea Here) , at least get a sense of reality about it. Read books, take seminars, visit like businesses and talk to the owners. For instance, people move to exotic locales (Key West, Costa Rica, San Francisco, Rehoboth Beach) with dreams of owning a guest house. We did that. It ain’t all a bed of roses. There are 24/7 "the customer is always right" dilemmas. Like at 2am when said customer is drunk and can’t find his room key. Or at 5:30am when you are making coffee and muffins, and Ms. Grouchy Guest is hovering, complaining to you about everything under the sun. Oh: and you need to not need to be alone. Ever. If you had a smile surgically implanted on your face, it would not be money wasted.
If you are buying an online business, you gotta be geeky because you are going to learn a whole new language. You need to know what a CPanel is, the basics of SEO marketing, you’ll learn the software that drives the website, you have to know basic html. The words admin, affiliate, hoplink, keywords, pay-per-click, traffic stats, viral marketing, php, ftp uploading, domain registration, yahoo credits, auto responders, opt-in… these all become part of your everyday language.
You can do it if you want to badly enough. It’s taken us two years of study to get far enough along we could even think about buying an online business. To make sense of the jargon, then believe we could make money. You could do it in a year if you really put your mind to it. Definitely worth the effort because you can work from home in your skivvies at your computer drinking sloe gin fizzes listening to Billy Joel. But, like learning a new foreign language, you have days (and days) when you think, "This ain’t ever going to happen."
The biggest roadblock is getting past all the people out there selling you their ebook or website or information and expertise on how to make money online. No mystery here: they make money selling information to you. Their Big Idea, the one you just paid for, is for you to make money selling that very same information to the next guy. Think Amway online.
What to Sell Online?
Your choice is Product (t-shirts or air-guns or books or software) or Information. Or some combination, either products with informational articles* to generate traffic. Or information that leads to product sales like the affiliate links I have on this site, or the products at the Dog Problems site.
*Your informational articles need to offer quality content. Useful content. You can’t just slam up any old paragraph filled with keywords hoping visitors find you from search engines. Well, you can. But if your content isn’t useful, those visitors will never come back and will never link to you from their website. And that’s where the gold is: thousands of visitors who’ve all told their friends how great your website is and who all link to you from their websites. They will only do that if the information is useful.
I generate very little (like $0) with my affiliate links here at Abroad. My traffic is pretty good, sometimes up to 300 visitors per day. But you need Big Traffic, in the 1000s per day, to generate sales from affiliate products. My topic, Costa Rica, is not broad enough (get it: "broad" enough?) to ever generate enough traffic to make money. I’ll just have to keep doing it for love and fame.
The same How Much formulas above apply to online or earth-bound businesses. If you are geeky and want to shop for an online business, there are a ton of places to shop. Start slow. Talk to the sellers.
Remember that if the seller is talking, he’s very very likely stretching the truth. Usually in a BIG way. And that he wants you to pre-pay for potential, for your time and effort. And that he thinks his idea is the best thing since sliced bread and you should pay dearly for the privilege of getting to own it.
Check the website’s traffic – there is no one way to do this. You have to check a bunch of places (I’ve put some suggestions below) and try to get the big picture.
To make any money online, you have to have either a killer product targeted to a broad audience (so that everyone who gets to your site buys at least one) or traffic in the thousands per day (so even if only one in a 1000 visitors buys, that’s enough to generate stable income for you).
You want verification of income figures. There will be an element of trust here, but if you check the traffic and can confirm to the best of your ability that they are indeed getting thousands of hits a day, if you check their WhoIs page and see that they’ve owned the website name for at least a couple of years, you’ll know they’ve been at it awhile. Or not.
Get geeky. Every website we’ve considered required having a clue about websites and how they operate.
These here tips are the veritable tip of the iceberg. If you have specific questions, please ask in the comments below. There is a lot to know, there are a ton of pitfalls and stumbling blocks. We never learned an inexpensive lesson. If we could save you from making one, that would be some gratification.
We aren’t raking in the big bucks. Yet. We bought two sites. One is not making anything, the other is bringing in coffee money. Both have good potential, all of which will go in our pockets if we work hard. We bought a website building package that so far seems good – excellent training if nothing else. And there are two other web projects in the works. As things "come to fruition," when we have something to show, you’ll see it here. More to be revealed…
Places to check a website’s traffic:
http://www.archive.org/web/web.php This is the Internet Wayback Machine. You can get a good idea of how long a website has been online. And what it’s been doing.
Check their pagerank: Download the Google toolbar – get it from Google.com. Then when you visit a website, you’ll see its pagerank. It shows up as PR4 or PR5, some number after PR. The higher the number, the better the ranking.
http://www.marketleap.com/publinkpop/ Check a website’s link popularity.
http://mikes-marketing-tools.com/ranking-reports/ Check a website’s search engine ranking.
http://www.virtualpet.com/industry/howto/wsreview.htm Excellent article on website review and evaluation tips.
Saratica, just curious, where did you get the formulas? Are they your own personal conclusions?
I’ve talked to umpteen business brokers and they all say that small businesses typically sell for between 3-5 times earnings.
I realize brokers have a stake in a higher sales price… is that the only explanation for 3x-5x?
Saratica, we are interested in your building a web site information. How do we contact you concerning more info?
I get all my formulas from Hal, he did all the biz brokerage. I read him your question and he chuckled.
His formulas come from his experience, both as a business broker and as a buyer and seller of his own businesses. He’s bought and sold at least seven since we’ve been married (1991) and there were a couple before that.
He highly recommends the Business Reference Guide, link above in the post. We have the 2002 edition and the 2007 is out. Perhaps businesses, like houses, have increased in price (I did not say “value” on purpose) during the bubble. But we stick by our formulas.
Not to cast aspersions on biz brokers but there is NO solid MLS data on sold businesses. No one publishes that data, it’s kept very private. So the only one who would have that data is a busy business broker. You are at their mercy.
Here’s the question to ask yourself: if you paid 5x earnings, that means you are paying the seller the next five years worth of income while you work the business for nothing. Why would you do that? In fact, you could probably start a lot of businesses for that money.
If you want a phone consultation, I’m happy to do it, but I charge money for that. If you want to ask a bunch of questions here in the comments, I will answer them for free.
I am not an expert on the website building program. We do not have a website up yet with it. But we’ve both been working thru it with the aim of having a $ generating site. It takes some time to get thru, very detailed. We recommend it because, so far, it’s been the most information and best training in one package that we’ve seen.
If you want a consultation, go here:
for instructions and we can chat today or tomorrow. Otherwise, just ask away – you can remain anonymous, I’ll answer what I know… either way is fine with me.
J, I’m going to assume you are looking at bricks and mortar businesses since you are working with business brokers? You are going to have it rough with biz brokers as you get more educated. First, lots of biz brokers just got in the business (like residential salespeople) because the market was going crazy. They are new, they don’t have enough experience to know what they are talking about. They’ve only worked in a rising market and certainly don’t see any correction. They will say that business brokerage is protected, that everyone needs work, blah blah blah.
But business sales are now starting to slow – commercial real estate has not crashed yet. But it will. You are likely talking to brokers still raking in the big bucks, who have been selling to buyers still in the throes of the good times.
Don’t overpay for your business, especially now. You have to choose your product carefully now, too. Be leery of businesses selling luxury items or things people don’t really need. Sell something people always need: grocery stores, reduced clothing stores, car repair shops… there are businesses that do well in good times and bad. Beer and cigarettes. Or have a business that caters to rich people, although there will be fewer of those around. Your business will depend on your population, type and number, who’s doing what with whom around you…
Good luck! We love owning a business. With the right one, you can have a living and have a life.
i totally agree about the idea of being an independent business owner. it is the only way to make some real money. i know a business where people are making 10,000 dollars a month and more -some are making 100,000 dollars a month! you have no overhead; the company takes care of that and your investment is only 140 dollars! compare that with trying to buy into a franchise like mcdonald’s. but, like any real business making real money it takes ACTION. sustained action for a period of time. anyway, check out the blog: massageincostarica.com for more info.
Boy, when you come back, you do it in a big way. Lots of info here. I’m sure it took LOADS of time to assemble. Thank you.
Glad to see you back. Teri
I’m curious what business you decide on. I’m assuming you’re also looking into starting stuff from scratch?
ps reading Crash Proof atm…
With my website building package (link above in the post), I’m starting an over-50 health-topic website. A very specific health topic – I will share it as soon as I have the website name. But it will have keyword-rich informational articles to draw traffic, then affiliate links and related products for sale for the actual income.
Why this topic? One of the best things about this website building package is that it takes you through some very specific, very detailed steps to help you find the topic that will work best for you. There’s more than one topic we could pursue, of course, but this will get us started.
I would never have picked this topic (when I do tell you, you’ll think “that’s boring”) but Hal and I brainstormed ideas we thought had merit and after doing the steps, this idea was the top choice. If this works, I’ll do others. But we both have this specific problem, everyone over 50 in my family has it, it is a huge topic when you get to be our age… and there are more people my age than your age these days, so hopefully plenty of people will be searching for this topic… we’ll see.
I will tell you the sites as they are ready, don’t mean to be so mysterious. But it’s the nature of the beast and I have to be mysterious until we have a handle on it. It’s our bread and butter quite literally.
I’m also going to put up a real estate referral website. There are some good deals out there and I can guide people to them. Plus there are vacation rental owners I know who have nice places and I can refer people there as well. For those who can get their money out of the states right now…
It would be very interesting what you guys come up with, and I hope you blog about the experiences (starting up, running) with the business as it gets going. Being as geeky as they come, I tried (and still trying) to run a web based business and its nooooot easy. Like you said, the key is traffic to the site, type of product, etc. Anyway, good luck and look forward reading about your business.
By the way, the number you put up are very accurate. Pay only about 1X annual earnings and never more than 2X. The only time you should be willing to go higher is if you see a potential growth in the business or the business generates a huge revenue but small profit with a potential to increase this profit margin. Anyway, just my experience in looking at buying a business, but you guys pretty much have everything covered.
Thank you, anonymous, for your comments on the numbers. It’s rare to hear agreement because we are usually the only ones saying what we are saying. The Key West biz brokers for the most part say all kinda stuff, but since they’ve NEVER bought and/or sold a business, they have no idea what they are talking about.
We will blog about the businesses. The one we are creating will take at least a year to build the traffic before any sales happen. The ones we bought already have traffic so are generating some $ already. From everything we know so far, traffic is the key, which is generated by having a product (whether physical or informational) that is in demand. Good luck!