Online businesses are set up for all kinds of reasons. An experiment, a weekend project or a genuine curiosity to see what’s possible. Many don’t take off, but some spark the imagination and grow a customer base. Once initial traction is found, further growth requires more energy. Some online business owners push through and scale, others lose interest in sustaining the business and look to exit.
Dominic Wells is the founder of Onfolio, which buys, improves and grows online businesses in the spaces of content, eCommerce and services. Wells has acquired over fifty online businesses in the past two years and his company helps entrepreneurs and passive investors capture returns not normally available in other industries. Onfolio raises investment to fund and accelerate acquisitions and is confident enough in its performance to pay out fixed yearly dividends.
An abundance of online businesses are available to purchase online, using popular marketplaces such as Empire Flippers, Flippa and Swift Exits. Here are three approaches to consider.
Buy and maintain
Capture excellent returns by simply purchasing an existing online business and running it yourself, with the aim of maintaining its profitability. According to Wells, the numbers stack up. “Online businesses are typically sold for around three to four times annual profits.” This means that from a pure investment standpoint, “if you bought one and maintained its profit by running it yourself, you would enjoy a 25-40% cash on cash return on investment, every year.” Compare this to property, for example, and it’s an interesting prospect.
If you have aces to bring to the table, this plan could be hugely profitable. A mailing list, a reputation, a knack for growing companies. An eye for detail could mean you make a few tweaks that improve the conversion rates of the site. Capitalise on a bored owner by spotting things they missed, reinvigorating the online business and reaping the rewards of doing so. Even by just maintaining the profits, you’ll be clawing back your investment.
However, this strategy isn’t for newbies. “The problem most people face is competency risk. They don’t know how to run an online business, which makes the ‘maintain profits’ part easier said than done,” said Wells. There might be nuances that the previous owner didn’t let on, or the market might be changing quickly. Google Adsense, affiliate links and ecommerce are fast-moving entities that require effort just to maintain. Staying the same might be a full-time job.
“This is a very active investment,” added Wells, “while most people prefer something passive.” The active nature of buying and maintaining an online business reveals why they “only tend to sell for three to four times profit rather than significantly more.” If an online business can be bolted on to an investor’s existing business, the gains could multiply. But making a success of an online shop, platform or content site is a dark art role to which amateurs need not apply.
Buy and outsource
A less active option is to buy an online business then hand it over to a professional to run. Wells explained that “hiring an operator to run the business for you means the returns should still be around 20% and far more passive.” A good operator will make sure your business stays alive and even grows. They should know how to avoid common online business pitfalls. The operator is likely to run a portfolio of sites, with member benefits including expert knowledge, shared networks, similar audience profiles and economies of scale. “You could make your money back in less than five years, and after that you’re winning indefinitely.”
Running the online businesses of business owners is now a business in itself, Wells advised. “There are an increasing number of operators who will turn an active investment into something passive.” Whilst it reduces the returns, “since they don’t work for free”, they should grow the business so they easily cover their costs. “Even if they only maintain it, the margins are still attractive.” But what if they don’t? What if Google changes its algorithm, the previous owner worked more than they let on and the hired operator runs it into the ground? This option, whilst passive, is important to get right. Delegate, but don’t abdicate.
Invest in a fund
A third way to benefit from online business acquisitions is to invest in a fund that buys online businesses. “This offers diversification and could bring between 20% and 30% returns in a good year, albeit with less control,” according to Wells, who explained that “this market is in its infancy, but the opportunities are huge,” and whose company pays a fixed twelve percent yearly dividend.
Most funds will disclose their financial records as well as a list of businesses on their books. It might mean that investors can leverage their other assets to grow the businesses further, for example that mailing list, extensive network or reputation that we mentioned earlier. It reduces admin and business running headaches down to zero, since someone else owns them, but limits the rewards accordingly. For someone wanting to scratch the itch of running an online business, it won’t cut it. For someone looking purely to make a return, it might work out
Wells put investing in an online business fund forward as an investment option that stacks up next to property, stocks and shares, especially whilst the market is relatively new. “Financing options and leverage are still in their infancy, which gives power and opportunity to people who have the cash to invest.” Plus, the cost of entering the market is tiny, since the fund takes care of the administration and due diligence required for sourcing and purchasing online businesses.
But whilst you won’t need to carry out due diligence on additions to their portfolio, you will need to do some vetting. Investing in a fund means you place your trust in its managers. You trust that they have their finger on the pulse of market changes in order to protect your investment. Their track record is important so research on them is paramount,
With all investment decisions, risks must be considered carefully and anyone planning to invest should seek proper advice and be prepared that they could lose everything. But for business owners looking to generate return on spare cash, buying or investing in online-only businesses is an option worth exploring.