If you’ve been looking around the web, you might have noticed a large number of people enthralled in the business of website flipping. That’s because buying websites can be a really profitable venture. As you’ll soon find out, many websites are valued below their true monetary worth, generally because of the element of risk involved when compared to traditional businesses.
Still, when you compare a good online business to a brick and mortar establishment, the differences are hardly significant. Both types of businesses can turn in a good profit every month – and depending on the revenue model, this profit can be sustained. So the best approach when you contemplate buying a website is to think of it as any other business.
Why should I buy a Website?
First, let’s assume that that you have some money stashed away safely as you look for a worthwhile investment. You have the options of buying real estate, a small business, or a website. Now let’s peek into the returns you should expect.
If you buy real estate, maybe a house or an apartment, you’ll probably rent it out for about 1% of the price you bought it for. That percentage could be higher or lower depending on the market forces in your region, but 1% is still a good estimate. A $100,000 apartment would bring returns of $1,000 a month or $12,000 a year. That means it’ll take you at least 8 years to get your money back.
There are expenses too, like tax, repairs, and insurance and mortgage payments. So in the end, your return on investment in the property will be in the region of 5% a year. Even if the house were to appreciate over the years, the ROI would still not grow by a significant margin.
If you buy a small business, you should expect returns of about 33% a year if you bought it for a 3x multiple of its earnings. This figure could still vary dramatically depending on a number of factors, including your knowledge or management skills in the industry.
What if you buy a website? The good news is that most website owners would be willing to sell their businesses at a lower valuation compared to other businesses. From a neutral perspective, you’d expect a website to sell for 1 to 3 times its annual profits. If it’s got a really good business model, the multiple should be 3. But that’s scarcely ever the case.
Take a look around at what some websites are selling for. Some go for as little as 6 times the monthly income, while many others fall in the region of 12-24 times that. Compared to most traditional businesses, this is a much lower valuation and it means you can recover your money in a shorter period.
Let’s take an example. If you bought a website that makes $1,200 a month for $14,400 (1x multiple) then you should be able to recover your investment in just one year – that’s 100% ROI! And the beauty of the web is that you can add a little extra effort and dramatically improve the ROI, which brings me to my next point:
Online Investments aren’t just about ROI
Real estate investments may be safer, small business may also be less risky, but web businesses beat them hands down when it comes to scaling potential. Imagine buying a website that makes just $300 a month in profits, and then turning it around to make $1,500 in profits. You’ve increased the value of the website five-fold, which means that you can sell the web ‘property’ for 5 times what you bought it for.
That’s what website flippers do; they buy underperforming websites, revamp these properties (real estate style) and sell them on 6 months later for several times the money they bought them for. Of course, not every story is a success story, there’s quite some level of expertise needed to pull this off, but nothing that you can’t learn.
But even if you are buying a website without any plans to sell it, you can still do a pretty decent job of turning its fortunes around. A website business probably has greater potential for growth – it all depends on how good and dedicated you can be to improving and promoting it. The real question is, can you handle it?
Karl writes for valuator.com.au – click here to learn more about why you should buy a website, but making sure you have the right value first.
Comments are closed.