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Thread: First time purchase, analysis of future risk.

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    First time purchase, analysis of future risk.

    A year or so ago I combed through the EP Forum thinking I was going to buy my first site and go from there, I am highly interested in the idea of buying established cash flows, sorta treating websites like a rental property. My background is primarily ecommerce and I have a good nack for business. But, I am not specifically looking for e-commerce sites and actually avoiding them to a certain extent. Anyways after taking a break from looking for sites I am back at it.

    I recently pursued a deal which fell through, I was confident with my due diligence, but basically decided I was not going to spend more than a certain amount and could not reach an agreement with the buyer.

    I have now found a new site I am highly interested in and although I am confident in most of my abilities to perform due diligence, it is my first time and being almost triple the price of the previous negotiation I am wanting to be a bit more careful. I also want to learn a lot so that going forward so I get better and better at what I am trying to do. Now I am basically asking for some specific help. Other than some traffic verification, which I am going to try to learn a bit on my own before asking question, my main concern is viability of the site going forward. To me this has to be one of the most difficult, but yet most important aspects of DD. It can be vague, yet require expertise in a specific field. Basically I am trying to analyse the risk of something happening overnight that flips the business on its head. An example may be changes in googles algorithms.

    So if anyone has any thoughts on future risk or is experienced and willing to talk privately let me know.

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    aka "meathead1234" Thomas is a Premium Member
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    Here's a post from recently where I answered a question related to the "future" when doing due diligence: http://experienced-people.net/forums...1772#post71772

    Depends on what the current business model is - it's impossible to give blanket advice when it comes to due diligence (there are plenty of people who have never bought a site willing to offer "advice" but I would ignore anyone who hasn't invested at LEAST $100,000 themselves). If you shoot me a PM with the site you're looking at, happy to give you a quick 5 minute analysis and point you in the right direction for things to look into.

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    Moderator Kay is a Premium Member
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    Hi Nokkieny, welcome back!

    Thomas has given you good advice and a kind offer of help. Take it!

    I don't give anyone DD advice, although I try to help them to learn to do it for themselves - which is exactly what you're aiming to do. However, I do have a quick observation about what you wrote.

    Basically I am trying to analyse the risk of something happening overnight that flips the business on its head.
    Trying to predict the future is indeed very tricky. And predictions, even though though they're made on the basis of being well-informed and educated in the market you're entering, can never be guaranteed to be accurate. If you accept that, then your best course of action is to minimise your risk. So, how do you do that? Perhaps by looking for weaknesses in the business which would make it vulnerable to being turned on its head overnight. Without knowing the business or the market it's in it's hard to be more specific about what the weakness might be. One of the first things I would look for is any over-reliance on anything that could change overnight. You already gave the example of an algo change. Therefore, you'd want to be sure of different traffic sources. Same with your suppliers - what if the big one went bust? Customers - what if the largest suddenly went elsewhere? These don't have to be deal-breakers if you have a plan to cope with the "what if..." crisis happening.

    My ideas are perhaps too simple, I guess you could say all that as "don't put all your eggs in one basket". Along the lines of avoiding over-reliance, the same could be said about focusing on one product, or one technology. This might not be too bad if you can be adaptable and move quickly. Always keep your finger on the pulse of technological and market changes. If you don't have the time to do it, find some way to obtain a digest of what you need to know.

    BTW, I've never bought a site for $100k, so feel free to ignore my thoughts on the matter. Just tryin' to help.
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    I think focusing on the site operations and viability going forward is exactly the right place to put your attention. One of the key aspects of a site that is almost always glossed over, especially by the website broker crowd, is what it takes in terms of expertise and time to keep a site running at the level that they're selling it as being. That's a bit of a mouthful there, but in a nutshell what you won't see is a detailed explanation of the time the (soon to be) former owner puts into running the site. Beyond that, what you will need to become in order to match that level of effort. How long will it take you to ramp up, and does the person currently running the site have some special experience or background that makes them more suitable than you would be to run the site?

    Let me give you an example of this. Recently, I was looking at an online community website (these are the types of sites I specialize in), listed by a broker. Here's a link if you're curious. Now, the data there only accounts for a small amount for hosting in the expenses column. In other words, the amount of time the current owner invests in the site is valued at zero. It's currently listed at a bit over a 3x multiple, which may be fair if all the numbers are solid. I usually assume they are not, though.

    The real problem with the site I've given as an example, though, is that the current owner is far more qualified to run the site than I could ever be. The current owner not only works in the industry, but states that he has inside information that even if other people could gain access to, would be extremely difficult for anyone else to be able to assemble in a meaningful manner. In other words, for anyone other than an industry expert, you can expect this site to be a declining asset from the moment you buy it. Of course the broker and the seller would dispute that, but this is the way I interpret the listing.

    So, to get back around to what you're asking, being able to assess what you personally would need to do in order to maintain and expand on the business that you're taking over is a critical piece of information that too many people buying websites overlook. Even if the stats you're being sold are solid (which they are usually not), you need to make sure you're not going to buy a declining asset because the seller misrepresented the amount of time and the level of expertise the site demands.
    Last edited by Kay; 26 August 2014 at 5:15 pm. Reason: Promoted to front page article

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    Quote Originally Posted by petertdavis View Post
    Let me give you an example of this. Recently, I was looking at an online community website (these are the types of sites I specialize in), listed by a broker. Here's a link if you're curious.
    Hmm. I was interested in that exact same site, but it was a long time ago. I dug into my copies of the relevant files to get a date ... and I find that this was over two years ago!

    Quote Originally Posted by petertdavis View Post
    The current owner not only works in the industry, but states that he has inside information
    Owners sometimes make claims like that on the site itself. That's like putting a big flag on the site warning potential buyers that the seller is irreplaceable.

    I would ignore anyone who hasn't invested at LEAST $100,000 themselves
    That would exclude a lot of the folk out there dishing out advice on the matter! But, I agree with you.
    Find the right business broker to maximise your price and the chances of selling your business.

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    aka "meathead1234" Thomas is a Premium Member
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    Quote Originally Posted by Clinton View Post
    That would exclude a lot of the folk out there dishing out advice on the matter! But, I agree with you.
    Yep. There's a big difference between "knowing" what to do, and actually having done it with your own money. You and I both know that due diligence is never a perfect process and it's all about finding a comfortable middle ground between what was initially presented and what you're willing to accept risk wise - and that itself is entirely subjective. I have seen plenty of deals where one buyer has fallen through due to a deal-killing issue for them, but something that is seen as an opportunity by another buyer. A good example of that would be a site that has been hit by a recent Google update - to a SEO savvy buyer that's often seen as an opportunity to make a "distressed" purchase but would not be suitable for a first-time buyer who has no practical experience of recovering sites like that.

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    I get the gist of what's being said on this thread. Beware of 'advice' in the same way as you have to be careful of any person pushing you in any given direction. You have to learn for yourself - by doing.

    Thomas, please don't take this as something against you personally (BTW, thanks for the excellent advice you gave me last week - I acted on it immediately), but I didn't particularly like the idea that only those who dealt at a certain level could claim to have an opinion worth listening to on the matter. I felt like countering that with, if you haven't worked at financial controller level where you've been responsible for $xxx million annual spending, then don't bother saying anything about financial matters. But why start pulling rank?

    Everyone is entitled to have their say. A forum is a great leveller. And if someone gives crap advice, at least on EP there'll be people to challenge it. I just didn't like the idea of anyone feeling too scared to say anything because they hadn't reached a certain milestone in whatever subject is being discussed.
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    aka "meathead1234" Thomas is a Premium Member
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    Quote Originally Posted by Kay View Post
    I get the gist of what's being said on this thread. Beware of 'advice' in the same way as you have to be careful of any person pushing you in any given direction. You have to learn for yourself - by doing.

    Thomas, please don't take this as something against you personally (BTW, thanks for the excellent advice you gave me last week - I acted on it immediately), but I didn't particularly like the idea that only those who dealt at a certain level could claim to have an opinion worth listening to on the matter. I felt like countering that with, if you haven't worked at financial controller level where you've been responsible for $xxx million annual spending, then don't bother saying anything about financial matters. But why start pulling rank?

    Everyone is entitled to have their say. A forum is a great leveller. And if someone gives crap advice, at least on EP there'll be people to challenge it. I just didn't like the idea of anyone feeling too scared to say anything because they hadn't reached a certain milestone in whatever subject is being discussed.
    I'm just giving my honest advice. I have seen people first hand (in total) lose millions of dollars over the years from poor due diligence advice usually from people who have no idea what they are doing (the Flippa blog, for example, is one place riddled with poor advice). I certainly don't make any friends for my opinions but I've built my own business on brutal honesty and I like to think that leads to consistent good advice.

    It's certainly nothing personal against anyone here, there is plenty of good advice going around. Just a general gripe I have with forums is as it's usually anonymous it's difficult to know who to listen to. I've seen (on other forums), in niches like SEO especially, people giving terrible advice that they have copy/pasted from elsewhere. Causes all sorts of problems even though they are only trying to help and "contribute".

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    Quote Originally Posted by petertdavis View Post
    I think focusing on the site operations and viability going forward is exactly the right place to put your attention. One of the key aspects of a site that is almost always glossed over, especially by the website broker crowd, is what it takes in terms of expertise and time to keep a site running at the level that they're selling it as being. That's a bit of a mouthful there, but in a nutshell what you won't see is a detailed explanation of the time the (soon to be) former owner puts into running the site. Beyond that, what you will need to become in order to match that level of effort. How long will it take you to ramp up, and does the person currently running the site have some special experience or background that makes them more suitable than you would be to run the site?

    Let me give you an example of this. Recently, I was looking at an online community website (these are the types of sites I specialize in), listed by a broker. Here's a link if you're curious. Now, the data there only accounts for a small amount for hosting in the expenses column. In other words, the amount of time the current owner invests in the site is valued at zero. It's currently listed at a bit over a 3x multiple, which may be fair if all the numbers are solid. I usually assume they are not, though.

    The real problem with the site I've given as an example, though, is that the current owner is far more qualified to run the site than I could ever be. The current owner not only works in the industry, but states that he has inside information that even if other people could gain access to, would be extremely difficult for anyone else to be able to assemble in a meaningful manner. In other words, for anyone other than an industry expert, you can expect this site to be a declining asset from the moment you buy it. Of course the broker and the seller would dispute that, but this is the way I interpret the listing.

    So, to get back around to what you're asking, being able to assess what you personally would need to do in order to maintain and expand on the business that you're taking over is a critical piece of information that too many people buying websites overlook. Even if the stats you're being sold are solid (which they are usually not), you need to make sure you're not going to buy a declining asset because the seller misrepresented the amount of time and the level of expertise the site demands.
    Heh, I had actually seen that air traffic controller site before. I am interested in what the actual multiples sites are typically selling for, I can't remember which broker it was but they listed their past sales with final price and it seems like in most cases the multiple was fairly low versus the list price. Of course this is just one site, but I sorta get the feeling that most people are bargain hunting.
    I definitely build in owner contribution and any un-expensed labor into my valuation. This is very important to me because I am trying to shift from my work heavy business to more passive businesses. However, you basically brought up my largest concern with the site I am looking at now and that is the owner expertise. It is sorta a tricky issue because the site itself runs fairly simply on its own two feet, its not like if the owner left for a week things would start crashing down. But, I am really digging into the what ifs, what I would need to outsource, but also what I can learn myself. Long term I plan to have in house experts that would compliment the needs of a portfolio of sites, but for now I am on my own and learning.
    That being said, the owners are willing to help me along the way, and really provide a long term crutch to make sure things go smoothly, of course I will build this into the purchase contract, so mine and their expectations align. They are even offering some of their current staff to continue working if needed, but I am going to consider outsourcing to cut costs.
    One thing I have realized after analysing many listings is it would be almost impossible to find that perfect buy it and forget it site. So I am starting to lean towards sites which I can really tell the sellers care, they are honest and not just looking to dump and run. I think this goes a long way in many respects. which for me begs the question would I rather go after a site where someone built it from scratch and it was their baby, which means the probably do play an active role in running the site and do have some unique knowledge, or go after something being sold by an investor type who may outsource everything or require very little work, but they always viewed the site as a property.
    Last edited by nokkieny; 26 August 2014 at 10:11 pm.

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    Quote Originally Posted by Thomas View Post
    Here's a post from recently where I answered a question related to the "future" when doing due diligence: http://experienced-people.net/forums...1772#post71772

    Depends on what the current business model is - it's impossible to give blanket advice when it comes to due diligence (there are plenty of people who have never bought a site willing to offer "advice" but I would ignore anyone who hasn't invested at LEAST $100,000 themselves). If you shoot me a PM with the site you're looking at, happy to give you a quick 5 minute analysis and point you in the right direction for things to look into.
    Getting late here but I will message you tomorrow, Yes I really would like someone that is actually practicing what they preach to give me a quick synopsis, basically I am trying to learn as much as possible in the process, so although I am fairly confident after a 5 hour conference call today, I know there will likely be things I have overlooked and not considered.

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