 Hey, what's up everybody and welcome back to the growth 48 podcast. If you missed last week episodes with Tyler Wagner, go check it out. We talked about how he was able to scale his six figure publishing company in less than one year. So today's special guest is David Newell. He's a brokerage director at the F.E. International. He started out as an investment banker. He moved online to use his transaction experience for website brokerage at F.E. International. He spends his time speaking with buyers, executing deals and working on raising industry standards to encourage more investments. In 2014, David closed more than $6 million in sales and has authored the industry's leading book on buying internet businesses for investors. So in today's podcast, you're going to learn exactly the top tips and insight information on what it truly takes to acquire a profitable business. So without further ado, please enjoy today's podcast with David Newell. Welcome to the growth 48 podcast, where we interview top entrepreneurs and investors to learn how to master their strategies and tactics from sales systems and marketing automations to how and why they invest in companies. David, I just want to thank you for coming on the growth 48 podcast. You and I were briefly talking about actually talking last week, kind of like a preliminary to this podcast on the whole aspect of buying an online asset. And it's kind of different than just going into real estate, but there are similarities. So hopefully in today's podcast, we can run through some key elements and key metrics that all buyers out there should be concentrating on. Yeah, absolutely. Thank you for inviting me on. It's my pleasure. So let's kind of like really cut to the chase right away is let's kind of paint out a scenario over here. Say I'm a buyer and I'm looking to purchase an asset online. And for the sake of the conversation, let's say the asset is an e-commerce company. What are some key metrics or key things that we should be looking at before we actually place a bid? I think the real importance to understand with any online business and particularly with e-commerce is to get a sense on traffic and on the financials. You know, obviously you don't want to buy anything that's falling down. So you've got to be looking for consistency month on month for at least the last 12 months, if not further back and particularly looking at the closest months. So really watching whether that, you know, top line and bottom line has been growing and how it's trending. And I think traffic wise, diversity is very helpful. A lot of people get concerned about businesses that have high organic search and thus like great sensitivity to changes in search engines. You have to dig in into every single channel. And if a business has 60% organic search traffic and a lot of businesses do, then you need to dig in and look at what the kind of link profile is, how that's been developed, what kind of keyword rankings it's had, how they've changed over time, what kind of keyword concentration they have. Because, you know, there's a big difference between having a business that's got 60% search traffic and all of that is coming from four keywords that have just come up in the last six months or having 60% search traffic and that's over 500 keywords and the link profile has got blue chips in it and so forth. So I think obviously there's a lot of things to look at, but once you've got traffic and financials kind of ironed out, then you know you've got the fundamentals of a business that's worth digging deeper into. And when you go into the actual Google Analytics, besides the keywords and everything, are we looking at any kind of past penalties that they've been hit on through Google? Yeah, for sure. Actually, at FE, we have a quite useful penalty tracker tools. If you just Google Penalty Indicator tool, you can put in the domain and it maps basically the last three, five years of organic search history over where the major Google algorithm changes have been. I don't think, you know, a lot of businesses did get hit by Panda and Penguin and Hummingbird, at least smaller in part. And I think it's important not to be too binary about businesses that have got damaged by that if the owner has been proactive, rectify those issues and traffic is consistently growing again. You know, if it hasn't been and there looks like there's gray or black hat SEO techniques going on, then that's a different story entirely. And when you're looking at, for example, we said e-commerce over here, a physical tangible product from either dropshipping or warehouse, are you guys also looking at how the logistics are built into the company? Yeah, 100%. So obviously with an e-commerce specific business, if it's not dropship, if you're doing like partial fulfillment exercise or having like a proprietary warehousing solution, then you need to be all over the supply chain. You need to be like carefully vetting the supplier agreements, what kind of contracts are in place, if at all, what kind of terms, whether they'll transfer to you, you need to be carefully kind of understanding the communication that's going on between the business and those suppliers to see what the kind of reorder process is, how that gets stored, how that gets shipped, how that gets fulfilled. And I think that's really important to like dig into the weeds on. A lot of buyers can get undone by not having done enough due diligence on the mundane day-to-day stuff and find that when they buy a business, it's not a five hour a week job as the owner was telling you, it's a 30 hour a week job because you're relentlessly reordering products and working out shipments and so forth. So it's important to like dig deeper on that stuff. Well, you hit on a key element over here. Let's talk about the owner for a second. So anytime we're looking at purchasing something from my end, the first question I always ask is actually two questions. One question is A, why is a founder or the owner selling and to how attached are they in the business? Are they actually the business itself? Like when they sell, how much of a role do we have to fill in? So do you guys take this into consideration before purchasing? Yeah, 100%. So key man risk as it's like, I guess more jargony called is, you know, a big thing to look into. I would say on e-commerce businesses, that's generally speaking, thematically less of an issue. You don't intend to see too much key man, unless it's just key man from a sheer man hour standpoint. Whereas for example, on a SaaS business, if the owner has developed that product for the last three or five years and is the only person who knows the code base, then you've got a very different type of key man risk attached to that business. And that should certainly be reflected in the both the profit of the business. So when you're thinking about adding back the cost to replace that owner, whether it's ours or technical work, should be priced at a premium if they're particularly attached to it. But it should also be reflected in the overall multiple of the business because if you take out someone that technically important, then chances are you shouldn't be paying a premium multiple because you're not going to be able to generate the same amount of revenue going forward or as easily as he was. So yeah, it's something that you should be very hot on. I think what we recommend to buyers is to establish like what we call a task matrix. So we get them, we get the owner to write out absolutely everything they're doing on a daily, weekly, monthly basis, assign the amount of hours next to it, assign the sort of nature of the task so you can get an idea as to whether that's actually outsourceable or whether you need to bring someone in and what kind of job spec they'd need to do. Quickly touching base on this, when you're looking at, for example, the whole scope of the company, and let's say we did the Google analytics, everything checks out, they're ranking for XY keywords, there's no black hat stuff, back linking is great. The historical data is there. They haven't been really penalized for anything. We're looking at month to month churn rate, for example, for SaaS, it's fine. You know, maybe they're doing industry average of 15% per month churn rate, which is great. The revenue is pretty steady for the last 12 months. Let me ask you this. What do you have a formula or what is a determining factor to figure out what that monthly multiple would be? So there's about 120 or so factors that we look at and they split out. We'll talk about one for today. I'll distill them down. So like, and I would say that the multiple is most sensitive to three things. One, the age of the business, which essentially sets out the track record and demonstrates, you know, the sustainability of the monetization model that they're doing. So a three, like a five year old business is already at a premium to a one year old business, let's say. So age of the business is important to buyers. The second is the monetization method. So recurring revenue is more valuable than one time revenue. So SAS business is always going to be at a multiple premium setter as paribus to a content business that's monetized through AdSense, for example. And the third is the amount of owner time spent in the business and the nature of the work that they're doing. So there's what's known as a passivity premium. So the less work that's required in the business, the more valuable it is. So if you have a SAS business that's 30 hours a week, then it's probably not going to be a three X business, but if it's a SAS business that's one hour a week, it's going to start pushing towards like three and a half X because of that kind of passivity premium. So those three are like the real things that move the multiple around and everything else just kind of tease it up. You briefly mentioned AdSense. Is that a leverage play that the seller can implement or would that be more or less a disadvantage when it comes to selling kind of like doubling down saying, oh, we have X amount of AdSense per month. What do you mean, leverage play? Well, you know, for example, some people say we're producing 6,000 or 12,000 recurring revenue from AdSense and they consider that as an asset, but more or less is too variable. You're not really owning a product or owning a service or owning any intellectual property. You're just at the mercy of Google. Yeah, no, it's like AdSense is just priced as any other one time revenue stream, basically. It becomes premium when it's on very large, very well established businesses. So you can get like AdSense revenue is kind of priced at 2.2 to 2.7 X on smaller sites, but on like seven figure sites, AdSense revenue can be priced 3X and above if that business is, you know, five plus 10 plus years old. It's a complete major authority in the niche. Then it's a different kind of risk profile for buyers. Cool. Let me ask you this. When it comes to scanning their back end, how much does tech play a role into it? Say they have like really, really 1.0 type of tech and then you upgrade, how much is that a role in actually buying it? It happens very rarely. It happens very rarely that people are running on really poor like tech stacks or like very old architecture for the most part. Most people are running on the latest WordPress or open source platforms. Most people running SaaS businesses are very good at keeping everything up to date, annotating, running unit tests and so forth. You'll find that that's a very like technologically advanced community that's working with like the best of the best type thing. So for sure, it's a factor that buyers should like look into and just tick off. But for the most part, it's not a it's not an exercise that brings up anything. That's a deal killer. What would you say are deal killers? Like that's it. That's a killer. Deal killer is misrepresentation by the seller for the most part, which happens less on broken sales. It happens more on direct sales. Anything that points towards like fraudulent misrepresentation of financials. So some people like, you know, have misrepresented affiliate income. Quite common one, for example, is it's quite difficult if you have Amazon affiliate revenue on a site and you have an account that has multiple Amazon sites linking into it and they're all using the same Amazon affiliate ID. It's almost impossible to track the revenue by URL. So there's been instances in the past where people have bought affiliate sites claiming like a grand month, but actually they're doing four and the seller had three other sites that were topping up the other four, but you couldn't see in the parent level account until you swap the IDs out. The only real way to like guard against something like that is to do a back of the envelope traffic analysis where you kind of price what you think a typical user should be worth and sense check the amount of visitors that site's getting per month versus what the state's revenues are. If the revenue piece is coming out wildly high, then chances are they're fudging the Amazon numbers. So yeah, it's basically like financial misrepresentation that kills deals. It's trusting for the most part. And this is where obviously a broker comes into play. Well, it's useful just because we do very aggressive pre-listing DD or at least we do an FE and say like seven times out of 10, we've probably done more DD up front than the buyer ends up doing in after they've made an offer. So let's go flip the gear over here a little bit. Obviously, you know, you spend your time. You do your due diligence. You check everything out. Email list is great. Convergence are great. Churn rate is great. Revenue is great. Everything checks out. What is the key metrics or the key elements that we have to look out for when the transferring process comes into play? Yeah, I think it's not too complex in most of our deals like for kind of best in class and ease of use, we try and have the buyer pour into everything the seller is already using to minimize the risk of downtime. So they'll take over the hosting environment. Domain name then only needs to swap and keep the name servers in place. All of like the little subscription accounts are assigned quite easily. So really, you know, the only major kind of transfer headaches come with merchant processes and hosting. And if the hosting account is being swapped straight in and out, well, it's easy enough. Merchant process of various case to case. For the most part, they are all transferable, just a case of aggressively chasing. They're usually very poor support teams to push things over. But there's certainly no like deal killing accounts. Other than the money and what do you put the money in escrow though? So say we purchase something for 100k and then we have the we just put the money in escrow before the final transfer. Correct. So you sign the APA, the asset purchase agreement, you put funds in escrow. And once funds are secured, the seller transfers everything to you. And then you usually have like a one to three business day inspection period to order everything that you've got. Make sure the revenue is coming through the accounts, make sure traffic is coming onto the site, make sure, you know, all the contents are properly. And then once you're happy and satisfied, you release through the inspection period and the funds go to the seller. So in your experience, Dave, where do you think or where do you see this industry going in the next couple of years? Yeah, I think it's going to become the hobby, hobby income of increasing number of like middle class, middle age people. So I would say that the largest and fastest growing bi demographic out there at the moment are baby boomers looking to buy online businesses to tack on to their retirement portfolio or to accelerate their retirement from business. So it's starting to become very fashionable for like 40 or 50 year old doctors, bankers, accountants to buy up content, SaaS businesses, bring in a bit of tech expertise from outside and run those for, you know, 30 plus percent yields year on year. So I think demand side, it's only going to explode. Like we've quadrupled our list of buyers in the last 12 months alone. Supply side, you're already seeing the effects of that. They're simply not the same parity increase in quality of supply of businesses. So, you know, multiples have gone up noticeably in the last 12 months and probably more in the last 24 months. And until, you know, more of that comes to the market, I don't see that changing. And I think that's really a kind of consciousness expansion exercise that industry participants need to do. So like basically going around telling people that there's a liquid market to buy and sell sites, because you'd be surprised and amazed at how many people that are five, 10 years in the internet marketing space that don't know that they can sell their 500 grand, you know, block or whatever. Well, it's also quality. You know, it's it's not that easy to even create a 500 K. Very true. Very true indeed. Interesting to let me ask you this. So you're talking about doctors, lawyers, you're buying that that's their portfolio. It's better yield and return than real estate, but they're not running it. So they're putting like a president in the place. Are they putting in somebody that's actually running the business for them? Yeah, I mean, it depends very much on the type of the business. So those people are obviously attracted to assets that are coming with content writers in place, they're coming with VAs in place, coming with developers in place. And then realistically, all they have to bring to it is some marketing and strategic smarts which generally speaking, if they've got, you know, half a million bucks to spend, they are pretty good in that camp. They're not buying stuff that's, you know, very intense or requires technical ability because they simply don't have that. So more or less they're buying content generation businesses. That's going to come with a VA, more or less maybe the higher couple of content writers or freelancers, maybe a project manager to oversee that, plug in play and see you later. Exactly. And a lot of the time, all of those people are coming already with the business, they're almost buying a package solution. You know, certainly a lot of the businesses we sell are less than 15, 10 hours a week. And I know I'm almost all of the day to day work is outsourced to, to VA's content writers reliably and for a long time. Beautiful. Well, David, I just want to thank you so much for coming on the Girls 48 podcast. Let's wrap this up. Do you have any final tips for anybody who wants to sell or buy out there? Yeah, I think buy wise do as much DD on the people you're buying from as the business yourself, because there's not a lot of quality representation out there. So make sure the people you're buying from, you know, have been in the game for a while. They've got experience, precedent deals. A team, you know, you can call them up, feel them out. And I think my best tip for buying is it's not always about the price. Like get on the phone with a seller and work out what's important to them. Like if they want to deal done fast, or they have a specific personal condition to get out of it, you can often find that doing a quick deal or filling a personal thing can save you a significant amount of value. So worth exploring every oven you can on those deals. Awesome. Well, thank you so much, David, and have an amazing day. Cool. Thanks, buddy. This has been the Growth 48 podcast. Thanks for listening.