This week I have been advising some of our graduates about website purchase due diligence, and how best to negotiate the buy price so that they don’t overpay when buying a website.
This is advice that I regularly share as part of good Website Buying Due Diligence, and thought it would be good to post it here today so that you can learn these rules too. Negotiation is key, and could mean the difference between whether you make or lose millions.
How to make an offer to buy a website
(and an important part your website buying due diligence)
Hi. It’s Matt Raad here. Today I wanted to share with you a quick tip on how you might make an offer on a website. This is something I see all the time. And interestingly, in the last week, I’ve also helped three of our students with this exact same advice. They’re all currently making offers on website businesses.
What $ amount should you offer?
Basically the tip is, I want you to think about the end game; i.e. what happens if you have to sell the website? From there I work backwards, and that will determine how much I offer on a website.
So, let me explain what I mean. This situation generally seems to come up a lot when there’s a website that is really good, but it’s just not selling. It might be on a website platform like Flippa or Empire Flippers etc. But the site’s not selling even though you do you due diligence and you can see it’s a really good website.
So like I said, I’ve literally helped three of our clients this week with exactly this advice, and I’ll give you a specific example.
How to value a website making $2,500 per month…
One of our clients is looking at buying a website, it was listed for about $100,000, and it’s making around $2,500 a month. My client’s done the due diligence, and it’s the real deal. The due diligence stacks up.
This site makes $2,500 a month; day-in, day-out. In our world that’s generally worth anywhere from $25,000 to $50,000, being 10-20 times monthly multiple. And that’s what you would be happy to buy this website for.
Now the owner of the website is saying he will only accept offers a lot higher than that. He wants $75,000 plus for it. But because it is such a legitimate deal, my client is saying to me, “Okay, what do I do in this instance? I really want to buy the website. It’s real, but do I offer the full $75,000? I certainly can, and I’ve got the cash to do it.” So, they’re at the point of saying yes, I’ll pay the $75,000.
How easy is it to sell this website? This can affect your buy price and valuation.
Now, here’s my advice to my client, and this is the advice I’m giving you. It may well be fine to pay $75,000, but your final consideration needs to be that this website hasn’t sold to anyone. It’s been sitting on this website platform for three to six months, and it just not selling (at the $75,000 price).
So then, here’s your risk – you buy the site, and even if it keeps continuing as it is; should you later go and sell it, you’re not going to be able to sell it for $75,000 either, because no one else has made that offer.
Here’s what to negotiate with the website seller…
Therefore, I would go back and negotiate with the seller and tell them what I’m willing to pay. I am a cash buyer, and I am happy to pay a 10-20 times multiple. Use all the negotiating techniques that we teach, but you must make it obvious and say to the seller you’re not paying over $50,000, and you negotiate.
So, in this particular instance I said to my client, “look I’d be wanting to get that site for under $75,000, purely because I’m concerned that for some bizarre reason, the site has not sold at that level yet. There’s not even a single offer on it.”
Opportunity or Red Flag?
Now just so you know, this particular site is in a strange niche. And we typically find this to be a main reason why it hasn’t sold yet. And you do see that from time to time. Or, it hasn’t been listed particularly well.
It is often that we see this, and it makes most website buyers a little bit nervous or wary, so the offers just don’t come in on the website. It’s not necessarily a red flag.
But what IS a red flag is that we don’t want to be over-paying for those websites. This is because when you come to sell a website a couple of years down the track, you’re going to be faced with exactly the same issue.
The importance of buying right…
Finally, remember that rule in business they always teach you, and I think it’s in real estate investing as well: “You make your money when you buy”. It’s not usually: “You make your money when you sell” – although in my opinion and experience, you make heaps of money when you come to sell websites!
So, when you see websites that don’t seem to be selling that well, yet you know they’re good websites; always remind yourself, you make your money when you buy. So, it’s important to get them at the right price.
Train yourself to think about your exit strategy – before you buy!
So that’s my tip for today – an important part of your website buying due diligence is to make sure you are buying websites at the right price by taking into account the end game – what you may be able to sell the website for.
