There was an entrepreneur in the United States famous for appearing in TV commercials and declaring “I liked the product so much, I bought the company.” That same saying could apply to the website BizSugar.com and me.
Back in early 2008 I’d seen the site and fell in love with it — if you can fall in love with a website. The site’s owner and I had a sporadic email acquaintance for over a year. In early 2009 we happened to be emailing back and forth about partnering to cross promote our sites. One thing led to another, and I ended up offering to buy BizSugar.
In the spring of 2009 we closed the deal. Suddenly I was the proud owner!
From my perspective it was a relatively easy transaction. You see, in my corporate career I’d been in mergers and acquisitions. So I was used to buying and selling businesses.
Buying a small website is similar to buying a company – yet different. Let me share 5 lessons I’ve learned about buying websites, using examples from my experience buying BizSugar:
(1) Take your time with negotiations
Time lets both sides get to know one another and develop trust. The BizSugar negotiations took many weeks. Remember that sellers always think their site is worth more than you are willing to pay. You’ll need time to address what’s motivating the seller. A seller may need the money, or may have changed strategic directions – or have other reasons for wanting to sell. Once you understand the seller’s motivation(s), you are better positioned to negotiate and reach accord.
(2) Price it according to the value the site holds for YOU, not the seller
There are a lot of ways to value a website. Some purchasers value the existing revenues or cash flow. Some buy solely for the site’s rankings and backlinks. Some buy just to get a domain name.
I buy for future value, and I look for sites with untapped potential. I want to shape a site to my own purposes.
- Step 1: I estimate future earnings based on the assumption that I can improve it and attract sponsors (my main business model).
- Step 2: I price it based on “build versus buy.” Would it be cheaper to build it from scratch and get it to its current traffic and brand visibility? Or can I shortcut the time and expense by buying the site? I estimate what it would cost to replicate everything the site has today, and set my max price somewhere under that figure.
“Build-vs-buy” is not the same as how much the seller has sunk in the site – don’t fall into that trap. The seller may have been inefficient. Or today the site simply could be built less expensively (technology costs keep dropping).
(3) Do your due diligence, but be prepared for the unexpected
If you ran a large corporation and wanted to buy a business, you’d send a team of MBAs and accountants on location to do a due diligence investigation. But an entrepreneur’s economics are different. You’re pretty much on your own – no team, or none you can spare for due diligence at least. And you’ll have to do most of your investigation on the Web, without traveling.
Here’s how I did due diligence: I spent hours on the site clicking around and performing different functions. This helps you discover whether you’ll be buying a can of worms or uncovering a hidden gem. Evaluate:
- What’s the quality of the content? Is the site ‘clean’ or overrun with spam (a big problem for user-generated content sites)?
- Does the software work the way it’s supposed to, or are parts of the site broken?
- Is the site well optimized for search engines or is there low-hanging fruit you can improve?
Also, don’t forget Google. You can learn a lot just by going to Google and investigating the site. You’ll learn about the site’s reputation and the owner’s reputation, among other things. Be sure to check Archive.org just to make sure the site wasn’t a ‘bad’ site in the past. Finally, I suggest using the SEO tools by SEOBook to analyze the site’s link profile, competitive landscape and current search ranking situation.
Of course, be sure to ask the site owner for traffic numbers, email subscriber numbers and other key metrics. But remember — you never REALLY know what you’re getting until you own it. That brings me to the next point.
(4) Expect it to take twice as long and cost 3 times as much to operate the site
Being an entrepreneur means I am eternally optimistic … about everything. That includes my estimates about what it takes to run a website. I usually underestimate.
BizSugar uses an open source software platform called Pligg. Back in 2009, Pligg was not as mature a software program as, say, WordPress. Even today, few developers are expert in it. After several false starts that set me back a few months, I finally found a skilled PHP programmer. I then paid him while he learned the Pligg platform (now he’s an expert at it – and a fast learner, luckily). Still, it took more time and money than anticipated.
Operating a Pligg community is labor intensive. While the site owner does not have to create much content (users do), the community needs active monitoring daily. Eventually I ended up hiring a community manager – another expense I hadn’t fully anticipated. And we had to customize the Pligg software to filter the avalanche of spam that Pligg sites attract once traffic grows – yet another unanticipated expense.
Despite the unanticipated expenses and set backs, I was determined to make it a success. I adjusted on the fly and treated the expenses as an investment – because I had a clear future vision for the site. For that reason, it still was a worthwhile deal.
No matter what software a site uses, expect the unexpected.
(5) Use an escrow service and hold back money for a transition period after closing
When you close the transaction, use an escrow service such as Escrow.com. For BizSugar we did not use escrow, but that’s because there was a lot of mutual trust.
However, I did hold back 25% of the purchase price pending a 60-day transition period. You are going to need the seller’s cooperation after closing to answer questions and troubleshoot issues you don’t yet understand. You have to give sellers an incentive to assist after closing. In the case of BizSugar, the seller was kind enough to help even after I paid the holdback — just because he’s a stand-up guy. But don’t count on that.
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I hope these pointers help you should you consider buying a website. Remember, there’s always risk. But uncovering the potential of a site and seeing it grow is oh-so-heady. And rewarding.
What about you? Have you bought a website, or considered it? If so, what’s your experience been?
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