As someone interested in business ownership and building income streams in the online space, which of these options would you choose?
- Buy an existing website that produces a consistent $1,000 a month in profit that cost $25,000 cash to acquire, or
- Start one from scratch that could take 6 months of your time, energy, and $5,000 in educational resources and marketing expenses to produce the same amount of monthly income.
This is a question many entrepreneurs and investors face and it can feel overwhelming, especially if you just starting out. In this article I’m going to discuss what factors to look at when making the decision of buying an existing website versus starting one from scratch as well as the pros and cons of both. I’m hoping you gain a better understanding of your own strengths and will be able to achieve your goals of online income. In order to make a proper decision, you should first look at three key factors of website ownership:
- Money to invest
- Knowledge and experience
Rarely do people have all three, if you do, consider yourself fortunate! Most people will be lacking in one department, so let’s have a look at how they play into buying an existing website or starting one from scratch.
Time – time is considered one of the most valuable assets in business. How one values that time is up to each individual but it is important to consider it as a cost when looking at starting a new website or acquiring one. Whether your number is $10 or $250 an hour, the time you spend working on something could be used to make money elsewhere. A seller of an existing business will let potential buyers know exactly how much time is required to maintain the business at current levels. This makes it easy to gauge how much time you will spend each week running it yourself or outsourcing the tasks and what you’ll have to do to grow it. With starting a website from scratch, the time required is largely undetermined. If the business fails you’ll have learned but you won’t have produced a new source of income.
Money – if you don’t have the cash, there are some creative options available to you, namely partnering with someone who has money, using other people’s money (friends, family, investors), or approaching a website owner directly and partnering with them for a percentage of the profit in the case you have experience to bring to the table.
Experience – I personally believe that the best way to learn something is by doing it. While it’s important to still learn the basics on paper, book smarts can only take you so far. It takes getting in the grind and learning from the daily challenges of business ownership in order to gain confidence and continue to move forward. Starting a business as well as acquiring one will help fulfill this department.
Note: the lack thereof of these factors are listed as some of the main reasons for startup businesses failing within the first 5 years as shown in this 2014 study done by Statisticbrain. I believe these factors also apply to taking over a business.
Source: Statisticbrain Now let’s have a look at the pros and cons of each.
Acquiring an Existing Online Business
The table below summarises some of the pros and cons to acquiring an existing online business.
Source: FE International
Pros in depth
The business model has already proven itself to be profitable – being able to hit the ground running is one of the most attractive things about buying an established business. From day one, the business will be making the new owner positive cash flow.
Improve the business from a fresh perspective – the seller may have focused on one type of marketing and have overlooked numerous opportunities to grow the business, simply due to a lack of knowledge, time, and resources that you may be able to take advantage of. I’ve seen an existing website bought for $3,000 dollars, the new owner made a few changes that instantly increased profit, then was resold a few months later for a $25,000 profit. This scenario is not that uncommon.
Gain existing assets – you’ll be taking over customer lists, supplier relationships, access to the software coders who worked on the product, etc. that can be leveraged for growth.
Increase your existing market position – if you already run a business and are looking to acquire a competitor or expand your offerings, you will not only be able to leverage your existing resources but significantly improve the profitability of your current business.
Spread out the risk through creative financing – in many situations, the seller of a business will be willing to accept an offer with creative financing such as an earn out, seller note, or a holdback. This allows a buyer to put down a percentage of the total offer upfront in cash and have the rest be based on the longer term performance of the business.
Gain first-hand knowledge and experience – jumping into a business in motion will force you to learn quickly. This can be a good and bad thing, depending on your learning style.
Cons in Depth
Takes a significant amount of upfront capital – most well performing web based businesses will go for around 2 to 3 times their most recent year’s profit totals. This means that if the business performs at the current levels, it will take 2 to 3 years to recoup your investment. For some, that is too much risk to handle. For others, especially if they know how to grow the business right away, it presents itself as an opportunity to make their investment back much sooner.
Risk of losing everything – just like any investment, there is a risk of losing everything when purchasing an existing business. Google has the ability to wipe out organic traffic overnight, long-standing suppliers can be lost, and reputations can be soiled.
Inherit previous owner’s mistakes – poor quality content and backlinks, lack of customer service, soured relationships with suppliers and other partners are all potential things that you will have to deal with when purchasing an existing business. It is always highly recommended to conduct proper due diligence to avoid purchasing something with insurmountable faults. Try to understand exactly what you are working with and you’ll be in a good position.
Starting an Online Business from Scratch
The table below summarises some of the pros and cons to starting an online business from nothing.
Source: FE International
Pros in depth
May cost less in the long run – it is possible to create a new website with professional design, outsourced content, and basic SEO for under $300. Add in regular quality content, more advanced SEO, and some conversion testing at $500-$1,000 a month and you could end up with a website that makes thousands of dollars in consistent profit after some time. For those lacking capital to purchasing an existing website, starting a site from scratch is very attractive, especially because the site can be sold for a lump sum gain after some time.
Gain first-hand knowledge and experience – win or lose at the game, you will always know more at the end than the start.
Full control over the quality – important things such as SEO, monetization strategy and testing, products and services, customer service, direction to take the business, etc. can be in your own control.
Cons in depth
Take a significant amount of time and resources – there are no guarantees of success in business, and this especially stands as true with starting a business from scratch. Something to consider: the easier it is to create something, the more competition there will be and the less likely you’ll make any money.
Risk not making any profit – you could spend one year building sites just to have none of them make any money in the end. I suggest having a backup plan in place i.e. keeping your day job while you build your side income up to match your current income. Some choose to go “all-in” and quit their job prematurely. This can help motivate someone to success, but it leaves you very vulnerable.
Now that we’ve looked at both options, determine what you have out of time, money, and experience and consider our recommendations for the different combinations:
For most of these, you may be able to get creative and partner up with someone who has what you are lacking. If you have experience but no time and money, find someone who has the time to search out opportunities that can also fund the purchase, or find another partner that has the funds. Use your experience to guide the business a long.
How Much Money Can You Risk To Lose and How Do You Value Your Time?
This question is important to ask yourself no matter what combination of time, money, and experience you have. If you are buying an existing website, think about what the seller has put into it to get it to this point and what you’d have to do to recreate that income. If it makes sense for you to spend the money to surpass the hassles of starting from scratch, ask yourself how much money you can risk to lose and go from there.
Neither option is inherently better than the other as they both can provide significant returns on investment. It all comes down to what works for you and the people you choose to work with.
If you have any questions regarding one of our listings, how to better monetize your website, or anything else, please leave a comment below or get in touch with us by email.