September 24, 2012, 5:00 am

Is Buying a Site a Good Investment?

by: The Financial Blogger    Category: Alternative Income,Make Money Online
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It is no secret that I was able to build my online company through several blog acquisitions. In fact, this is how TFB got out of the blogosphere and found its niche. What I like best about this field is that most people ignore how it works and it’s always fun to talk about something that most people don’t know! It makes it “exotic” Hahaha!

 

We bought our first blog back in 2009 and have since made several purchases. While our business revenues kept growing we hadn’t looked at our ROI. We were happy to see that we were generating more than the previous owners with lower expenses. But we didn’t calculate where we were at in terms of profitability. The business has been growing quickly for the past 4 years and my interest was more into growing the biz than cashing out the dough!

 

Only recently, I thought of looking back into my archives to see how the return on our major purchases was. I wanted to know if we were making a lot of money or were simply growing our gross revenues without looking at expenses. In other words; how much did I make on my investment? Is buying a site a better idea than the stock market or real estate?

 

Some people like Dividend Ninja thinks that dividend stocks can do as well, I have to disagree…

 

What I Did Over The Past Three Years

 

I’m an investment guy so I surely like to make gains with my money. What I did since 2009 was create an excel spreadsheet for each site we own in order to track down revenues month per month. We do that for our major properties only so it makes roughly 8 excel spreadsheet to update on a monthly basis. We were then able to track each type of income and expenses. This is what the spreadsheet look like:

 

As you can see, this is far from being complicated but it gives you a clear idea of:

-          How much you make per month

-          How much you spend per month

-          What are your higher income sources (% included in the last column)

 

For the past three years, my main concern was to make profit on a monthly basis and I didn’t pay much attention to the real investment return. To be honest, I would have paid more attention if the profit per site was minimal but it wasn’t the case. This is why I let it go for a while and concentrated on growth. Now that the company is more “mature” we can consider its ROI more closely!

 

How Much To Expect Per Site

 

Properties that were bought 3 years ago were obviously our best deals. Back then, it was quite easy to pay 18 to 24 months revenue, even for major sites. We made small purchases with lower multiples but what matters most is when you shell out over $10,000 on a site; you want to make sure you’ll get your money back! Our most lucrative deal shows a 67% investment return during the first year and an average of 74% average returned since we bought it.

 

Our latest purchases were made between 30 and 48 months worth of income. You can guess that we didn’t make a 74% return on them ;-). Prior to making an offer, we were using a different valuation model on our end to make sure the blog was worth the investment. It’s one thing to pay the “right value” for a property, but it has to fit into the profitability model you have built.

 

Our goal with a site is to make a 25% NETreturn on our investment per year. We don’t aim at getting all our money back within months; we aim for a sustainable business model. Therefore, if we pay $10,000 for a site, we need to make sure we will make $2,500 net per year with it. This means that we are ready to pay slightly under 48 months of gross income since we have to calculate our expenses too. Note, this is the price we are willing to pay only for major properties (which include specific characteristics). For smaller blogs (under 25,000 visitors per month), we would never apply such multiples to determine its value. The goal with major properties is to build a sustainable business model. I want to see these blogs and this company profitable for the next 50 years. This is why I’m not after a quick deal!

 

Technically, a 25% investment return is hardly obtained from the stock market so we figured it is a good way to analyze if it’s worth it to buy it or not. Since it’s based on estimates, we also figured that if we are wrong and we make 15% instead of 25%, we are still in a decent position. Obviously the goal is to be very conservative in our calculations so we can generate net returns over 25%.

 

The hard part is to assess how much a site could make once it has been transferred into our hands. We don’t share these thoughts with the blog owner so it’s even harder to work with only a few metrics to make sure we can optimize the site. The goal here is to find a blog that makes $500/month for example but that we know that we can make $750/$1,000 per month with optimization. Therefore, we can pay for the site based on a $500/month valuation and shift it to a 5 figure earning blog within months.

 

Our Hidden Valuation Model

 

We always share our valuation model with a potential seller so he can understand how we evaluate his site. The valuation model we share is the one with the actual metrics. We will consider the past 12 months of income and the sources of income to use a proper multiplier. Then, we are willing to add a premium depending on other metrics:

 

Brand / Size of the Blog (monthly visitors, sources of traffic)

Size of Community (RSS readers, newsletter subscribers, number of comments per posts)

Any additional features (extra articles, excel spreadsheets, ebooks, etc)

(More on our valuation model here).

 

So we usually start with a 24 month multiple and add a premium for bigger sites based on the above mentioned metrics. I like to explain our thinking regarding the calculations to the potential seller because it avoids uncertainty and confusion for both parties. There is also usually less negotiation since we already mentioned the strengths and weaknesses of the site in our offer. But this is the part the seller sees, on the other hand, we made other kinds of calculations to see if the investment is worth it or not…

 

This is why we always ask to see the top 10 pages viewed along with the top 10 keywords the site ranks for. This will give you a great indication of the income potential. Our first money maker on a new site will always be Adsense. This is an easy way to start making money quickly with a new site. You simply plug in the code and wait for the clicks. What I like about Adsense is that it is relatively sustainable. A site making $200/month in Adsense will most likely continue to earn this figure for several months as long as you continue to update the site with quality content.

 

Most of the time, the previous blogger didn’t pay much attention to optimizing his advertising space. We can quickly see if we can add more and how much we can make when we compare it to our own network. The fact that we cover several sub topics of personal finance helps us evaluate what is a good click through rate andCPC(cost per click). Based on the number of pages viewed, we can calculate how many ad impressions we will get along with theCTRandCPC. Over the past three years, this technique has proven successful and the calculations quite accurate. This is how we know if we can increase the current Adsense income.

 

Then, we go through the top most visited pages of the site and look for potential affiliates. We then estimate how much we can make from affiliate programs for these pages. It’s important to optimize these 10 pages as they usually represent 80% or more of your traffic and most probably will generate greater than 80% of your income. It’s harder to assess potential affiliate income when compared to Adsense. We are currently working on this model to become more accurate in our calculations. We usually use very conservative numbers (such as a conversion rate under 0.5%) as affiliate marketing is something that is quite hard to master. I wish I could pull out $500/month per site from affiliates but this is far from being the truth!

 

The last step we do is to prepare a growth plan for the site. If we can’t find many ways to improve the site with major changes, chances are that we won’t make an offer. Many big companies buy financial blogs thinking they simply have to continue what has been done by the previous owner and rack up the money. This is a huge mistake. First, you are not the previous owner so chances are that you won’t be able to replicate exactly the same strategy without your readers realizing it. Second, the internet changes so fast that if you simply think of jumping on the train and taking a ride, you will get kicked out pretty fast!

 

Our growth plan will include several metrics:

-          Potential synergy with our existing network (readership swap, link building, etc)

-          Ebooks and newsletter funnels

-          Reader acquisition models (contests, newsletters, RSS, comments, etc)

-          Community projects (how can we use the force of the existing community to grow the site)

-          Potential direction in terms of writing, topics, design

-          Maximization of the existing content

 

Based on these “secret” assumptions, we’ll gain a good idea of how much we can make per month with a site on a sustainable model. After that, we need to assess the cost to make sure we make 25% net return :-D. As long as we pay under this value, we consider that we are making a good investment. But before clicking on “send”, we have to calculate our costs…

 

What Are the Other Costs When Purchasing a Blog?

 

Besides the price of the blog itself, there are a few other costs to consider. You have the transaction and operational costs. We don’t count the transaction cost in our valuation model since they are minimal and they are a one shot expense. In the transaction cost you will find:

-          Money conversion (we sometimes have to convert CAD to USD or USD to CAD to make our purchase)

 

-          Security / Money Transfer fees (we usually use a site called Escrow to make sure the money is held by a third party during the transfer)

 

-          Server costs (we don’t have server costs anymore since we park all our purchase on a VPS over at Liquid Web. This is the most reliable server we have ever had and was able to get traffic spikes up to 20,000 visitors in a single day without crashing. If you are getting serious about hosting, Liquid Web is definitely a server you want to consider).

 

The most important costs to calculate are the operational costs. These are the costs incurred to run the blog after the transaction. The calculations of these costs are very important considering that it will affect the net profit directly. Depending on the specificity of the topic, a writer can cost between $20 and $50 per article. If you need someone to blog about insurance or investments for example, the rate you will have to pay your writer is higher. The second question we have to answer is how many articles will we need to post per week? This depends on the actual posting schedule and our ability to write on a site at the same time. The model I find the most profitable and effective in term of traffic and pleasing our readership is two to three times per week. We don’t consider writing more articles because A) people don’t have time to read 20 blogs each day and B) I would rather have longer and higher quality articles on my blogs than 500 word quick reads that don’t lead anywhere. I would rather have fewer, more engaged readers due to the length of my articles.

 

Once we found a good writer and the site is hosted on Liquid Web, we are pretty much set to know how much the site will cost. We usually don’t use much money to promote the site or to do link building. These expenses are usually reserved for smaller blogs or niche sites where we need to boost rankings. Major website properties don’t need “marketing” expenses as they are already filled with high quality back links. This is another reason why we are looking to buy these types of sites; because we already know the traffic is there!

 

Is This is Still a Good Business Model Post Panda Updates?

 

As many of you know, we used to make a lot of money with private advertisers. This is how some sites were paid off within 12 to 18 months. But the game has changed a lot since then and we don’t work with many private advertisers anymore.

 

Surprisingly, it was not too hard to shift a monetization model on a blog. Blogs that were purchased in the past two years are still making their 25% return even without private advertisers! This is due to a lot of Adsense Optimization and affiliate funnels.

 

Our newest additions are currently generating 30% net where more than 80% of our income is coming from Adsense and affiliate funnels. It’s interesting to see that slowly leaving the private advertising world is not really hurting our business. We actually increased our traffic at the same time and are moving forward with a more sustainable model.

 

I’ve made the investment return calculations on our some of our investments. Since we own several properties, I’ve picked one of our oldest acquisitions, one that has been around for about 2 years and one amongst our most recent acquisitions as we made a few moves during the panda updates (during the past 18 months).

 

Site #1: Earned 28% on the first year, 18% on the second (the 10% difference is related to the cut in private advertisers). However, the 18% is currently growing and the income sources are 100% sustainable now!

 

Site #2: Earned 68% on the first year, 71% on the second year and currently showing 82% return for this year. Email funnels and adsense optimization combined with the fact that we didn’t pay a high multiple for the site makes this one very interesting!

 

Site #3: Earned 30% on the first year which is pretty good since it was bought during the panda updates and it didn’t affected our valuation model.

 

Yeah… I know you want the name of each site… but I want to keep a few things secret. If not, there is no fun! Hahaha! Investment returns are net of cost but not net of taxes. Since everything is blended into one financial statement, I can’t really consider the tax generated by each site.

 

What is My Next Move

 

Am I still in the buying blog business?

 

The answer is yes and no ;-). I’m still in the business as I will never turn down a good opportunity (you know my affection towards leveraging, right?). But we are currently concentrating on paying down our corporate debts in order to enjoy some dividends from the company later on. This is why we have become a lot pickier in our choices. At the point we are at now, we would probably not consider a site generating less than 50,000 visitors per month. We already have web properties that we are working on improving traffic and would rather work on optimizing income than traffic for future properties. Since there are not that many sites seeing such high volume, I don’t expect to buy any sites for the next twelve months. We had to wait 9 months or so to make our latest purchase and I haven’t see anything else interesting since then. What I like is that we currently have a huge team of VAs and writers ready to take on any other project. This is the advantage of having a high cost structure I guess; we can grow instantly without affecting our personal lives!

 

My next move will be more towards the creation of a few sites that I have in mind. I’m already working very hard on my latest project; Dividend Stock Analysis which is part of Sunil’s Authority Site Challenge. I will also use some of our resources to build a few more niche sites around a specific topics (more to come on that later). Since I’m launching my second dividend investing eBook today (what?? You didn’t know? Check out Dividend Growth: Freedom to Passive Income Kindle Book announcement on The Dividend Guy Blog now!), I have a lot of work to promote and work on the book ranking. I’m actually preparing a nice piece on the publication of a book for you. The Kindle version is actually the first part of a bigger plan….mwhahahaha!

 

At FinCon12, Ramit Sethi from I Will Teach You To be Rich said something funny: “the blogging real estate market seems to slow down and buying/selling blog is not on a good trend right now”. I don’t know where he got his info but I can tell that it’s far from being the truth in my case. I think that big companies making huge purchases such as Consumerism Commentary or Get Rich Slowly are probably eating their sox right now. The reason is simple; they have tons of money to spend on sites but no plan to make them run! Therefore, they now realize that they are pumping cash into the site and the investment return is not there. They probably hired people that don’t run blogs to make the acquisition. It’s like hiring someone without a driving license to purchase cars for the resale business… They may be very good at what the usually do but the blogging business, as any other business is very different and specific. Personally, I’m more like Sam @ Financial Samurai; I’m very bullish about the PF blogging for the upcoming years!

 

So my question to you is simple; do you still think that stock investing is still better than blog investments?

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Comments

Pure Gold. I will be bookmarking!
Thanks for letting us see the secret lives of professional Bloggers too

Is there a post about how you have improved income specifically? Moving ad sizes, or locations etc. ?
What is worth more in your valuations – Higher amount of readers or more engaged / commenting readers?

For the average Joe stocks are a better investment in my opinion. You have to have very specialized skills and knowledge to deal in blogs. That said it was very interesting to read through your processes. I personally am building from the ground up with my blog. Just got a professional redesign so hope that helps!

by: The Financial Blogger | September 24th, 2012 (10:10 am)

Hey Derek!

It’s a little bit over the place, but I would read the following if I were you:
http://www.thefinancialblogger.com/how-to-build-a-media-kit-and-make-a-killing-with-private-advertisers/

http://www.thefinancialblogger.com/adsense-optimisation-for-pf-blogs/

http://www.thefinancialblogger.com/category/newsletter/

I actually prefer a higher amount of reader when I buy and a more engaged reader when I own :-). You need size when you buy in order to make money out of advertising. but if you want to make real money, you need engaged readers that will buy your product :-D

A big challenge for buying blogs is scale. Warren Buffett has been saying in the last couple years that US rental real estate is one of the best possible investments. But he has no way to make it “work” on a massive scale and, therefore, it’s too piddly to get into.

Buying a blog isn’t like buying a newspaper; it’s like buying a newspaper column. Is there profit? Absolutely. Excellent % returns? Without question. But institutional investors just couldn’t be bothered.

by: The Financial Blogger | September 24th, 2012 (10:20 am)

Hey Lance,

from what I can see, most peole think it’s easier to pick up their own stocks and most of them are actually losing money out of their pick ;-).

But I agree with you that it requires specific knowledge to buy/sell/operate websites. But for those who can, the money to be made is right there!

by: The Financial Blogger | September 24th, 2012 (12:55 pm)

@ Joe,

I think that institutionnal investors should take a look at the model. A small time of full time employees could run multiple blogs and generate very high return. I think that it is scalable!

As a matter of fact, we started with 1 blog, then 2, 3, and we now run about 8-10 major websites and still work 10-15hrs/week each. In the next 12 months, we will surely buy another site :-)

by: The Dividend Trader | September 24th, 2012 (3:04 pm)

Here’s an issue I haven’t seen covered. How Does a blogger finding a paid writting gig? I asked you a while back why someone would choose to “ghost” write for another blog when they could start thier own and keep all the money to themselves, your answer was short, it’s a ton of work to build a profitable blog, very true, I see loads of great content on dead blogs.

Thanks Rob

Wow! FANTASTIC POST MIKE! We have talked in private and we have a very different business model but I think yours is much more sustainable for the long term.

I respect what you have grown, but I disagree with your valuation and I think Panda and Penguin prove that for me. There needs to be a discount given for that big looming G that controls income on sites…while I would love to be offered 48 months worth of revenue I believe the person buying it would be crazy! Its like buying a business where the gov’t is ready to change its regulations…there is going to be a discount built into the valuation.

I am a huge fan of these types of posts – lets us readers in and peek at the thought process of someone who is living their dream!

Great post! Love the insights on valuation – I’ll get working on those :).

To answer your question at the end, I think they are apples and oranges. Investing doesn’t involve operating the blogs or the company. If you were to offer me to invest in your company, now that would be comparing investing in stocks or investing in a blog business :)

I don’t see you as an investor when you buy blogs but as an entrepreneur and a business man. It looks like your processes have made you successful with buying blogs but I would venture to guess that it’s not the same for all. Do you know of any that have challenges turning their blog purchases into a profit making machine?

by: The Financial Blogger | September 24th, 2012 (4:34 pm)

Hey Rob,

I remember that answer. I’ll try to develop in the future :-)

by: The Financial Blogger | September 24th, 2012 (4:52 pm)

Hey Evan,

If the content is good, Pandas, Penguins and the other animals won’t affect your ranking :-)
Government can change lending terms + affect interest rate anytime and people are still buying real estate :-)

@Passive Income Earner,

you have point there in term of time (and skills) required. I should say that blogging is more lucrative than real estate ;-)

the biggest challenge is often the community! you don’t want to be seen as the big bad guy who wants to make profit out of a blog readers used to love.

by: Financial Samurai | September 25th, 2012 (2:46 am)

Evan, I actually think selling less than 48 months of revenue isnt that great unless they are seriously burnt out!

Buying a company at only 4x revenue is so cheap, especially when the hunt for yield is so strong in this low interest rate environment.

Real wealth is built holding over the long run!

Hey Mike, I’m with Evan – Thanks for sharing! I understand the importance of privacy on the names… I do have one question. Does your expected return include the interest you are paying on the corporate debts? or since the debts (seem to be at least) are grouped together, is that another separate expense. Just curious… Keep writing the MEGA posts!

by: The Financial Blogger | September 25th, 2012 (7:39 am)

Hey Corey,

thx! I actually see a big difference in the comments too :-) I love it!

I’ve shared as much as I could!

That’s a pretty good question. Returns doesn’t include interest on corporate debts because of two things:

#1 The loan wasn’t used to buy one property only so it’s hard to break it down.

#2 We use a lot of our own money (so the company owes us $) and this is what we are reimbursing aggressively right now. But we are not charging interest on that debt. Depending on the moment, the company will owe me or my partner (this time is my partner) a lumpsum that we quickly reimburse (usually within 1 year) with our other revenues.

The other aspect I didn’t touch is my global expenses structure (VA’s, accounting, interest charges, etc). Those expenses are obviously draining a part of our profit.

@FS,

I think I look at google’s control of the revenue of this world differently than you and TFB.

by: The Financial Blogger | September 25th, 2012 (9:51 am)

Evan,

I’d be curious to know if you consider Real Estate a risky investment model or not as you have absolutely not control over interest rate and mortgage rules. Both are being regulated by a single group of individuals who can pretty much do whatever they want similar to Google’s position on the internet. I see both fields as being Real Estate.

Mike: what about to share some tips how to find a good writer? Personally my main problem is – my English sux :) Even though I live in Australia for the past 2 years, I’m from non-English speaking European country so there is no way to get on US native person level any soon. And my experience with hiring writers is, well, disaster :-(

by: The Financial Blogger | September 25th, 2012 (11:07 am)

Hey Jakub,

no excuse here… I’m French! lol! I have found someone to edit all my articles before they get publish.

if you are looking for a good writer, hire an existing blogger, there are the best and most of them will be happy to write for cash :-)

Wow, this is a thorough article! You’ve really done your homework! I think the most important thing you can look at when you’re trying to decide whether to buy a site is to look at the ROI over time. If you’re going to make your money back in two or three years, by all means go for it! But, pay with cash. ;)

Mike,

Thanks for sharing. That makes a lot of sense.

Other expenses was going to be my next question (about expenses). It’s safe to assume that content creation was included?

I have been thinking about the ROI lately as I have taken on a lot of projects. I have a slightly different model as I took on a couple “projects”. I probably won’t take on anymore though as I am running at full speed right now.

Mike,

“Iâ??d be curious to know if you consider Real Estate a risky investment model or not as you have absolutely not control over interest rate and mortgage rules. Both are being regulated by a single group of individuals who can pretty much do whatever they want similar to Googleâ??s position on the internet. I see both fields as being Real Estate.”

I can get behind you with part of that analogy. Interest rate and mortgage rules are taken on when you purchase the property or ReFi, so no I don’t see it as the same thing.

Notwithstanding, I can jump on the analogy if you were buying a commercial property and had no clue if you could get it zoned for residential. In that case I believe that would provide a discount to the price which is all I am really saying…websites should be discounted for the looming Google t hat could destroy any niche/authority/blog it wanted

by: The Financial Blogger | September 26th, 2012 (4:31 am)

@John,
aaahh, there is nothing like a little bit of leverage to make your business runs faster :-) hahaha!

@20′s Finances,
yes, I always consider the cost of having a writer on a new blog that I’m about to purchase. In fact, I make sure I have a few candidate prior to buy the property. It’s important to find someone that has a similar voice than the previous author!

@Evan,
don’t you think that investors would not pay such high price for real estate right now (in Canada anyway) if they knew that interest rate would jump to 8% in 5 years? The thing is that nobody knows what is going to happen with interest rate and still people are paying up to 15 times the annual revenues and they could lose all their money if interest rate goes up. I think there is risk everywhere and I don’t see Google shutting down a whole topic on the interest just for the fun of it.

None of my sites were negatively affected by the Penguins and I’ve recuperate the traffic I’ve lost on the first Panda update since Google made corrections as it was penalizing the wrong sites.

[...] my previous post “Is Buying a Site a Good Investment?” Rob from The Dividend Trader asked a pretty good [...]

Hey MIke, sorry to arrive late to the party here. :)

Actually, I think websites are a FAR better investment than stocks! I just wouldn’t want to give up my RRSP and TFSA nest eggs and go all into websites.

However my recent purchase of The Dividend Pig has been a fantastic investment. I’ve alreay made over 20% ROI (Return on Investment) in less than a month. Of course it’s not huge captial, but the potential is huge!

To get a 20% ROI on the average dividend stock takes 10x that capital and a good year or more. ;)

All the best, and looking forward to getting the word out on your new eBooks!

Cheers
Avrom

[...] The Financial Blogger  – Is Buying a Good Site a Good Investment? [...]

So when I build up to the point of earning $500,000 per year, will you buy my blog? :)

Good post. I keep saying I should get into the blog-buying business but I never seem to get around to it. For the beginning blog buyer, what price point would you recommend? Something under $10,000? I know plenty about how to run a blog once I have it but not much about the buying process.

by: The Financial Blogger | September 28th, 2012 (5:45 pm)

I will definitely be interested but I don’t know if I will be able to afford it! hahaha!

I think I would start with an investment around $5,000 so you have a site that is making money (roughly $200 to $400 per month) and you don’t put too much at risk.

smaller site won’t prepare you to build a sustainable business but you can obviously buy a site at $500-$1000 and fill it with sponsored posts and make your money back within 3 months ;-) that’s another business model but I doubt it last for the upcoming years…

@Kyle,
When U are making that kind of money on your blog, you can buy us all out. :) You could theoretically buy all the dividend blogs, if Mike sells them to you – since he owns them all. You could slowly buy out the competition. :)

Then you could slowly write index investing articles.and put your eBook up in the sidebar. I can see it now, The Dividend Guy Blog with “ETF Investing – Low Maintenance and Stellar Returns” in the top sidebar. LOL

Cheers
Avrom

[...] epic posts this week by The Financial Blogger, who asked Is Buying a Site a Good Investment?  and Do You Have What it Takes to Make [...]

[…] epic posts this week by The Financial Blogger, who asked Is Buying a Site a Good Investment?  and Do You Have What it Takes to Make […]