We spoke with Blake Hutchinson, CEO of Flippa, one of the largest end-to-end business marketplaces in the world. Read on for his insights into buying digital businesses online.
But today, as more and more businesses move online, so has the process of buying a small business – especially when purchasing businesses that only exist online themselves. As many as two-thirds of retail sales occur online, making eCommerce a rapidly growing industry. And eCommerce is just the tip of the iceberg when it comes to the types of businesses you can buy online, without ever leaving your home.
We spoke with Blake Hutchinson, CEO of Flippa, for his insights about using online marketplaces to buy digital businesses. Flippa is one of the largest end-to-end business marketplaces, selling eCommerce, SaaS, advertising, marketplace, and service businesses – and more.
Why Buy Online?
A traditional search for a business to buy can be a lengthy, involved, and complicated process. Likely you would already be searching online to an extent – many small businesses for sale are listed on marketplaces. However, with an online platform, you don’t just have to start online; your whole journey can take place from the comfort of your own home. Flippa, for instance, makes searching for a business online even easier by helping buyers to connect directly to sellers, review materials, learn more about the nature of the business, negotiate price, and more.
Actually buying an online business takes that convenience to an even higher level – have online business, will travel! “Scale benefits online businesses,” says Hutchinson. “They typically have lower running costs, and the very nature of their ‘cloud-based’ location means that ownership geography is less constrained.”
With an online business, you also don’t need to worry about buying or leasing real estate, and many equipment costs can be lower than a brick and mortar location. Hutchinson also notes the importance of transparent and easy access to seeing and tracking the operational health of a business. “You can review key data sources, letting you assess the efficiency of the business and identify growth opportunities,” he explains.
Tips for Buying an Online Business
Buy in an industry you’re passionate about.
Buying something that doesn’t drive you can lead to burnout – motivation stems from passion. Luckily, small business allows many to follow their passions more easily than Corporate America, and it shows: in Guidant’s Small Business Trends survey, small business owners rated their level of happiness at an average of eight on a scale of one to 10 (10 being the happiest). Thirty-seven percent rated their happiness at 10.
Always conduct due diligence.
Due diligence should include a close review of the financial and operational health of the business. Potential buyers should look for and understand the acquisition cost to revenue ratio, review the business’s site traffic, financials, and what assets are available in the sale.
That’s just the start – it’s wise to dig deep to understand how the operational process of the business works. For example, if you’re purchasing an advertising -website, learn exactly how the content is produced. If you’re purchasing an eCommerce business, learn what product or products contribute the most to revenue.
Respect the nuances of the business model.
Not every online business is the same. Understanding and respecting the differences in business models lets you more efficiently run your new business, meaning you need to understand these nuances before entering the business. In short – know what you’re getting into. Some examples:
- If buying a SaaS business, consider the churn rate, monthly recurring revenue, and the lifetime value of a customer. In a SaaS business, multiples are typically higher, given the recurring nature of the revenue stream.
- If buying an advertising business, consider the costs of creating content, the dependency on the affiliate or advertiser base, and the cost to acquire a customer.
- If buying an eCommerce business, the cost to acquire a customer is a primary concern. Niche products can be great – you need to stand out from the crowd. There are quite literally millions of retailers selling the same thing.
Trustworthy Marketplaces and Sellers
While deciding if an online business is the right fit for you is a very personal choice, deeply understanding the business you’re interested in is a huge step in making that choice – and the marketplace you work through should help you.
A reasonable asking price and operational and financial metrics that stack up is just the first step. “As with any purchase of a high-value item, you should verify the details and understand the risk attached to the investment. It’s like buying a house. If you’re worried about the plumbing…check the plumbing,” says Hutchinson.
To do this, you’ll want to work through an online marketplace that helps you determine if a business is the right fit for you through facilitating communication, providing trust, and verifying sellers.
One of the ways that Flippa accomplishes this by helping buyers interact easily with sellers; they utilize a team of dedicated account managers to assist with communication. Communication is a key step to understanding what the business opportunity is, and if there are any “skeletons in the closet.”
“Trust is key. With Flippa, a seller can’t finalize a transaction and receive money without passing a bank-grade ‘Know Your Customer’ [KYC] check. Even then, we work with both parties to facilitate the asset exchange,” Hutchinson explains. “Only after you’ve ‘test driven’ the services acquired should you release funds. ALWAYS issue a contract of sale with a binding transitionary period.”
Like other marketplaces, Flippa can’t guarantee the inputs provided by the seller – this is where buyer due diligence comes in. However, Flippa enables connections to key sources of information like cloud accounting and Google Analytics. “We’re adding an even larger number of sources in the next three to six months,” Hutchinson adds.
Flippa also offers buyer matching, which pairs sellers with prospective buyers – free to the buyer.
There are two essential elements to buying a digital business online:
- Choose a trustworthy marketplace that makes it easy for you to review and verify the financial and operational health of a business.
- Do your due diligence. Understand the business’s opportunity, its financial and operational health, assets, nuances of its business model, and other key information before making your decision.
It’s clear that knowledge is the key to buying a business, no matter if it’s brick and mortar or online-only. Flippa and Guidant Financial both offer free educational content, so you can learn more – and feel confident in deciding to follow your small business ambitions.
- Flippa Sold Business Case Studies
- Flippa’s Buying and Selling Online Business Blog
- Flippa on YouTube, Twitter, Facebook, and LinkedIn
- The Complete Guide to Becoming a Small Business Owner
- The Complete Guide to Small Business Funding
- Business Valuations – A simple way to understand the value of a business