How to Buy a Quality Business on Flippa
I heard recently from the head of Flippa that my business partners and I had collectively bought and sold the most businesses by gross value. This was a surprise, as that’s not our day job, and we’ve done less that a dozen transactions. Our actual job is building SmartrMail.
Flippa is the biggest marketplace for buying and selling online businesses. We’ve used Flippa to help start businesses, grow our existing businesses, and to generate free cash flow as ‘side hutles’ while we were employed. We’ve done well financially from it: everything we’ve sold has been for at least 3x what we paid. It’s also taught us some important lessons on running and growing different types of internet businesses.
I’ve had friends often ask ‘how do I buy a website?’. So, for them and anyone else interested, here’s my guide on how we buy websites on Flippa:
1. Decide What Type of Business To Look For
First off, think about the type of business you might want to run. We’ve bought a range of businesses, from Design Blogs to Digital Template Stores, to Marketing Tools. Some are going to require more hands-on work to improve, grow and maintain. An eCommerce store will take more day to day running than a blog. But none of them are ‘passive’. All require effort and work to improve and maintain. My personal view on web businesses is if they’re not growing they’re dying, so you will need to always be actively growing your business.
Our personal preference is older, established websites that have an audience, but haven’t been given much attention from their owners. So they may have a steady (but declining) stream of organic traffic, or have an established customer purchase history, but haven’t been updated for a long time. We’re happy to buy old, ugly websites, as long as they’re on an easy to improve platform. In our experience, sites on platforms like WordPress, BigCommerce, Shopify, Magento are best as they can quickly be improved.
In eCommerce we tend to like digital goods over real goods as there’s no stock to handle. We avoid drop-shipping as it seems too hard to get good margins. Established blogs are great if you like and understand the topic. I’ll go into more detail around why we like blogs, and few ways we’ve quickly monetized blogs to 10x earnings, in another post.
It’s up to you what type of business you choose. We look at hundreds to find quality and value, and only buy businesses we can understand or confidently learn about quickly.
2. Search for Businesses at least 2 years old
To quickly weed out 90% of the junk and scam businesses, limit your search for businesses that are minimum two years old.
Does this mean you might overlook a good, young business? Certainly. But it removes you having to sift through the bulk of the silt to find a speck of gold. Most scammers or quick flippers don’t have the patience set up and run a scam website for more than a year. You can set Web Site Age in advanced search.
2. Understand Valuation Multiples
You’re buying a business, so you should understand the basics of how business is valued, which is Annual Earnings Multiples. If you’re buying shares of a public company on a stock exchange, you might pay 20x Annual Earning for those shares. That is, that company’s annual earnings are 1/20 of the value of the company. Public companies are considered a ‘safe’ investment as there’s a lot of information about them, their books are audited by a trusted 3rd pary, and there’s high liquidity as you can easily sell your shares.
Buying on Flippa is the complete opposite.
There’s an incredibly high risk of getting ripped off when buying a business from an online marketplace, so the value should be much lower than 20x earnings. When looking at a businesses earnings, make sure you use the last 12 months of data to calculate ‘annual earnings’. Often people will look at the last 3 months and multiply that by 4. That’s a mistake. It’s human nature to optimise for earnings when you’re selling a business, so the last 3 months earnings are likely jacked up (by any means). Also, just assume some costs have been stripped out to boost earnings, espcially any owner’s time.
3. Buy Value
We look to buy companies on a Price to Earnings (P/E) of 1x. That is, if you held the company for a year, with no change in current earnings, it would pay back the value of the purchase price. We’ve bought businesses on valuations between 0.8x-3x earnings before. Mostly we’ve bought at around 1x-1.5x.
Sometimes we’ll pay up to 3x on a business that has obvious ways to grow earnings quickly, or that can provide one of our other businesses with immediate earnings growth.
Mostly we’ll stick to paying 1x — 1.5x earnings. The risk of buying something worth less than it seems is so high that we’d prefer not to go over this. It’s better to miss out on something good that isn’t cheap than lose your money.
4. Set Your Budget and Earnings Range
So lets say you’ve set an earnings range of 1x-2x P/E. You can work out what Monthly Profit range to set on search by dividing your total budget to buy a business by 24 and 12 (1x-2x).
For example, assume you’ve got $2,500 to spend on a business. The Monthy Profit slider could be set between $50–250 Profit per month. If you pay $2,500 for a business earning $250 per month, that’s a P/E of 0.8x (great!). Paying $2,500 for a business earning $50 per month is 4.2x, which is expensive. Ideally you’d pay up to $1,200 max for a $50 per month business.
4. Search for a Business You Can Run
Ok we understand how to value a business, so it’s time to browse away. Look for anything that you understand or thing you could learn about. If you’re buying a blog or ecommerce site, it’s pretty easy to understand what you’re getting.
For example, buying a blog about something you’re already interested in means you can hit the ground running with new content, and new marketing, as you understand the topic, and the audience. Neil Patel wrote a comprehensive guide to building up your blog audience. Read it in a day and that’s enough to grow your blog. As you build your audience you can add different streams of revenue outside of just Ads, which I’ll go into another time.
The beauty of buying an established business, as opposed to starting one, is you’re getting many years of hardwork for not a lot of money. If you stick to looking at businesses built on top of one of the established platforms mentioned above, you can easily find people on Upwork to help with technical and design updates.
5. Understand the Technology Risks
If you’re buying a more complicated tech business, you need to understand the technology risk. For example, if you’re looking at a SaaS, you need to research the market, and the technology it’s built with. Understand the cost to continue development and support. Same goes for native mobile apps on iOS and Android.
If you’re a developer and you find a business in an area you understand, then you’re at a distinct advantage in assessing it. If you’re not technically minded, then I’d suggest either partnering with someone who is, or avoiding businesses that rely heavily on technical innovation.
6. Be Patient and Thorough
There are thousands of listings, but most of the businesses on there are junk. The rest are scams. Seriously.
Only a handful are quality, so deep research and patience is needed. Expect to be looking for at least a couple of weeks at new listings. I’d suggest creating an account, and saving your particular search. That way you’ll get send a daily email digest of new listings matching your search critera.
This is the most important step: the patience to look at hundreds of businesses and saying no quickly, until you find one that has met all the above criteria. It’s something Warren Buffet and Charlie Munger talk about a lot: doing nothing for a long time until they find something excellent.
7. Be Ready to Move Quickly
When you find a business you like, that’s priced within the P/E range you’re comfortable with, message the seller. Ask:
- Add you to their Google Analytics (you’ll need to give your gmail address) to verify their traffic sources.
- What’s their reserve?
- What would they do to grow the business?
Checkout the seller’s selling history, has the site been sold previously, if so what were the comments on it. Google the seller. Go to the website for sale, search around it, sign up, dig in and use it. Go to their social channels, check what people are saying about the business. If it’s selling something, buy something to see what it’s like.
If everything checks out, next set up a time to Skype/Hangouts call with the seller. Ask the same questions, reasons for selling, and make them screenshare and login to their payment gateway (PayPal, Stripe etc) and show you the actual earnings on the call. Do the same with the website’s admin panel, and email inbox.
Indepth research here is the most crucial step to avoid getting your face ripped off. Expect to deep research like this 3–10 times before you find and successfully buy a business.
If you start asking questions straight away, you’ll be prepared incase a business suddenly gets a Buy It Now price added. For businesses that have a high reserve price, just ‘watch’ them. It likely won’t sell, and if it does be thankful it wasn’t you that overpaid. Often first time sellers have unrealistic price expectations, and may relist a business a few times before it comes into a reasonable sale range.
8. Use Escrow to Buy
If you’re buying on Flippa, just use their Escrow services. Give yourself at least a 7 day escrow period. This means the business, email and social accounts will be transferred over to you on day 1, and you’ve got 7 days to check it’s legit before the funds are released to the buyer. Use the time to check the traffic (sales if there are any) is as it should be.
Woohoo, you’re now a business owner! Next step, growing your business…