Why To Consider Buying Websites (and Why You Shouldn’t Sell)
9 votes, 4.44 avg. tacos (88% full)

A Minor Rebuttal

I read Greg’s recent post that weighs the pros and cons of selling your website. While I agree with the points that Greg makes, I do think that there’s one extremely important factor that you should always take into account when selling anything, and his post failed to mention it.

But before I tell you what this all-important factor is, I’m going to tell you a little bit about myself and why I might be worth listening to.

A Little Bit of Background

I own WiredInvestors.com, a website that is dedicated to educating people about buying (and selling) websites. I’m a little bit of a finance nerd – I used to work at a bank as an exotics trader, and my degree is also in finance, so in many ways I view the world through green-tinted glasses.

About 8 months ago, I discovered the world of SEO, Niche/Authority Sites, and Internet Marketing in general. More importantly, I discovered places like Flippa & Empire Flippers where you could buy and sell sites. At first I was extremely skeptical – I mean, the rule of thumb of 20x monthly earnings that gets thrown around seemed absurdly cheap to me – that means that on average, these websites are returning 60% a year!

Despite my skepticism, I decided to give this site-buying thing a try, and thank god I did. To date, my first (and least successful) investment is on track to have an annual ROI of 63%. But beyond that, the more important takeaway was the lesson I learned: With discipline, good due diligence, and a little bit of luck, buying websites for investment purposes can produce returns that are frankly a little ridiculous.

That’s why I started WiredInvestors – I wanted to create a resource where people could learn how to approach buying and selling websites from an investment perspective, rather than just from an internet marketing perspective. I have a lot to say about due diligence, valuation, and why buying and holding is a better strategy than buying and selling. Which brings be back to my main point…

The Most Important Factor when Deciding Whether to Sell Something

So, what’s this crucial factor that I feel like Greg missed out on in his article?

Price.

You might think that this is a point that’s too obvious to consider. Of course you would take into account the price of an asset that you’re selling. That’s so obvious it’s not even worth mentioning!

While I agree that it’s obvious, I also think that it’s far too important a consideration to go unmentioned when buying or selling any asset, and people don’t put enough thought into it.

As I’ve mentioned already, I’m a bit of a finance geek, and pretty much all of my professional expertise/experience so far in my life has been in the finance industry. As such, I approach the world with an investment/finance mindset – and if there’s anything I’ve noticed about the web marketing space, it’s this:

When viewed through the lens of someone who understands the broader investment world, websites and digital assets are incredibly undervalued.

The Broader Investment Universe

When you take a bird’s eye view of the assets that are bought and sold on sites like Flippa or by brokers like Empire Flippers, it becomes abundantly clear that the asset class (websites/digital assets as a whole) are cheaper than pretty much every other asset class out there.

Think about the most well-known asset class out there – stocks. Historically, in the US, stocks have traded at a PE of about 15. That essentially means that if the company that you buy has stable earnings that aren’t growing or declining, it would take you 15 years to recoup your initial investment. A PE of 15 equates to an earnings yield of 6.7%.

Bonds are another well-known asset class. Interest rates right now around the world are at historical lows. I don’t really want to get into finance-jargon territory, so I’ll just say this – in the current investment climate, if you want to get annual returns of more than 5% with bonds; you’re going to have to invest in some pretty junk companies or countries.

Now, let’s look at the asset class that we’re all interested in – websites. While the valuations for websites fluctuate, the rule of thumb that Empire Flippers use is 20x monthly earnings. Generally speaking, the higher end the website, the higher the valuation multiple – some real online businesses like ecommerce or SAAS sites sell for 30x-35x monthly earnings.

Even if we take the highest figure – 35x monthly earnings – if we translate that into a P/E ratio that’s used in the Stock market, we get a P/E of 2.92. 35x is on high end of website valuations – more commonly, you’ll see sites going for 20x-25x. That’s equivalent to a stock market P/E ratio of just 2.0 (or less).

My point is this: if we look at the digital asset marketplace from an investment perspective, pretty much every website that’s being bought or sold is incredibly good value when you compare it to the broader investment universe.

Sounds Great... What's the Catch?

Now, the argument above is a bit of a simplification, and there are definitely some caveats – here are a few of them:

  •  Websites require work – even the most passive website investment will require a few hours a month of maintenance.
  • Managing websites requires a specific set of skills that not everybody has. These skills take time and effort to acquire.
  • The whole marketplace for websites is unregulated and is full of scammers. You can mitigate some of the risk of fraud by buying and selling through a broker, but the risk still exists. It’s pretty much the Wild West. You’re not going to be able to sue a Russian scammer for selling you a dud website.
  • The lifespan of a digital asset is usually quite a bit shorter than that of a listed company. Chances are a company like IBM will be around long after your niche site about fishing rods has died. This is especially true if the digital asset in question relies on Google for traffic – everyone in the web marketing space knows that your rankings can get blown up by Google at any time.

It’s also important to know that if you’re buying and selling websites, your success or failure depends solely on yourself. There are virtually no protections or guarantees. A company listed on the stock market is required by law to report their numbers truthfully, and while there is occasionally fraud, it is exceedingly rare in the grand scheme of things. The same can’t be said for digital assets. It’s up to you to protect yourself by doing good due diligence on both the website and the seller, and to make smart investment decisions.

That being said, even taking into account all the potential pitfalls, I still believe that digital assets are basically too cheap to ignore when compared to the broader investment universe. This is doubly true if we take into account the current investment climate (relatively expensive stock market valuations and a absurdly low interest rate environment).

Now We Come Full Circle – Why You Shouldn’t Sell

Since I believe that (on average) websites are priced cheaply and are worth buying, it follows that (on average) I don’t think they’re worth selling. Now, that’s not to say that you should never sell a website. I think that selling a digital asset can be appropriate in the following situations:

  • You have limited time, and you need to prioritize working on larger, more important sites (or other stuff in life) rather than maintaining smaller sites in your portfolio
  • You need the money from the sale for personal reasons or in order to invest in something more attractive
  • The site you’re selling carries a level of risk that you’re not comfortable with (e.g it was link built with PBNs or black hat methods)
  • Someone makes you an offer you can’t refuse

All the reasons above are legitimate reasons to sell. I’m not saying that nobody should ever sell a digital asset. However, I do think that for many people who are in the IM Space, selling is the default option - and this shouldn’t really be the case.

From an investment perspective, holding on to these cashflow positive digital assets makes much more sense than selling them at current valuations.

So, What Should You Do With the Extra Dough?

If you own a few sites and you have a stream of cashflow coming in, what should you do with said cash that you get from holding on to the asset?

The first thing I’d say is that if you don’t have a good place to put the extra money, that’s even more of a reason not to sell. If you don’t know where to allocate cashflow that’s coming in on a monthly basis, chances are good that you wouldn’t know what to do with the proceeds from a sale either.

There are a number of things you can do with monthly cashflow – here are a few ideas:

  • Reinvest in your sites – You can choose to invest in more/better content, work on traffic, try different monetization options or improve conversion rates. There are a number of ways that you can improve a website, and in many cases, the tasks involved can be outsourced or simplified with the right tools. As an example: On one of the sites that I owned, I outsourced an eBook that ended drastically improving the ROI of a site.
  • Buy new sites – On the one hand, you want to diversify a little so that you’re not relying solely on one site for income. On the other hand, you don’t want to spread yourself too thin. If you feel you have the time and energy to add another site to your portfolio, you can save up a few months of earnings and try to buy another site. However, what you absolutely should not do is rush a transaction because you’ve allocated the cash already. Wait for the right opportunity to come along before you buy – avoiding losses is half the battle, and a hurried buyer is not a careful buyer.
  • Diversify into other assets – While I believe strongly that websites can be great investments, a portfolio of diversified assets is probably a good idea for most people. Having some of your money in stocks, bonds, or real estate can help soften the blow if a site you own gets crushed by the latest Google update.
  • Hold it in the bank – This is pretty self-explanatory. While it hurts not getting a return on your money, having cash in a bank account is virtually risk free. Having a good amount of cash stowed away in case of emergency is generally a good idea, especially if you’re working on your online business full time.

To Sum it All Up

So, next time you’re thinking about selling a profitable website, stop and consider the broader picture. Does a sale make sense when you compare the digital asset you own to other types of assets available to you? More often than not, the answer will be no.

Instead, (if you have the funds available), you should seriously consider buying websites as investments. The market for digital assets is dirt cheap right now, and while that’s likely to change in the not-too-distant-future, at the moment, you can still take advantage of the opportunity to earn huge returns on this underappreciated and undervalued asset class.

If you’re interested in learning more about buying websites for investment purposes, here are some good resources. In my opinion, due diligence is the most important skill when it comes to investing in digital assets, so many of the links below relate to due diligence:

Want to Learn How to Become a Successful Website Investor? Sign Up for the WiredInvestors Newsletter Below:

Wired Investors

Buy And Sell Websites: Online Investing Explained Part 1 & Part 2

How to Find Established Sites for Sale - Live Casy Study Part 1 & Part 2

Flippa

Flippa Blog - Getting Started

Flippa - Guides for both Buyers and Sellers

Empire Flippers

Empire Flippers - Debate: Buying vs Building

Empire Flippers - Buyer’s FAQ

Empire Flippers Blog

Other Resources:

Experienced People - Guide to Buying a Website

Flipfilter - Advanced Due Diligence Guide

FE International - How to Value a Website

Why To Consider Buying Websites (and Why You Shouldn’t Sell)
9 votes, 4.44 avg. tacos (88% full)
  1. Really great post. I’ve thought this for a long time and have seen people make investments into websites and turn a profit very quickly. I would point out that many sites are selling far above the 35x monthly earnings that you cited as a high estimate. In fact, I’ve seen sales going for upwards of 80x monthly earnings. It’s all about selling a real business rather than just a website. Obviously, with a large amount of the websites that are sold relying 100% on Google to send them traffic the business model is extremely risky especially given the recent climate for algo changes. I would argue that this is the main reason for “low” prices of websites.

    • While I don’t particularly make the distinction between ‘real business’ and ‘just a website’, there are certainly web assets that get valued higher.

      I mean – if you think about it, a companies like twitter, instagram, etc. are really just websites + apps, and we all know how silly valuations can get for those types of companies.

      In the marketplaces that I’ve been keeping an eye on, valuations have been roughly in range that I discussed, although I’m certain on the higher end, valuations get even higher.

  2. Although the ROI might be much higher than for example real estate the risks are much higher as well.

    It only takes one pathetic competitor that blasts your sites with thousands of spammy links and tanks you into oblivion, this is a huge risk when dealing with virtual real estate, unless the site has such authority that it can stand some blasts, but that’s not often the case, unless you talk about sites that cost hundreds of thousands of dollars.

    As you already laid out, there are many more risks around the corner and a small mistake is easily made when purchasing a site, especially with the huge amount of deceptive sellers that become smarter by the day.

    When you take all those risks into calculation that everyone will run into at some point the ROI drops significantly.

    For example I could buy a house for $100k and rent it out for $1k/month if I buy smart, that house will always be there, and I can always sell it for $100k again at some point, or likely more due to inflation, virtually an endless ROI. Let’s say we rent this house for 30 years and for the ease of things we ignore maintenance costs (virtual real estate has maintenance costs as well so). That’s 30 years * $12k/year = $480000,- + let’s assume the house is worth $200k at that point = $680.000,- return on a $100k investment

    Now buy a website for $100k, under the 20* monthly rule, that means the site makes $5k/month. What kind of lifetime ROI would you expect from that? To make $680k from this 5k/month earning website it would have to keep earning that amount of money for 680k/5k month = 136 months or more than 11 years.

    That’s a long time where a lot of things can go wrong, with the house you’re 100% sure it rises in value, if it burns to the ground you can have an insurance to cover your losses, with a website it’s like the wild west. The house you don’t have to build out, it will still keep earning the same money, not so sure with a website.

    You could argue a website can make more money over time, so can a house if you do decide to build it out, but once again at a much lower risk.

    I wouldn’t recommend investing significant sums of money in websites, keep that for “real” estate, unless you have a solid plan to grow the website in a fast way and resell it, now that would be a smart investment imo.

    • Negative SEO of the type you’ve mentioned is not all that common outside of a few niches (spammy niches that are dominated by blackhats), and in any case, the best web assets are the ones that have other ways to drive traffic outside of relying on search engines.

      In any case, this risk theoretically exists with actual real estate as well – if you buy a house in a bad neighborhood, vandalism and other kinds of crime are real risks that can devalue an investment property.

      That being said, yes, investing online definitely riskier than some other forms of investing. That being said, there are a couple of flaws in the comparison that you made.

      The first and foremost is that you’re forgetting about what Einstein called the eight wonder of the world – compound interest. But I’ll get to that at the end of my reply.

      With regards to your real estate numbers (below arguments reference the US property market)

      1. 12% a year yield on a rental property is on the high end.
      Average gross yields sit at about 9% at the moment, so I agree with you that if you can find properties at 12% consistently, that means that you can consistently beat the market and as such Real Estate is definitely the investment you should focus on (because you’re good at it). Also, you should note that in the real estate market, higher rental yields correlate with riskier purchases (this is the case with almost all investment markets). E.g, you can get super high yields in some places not because the rent is expensive, but because property values are plummeting.

      2. Maintenance costs for a rental property like the type you’re describing are significant – much greater than the equivalent maintenance costs of a website. Zillow estimates operating expenses at about 35% of gross income, so that’ $350 a month. I’ll just use this figure – that brings your monthly down from your already-high estimate of 12% to 7.8%.

      3. On your third calculation, you underestimate the likely valuation of a 100k house in 30 years – again, this is probably because you haven’t taken into account compounding. If you buy a house today and sell it in 30 years and only net $200k, then you’ve probably lost money to inflation. Historically, US house prices have appreciated at about 3%-5% – assuming this trend continues, (using 4% as an example), your house should sell for around 325K in 30 years.

      But in any case, this whole argument is flawed because of the lack of appreciation for the power of compounding.

      Assuming you find a way to reinvest your earnings into real estate over time, using my adjusted numbers for the real estate case,

      4% a year in appreciation + ~7.8% a year in rental income –> 11.8% a year over 30 years.

      = 100K * 1.118^30 –> $2.84 million in 30 years. This is the real figure that we should be comparing to, not the 680K that you stated, which was missing out on the effect of compounding.

      Compare that to websites – using 20x –>

      5K a month = 60K a year –> 60% yield

      100K * 1.6^X = 2.84million –> X = 7.1 ~ 7 years (http://www.wolframalpha.com/input/?i=100000+*+1.6%5Ex+%3D+2.84million)

      With that somewhat absurd math out of the way, here area few points i want to make:

      1. Website investing is riskier in general. This is definitely true – but like all things in life, risk can be mitigated with knowledge and skill. For someone who has a vast knowledge of online business but no experience in real estate investing, does this remain true? One of the reasons why real estate is less risky is because it is better understood by the average person.

      2. It is absolutely false that you can be 100% sure that real estate values will rise. Tell that to people who owned homes in Detroit. Real estate values as an asset class increase over time (given enough time), but its silly to say that an individual property will rise in value 100% of the time. 100% is not a number that exists in investing.

      3. Yes, website investing is like the wild west. Some people will do really well, and some people will do really badly. I make this comparison pretty frequently on my website. It’s a risky business, and if you take a wrong step you will lose money.

      On the other hand, I don’t agree with your recommendation that people should instead invest in real estate. If you want a hands-off, safe investing approach, I highly recommend the Boglehead method. This is the perfect investing approach for anyone who doesn’t want to think about investing and wants a safe, secure way to manage their money with fuss or hassle. Real Estate investing is a pretty risky venture in itself and should not be the default for the average person.

      I wouldn’t recommend investing significant sums of money in websites, keep that for “real” estate, unless you have a solid plan to grow the website in a fast way and resell it, now that would be a smart investment imo.

  3. I am pretty torn about this piece – there is no doubt that George has pinpointed the striking differences in valuation between traditional asset classes and digital assets, mainly overlooked due to the mismatch in mindsets between financial investors and internet marketers. But it is for this exact reason that educating prospective buyers will rapidly shorten the window of opportunity presented to us and push up the P/E multiples (which will effectively reduce the future investors’ ROIs)! Those that have sold may realize in hindsight that they have sold their assets too cheaply in the near future.

    Setting the selfish desires to keep such gems to myself aside, this article gives a great perspective regarding the valuations of the digital landscape, as well as the steps necessary to be well-equipped to capture this opportunity.
    A commendable effort in educating current and prospective investors alike – rock on!

  4. Great post George. I made the mistake of selling a website I shouldn’t have a few years back. I sold it for $7,000. Sometimes the small chunks of money are hard to resist. But now the site is making way more than it was when I sold it. Right now I am more interested in building up my portfolio over time than making a quick buck. If you do it right, websites can be way better than rental properties :)

  5. In my experience its been much more profitable to clone sites and improve them rather than buy them outright. Most marketers are lazy, create second rate sites that they somehow push up with offsite signals (90% of the stuff you find on Flippa/Broker sites) It’s generally inexpensive to duplicate their efforts and expand on them from scratch than to pay them 12-30x.

    You usually won’t see instant ROI, but 6-12 month marks you should be able to recreate success or improve it if you’re a good marketer.

    • Hi Tim,

      Cloning sites is a valid strategy of course, but for lots of people, the sandbox is a major hurdle. I reckon with a similar skillset, buying a ~5k site, making improvements, building traffic etc and selling after 12 months will yield a greater absolute returns (after accounting for all costs) than building a site from scratch and selling at twelve months. Of course, buying entails a much larger upfront risk.

      Also, buying sites gives more room for someone to focus on their area of expertise – etc. if you’re an SEO guy, you can buy sites that have weak SEO and make improvements. Same thing if you’re a conversion expert, a great content writer, etc. Whereas when building, you need to have a well rounded skillset with some knowledge in all of these areas (or have people one hand who can help).

  6. And right now i don’t know of any other asset class where you can buy an asset, spurce it up and hold for 3-6 months and resell it for double the multiple.

    I’m talking about the marketplace arbitrage than flippa/EP gives you.

    this does not include increasing traffic or visitor value before selling.

  7. I love the way how you argue! Matches exact my thoughts on buying/selling websites. I think this article is first of its kind I’ve ever read.

    Many buyers/sellers don’t treat the process like a business or never have heard about opportunity costs.

    Thanks for writing this great article.

  8. Something that’s been on my mind for the last few weeks has really helped me re-think some things. Great article! cheers.

  9. Great post George and I completely agree with you that the potential ROI is ridiculous compared to more traditional investment options. The risk is higher, but if you take the necessary steps to mitigate those risks, then there’s not much to worry about.

  10. I don’t know how i should think about websites like those amazon test niche sites. They seem to be new age spammy ad-sense seo websites. I agree with George Do, websites which depend on search engines are not sustainable in my opinion. You have this possible risk of losing 80% of your income over night just because google is in the mood!

    • I think Amazon affiliate niche sites can work as investments provided that you get good multiples and you have the technical ability SEO-wise to gauge the risk.

      So for example, I bought a site that I got for a 10x multiple – changed the layout a little bit in an attempt to improve conversions (the site design was awful) and the next month I doubled the money –> I basically bought the site for 5x.

      At these kind of multiples, I’m willing to take on an Amazon site with a dodgy link profile. What you don’t want to do is buy an Amazon site at 25x without understanding the SEO related risks. Amazon sites have a shelf life, and 95% of them use PBNs,tiered links, or some other non-white hat method of link building (because building links to review sites is really difficult).

      If you have the ability to gauge these types of risks, then you can make calculated investments and do alright as long as you don’t overpay. The issue is when people buy these amazon sites thinking they’re going to be around for the next 3 years and it gets penalized or something in 6 months.

  11. Nicolas Medina says:

    Great post! Like you, I have a financial background (I use to invest with financial options) and the ROI in IM is amazing still compared with a great return in the stock market (20%).

    I also agree that you pay this extra return with higher risks, but they can be mitigates if you know what you are doing. I think that one important thing to do is to diversify you monetizations methods and traffic sources. The ultimate goal would be to create a brand a dont dependon any third party traffic source (google, facebook, etc. )

    I will definetily start reading your blog!

  12. I agree with the point of putting money aside in the bank for bad days. I do save 70% of my income just incase Google blows me up, with these savings, I can easily brake even and create / buy a new asset to keep the cash flowing, If you have no money in the bank, ur in trouble.

    • Definitely true. Feeling financially secure is extremely important to being a good investor. If you’re not financially secure, it’s much easier to panic in a bad situation (e.g a market crash or similar). If you are financially secure, you have

      1. The peace of mind to wait out the storm and

      2. The opportunity to capitalize on great deals.

  13. Buying a website is a risky job especially if the investment is big. My first experience was a big fail. So after some time spent on Flippa I found out about a site called Safe Site Buying which I heard that was created by super sellers from flippa and got a coupon code “ssb20” which was supposed to give me a huge 25% discount. This deal looked pretty good to me so I tried it. They provided me with a full report, 20 pages long and with their own
    subjective opinion. They were very helpful. When you want to spend more than $2-3000 on a website this service is a must if you ask me.

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