Buyer Mistakes: Looking Beyond Price And Multiple
Updated on February 29, 2020
It’s easy to look at the price tag on a website purchase as the ultimate determinate as to whether you got a good/bad deal but…might that be wrong?
Many new or inexperienced buyers don’t look beyond the price and end up purchasing an online business that requires a lot more time and attention than they were prepared for. Sure, they might have gotten a discount, but did they get a good deal?
Not sure what I mean? Let me explain. The Empire Flippers Marketplace determines a website’s value based on its average profit prior to listing it for sale. This can be anywhere from 3 months to 12 months, depending. Once we know this number, we then multiply it by a multiple (Anywhere from 20X to 40X plus). The multiple is determined by a variety of factors. The product of this equation is your listing price.
For example:
Option A: A dropshipping site earns $5000/month net profit. $5000 x 25 = $125,000 listing price
Option B: An Amazon affiliate site earns $5000/month net profit. $5000 x 30 = $150,000 listing price
Both websites earn $5000 net profit a month, so as a buyer, which would you choose?
Most new or inexperienced buyers might default to Option A. Why pay $25,000 more for Option B if you’re still going to make the same amount of net profit monthly? ($5K per month)
There may be several things these buyers did not take into account though, and chances are, some of these buyers ended up with a website/business that requiring more work than they initially bargained for.
Whether you’ve made this mistake personally or are brand new to the Marketplace, here is a checklist of items that go beyond price that you should consider before hitting the Buy Now button.
1. How much time does it take to run this website?
Ultimately you need to decide how many hours you are willing to invest to simply maintain a website’s current level of profit. Using our above website comparison, there is a good chance that you will need to invest several more hours in the dropshipping business.
Why? Because dropshipping businesses are not as easy to automate as affiliate sites. Often times, dropshippers are required to manually place orders with their manufacturers; respond to customer service inquiries via the phone, email, or chat; update product inventory manually; and more.
Alternatively, there are plenty of affiliate websites that require regular blog posts, social media management, and guest post outreach to maintain interest and profit.
Who will write these posts? Who will be conducting all the outreach and social posting? These are all things that will affect the number of hours that go into the website.
When deciding to purchase the site, buyers should subordinate the price tag, with its monthly revenue and multiple, to their assessment of their available time, knowledge, skill-set, business needs, and interests.
2. How many moving pieces are there and how complicated are they?
When I say moving pieces, I’m referring to all the tasks and functions it takes to make the business function on a daily basis. This can include everything from hosting and website maintenance to tracking product inventory, taking new orders, communicating with manufacturers or customers, and more.
In the case of a dropshipping site, how complicated is it to accept orders and fulfill them? For an affiliate site, how difficult is it to update opt-ins and widgets, etc.?
Depending on how many moving parts it has and your level of tech-savvy, you may not want to choose a particular site.
3. What kind of skillsets are required to make the business run?
It’s easy to look at a profitable business from the outside and assume the upkeep is simple. Unfortunately, this is naive.
People have different skill sets. Some are tech-savvy, while others are great content creators. Some are born salespeople, and some are not.
When it comes to buying, maybe you don’t possess all of the required skill sets, but you can certainly hire someone to perform that role. Understanding which skillsets are required to make the business run will give you a better idea of whether or not you want to move forward with a particular website.
4. Which website best suits YOUR Skill Set?
When considering websites to buy, you want to consider which is best suited for your particular skillset. There are two reasons for this: one, you’ll avoid having to outsource workers to help you run and maintain the website, and two, you’ll have a better understanding of your actual business increases and your odds of growing its level of success.
For example, if you are a Paid Traffic Expert and the prospective website is built on paid traffic, it may be a good fit for you.
I have met several individuals who have no clue how to manage the most basic aspects of their website or business. They are at the mercy of others to keep their website functional, and this is not a good place to be.
5. Which site better diversifies your portfolio?
The rules online change regularly. Having a linear portfolio can be risky– it’s like placing all of your eggs in one basket.
For example, if you have only dropshipping websites, you may want to diversify with an Amazon affiliate site. This way, if you lose your dropshipping manufacturers, you will still have an income source.
This scenario works the other way around as well. If you rely on affiliate sales and Google changes their algorithm, your website may be slapped and fall from Page One, losing traffic and profit overnight.
6. Which website would you rather work on?
There’s a lot to be said about doing work you actually enjoy. If you are debating between multiple sites, look at their niche and think long and hard about which you would rather work on.
If you feel drawn to one in particular, you will likely invest more of yourself, giving it the opportunity to grow and succeed.
7. Does the price tag really make it worth your time?
Surely you have an idea of how much money you are willing to spend on a website before you start looking, but you also need to consider whether it will offer you a good return on your investment of time spent working and maintaining it.
Let me break this down further. For example,
Website A is listed for $20,000 at a 20X multiple (and earns $1000/month in profit) and Website B is listed for $100,000 at a 25X multiple (and earns $4000/month in profit).
Website A is listed at a lower multiple, which can sound good, but to see its true value you must consider how much you would earn if you put 100 hours per month of work into Website A versus Website B.
In this particular case, 100 hours per month would mean you only make approximately $10/hour for Website A, whereas you would make $40/hour for Website B.
Though you may have to initially invest more money in the beginning, the ROI on your time will be higher for Website B.
Pricing and Multiples – Are They Really All That Matters?
As you can see, pricing and multiples are important, but there are quite a few other factors that come into play when making a buying decision. There is often a lot more that goes into running a website, and understanding this beforehand will help you choose the website that’s right for you. Next time you’re looking to expand your business portfolio, consider these 7 criteria and reduce the likelihood of buyer’s remorse.
