I learned about website investing the traditional way: I built a successful website and someone emailed me one day with an offer to buy it. While I wasn’t in the market to sell my website (we were doubling every year), the math behind the offer blew me away.
By way of comparison, imagine that you want to go buy some stocks. You are paying a fixed amount today (the stock price) for a claim on the earnings and future growth of the company. The ratio of the price to earnings is referred to as the Price-Earnings ratio. As I write this in 2019, the PE ratio for the S&P 500 is 22.97. So I must pay $23 for every $1 of earnings.
A $10,000 investment gives me claim to $434 per year of earnings. Plus future growth, which will be at about the same rate as GDP. This will average 3% – 5% per year.
The fair market value of an established website is 3 – 4 times expected annual earnings. Assuming the site continues to earn at that level, you will earn $2500 – $3300 per year on your investment. You’re buying an earnings stream six to eight times more profitable than stocks.
With the chance to use your control of the business to dramatically grow traffic and revenue. Or invest in expanding your content and acquiring similar websites. There’s no such thing as a free lunch, of course. You need to manage around a variety of risks to secure these rewards.
Why Are The Potential Returns So High?
Unlike stocks, you’re buying a micro-business when you buy a website. Small businesses are generally priced at a much higher return due the level of effort required to run the business and higher level of risk involved in a small business. The opportunity lies in how you manage this.
There is a limited pool of buyers for the website relative to other investments, which increases the typical returns from a deal. Since you’re buying a website instead of a mature business, any buyer needs to be able to manage and operate the business. This requires expertise in several areas. We cover this in greater detail in our guide to acquisition integration.
A second factor increasing returns: risk and lack of liquidity. There are many ways a deal can go wrong. The seller may misrepresent the quality of the website. Google or Facebook may change their ranking algorithm and reduce your traffic. New competitors are always emerging. Unlike stocks, you cannot quickly sell a website – you would need to list it and find a buyer. These factors also merit a higher price.
Operating costs are an interesting topic and a potential source of competitive advantage. The good news: you can automate or outsource a lot of the management effort. At a minimum, you should build up a list of preferred vendors and learn how to hire freelancers. Learning how to perform basic work yourself (WordPress, AdOps, basic coding) is a significant advantage. When you consider that most publishing companies can’t spin up a project for under $25,000, keeping costs down and working efficiently is a key edge for independent website investors.
The Best Part: Restructuring & Organic Growth
Unlike stocks, you have the ability to set direction for the business. In fact, that is a topic worth exploring well before you buy a website. Take a look at our website investing strategy guide.
This can be a key source of growth. A couple of things to think about:
- Switching advertising networks to one which will pay a higher rate
- Adding new content to expand your audience and organic traffic
- Optimizing content and design to improve user experience
- Testing new advertising campaigns
These can increase the earnings of your website by an order of magnitude if successful.
This is a key benefit if you have special insight into digital marketing, e-commerce, and search engine optimization. You can apply these skills to increase the value of the purchased website, just as you use these skills in your day job.
How To Get Started With Website Investing
We’ve assembled a collection of resources for the new website investor.
To get started, we recommend thinking about your broader strategy and process for creating value via website investing. Our guide on this topic will help you set appropriate goals for you efforts and organize your overall process for the project.
Next, we would advise reading our two studies on website revenue and post-deal performance. We tracked a group of 100 websites that were sold at option over a period of several years. This gave us some perspective on what the success rates look like.
Once you’re ready to move forward with website investing, take a look at our acquisition integration guide to walk through some of the details on how to implement the transaction. It shows you how to increase the traffic and profitability of a website after you’ve purchased it.