Web-based companies have long been an attractive option for many prospective business owners, whether they’re interested in jumping in full-time, or moonlighting with a business while they continue working full-time elsewhere.
Online businesses are often simpler and faster to purchase and profit from because there are fewer hoops the owner needs to jump through. Additionally, many Web-based and e-commerce businesses require no physical property, leases, or even product stock to worry about, so overhead is very low and the owner can set their own schedule and work from home.
Regrettably, Web-based businesses have earned a reputation as scams, and there’s no denying the fact that scammers abound in the space. As with any business opportunity, a prospective buyer will need to be selective and use good common sense when considering buying an online business. But, it’s definitely possible to find legitimate online business opportunities and make a decent living on the Internet.
There are important things you should consider before choosing a Web-based business. The following tips should help you weed out the legitimate opportunities from the likely scams, and help ensure the opportunity you’re pursuing has plenty of profit potential:
You must treat it like a business
While it’s smart and beneficial to follow your passions when starting or buying a business, passion alone isn’t enough to make a business profitable. Whether it’s a physical retail store or an eCommerce website, your business needs customers that are willing and able to pay for the products or services you’re offering. Without a need in the market and a product or service that fills that need, you don’t have the potential of a successful business. With that combination, as long as the profit margins are sufficient, the business is worth considering, whether it exists online or offline.
Online business records are often superior
One of the key benefits of buying a Web-based business is that they tend to have a robust data trail that outshines the business and financial records brick-and-mortar businesses often maintain. These thorough records can offer deep insight into the business’s profitability and sustainability, mitigating a number of the risks and uncertainties associated with starting your own business.
“When you buy an online business, you can look at the history and a proven track record, and know you are stepping into a business that’s already producing income,” says Bill Evans of Digital Business Investor, a resource for website brokers and marketplaces.
Due diligence is still required
No matter what type of business you’re considering buying, always look closely at the financial records. This includes bank statements, profit and loss statements, and tax returns. You need to confirm that the numbers make sense and nothing is being hidden. Cash flow is an important piece of the puzzle, as is a record of consistent and sustainable profit.
“You can weed out 80 percent of the businesses you’re considering based on that alone,” Evans says. He also cautions buyers to watch for common “creative bookkeeping” methods that can artificially inflate profits. It’s harder to be creative or hide things on a tax return, however, so a smart buyer will insist on seeing tax returns during the due-diligence stage.
Different types of online businesses have different measures of success
When reviewing the records of an eCommerce business, pay special attention to the product being sold:
- Does the business have its own brand, or is it a reseller of other brands?
- Is it based on a dropshipping model, or will you be expected to stock products and fulfill orders directly?
- Are mutually beneficial relationships already established along the entire supply chain, or will you need to pursue better contracts going forward?
- Who are you competing with, both online and offline?
In a software-as-a-service businesses (SaaS), on the other hand, the key metrics you need to consider include subscriber growth and churn. The lifetime value of each subscriber is also crucial, as it establishes how much you can reasonably invest in acquiring new subscribers and improving the service offering without jeopardizing long-term profitability.
While scams exist, being a smart buyer can mitigate the risk
As with any commercial investment, learning everything you can about the business you’re interested in buying is the best protection against being scammed, so review those records carefully and use a healthy dose of common sense.
In general, walk away if you run into:
- High pressure sales efforts - If the seller is pressuring you to make a quick decision, perhaps claiming you’re going to miss out by not buying immediately, move on. (“At this price, you only have 72 hours to take action!”) Often, this tactic is designed to prevent buyers from doing adequate research and should definitely make you skeptical. Owners of a legitimate business will allow buyers adequate time to research, and will be willing and able to answer questions and provide information as needed.
- Many similar businesses entering the market quickly - Generally speaking, online businesses that have popped up strictly as a “me too” response to a recent fad are highly unlikely to offer long-term, sustainable profitability. (Think fidget spinners.)
- Unrealistic claims of profit, ease, or both - Common sense dictates if something seems too good to be true, it probably is. Any business that claims an unbelievably fast or large income potential is likely a scam. (“Make $30,000 a day while working in your underwear!”)
Once you confirm the website you’re looking at truly is a legitimate business, the same common sense questions and research can help you determine if it fits your personal goals and resources.
There’s bound to be a learning curve involved
It doesn’t take a tech wizard to successfully run an online business, but — as with any new business opportunity — there are going to be things you need to learn in order to be successful, and some basic understanding of the necessary technology is likely to be on that list.
You’ll need to become familiar with the concept you’re interested in and learn how the market operates, including your competition, vendors and suppliers, and who your target customer is. In many cases, this initial research will reveal that the business model is largely based on a particular technology or set of tools, and learning how to use those tools is integral to success.
Google AdSense, for example, serves as one of the key sources of income for many content-based online businesses like blogs or forums. On the other hand, an e-commerce model where you’ll be selling digital or physical goods may rely heavily on a particular eCommerce platform (like Shopify or WooCommerce) or established marketplaces like Amazon and eBay. By learning about the market in which you’re looking to buy and the specific tools and practices that make it possible and profitable, you can determine what kind of learning curve a particular business will require of you, personally.
While technical skills will sometimes be necessary to build or maintain an online business, in most cases, coding and other technical tasks can easily be outsourced at a reasonable price. Don’t allow a lack of deep technical knowledge to hold you back from buying a Web-based business.
A business plan is still a necessity
Just like any other business, Web-based businesses need a formal business plan. If the current owner doesn’t already have a solid plan in place, creating one objectively needs to be part of your decision-making process. Don’t wait until you’ve already committed to buying the business to realize there are fundamental flaws in the business plan.
Consulting with a team of experts who are knowledgeable and experienced in Web-based business transactions can be very helpful during this and other planning stages prior to making a purchase. Once you have access to the necessary documentation, it’s well worth the modest cost required to have an attorney or accountant look it over, as well as a professional business broker. Once a purchase agreement is created, you’ll want your team to review that as well.
Determining Web-based business valuation
Valuation is a key aspect of any prospective business purchase. Determining the fair market value of an online business depends largely on three main factors:
- Audience - Give preference to Web-based businesses that already have well-established audiences. It will be far easier to launch new products and maintain cash flow if the company already has a database of existing customers and fans on social media, for example.
- Age of the business - The older the online business is, the more valuable it is, generally speaking. Since things change so quickly online, businesses that have been around for at least three years warrant serious consideration. It’s not a guarantee of success, of course, but it is a sign of a valid, sustainable business model and a product or service that’s likely to remain in demand.
- Preferred pricing method - Valuation experts agree that fair market value for a successful Web-based business usually comes to around two to three times the company’s annual revenue, although there are other valuation methods that may be more appropriate for specific industries and niches. Again, rely on your team of experts if you’re not intimately familiar with the valuation process for the business you’re exploring.
As you can see, buying a Web-based business is essentially the same as buying an offline business. By treating it with the same level of respect, determination, and common sense, you can be confident in your ability to identify the best online business for your personal needs and goals, and in your chances of long-term success.
Take a look at what’s currently available in Web-based businesses for sale in the nation’s premier commercial acquisition listing engine.