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…
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!
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.
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)
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)
– 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…
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!
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.
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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