This post is a guest post by Gary Gottlieb from nEquity, and provides a different take on a strategy you can utilise to maximise profitability, rather than simply buying and flipping sites over the short term.
With so many articles (spun so many times!) that cover website flipping from a beginner’s perspective we’ll try and fill the gap over the next few weeks with articles for more experienced site traders, exploring aspects such as creative vendor financing, advanced revenue share agreements and with today’s post, growing your profits through website mergers and acquisitions.
M&A is traditionally the purchase of businesses that (usually) fits in with the purchasing business, and can therefore generate significant cost savings and additional revenues through the two businesses working together. In internet business, synergies are created in that the value of both websites working together is greater than that of the individual sites separately (1+1=3!). These synergies include but are not limited to traffic sharing, admin outsourcing, advertising, and cost synergies.
To help understand the concept, we’ve included an example of an actual traffic and advertising synergy from a website acquisition nEquity were involved in.
Our client owned an automotive forum, and got in touch with us to assist in expanding his business and increasing profits.
Firstly, we gave the client several ideas on the types of site that would make suitable targets, link in well with his current site and could possibly be bought for excellent value. The preferred option was to leverage off related traffic at his forum, so the acquired site would need to share a similar profile.
We advised on the purchase of a website that sold car accessories and parts, as this could be linked into and advertised at the forum and could gain an excellent reputation and credibility amongst members. People would essentially begin to talk about the new site on the forum, and it would generate a solid base of repeat business that could be added to the acquired site.
We presented several target websites that fit the criteria. Data was analysed and modelled to see what kind of profits could be achieved, and where the most gains could be made. Due diligence was also undertaken for the client, on the targets that were short-listed and the deal eventually closed.
The client purchased a site that was producing (pre purchase) $4,000 in profits each month. Thanks to natural synergies with the forum, the acquired site began to produce $6,000 monthly shortly after changing hands; simply by being able to advertise the site on the forum to existing members, and having a trusted name they gained credibility as a destination site to purchase car parts and accessories. The accessories site was bought at a relatively low price, especially considering the valuation was based on monthly profit of $4,000 rather than the quickly achieved $6,000. Profits are also expected to grow from the forum’s members as the forum grows and the site’s reputation improves. All this is in addition to the potential to grow the site outside of the forum too.
Other cases of a good website merger can be to acquire a website purely to direct its traffic to your own. For example if you purchase a lot of paid traffic, you could look at the cost to purchase a similar site that generates its traffic organically, and compare to the costs of you paid campaign (PPC or otherwise) to get this same amount of targeted traffic. If purchasing the site is significantly cheaper than purchasing from Google or some other source of advertising, you could acquire this site purely for its traffic. Of course traffic at the target site needs to be carefully analysed to find how much of it is related, targeted and useful traffic.
Significant synergies can also be created in cost reductions when you ‘inherit’ cheaper suppliers. One of our clients had a very cheap drop-ship supplier for designer chairs he sold online, and was able to use this to buy another website and increase its profitability dramatically. In our discussions and idea generation, we discovered that the website owner had a significantly cheap drop ship supplier for the chairs, so we presented the idea of purchasing websites that sold the same chairs and simply switching supplier from theirs to his. The acquired website could increase profits dramatically with no extra work.
We searched and found several options. In this case, the target sites weren’t actually advertised for sale, but we approached them about our interest on behalf of the buyer.
Those potentially interested in selling supplied us with info such as current revenue and supplier costs for analysis, which later confirmed that several of these sites could see increased profit simply from earning a greater margin on sales through a cheaper supplier. The client decided there was one particular site he liked, so we proceeded to conduct due diligence on the site; everything looked good and a deal for the site was closed. Our client acquired the site on the basis that it was generating a profit of $900 a month, but after switching to his cheaper supplier, monthly profit would increase to around $1,350 per month.
In summary, site owners should take note of the opportunities that are available to expand their businesses and profits through a merger or acquisition of another website. The synergies that can be gained are very simple with websites which is the wonderful thing about website M&A as opposed to traditional M&A.
About the Author
nEquity is a website M&A advisory firm, specialized in the small to mid size websites market. We provide business owners with website M&A advisory services to assist in expanding their business online and therefore grow profits. In addition to our website M&A advisory we can provide separate website valuation and website due diligence services.