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?
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: