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WES S02E02: Analyzing Websites For Beginner Buyers

Justin Cooke March 22, 2016

Subscribe to our VIP LISTNow that we’ve covered some of the basic business models in Season 2, Episode 1, it’s time to start looking at some of the terms and ways to quickly scan/analyze potential website purchases.

We take a look at terms like ROI, EBITDA, and how they apply to online businesses.

We also look at some of the metrics that, at a glance, might help you quickly disqualify a potential purchase. (Or know that you need to dig a bit deeper)

 

If you’re liking this show and want to give us some love, make sure to stop by iTunes and leave us a review! That’s the best way to support the show and helps us spread the word.

Listen To The Full Interview:

What You’ll Learn From This Episode:

  • The Metrics
  1. Multiple
  2. ROI – Return of Investment
  • The 2 Biggest Disqualifiers
  1. History
  2. The Growth Plan

Looking to Buy? Click to View the Marketplace


Featured On The Show:

 

Justin Cook:                        Whatever your ROI is, it needs to be higher than the interest rate you’re paying on the loan.

Speaker 2:                           Buying and selling businesses just got a lot easier. Welcome to the web equity show where thousands of successful entrepreneurs go to learn about buying, growing and selling online businesses. Your hosts, Justin Cook and Ace Chapman share their real life advise, examples and expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.

Justin Cook:                        Welcome to episode 18 of the web equity show, also known as season two, episode two. I’m your host, Justin Cook, and I’m here with my co-host, Ace Chapman. What’s going on buddy?

Ace Chapman:                   What is up sir, we’re into the second episode of season two, man, this is gonna be a lot of fun.

Justin Cook:                        Yeah man, we are moving on from the very, very, very basic stuff when we’re talking about analyzing websites for beginner buyers. So we’re moving up in the world a little bit and one of the things we wanted to get into you is some of the terms, right? I mean, some of the these we’re gonna talk about in future episodes and in the show, we just kinda got to find them. And so instead of sitting there and defining every single term, we’re gonna kind of chat our way through it. We’re gonna have some tips and tricks for each so that you as a potential buyer or an actual buyer can get some value out of it even if you’re at an intermediate or advanced stage. How’s that sound, buddy?

Ace Chapman:                   Yeah, I realized even on our very first episode, it’s easy to get into talking just the lingo because we’re doing this stuff every day. It’s easy to take for granted that we haven’t broken down what things represent and stand for. And I think there are some folks that are even doing deals and we get into some of the concepts that we’re going to talk about that a pretty basic that a lot of people may not be aware of. So I think it would be good for the new folks and some of the veterans as well.

Justin Cook:                        Yeah, it’s cool, yeah. We actually had a catch up call, you and I, right before we got on the show, talkin’ about some of the deals we got goin’, right? So there’s a lot of action and magic happening in the space right now. I think that’s gonna continue through 2016 and we’re gonna look at some of that basic criteria that some of our buyers are looking at, that you started out looking at and I think people will be interested in this and then we’re going to start talking about how you can determine whether a site is right for you and some of the things that are signs that it’s not right for you, right?

Ace Chapman:                   Yeah, yeah.

Justin Cook:                        Alright man. Let’s do some listener love. First up, we’ve got a five star iTunes review, buddy. It says, “Must listen for digital investors from Tim Douglas. This podcast is a must-listen audio for anyone interested in investing in digital property. I’m currently working with both Ace and the Empire Flippers and both organizations have operated with the utmost integrity. This podcast’s just a taste of how these guys can help digital investors achieve their goals. Thanks for doing this Ace and Justin.” This is just a taste man. Just a little tip of the tongue taste.

Ace Chapman:                   Yeah, just a little appetizer, but like you said, this year man, it’s already off to a raging start. There’s so much going on but it’s hard to kinda condense all this stuff into these episodes. I love that we’re breaking down the basics, but it’s also just exciting to be in this space right now. We started a long time ago and I feel like we’ve hit this feverish pitch. This is just the taste.

Justin Cook:                        Yeah, buddy. Let’s talk about an email I got from Michael H., shot us an email just the other day. Said, “thanks for the inspiration Justin and Ace. Hey guys, wanted to give a huge thanks for all inspiration, great podcast. In the past I bought and built a few websites on the side, but listening to your show last year really pushed me to do it full time. I made some big gains in the past six months following Ace’s mini mogul business strategy. I’m looking forward to the next season of your podcast. I recommend it to everyone I know who asked me about what I do. Thanks again for everything you guys do, Michael H. It is weird to tell people what you do. I mean, I’m a mini mogul. You kind of sound like an asshole, right? You can’t come across and be like, yeah, I’m a mini mogul and be like, want to be Donald Trump bullshit. Right? Like that doesn’t sound realistic.

Ace Chapman:                   I Know and I guess since that concept is contributed to me, then that makes me the Ace-hole.

Justin Cook:                        Yeah, you’re an Ace-hole, Ace. No, I mean it’s cool though. I mean the concept is cool and I like the concept. We actually talked to you on the Empire podcast about that exact context. I think it’s interesting. It’s just kinda one of those things you’re like, this is what I do, this is the process. I’m not sure I want to call it that, but yeah, this is what I do. So it’s cool. I think it’s also cool that you can send someone a podcast that explains what you’re doing and they go, oh, okay, I get it now and hopefully this show is helpful for Mike. Alright buddy, we’re gonna to get into episode 18. again, this is analyzing websites for beginner buys. You ready to do this?

Ace Chapman:                   Let’s do it.

Justin Cook:                        Alright Ace, so first off, we need to talk about some of the terms, right? Basically the metrics. And the first one we have and this comes up a lot with website brokers, comes up a lot with online business deals, offline business deals, and we’re talking about multiple.

Ace Chapman:                   Yeah. Multiple is one of the easier metrics to get started and to, hey, is this a deal that I even want to consider? Because if the multiple is way out of whack, it may not even be worth your time.

Justin Cook:                        Yeah. So when we’re talking about multiple, what that means is, well, Mr. Brick, it’s a little messy because we like to use multiples that are a little different than everyone else. With empire flippers, we use a monthly multiple and it’s basically the deal price divided by the net profit or basically the kind of cash that the business is kicking out. So for example, if it’s $800,000 and it’s doing $40,000 a month, that would be a 20 X multiple. Now we’re one of the few that talk about that way. A lot of people use annual numbers. So, and the same example, $800,000 business for sale. If it’s doing $400,000 a year, that would be a two X multiple. So if there’s some benefit, I think, in clarifying whether it’s monthly or annual multiple we’re talking about.

Ace Chapman:                   Yeah, traditionally internet deals have been monthly and a lot of that is based on the history and the fact that five years ago, 10 years ago, you could buy deals at even a six month multiple. So instead of the traditional way, which offline we use years because you know, the average was two years. It didn’t make sense to say 0.5. So the history behind that is that it started off as being a monthly based multiple and then over the years it’s grown multiple wise, but a lot of folks still do use that monthly multiple. I like the way you guys do it Justin because it instantly gives you a real return as opposed to trying to guess is this 2.5 or is this 2.2, you have an exact monthly multiple. So I like that for these deals.

Justin Cook:                        That’s cool. It gets a little messy when you get over 30 and you’re trying to do like, well how many now? 37 32 you’re like, ah, it’s a little messy. But yeah, I think it’s helpful. And you know, when we talk about multiple, we just have to get into net income, right? We have to get into profit, cash flow, EBITDA. We have to start talking about these things because they’re different, but they are gonna make a difference in what that multiple is.

Ace Chapman:                   Yeah and different brokers will just use different words for the same thing as well. So it’s a little more complicated than just saying, oh well this is the profit. So you could have gross profit, but there still things that are in that gross profit that will take down, it’s not gonna be your net profits. You may have cost of goods if it’s an e-commerce site and then they’ll say, well, after the cost of goods, you’ve got to gross profit at this. And you know, some brokers will use that as the number because they’re stance is, well it’s up to you how you run the admin. It’s up to you what your cost structure is gonna be. So we’re gonna give you this gross profit number.

                                                So you’ve gotta know what you’re looking at. And then just the wording can be different where they’re calling it cashflow as opposed to net profit. So often if you see the word cashflow, what that represents is the net profit. But again, you got to clarify with the person you’re talking to. Hey, how did you come up with this number? What all is included? Because it’s not just a standard across the industry. For sure. For sure.

Justin Cook:                        Yeah, and this really comes into play with the larger deals too. If you’re talking about a 60,000 dollar Amazon affiliate site, not as important. If you’re talking about a much larger, let’s say e-commerce company with multiple employees, a warehouse and things, it’s a little more complicated and I think it needs to be explained a bit more. For the most part with the sell-side brokers, they, correct me if I’m wrong here Ace, but they do not include the owner’s time. They’ll include employees, they’ll include virtual assistance, they’ll include any staff, but they don’t include their own time and the reason that people value that very differently. So that’s normally taken out of it. And you’ll hear a term, seller discretionary earnings. That’s another term that’s used in the industry as well.

Ace Chapman:                   Yeah, you have that where you know, they’re not calculating in the time that they’re putting in. And then like you said, there’s the seller’s discretionary income, which could represent real expenses in the business or it could be things that are just true personal expenses and you’ve gotta get some clarification there because in some cases, you know the person may say, oh well you know, I sponsor my kid’s baseball team with this money and we’re gonna add that back into the profits. But did he get some level of business because of having a billboard out by the [inaudible 00:10:03]? So you really want to break down what they’re including in the profit and kind of add backs or based on that sort of discretionary income so that you’re clear about the benefits of where that money was going before.

Justin Cook:                        Yeah, I think we’re getting in the weeds a little bit. I’m not sure if I was listening to this whether I would be any more clearer, but let me just give an overview. When any broker, when any seller is talking about net income, profit, cash flow, EBITDA, seller discretionary earnings or income, anything like that, there’s going to be some variances and there’s variances in terms of they put their car payment on the business or did they put things that really shouldn’t be on the business and did they include that or did they take it out? A lot of times sellers are going to try to take that out and that always becomes a point of dispute, right? From the buyer’s perspective it’s a negotiating point that they can use. So sellers listening, you may want to be careful with that. You know, there may be some tax benefits for you including certain things in the business. There may not be some benefits when it comes time to sell that business and the buyer doesn’t want to count that earnings that you put towards your Lexus or whatever. So yeah, just keep that in mind. But in general, this number that’s being used, however they’re calling it or however they’re presenting it, that times the multiple is how they got to the listing price.

Ace Chapman:                   So let’s talk a little bit about one of the words you used, which is EBITDA. So the other term that you might see in some listings, typically larger listings is EBITDA and that stands for earnings before taxes, interest payments on debt or depreciation and amortization. And it’s basically telling you this is what the real cash in the business is. And so just like you were talking about Justin, there are things that when they’re doing their taxes, they’re gonna include as expenses that will either bury for you, like interest. I mean that’s gonna be something that’s gonna be based on your financing or no on financing at all. Your taxes is going to be based on you personally. So all of those types of things, and especially when you’re getting depreciation and amortization, all of those things are going to vary. So they’re gonna give you the earnings and it’s before any of that stuff comes out.

Justin Cook:                        That’s right. And so as an example, if a business was selling for $800,000, has net income of $400,000 and we’re talking annual multiples and it’s selling on a multiple of two x. And again, if we’re talking EBIDTA or whatever, if it’s making $400,000 a year, again that’s two X or as we like to say, 24 months, 24 X. Cool man. So let’s talk about the next bit, which is ROI or return on investment and basically ROI, we’re talking about how much cash you’re getting and what were percentage at the end of the year you’re looking to make as a return on your initial investment or as a return on the money put into the business.

Ace Chapman:                   Yeah, return on investment. That’s what this is all about at the end of the day. And you know, the pinning on what you’re doing in the deal, what’s your long term goals are, if you’re somebody who is just trying to replace your income, or if you’re really looking at this like building a portfolio and starting to use the cash flow to go out and buy other deals, ROI can get as complicated or as simple as you like it to be.

Justin Cook:                        So let’s say that you bought that business again, same business, it’s $800,000. You bought it all cash. Just cash deal, $800,000 and it’s pushing out net income every year or $400,000, right? So those are two X annual multiple. It’s two times the annual cash flow or net profit or whatever term they’re using, it’s two times that. Now in terms of your $800,000 investment, assuming things stay the same, right? You have the same costs, you had the same earnings the next year, everything just stays the same. Your ROI return on investment of your initial $800,000 is 50%. You’re getting $400,000 back over a 12 month period.

Ace Chapman:                   Yeah. So ROI, the simple calculation is return on investment equals net income divided by the investment amount.

Justin Cook:                        Yeah. Now you had an interesting point. We talked about this a little bit before the show, right? So if you’re not paying all cash for the $800,000 business and instead you have $300,000 cash you’re bringing to the table, but you’re taking out a loan for $500,000. There’s going to be some interest or some payment that you’re going to have to make on that $500,000 over time. So on a monthly basis and then a quarterly or annual basis, you’re gonna have to pay that $500,000 back. So it’s gonna take away from ROI that you’re getting on the business.

Ace Chapman:                   Yeah, and it boils down to, at the end of the day, we want to measure what our return is gonna be. When you’re calculating ROI, you don’t necessarily want to use the EBITDA method. You do want to put in the interest, you want to figure out, hey, where’s my depreciation? You want to go into the deal and figure out at the end of the day, what’s my total return on this business, and you end up with a number that is essentially the inverse of the multiple, you know, instead of having a multiple of two [inaudible 00:15:21] in the $800,000 investment without any interest costs, where you’re gonna get a true multiple, that ROI on that deal would be 50% and so it’s gonna go down from 50% depending on how much financing you use and other expenses that you add into the deal when you buy it.

Justin Cook:                        Yeah. Ultimately, another way to think of this too is the same exact business we’re talking about. $800,000 purchase. It’s kicking out $400,000 a year. That’s a 50% ROI. If you, and let’s say if, if you borrowed 500,000 of that 800,000 to buy that business and you borrowed it at a whopping 20% interest, right? If the business stays the same, it continues doing what it’s doing. The costs don’t go up. Our revenue and profits don’t go down. You’re making money. So you’re making the difference between the 50% ROI that you’re getting and the 20% in interest that you’re paying. So that 30% is your take, right? And that’s a good way to think of it. Whatever your ROI is, it needs to be higher than the interest rate you’re paying on the loan.

Ace Chapman:                   Exactly. Let’s move on to some of the things to consider when you’re looking at a deal. I mean on a basic level, I know a lot of people, you don’t want to waste time looking at deals that aren’t gonna make sense. Now we’re seeing a lot of deals come to market. There are a lot of opportunities. As quickly as you can disqualify a deal, that means you can spend time on deals that are gonna be more likely to end with a closing. You know that when you’re trying to get into buying and selling businesses, your most valuable asset is your time. And so when you can kind of save time by disqualifying deals and and focus on good deals, that helps you to get more closing stuff.

Justin Cook:                        Yeah, so I like what I like what you’re saying there. So consider this, dear listener. Dear listener, if you’re looking to buy a website or online business and the real kind of sticking point for you requires four or five emails back and forth with the seller and kind of digging into the business, that is horrible because this will take a ton of your time, right? You’re gonna be sending this email, wait for them to respond and send another email. You have to really dig. Now that may be really important to you, but what you want to do is you want to look for disqualifiers that are on the surface, right? Things that are clearly and visibly apparent as reasons you do not want to buy it. Because those are things you don’t have to contact the seller. You don’t even have to get involved, you look at the deal and we can make a quick decision. Those, ’cause you want to disqualify, as a buyer you’re going in somewhat negative. You’re looking for reasons that the site or business should be disqualified. So you look really quick, you find something and say, oh good, move on to the next one. Oh good. This one’s disqualified. Go on to the next one. And one of the ones you put in here, and you can talk about this a bit, is the personality based businesses.

Ace Chapman:                   Yeah. You see this a lot more with Internet businesses. It’s not as much an issue when lookin’ at offline businesses. A lot of times it’s not tied to a person’s brand, but it’s the personality driven businesses. So one of the things that I recognize even for my AceChapman.com business, that’s not a business that I would look to sell [crosstalk 00:18:43]-

Justin Cook:                        Good luck with that. They didn’t want to buy it, [crosstalk 00:18:45] no, not so much.

Ace Chapman:                   So that’s not an asset that I’m looking to sell. So I’ve got my portfolio of businesses that my name is not mentioned in any way, but then I’ve got my personality driven business and if you’re looking at those, there are some ways to get around that whole thing. If you find one that you’re absolutely in love with, Justin and I’ve seen deals where there’s a transition period and the person kind of says, “Hey, this is the new guy,” and stays in the business and slowly works over to you being the new personality or they kind of work themselves out. But rather than having to deal with that on your first deal, it’s better just to go and find something that isn’t personality driven.

                                                And that the huge risk there for a new buyer is getting into the deal. And then you know, the people feeling like, oh well, you know, I really liked the [inaudible 00:19:45] guy got a lot better. That’s who my relationship was with. And you know, you start to see this attrition rate increase because they had a relationship with a previous person. I’ve seen this with offline businesses on a very small percentage where some customers will find out, even though they didn’t have a direct relationship with the owner, they just feel like, oh well this is under new ownership, I’m going to move to somebody else. That increases it tremendously when the business really is built around the individual.

Justin Cook:                        Yeah. Let’s say there’s Barbara’s cafes, she’s been running it 15 years, she sees Mike every morning ’cause he eats his eggs and bacon. She knows exactly how he wants it. She goes and talks to them for a bit. They joke about the kids. That’s a harder business to sell. Mike has a relationship with Barbara, not Mr. Slick Willie looking to buy this business and hop in there and take it over. You’re not Barbara, man. You know, like it’s just not the same and-

Ace Chapman:                   and we all know slick Willie is going around buying all kinds of businesses [crosstalk 00:20:46]-

Justin Cook:                        Sick Willy, slick mini mogul willy is a [crosstalk 00:20:52]

Ace Chapman:                   Yeah and it can’t make a good cup of coffee either.

Justin Cook:                        Excuse me, I’m making your coffee. I’m moguling it up over here. Yeah. It’s not going to work. Same thing as online businesses to a certain extent, right? So you know podcasts related businesses, it’s challenging if they really are attached to it because of you. This is a spectrum, right? On the very high end there’s Barbara who knows all of our customers by first name basis and all this, down to kind of the lower end where yes, maybe they write some posts but some of them are written by someone else. It’s not so much them. But yeah, I think as a new buyer, one that’s very personality driven, unless you are a part of that community already, unless like you’re maybe a co-host the show or you’re like involved in the audience and they know and appreciate you too, definitely not when you want to start with. I think that could be a recipe for disaster potentially.

Ace Chapman:                   Yeah. Let’s talk about the next, the next big disqualifier that a Newbie can use and that’s history. You want to talk a little bit about that, Justin?

Justin Cook:                        Yeah, man. So here’s the thing. If a business has been around for six months. First two months suck, last four months, it’s crushing it, just crushing it. Right? Well you don’t know where on the spectrum of crushing it it is. It could be, you see this amazing trend lines going up on but up. It could have next hit its peak. It could go through the roof and start making a bunch of money. The big issue is it’s a risk. It’s a bigger risk. So if the business had been around for a year and a half, two years, three years, five years, 10 years, you have a much longer track record, right? It’s kind of gone through the peaks and valleys and dips that all businesses go through and you can see that tracked out over a longer period of time. So in general, this is a big one when it comes to multiple, we mentioned before, you know, multiples are multiplied by the cash flow or net profit, shorter businesses or a shorter lifespan businesses are going to have shorter multiples because the risk factor is much higher.

Ace Chapman:                   Yeah. What I tell people is as well is you want to pay attention to how much time you want to work in the deal and your skillset when it comes to these. So just like you’re saying, the multiple for a shorter history deal, you want to get that at a better price. You wanna get that at a better multiple for you and a lot of times with the seller, you can legitimize that by just tell him like, hey, this hadn’t been in business that long. I’m taking a big risk. I need a great deal. Now, if there’s somebody who has the time that if this thing doesn’t go well, you can get in there and make changes. You’re really paying attention to the deal and the trends and you know, we’re able to work on the business. That’s a risk that could be worth taking. But if you’re looking to get into a deal, you’re kind of dipping your toe in the water. You don’t want to spend a bunch of time, you’re trying to keep the risks really low. Then one of the things to just cross out the list is those young deals.

Justin Cook:                        Yeah, I know. I think young deals are going to have more risks. They could double or triple in 12 months. They could disappear in 12 months and so I tell you as an a new buyer, you may not have the experience yet to get to kind of determine which ones are steels and which ones are losers. So you may want to avoid the younger deals and look for ones with a bit more stability and a bit more history. I think that’s important. You said you’d like to look at deals over two years. I think that’s good. I’d say definitely nothing less than a year. Probably 18 months you’re going to need. One of the things with an older deal too, as you may see declining earnings, let’s say it’s a six year old website or on my business and it just seems to be declining over time, month over month or quarter over quarter, year over year.

                                                I would go into that, assuming that I know that the seller has been working to improve it and they’re going to tell you, oh, well, you know, I’ve just kind of let it, I just haven’t been as focused on it or whatever. I don’t buy that, generally when they say, oh, I just haven’t put the time into it, I’m doing other things, especially if it’s significant income or earnings, I assume they’ve been working their ass off to correct it and they can’t stop the downward trend. So as a bar, that that can be fine. There may be an opportunity for me to get a discount or to get a deal before someone else matches up, but I damn well better be sure I have a plan in place to correct that. I need to be able to see the opportunity to turn it around and see something they don’t see.

Ace Chapman:                   Yeah. You want to be very specific about what you’re going into that business and how you’re gonna grow it it. So when you’re getting the information and trying to figure out some of these basic things, you’re going to usually get a prospectus. In addition to the prospectus. There’s some things that you want to ask for just at at the most basic level. And so one of the things that I always request immediately just to start digging into the deal is access to the Google Analytics.

Justin Cook:                        Yeah. Google Analytics is gonna give you kind of the history of the traffic or the visitors to the website. So you’re gonna be able to see where they’re coming from. What countries they’re coming from, what cities they’re coming from, how long they’re staying on the site, which page they’re visiting, how long they’re staying on those pages. Which ones seem to be more attractive or less attractive, and just kind of get an overall feel for how the traffic is flowing throughout the website. One of the great things, and we’re gonna get into this a lot more in a future episode on due diligence, which I think we’re probably gonna do a couple episodes, is really, really important, but one of the best things about Google Analytics is you can verify everything that was said in the prospectus or the listing, so if they said this and Analytics is showing that or something different, it’s a red flag, right? They better have a damn good explanation when you talk to them about that or that’s a big problem.

Ace Chapman:                   Yeah. I think Google Analytics alone could be an episode, just what to look for, red flags, all of the things to examine and then if it’s an e-commerce business and they’re actually tracking conversions and all these things, you can go really, really deep into Google Analytics and so that’s something we’ll discuss in and of itself-

Justin Cook:                        How deep do you usually go? It depends on what deal, right? If it’s not heavily dependent on the traffic or the traffic isn’t suspect and not quite as much and more in other deals?

Ace Chapman:                   Yeah, I mean it’s based on the deal, it’s based on the size of the deal, the type of business. E-commerce is gonna be totally different from just the small [inaudible 00:27:35] or affiliate site which is different from a [Sass 00:27:39] business. So each-

Justin Cook:                        We look much more for bot traffic with an AdSense or add-based site then we do with an e-commerce site. Someone’s actually going and paying, I don’t care if they got bots, it doesn’t matter. Someone’s actually pulling their credit card and buying things. But if it’s an ad-based site and there’s bots. That’s a problem.

Ace Chapman:                   Yeah. The bots are pulling out credit cards man, let’s get some more bots in here.

Justin Cook:                        Get me some some of those bots, man. I want some of those bots visiting our site. Absolutely. One of the other things that you look for is you’re gonna get proof of earnings and upfront, first things first, you may just get like screenshots or you may just get something and that’s ultimately before you do the deal. Unless it’s a very small deal that’s not good enough. That’s just the preliminary information. We talked earlier about just getting a quick snapshot and deciding whether the deal’s for you or not. The screenshot of earnings is just that quick snapshot, so you go, oh, it doesn’t have this or here’s the problem, I’m not getting it. Ultimately as part of due diligence, you’re going to match what those screenshots say with what bank accounts say, with what a live walk through of their earning says, with the access to their earnings information, so you’re gonna need to match that up later but just a snapshot or images is fine to start.

Ace Chapman:                   Yeah, it is. It’s a good place to start. It’s also kind of based on the size of the deal. How in depth do you want to get it, but you want to make sure that it’s real. You can do the video, you can log in yourself. There’s a lot of different methods, but for right now when we’re just looking at that criteria and some initial information to gather for today’s episode, the main goal is to just see, hey, what are the screenshots? What’s the business doing? Is this inline with what I was told? And just making sure everything makes sense at this-

Justin Cook:                        It’s cool too ’cause if you just get a snapshot of earnings, let’s say you have a basic spreadsheet of profit and loss kind of thing and you have some earning screenshots, some of these deals take weeks or even months. And a good thing you can do, a sneaky thing you can do is make sure that later on when you’re doing a walkthrough or when you get updated information, make sure that old information on the new screenshots matches the new information. And if it doesn’t, again red flag. And again, as a buyer, you are looking for this kind of sneaky shit. You’re looking for ways they are not being honest with you or that the numbers don’t match. And so these are ways you can do that. It’s more due diligence stuff and we’ll talk about that later. But that’s a nice trick.

Ace Chapman:                   Yeah. Yeah. So after this you’ve got some initial information. You know what the multiple is, you’ve kinda got a guess on what your ROI is gonna be, the next thing is before digging too much into it, figuring out, hey, is this something that I can run? And more importantly, is it something that might be able to grow? So as you’re thinking about that, some of the questions you want to ask yourself are, do I have due diligence? I mean, do I have expertise in this area so that when I’m doing due diligence, I know what I’m looking at. You don’t know anything about software or programming or software development, getting into a software business or a [Sass 00:30:53] business could be a really, really high risk. And then after the due diligence period, being able to grow that business is also a risky thing.

Justin Cook:                        Yeah. I think keeping in mind, what value can you create? What expertise and value to the business do you bring, is important. And this is just good practice anyway, but think of the business as another entity. It’s a person, right? It’s a thing. And so if you’re looking to make a match with this business, what are you bringing to the table? How do you help this business and if there’s nothing there, that might not be a good match, especially in your first couple go-rounds.

Ace Chapman:                   Yeah, so I love looking for businesses that I can grow by adding some immediate value, not just kind of putting off into the future like, oh man, one day this is going to be so big. It’s just what can I do as soon as I close, I can start working on this and increase the value of this business.

Justin Cook:                        How do you handle that then by doing, I’m gonna put you on the spot, how do you handle that by doing a lot of deals. I mean, you have a limited amount of time. You have some other cycles. You have people that work with you that can help you do some of the stuff, but when you’re taking on a new deal, there’s gonna be a couple of months where you’re gonna try to implement those strategies. How do you not miss out on other deals that are going by at that time? Like how do you manage your time there?

Ace Chapman:                   Yeah, that’s one of the frustrating things. So one of the reasons that I do the whole program is to have the opportunity to invest in other people’s deals because that’s the only way with this stuff that you can take advantage of more deals, so-

Justin Cook:                        You’re doing he Ace Army thing. You have other people coming in, looking at deals, you’re going in on them with some deals and it’s a way for you to just expand, really. [crosstalk 00:32:44] Expand your deal flow really.

Ace Chapman:                   Yeah. Yeah. Deal flow and the deals that are actually getting closed. We held our first deal makers weekend a couple of weeks ago and that was neat because four of the attendees are people whose deals I’ve invested in who I’d never met in person before. So you know, we’re partners on businesses and I’d never one of them, I’m part of them, like three different businesses with one of the guys alone. So that’s how I get more deals done.

Justin Cook:                        Gotcha. Going back to that growth plan. There are a bunch of different specialties you can have and you don’t have to have all of them, but you might want to have one or two of them in place and that could be being a pro at creating autoresponders and what those are are automated email sequences that go out. Maybe you’re a pro at that and you realize, oh, he’s collecting emails but he has no autoresponder. I can add value there. Maybe you’re great at Facebook paid ad campaigns or organic campaigns. You’re great at driving social buzz or at paid traffic campaigns, maybe Google Ad Words, other paper click stuff. Maybe you’re an SEO expert and you see a page ranked on the fourth position on Google for a major, major keyword and you’re like, oh, I can get up to the second position or the first position.

                                                Maybe you’re good with sales funnels, maybe you’re good with pricing strategy. Maybe it’s a recurring product to 39 bucks a month that you know, people will be paying 79 bucks a month for and they wouldn’t blink an eye in terms of loss of sales. Again, you don’t have to be good at all these things, but you should have a little bit experience in one or two of them and you can start to look for deals where you provide that value. Remember, this is another entity you’re looking at. You have to bring some value to the table yourself, right? It’s not that the business is gonna do all this stuff for you. It’s what do you provide for them.

Ace Chapman:                   Yes, and you should have fun with it as well. I mean, when you’re in coming up with all of these interesting ways to grow the business, it’s testing, it’s not saying, oh, this is the end all be all. I’m gonna go in and grow this business with Facebook ads. You want to go in and say, Hey, I’m going to test ads. I’m going to test and doing some promotions of affiliate products. I’m going to test the pricing. So you’ve got several things in that deal that are potential ways to grow it.

Justin Cook:                        Yeah. The last point in terms of growth strategies are basically taking advantage of some strategic opportunities and economies of scale. So if I’ve got an e-commerce business, let’s just say, and I’ve got four people working in a warehouse. I own or rent the warehouse. I’ve already got everything set up. Taking on another e-commerce business, I have already got the employees, they’ve got extra hours in their day where they can stock these items and ship them out for me. There’s no costs in having to hire new people, ’cause I’ve already got these people on board. Maybe I can cut out the cost of the employees that are already with that business and just use my current employees. So there are all kinds of advantages of scale that you get when you’re doing a lot of deals and bringing a lot of deals on.

Ace Chapman:                   Definitely. You’ve got the scale, you’ve got cross promotion, you’ve got the ability to kind of use the content to drive to a couple of different places. I mean it really does become neat as you get into more and more deals.

Justin Cook:                        Yeah, we’ve got a good team in the Philippines, right? This was just for an example and they’re virtual assistants and they can handle live chat really well, maybe light phone calls, but it’s not a full on call center. So if a deal comes across where they’re handling, you know, a 100, 120 calls a day, that wouldn’t be a great pickup for Empire Flippers. But a deal where it’s a lot of chat or they do, and I will say Zendesk support, email support, and maybe a few outbound calls a day. That’s something our team is already trained for. They already do on a regular basis. And that would be an easier pickup for us. So I could immediately say, oh, you’re doing how many calls a day? Are these [inaudible 00:36:41]? Oh nope. That’s not for us. And then, oh, live chat, email support, yep, okay. Now I can dig a little deeper.

Ace Chapman:                   Yeah. Yeah, I love it.

Justin Cook:                        Alright buddy. So that is it for episode 18 or also season two, episode two of the Web equity show. If you’ve been listening to this show and you’re finding value, you like our season two, you like our first season, you love what we’re doing. Please head over to iTunes and give us a review. Your reviews help us keep the show goin’. As we probably mentioned before, we don’t make any money at this and honestly this isn’t really a business for us. This is kind of fun. We loved the talk. We love to talk to each other. We’d love to strategize and do deals and this is a way for us to do that and kind of share our insights and kind of what we’re doing with you. So really hope you’re digging it.

Speaker 2:                           Thanks for listening to the web equity show. Now is your chance to be a part of the action. Go to www.webequityshow.com/gift and send us your business acquisition or exit question and have it answered on the show.

 

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