If you have capital available and you’re assessing your investing options, you might be thinking about real estate, bonds or other investments. But, have you ever thought about buying an online business?
In recent years, online businesses have become increasingly popular as an alternative investment class for investors.
Why buy an online business? There are many reasons:
- An online business is a great way to generate passive income. Many online businesses only require the owner to spend anywhere from 30 minutes to 10 hours per month running the business, all while yielding a return of 30-40%. In fact, lots of people find they can run an online business in addition to their regular 9-5 job if need be.
- Generally speaking, you can buy an online business for 2.5-3.0x (a 30-40% ROI) and they are becoming more valuable each year with the average asking multiple now 3.0x; in comparison to 2.4x in 2010. So the natural capital appreciation is very strong in addition to the yield.
- From a liquidity standpoint, the marketplace for buying and selling them is growing exponentially so you can buy and exit a business relatively easily and safely using a quality online business brokerage.
Comparing to other investments, as you can see from the table below, online businesses provide an opportunity for 3-5x the return what you could achieve from any of the other common investment options.
|Bonds (Fidelity Average)||0.57% (1 year) 0.63% (3 year)|
What type of online businesses could I buy?
There are many different business types, for example content (display advertising), affiliate, ecommerce and software. Most first time buyers invest in a content or ecommerce type of business as they offer a simple to understand, repeatable and scalable business model for offline investors.
The following are all of your available options:
This type of business is centered around the buying and selling of products and services over the internet. It can be done direct, meaning the seller is physically shipping the product to the buyer, or via dropship, where the storage and shipping of the product is executed off site by the supplier.
|Easy to understand for offline investors||Can be time consuming|
|Dropshipping = no logistical responsibilities||Relatively high costs compared to other business models|
|Can be very hands on|
A free, content driven business that is interspersed with paid advertising messages in the form of banner ads or other ad placements. In the fashion niche, an advertising business could be a personal fashion blog, with a large following, which is monetized through related fashion ads e.g. advertising J.Crew or Neiman Marcus.
|Simple monetization model||Earnings are sensitive to traffic|
|Low maintenance||Continuous need for fresh content to drive traffic|
|It is difficult to build a following|
Selling other suppliers’ products and services in exchange for a commission that is an agreed upon portion of the sale.
|High margin (80%+)||Product selection can be make or break|
|No product/service creation required||Building authority takes time|
|Relatively low risk||Reliant on 3rd parties|
A website is used to attract traffic and capture user information. This information is ultimately converted into leads and sold as a service.
|High margin (80%+)||Traffic and conversion rates require vigilant maintenance|
|Low maintenance||Always requires fresh and relevant content|
|No product/service offering = low barrier to entry|
A software product created by a developer, typically sold by the download or on a subscription basis. (e.g. NetApp or PTC)
|Good margin (60%+) and stable cash flow||Software updates require technical experience|
|Low maintenance – pending minimal update requirements||Risks of piracy or copycat companies|
|Technical customer support is necessary|
A business where users pay a subscription to access a web hosted software instead of purchasing it outright and installing it on their computers. SaaS is at the core of centralized or cloud computing with the aim being that users can run their computer tools as online rented products. (e.g. Salesforce, Bullhorn, Hubspot)
|High level of recurring revenue||Software updates require technical experience|
|Good margins (50%+)||Risks of piracy or copycat companies|
|Higher barriers to entry||Technical customer support is necessary|
Users are charged a fee on a consistent intervallic basis – daily, monthly or annually – to subscribe to a continuous product offering or service. (e.g. Birchbox, Dollar Shave Club, Netflix, Spotify)
|High level of recurring revenue||Strong digital marketing and customer acquisition skill-set required|
|Good margins (50%+)||Ongoing customer support|
|High barrier to entry once established||Competitive product required for customer retention|
If you’re not sure what is the best fit for you, take stock of your experience, skill set and interests. You can unearth the best model through our test.
Where to Find Businesses for Sale?
Once you have decided upon a specific model of online business, it is important that you determine a suitable investment target before you even start your search. After making a decision on what you intend to invest in an online business, it is time to determine what marketplace or brokerage option you are going to use to complete the purchase.
The three most popular routes to buying an online business are marketplaces, auction sites and brokers which are explained in greater detail below:
Online Business Marketplaces
This option enables buyers to look across the industry at a wide range of available listings. After doing their research, buyers are then able to request more information about specific listings. Doing this alerts the seller or designated broker of an interested party. Although the process of buying a business through an online business marketplace is fairly easy, the ads are typically only as credible as the brokers and sellers that are listing them on the marketplace.
Examples: BizBuySell, BizQuest, BusinessBroker
Online Business Auction Sites
Functioning similarly to online business marketplaces up until the point of purchase, online business auction sites act as the eBay of the online business-for-sale world. These sites typically have a very large number of users/buyers and execute a high volume of business sales due to the peer to peer nature of the site. Although quick and easy is appealing, there are some drawbacks with Online Business Auction sites. Being extremely easy for a seller to post an ad for an online business for sale, these businesses and sellers are often under-vetted and buyers have been known to fall victim to fraudulent misrepresentations by sellers.
Online Business Brokers
Online Business Brokers specialize in the sale of online businesses. The process with a broker starts when the business owner engage brokers to discuss the sale of their business and leverage the broker’s knowledge, investor network and prior experience when it comes to executing deals. Many brokers offer a range of pre-vetted listings that all go through due diligence prior to listing. In general, working with a broker is a great way to get your feet wet when it comes to buying an online business. The broker is always there to offer advice, provide figures as well as hand-on guidance across the duration of the sales process.
Examples: FE International
Choosing the means to buying an online business is up there in importance with selecting the right type of online business model for you. As this article is meant for first time buyers, the recommendation is to reduce any and all risks that could come up during the purchase process. With this being said, an online business broker is a great resource to learn about and execute the purchase of an online business.
How to Manage a Business as an Investment
Lots of offline investors view online businesses as the digital alternative to real estate. With limited technical knowledge, most of these people hire ‘virtual assistants’ (VA’s) online to run the businesses in their absence, making them more or less completely passive investments.
If this is your first endeavor into an online business, the idea of hiring virtual assistants might be unnerving. The thought of outsourcing critical tasks for your brand new business can be a tough one to swallow. Remember, VA’s are simply people who work remotely and complete tasks online.
Although it may seem counterproductive to hire an employee that you may or may not ever meet in person, there are many benefits to hiring virtual assistants. The first being, cost, as virtual assistants typically cost less than your standard 9-5 employee. You are also able to contract a VA as you see fit for your business, whether that be hourly or on a project-to-project basis. Hiring VA’s also can reduce cost by eliminating the need for office space. Keep in mind that hiring VA’s can make a business that might have originally seemed like too much of a time commitment, feasible.
Virtual Assistants are also a great resource when it comes to tasks that you aren’t as familiar with, or have no interest in completing. There are a range of activities a VA could complete for your business; a few examples are:
- Accounting or Bookkeeping
- Article Research
- Blog Post Formatting and Scheduling
- Customer Support
- E-mail Management
- Forum Posting or Management
- Graphic design
- Keyword Research
- Market Research
- Outreach and Link Building
- Social Media Management
- Software Development
- Travel Planning
For more on hiring VAs see here:
Although there is no perfect investment strategy, I hope this post sheds some light on a few ways for you to execute making the best possible investment for your money. As discussed, purchasing an online business generates 30-40% returns and is a great place to start. Make sure however, to do your own due diligence before taking the plunge. Spend time researching business models, businesses that are for sale, VA’s and finally, the various ways that are available to you to purchase an online business. Any investment is an important one so lastly, make sure to read everything you can get your hands on about purchasing an online business.
Here are a few guides, case studies and articles to continue to help you make your investment decision.
More: Buying a Business
Case Study: Buying an Internet Business
For any specific questions about brokerage, please feel free to reach out to FE International directly at email@example.com