fbpx

Buying Distressed Websites

A distressed digital property can be a great investment at the right price.


Photo by Ben Cliff on Unsplash

As we all know, the world has been suffering from the coronavirus for the past 5 months. (Has it really been just 5 months? Wow…) The stock market is more or less back to normal, but much of the economy is still struggling. Savvy people are now looking for investment opportunities to buy under-performing and distressed assets.

I believe websites and other digital real estate provide a good opportunity for doing just this, and we’re starting to see a fair number of these assets get listed on Flippa. I recently bought one of these myself, and in this issue I’ll take you through the numbers and my thinking around this acquisition.

Why buy a distressed website?

Buying a poorly performing website goes against conventional wisdom, and the reason is simple: Website investing is risky enough as it is.

Sure, there are far riskier assets to invest in. But even well-performing sites can get hit with a Google ranking penalty, leading a dip in traffic & revenue that lasts for years. Running a poorly performing Ecommerce site is like running up a stair master, where you spend more and more to make each sale, never really getting on top of your costs.

Generally speaking, unless you’re a turnaround guru with lots of levers to pull, you don’t want to buy someone else’s problem.

But as I’m fond of saying, every business has a story. And if you can figure out what that story is, you can appropriately price in the risk. The way I see it, the same principles of stock market investing (at least in the old days) apply to website investing. Just like there are growth and value stocks, there are growth and value websites. You’ll pay more for the former, and find better deals with the latter.

To use a real estate metaphor: Just like a run-down house at the right price can be a good investment, a beaten-down website at the right price can be a good website. (And unlike with houses, you don’t have to worry about the quality of the surrounding neighborhoods dragging you down).

A recent example

Back in late April, I bought a distressed travel blog. As we all know, the travel industry has been absolutely decimated by the coronavirus. Since mid-February, travel sites have seen their traffic & revenue plummet by up to 90%.

Everyone in the industry is suffering, and this site was no exception. In fact, this particular site had a double whammy: It got hit with a big Google algorithm update in November, then the virus hit in February. ? Brutal.

Let’s take a look at the traffic.

As you can see, this site was getting close to 80,000 unique visitors per month before the Google update. After a brief unexplained jump in January, traffic started steadily declining in late February, and hasn’t looked back. It’s now a trickle of what it once was, at around 8,000 unique visitors per month. One tenth of what it was 9 months ago.

But it still has value. The key is to figure out how to price that value.

My final offer for the website was $12,500. Here’s how I got there.

How I valued this declining website

In 2019, the site earned about $20,800 in net profit, with 93% gross margins. Not bad at all!

This came from a wide variety of sources, pretty evenly split among ads (using a locked-in Mediavine contract), affiliates (18 affiliates in total, not including Amazon, which accounted for only a small amount of revenue), and sponsored posts (which are controversial, and probably accounted for the Google penalty in November.)

I assumed all of the traffic pre-November was out the window. Recovering from a Google penalty can take years, and in most cases traffic never quite recovers to the highs.

As for the virus? That’s another story…

It must be said that the coronavirus was clearly an enormous factor in all this. Nobody knows when the virus will subside or when travel will get back to normal. It will take at least a year, maybe two. Maybe even more than that. I don’t know any better than you do.

What I do know is that it will come back. Life goes on, just like it always does. It’s hard to see the light at the end of the tunnel, but if you’re buying distressed properties, you need to operate on a long time horizon. Given the unknowns, I tried to figure out what traffic & revenue would look like when things eventually did return back to normal.

RPM

I think one of the keys to estimating future cash flows with a site like this lies in the RPM, or revenue per 1,000 visitors. Basically, how much money the site is making per visitor.

Since November was when things first went south, and January was somewhat of an anomaly, I had very little pre-virus data to work with. I assumed that the “new normal” looked like a mix of December, January, and February; or around 40,000 unique visitors per month.

Using some formulas I created, I calculated this site’s “normal RPM” at about $26. In other words, the site makes $26 for every 1,000 visitors.

I then came up with three benchmark scenarios:

Worst-case scenario

In the worst-case scenario, traffic never recovers from current levels.

  • 8,000 visitors per month
  • $208/month net profit
  • 5+ year payback period (not good) ?

Medium-case scenario

In the medium-case scenario, traffic recovers to 50% of its post-November highs.

  • 20,000 visitors per month
  • $520/month net profit
  • 2 year payback period (good) ?

Best-case scenario

In the best-case scenario, traffic fully recovers to its highs.

  • 40,000 visitors per month
  • $1,040/month net profit
  • 1 year payback period (excellent) ?

I think the truth lies somewhere between medium & best-case scenario. The question is how long it takes each scenario to materialize. If it happens in under a year – kaching! But if it takes 3 years then it’s arguably not that great of a deal.

Negotiating the deal

The seller originally tried to sell it back in February, as soon as it became clear the virus was not going away anytime soon.

She had first listed it on Flippa for $40,000, or about 2.1x her 2019 net profit. No chance selling a declining business at that price. A month later her asking price dropped to $20,000. A few weeks after that it dropped again to $15,000. Then finally $10,000. It was clear the seller wanted to get what she could for the site, and move on with her life.

However, there were definitely a few other fish taking the bait at $10,000. And one thing to remember is that if your offer is too low, in the seller’s eyes the asset is simply not worth letting go. They’d rather just hang on for the ride.

We ended up settling on $12,500, or .7x the last 12 months’ net profit.

What’s next?

I’m not pretending to be a guru at this. I have no idea how the virus will play out. Nor do I know how long things will take to return to “normal.” It could be quite a long time.

It very well may be the case that this site wasn’t the steal I hoped it would be. Every month that passes pushes the profitability time horizon forward. Over time it may become clear that marginal opportunity cost was such that my money would have been better invested elsewhere.

But there are other benefits to an asset like this – ones that people don’t think about as often. My wife and I have a huge passion for travel, and owning this website will facilitate that for years to come. From this day forward, all of our travel is a business expense. That alone has a huge impact to our personal bottom line. Not to mention the discounts on hotels, tours, insurance, and free travel gear & other swag.

And remember – if sh*t hits the fan, you don’t need to fully recoup your costs in order to liquidate and breakeven. Just like with real estate, the asset retains value whether or not revenues exceed the purchase price. Assuming a standard 2.5x annual net profit multiple, if I wanted to get my $12,500 back for the asset, I would need to reach just $5,000/year in net profit, or about $416/month.

Wish me luck! ?

Other news

  • Flippa had a killer story about how a savvy entrepreneur was able to buy a $1,000 app, make a few creative changes, and sell it for a whopping $92,000. Inspiring stuff. This is what it’s all about. I’m super jealous.
  • Airbnb says that treehouse and airstream rentals are booming. It looks like Airbnb is trying to get back to its unique, homegrown roots – which is fantastic. But it’s hard to think of a better real estate investment than a treehouse that probably cost ~$10,000 and rents for $327/night.
  • Thrasio has acquired over 60 Amazon FBA businesses, and is now valued at $1 billion. Not bad for a two year old company. While it’s likely they’ll succeed creating the world’s biggest FBA empire for a while, this is Amazon we’re talking about. (Amazon isn’t so much a wolf in sheep’s clothing: They’re a wolf in wolf’s clothing, wearing a wolf mask and boots made of wolf fur.)

 

How’d you like this issue?

Share

Share on facebook
Share on linkedin
Share on twitter
Share on pinterest

Author

Stefan Von Imhof

Stefan Von Imhof

Stefan von Imhof, a co-founder of Alternative Assets, is also the Head of Product at Flippa - the world’s largest marketplace for buying & selling online businesses. He also created and runs Flippa’s Due Diligence Program, and has bought & sold over a dozen websites. Prior to Flippa he was at HG Insights, a market intelligence company which in 2020 sold to Riverwood Capital Partners.

Related Posts

A daily deals aggregator w/ a big mailing list

A daily deals aggregator w/ a big mailing list

Today, we’ve got a deep-dive on an a daily deals aggregator which has a massive email list. We are probably biased towards email newsletter-based businesses (for obvious reasons!) but we think this one may be overlooked.

Anatomy of a deal | Alternative Assets

Anatomy of a deal

A a look at a website I recently purchased which involved both an earnout agreement and buyer-side financing.