Are You Thinking About Buying A Website?
Read This Article And You Might Save $1000's of dollars
By Garnet R. Chaney
Last update: April 2004
This article discusses at least 6 hidden dangers of buying websites, and gives you at least 10 ideas to help you get the best deal when buying a website
Talk About Events Shaping the World Wide Web Today
Subjects > Computers > Internet > Web > Web Culture Discussion
By Garnet R. Chaney
Q. I am doing pretty well with my current websites, and I am thinking about expanding by buying websites from others. Is this a good idea?
A. Big companies have mergers all the time. I thought I found a website the other day where it looked like the company had gone out of business, their website was totally down. I did some research and discovered messsages talking about major layoffs, and even references losses due to 9/11. Later in the day, though, the site was back up, and I discovered other messages saying that despite raising millions of dollars to support their site, and burning through all the money, and having many people continue working for free, in the end they sold out to a bigger company.
Probably the trickiest part of buying a website is coming to some value that you can agree on with the webmaster. In the go-go days of the dot-com boom it was easy to give huge valuations to sites. I sold a large site once that had a proven value of at least $15,000,000 by every dot-com valuation metric in existence then (except for revenue!) However my buyer knew that I'd created the site in my spare time over a couple of years, so he wasn't willing to pay that much. But the buyer did pay an amount that was many times the salary I made as a Vice President of a (now defunct) dot-com during the same period as when I was making the site that I sold.
If you are looking at buying someone's hobbyist site, usually a webmaster who has been building a baby like that will want much more money for their time than you will feel it is worth. I've always liked the multiple of revenue model for buying things, but they may be insulted by an offer like that if they've not been very devoted to promoting revenue.
Yesterday in some searching I came across an interesting website, and I decided to research the owner of the website. I came across a post from 2000 where this owner was trying to sell their domain name on a domain name sales discussion group for $998,000. They had a site that could have been a good money maker back then. It was collecting money from subscriptions to a private area, and they claimed they had a lot of good will built up.
However, the owners name is still on their site, it doesn't look like they managed to sell it. And, although sites of that type were popular years ago, today there is a huge glut and most old sites I've seen of that type have since closed down because of the oversaturation in that market.
So although I doubt that website was generating $200,000 a year, in order to have a 5x revenue valuation of a million, back in 2000 it might have made sense to spend that kind of money. However, the new owner would have been buying the site only about a year in advance of a giant drop in revenues for that kind of site.
Also, from what I could see of the site, it looked like that site could have been cloned with less than $10,000 in purchased content and less than a month of graphic design and web design time. It's hardly worth paying a million bucks for something that can be so easily recreated.
Many experts at web valuation don't recommend paying more than 5 or 6 times the monthly earnings of a website. There is just too much flux in the web traffic market to justify anything more than that. Some of my clients have owned sites that were popular, generating a hundred or more real emails a day from users with praise and questions. Then because of a change in some search engine policy, their traffic level dove from millions of hits a month down to just a few thousand a month, due to a change in alliances between search engines.
In one case, one of my clients experienced this back in 2001 when Inktomi changed to be a pay-per-click provider. They were providing the behind the scenes search database to a number of web portals. When they contact him and he refused to pay them almost 30 cents a clickthrough, his traffic plummeted from millions of visitors a month to just thousands. And the drop happened in just two days, as he lost traffic from several portals simultaneously! Even Google, who claimed not to have an alliance with Inktomi, started sending less traffic at almost the same time.
In other cases, a site experiencing traffic rot can take a month or two to lose 90% of it's traffic.
Some problems you could be buying yourself when you buy someone else's website:
- Copyright violations - Where did the content come from?
- Are there any pending lawsuits, DMCA complaints, trademark violations, or other clouding of the site and it's content.
- Lack of transferability of merchant accounts used for subscriptions could force you to ask all the members of the site to re-sign up. You might run into real problems with this.
- Privacy issues regarding collected personal information.
- Problems with unlicensed scripts or programming, and license restrictions on transfer to a new owner.
- Possible problems with taking over the existing hosting account.
So, if despite these problems, you still want to expand by buying someone else's website, what are some tips to help you do this?
Here is a short list of tips to help you buy a website:
1) Don't overpay for the site. Try to pay a multiple of just a few months of their historic earnings. Only in the rarest of circumstances should you consider paying a price of more than a years earnings.
2) Make sure that any earnings you are shown actually come from the site you are buying. Some affiliate programs that the webmaster is making money from could actually be having traffic driven from multiple sites owned by the webmaster. Request a new and separate tracking id be setup for that site for a month, and monitor it carefully.
3) Realistically assess the total content on the site, and how long it would take you to build a clone of the content. For example, if you can write 40 pages a day, and the site is 400 pages of good content similar in quality to what you write, offer 50% - 75% of what you would consider a good income for 10 days of your own time.
4) What kind of content is on the website? If it is just a script echoing affiliate content from somewhere else, it might be cheaper to buy the script and build your own clone. Check carefully in the costs to buy your own copy of any scripts used on the site.
5) If you don't want to take over their existing hosting agreements, and are thinking about transfering the site to your own hosting, make sure there are no difficult to support technologies that might make such a transfer impossible. For example, you probably won't be able to easily transfer a ASP or a .NET site hosted on a Windows server over to your own Linux based server.
6) Do some investigation to make sure the site has not been associated with spam. Check their IP and domain name on a number of the spam black lists such as SPEWS and spamhaus.
7) Buy the site the same way big companies aquire new properties: Offer the current owner stock in your future success. Offer the owner a smaller downpayment, and a percentage of your ongoing revenues. 15% of your next years gross earnings might be fair, and 10% of the second years gross earnings. Promise them 25% of the sale value of the site if you sell it within the next 4 years.
8) Try to independently evaluate their web traffic from sources like Alexa, Google, and other search engines. Ask them to let you put a traffic counter, that you control, on their pages for a month, to see where their traffic comes from. Check if your numbers correlate to their traffic stats during the same month.
9) Prepare a simple agreement to cover the transfer of the website, and all intellectual property associated with the site. Get a good intellectual property attorney to review the agreement, such as http://www.techfirm.com. When dealing with such agreement, simple is better, try not to put any terms in the agreement that you don't want to be shackled to. You might consider including a non-compete clause that the old website owners agrees not to create a clone of the site you just bought, or do anything to interfere or steal any subscribers you might be buying. Such agreements have to be for a limited period of time.
Finally, a time proven way to obtain new properties is from the "distress sale".
A motivated seller will often sell at a much lower price than someone who hadn't thought before about the idea of selling. Look for website owners who are tired of running of their website, and don't want to see their site die, but would like to have someone else take over the operation of the site. Show them the care you take with your own sites, and you might be surprised to own a cool new site for very little more than the cost of transfering the name using a domain name registrar such as [Go Garnet Domain Names].
Good luck, and please let me know if this article helps you successfully negotiate to buy a new website.
Garnet R. Chaney is a successful netrepreneur for over 10 years, and a small business owner, consultant, and software developer, for over 20 years. He would be happy to answer your questions about software and internet business. You can [contact him with your questions.]
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