Empire Flippers: A Conversation with Justin Cooke About Buying and Selling Online Businesses

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Justin Cooke

Justin Cooke, co-founder of Empire Flippers

As co-founder of Empire Flippers, a business broker, Justin Cooke sees a lot. When he spoke with me recently from his temporary perch in Medellín, Columbia, I expected Justin would have much to say about buying and selling online businesses. Furthermore, I wasn’t surprised to learn that his front-row seat to the marketplace affords him an informed view on how the industry is evolving. I didn’t expect, however, that Justin has his own human scale business story to tell.

Justin speaks with the relaxed confidence of someone who has been there, done that. He’s built, sold, and purchased online businesses for his own account. He knows what it’s like to have skin in the game.

I find some brokers to be glib. Their assessments of risk and opportunity tend toward the superficial and self-serving. Justin, in contrast, is knowledgeable and grounded. If you contemplate buying or selling an online business, his perspectives are a good place to start.

I really enjoyed my wide-ranging conversation with Justin. I continue to mull the ideas he sparked in me regarding the value of learning by doing, the rapidly changing online market, and building businesses that serve our personal objectives.

Read the Transcript

The following has been edited to make it easier to read.

A Marketplace for Online Businesses

Dave Bayless: Justin, let’s start with the fundamentals. What does Empire Flippers do?

Justin Cooke: Empire Flippers provides a marketplace for people to buy and sell and invest in websites and online businesses.

Dave: Tell me more, what kinds of online businesses do you help market?

Justin: We started off with small websites—websites that make a little bit of money through advertising revenue and things like that—and grew it. So, the marketplace isn’t limited to websites that earn money through advertising now. We can take almost any type of online business. That includes Kindle authors. It includes Amazon FBA businesses and traditional e-commerce businesses. Basically, if you make money online and have an audience, then we can potentially help you sell your business.

The Broker’s Role

Dave: In your role as a broker or market maker, what is it more precisely that you do, and how do you get paid?

Justin: We started off building these small websites and selling them to our audience, which we built up over time through blogs and podcasting. Over time, we had a lot of people ask us, “You’ve already got this baked-in audience of people that want to buy sites that you’ve built. Can I sell my sites with you?” We were resistant to the idea at first. We said, “I don’t want to take away from selling our own sites,” because that’s where we made the majority of our money.

Over time, we realized that seemed to be a better and better idea. We started allowing other people to sell their sites to our audience. So that’s how we answered the double-sided marketplace problem: do the buyers come first or the sellers? In our case, we had the buyers already, and we had the sellers asking to do business with us. It just made sense. We grew from there.

In terms of what we provide, in terms of value for the people that come to us—particularly the sellers—it may be their first exit. They may not be familiar with how to structure a deal with someone looking to buy their business. We’ve got a lot of experience in that area. We’ve done hundreds of deals and upwards of $40 million in total transaction volume at this point. So this is something we deal with on a regular basis.

Sometimes it’s being the bearer of bad news when sellers bring us their business. They think it’s worth more than it is, and we have to give them that bad news. Sometimes it’s just helping them understand the process: when they should expect the money, what forms that money will take in terms of a straight cash offer, or an earn-out, that kind of thing.

So just helping guide them through the process. It’s also helping sell the business. We have our business advisors on the phone with both the sellers and the buyers. They go through this particular structure we’ve worked out the last few years that is really effective in getting deals done.

Migrating Online Businesses

Dave: I understand that one of the things you do when a transaction is consummated is help migrate assets from the seller to the buyer. Tell me more about that.

Justin: If you’ve never transferred a business from yourself to a buyer—most people haven’t or they haven’t done it often—it can be somewhat confusing. For example, let’s say it’s an Amazon affiliate site, or Amazon Associates program, where you have a lot of links that are linked to your Amazon account and are credited to your Amazon business. Changing all of those links can be challenging for someone who has never done it before.

So we have a team of migration specialists that help to migrate a business from the seller to the buyer. That’s done in conjunction with the payment. We actually hold the payment from the buyer then migrate the business to the buyer. Once the buyer confirms that everything’s been done and is correct, we finish the deal by paying the seller. It’s a value-add that we provide relative to some of our competitors. Some of the other brokers in the industry don’t do that. We’ve done it so many times that it makes sense for us to do it. It makes sense for us to help.

Now, there are some things we can’t do. For instance, if the seller is holding inventory in their garage, we can’t actually ship the inventory for them. We can help facilitate the process to make sure that it’s relatively smooth.

Paid for Success

Dave: Obviously, you need to get paid for all this. So how do you get paid?

Justin: We do. We get paid a listing fee on the front end. This is generally for people who are brand new to our process, people who are looking to sell smaller businesses and who have no other connection with us. The listing fee is $297. That’s a very small amount of the money we make. We make most of our money on the back end. When we successfully sell your business, we get 15% of the deal. That’s where the majority of our money is made.

Vetting Business Performance

Dave: You’re taking something of a risk by putting time and energy into a transaction. I imagine, then, that you’re reasonably selective about who you accept as a client. Is that right?

Justin: We have a vetting process that all listings go through. That includes looking at a few different things. That includes looking at the seller to make sure they’re a real person. Sometimes people are looking to scam or be less than honest about their identity. We also look at the business itself, including earnings and traffic to make sure that they’re legitimate. Then we look at the business structure and fundamentals. In some cases, that may be backlinks to make sure that the backlink profile is of high quality—things like that.

Some people will ask, “Well, is that due diligence? Are you doing due diligence on all of these deals?” No, it’s simply vetting. From our perspective, we want to have a clean, solid marketplace of quality businesses. We put in a lot of work to get deals done, to bring in buyers, to pay for the marketing and everything we need to do. We want to make sure that we have quality businesses that have a high likelihood of success. That’s one of the reasons 90-plus percent of the businesses we list get sold—we are so careful in the vetting process.

Valuing a Business

Dave: I suspect a question that is top of mind for buyers and sellers is, how is an online business valued?

Justin: I’m talking about less than $10 million valuations here. Big companies are valued much differently. For the rest of us who are building businesses under $10 million, valuation is going to be based on some multiple of profit. What does profit mean? Well, it’s often referred to as seller discretionary earnings. That’s any business profit including owner salary.

If I have a business that’s spitting out $300,000 a year in profit, whether I pay myself $50,000 a year as a salary or $100,000 a year, that $300,000 is the same. So we bake valuation based on that. Generally, it’s going to represent a multiple somewhere between 20 times to 35 times the net monthly profit. For a business that’s making, let’s say, $10,000 a month in profit, the business valuation might be somewhere between $200,000 and, on the upper end, $350,000.

Now, that’s a really big range, right? You might say, “Well, that’s way too wide, $200,000 is much different to me than $350,000. I need some more specifics.” Those specifics come down to risk. The riskier the business is for the buyer—or the perceived risk—the lower the multiple they’ll be willing to pay. So, for a business that’s been around five years versus a year-and-a-half, the latter is likely to have a lower valuation multiple. For a business that is very dependent on a single source of traffic—let’s say it’s all Google organic traffic—there’s a risk of problems with your Google rankings, and your traffic source could go away. That adds a little more to the risky side. That’s going to drop the multiple down a little bit. However, if you have multiple product lines, a strong brand, and repeat customers—these are things that increase your multiple.

We have a valuation tool that gives you a rough estimate of your multiple. I said 20 to maybe 35x—the valuation tool will narrow that range depending on the inputs you give it. Your inputs might give you a range of, let’s say, 28 to 32. During the vetting process, we’ll come up with a final multiple and valuation for your business based on a lot of subjective factors.

A Framework for De-personalizing Value

Dave: I imagine that by making that online valuation tool available, sellers can self-screen to the extent that they may have outsized expectations about how much their business might be worth.

Justin: Yeah, that does help, and we get some people that are not so happy when they fill it out. We use the valuation tool for two purposes. Number one, it’s a great lead generator for us. People say, “I want to see what my business is worth.” Those people generally have some interest in selling, even if it’s down the road. Some are genuinely interested in selling their business. So the tool is a great lead generator for us.

We also use the valuation tool on the back end of our process. Our vetting team will run every business that’s submitted to us through the valuation tool, get that range, and then look at all the subjective factors to come up with the actual multiple and the final valuation that we’re going to use to list and sell the business. So the tool is used both as a lead generator and operationally for us to have a baseline from which to determine the exact valuation multiple.

Having a baseline also helps in negotiation. Because we have a set process for determining the multiple, there’s a framework for discussing valuation that makes sense to the seller. If their business is listed at $300,000 and a buyer just comes in and offers $220,000, sometimes sellers have a tendency to take it personally. They put some blood, sweat, and tears into their business. So they’re inferring that the buyer is suggesting they’re worth $80,000 less. We can structure the conversation in a way that says, “Look, it’s not you that’s worthless. It’s just a reflection of the multiple based on these factors around your business.” This is particularly important, I’d say, with businesses in the mid-five-figures up to the mid-six-figures. That’s where sellers—and buyers—tend to take businesses a lot more personally.

A Trend Toward High-Touch Businesses

Dave: You’ve described the trajectory of your business. You started with smaller sites that were primarily generating advertising revenue. I get the impression that an increasing proportion of the companies you represent are more traditional e-commerce businesses that might have a fuller panoply of operational requirements and opportunities.

Justin: We started off selling smaller four-figure and low-five-figure websites. Normally they would be affiliate-based or be monetizing traffic via the Google AdSense program. Over time, we started selling larger and larger businesses. We got into traditional e-commerce businesses—including the newer FBA (Fulfillment by Amazon) variant. A lot of the businesses we’ve been selling in the last 12 to 18 months have been multi-channel e-commerce businesses. They’re selling directly on their website as well as via other channels such as FBA.

The larger the business, the more moving parts. They’re slightly more complicated, but they’re also generally worth more. That’s because of the different channels they sell through, greater revenue, and ultimately higher profits.

Dave: Beyond the differences in size and operational complexity, how is selling what might be called a high-touch business different from selling a business that doesn’t require such a broad range of operational expertise or capital investment?

Justin: Buyers are going to take complexity into account. If there’s a business where you have a team and process in place, buyers will be more interested. They are more likely to purchase businesses having processes at a higher multiple than businesses that don’t.

When we started, having a process wasn’t as critical. AdSense and Amazon Associate sites are pretty straightforward. There’s not a ton of day-to-day work required. With larger, more high-touch businesses, there are more moving parts. There are more things of which to be aware. The better sellers are at setting up processes and having a team in place to do the work, the more attractive an acquisition target the business becomes for buyers.

The Sales Timeline

Dave: If someone were to decide to sell their business via the Empire Flippers marketplace, what kind of timeline could they expect?

Justin: We only take on businesses that we think are salable. But we will take on businesses that are salable but may take a little longer.

If you’re selling your business and you want to sell it as quickly as possible, then you’re going to want to appeal to the largest number of buyers. For example, an e-commerce business in Australia selling to an Australian market is going to take us longer to sell. Our buyers are worldwide but we’re potentially limiting ourselves to an Australian buyer. If the business is large enough, there may be a willing buyer from outside Australia. In general, though, the buyer pool is smaller.

Businesses that have a very high tech requirement or require very specific domain knowledge generally take longer to sell. That’s because we have to find the right buyer. Not everyone has that technical expertise or that domain knowledge. So, it’s going to take a little longer to find that person.

That being said, we sold a $1.8 million business in eight months, and we sold a $1.3 million business in less than two months. It can go either way. In general, sites that range from $40,000 to $300,000 sell relatively quickly—typically within 30 to 60 days. If your business is valued at between $500,000 to $2 million, it may take two to six months to sell.

One of the things we do is set expectations with sellers. If we think it will be a harder sell to our buyers, we’ll let sellers know. We want to over-deliver on any such estimates. If the right buyer happens to come along sooner than expected, fantastic.

Financing the Acquisition

Dave: Tell me a bit about how buyers are financing their acquisitions.

Justin: Up until about a year ago, it was much more difficult to get any kind of outside financing. Often, the seller would offer to finance the deal. There are different ways to do this, right? You can have what’s called an earn-out that’s tied to revenue. The seller will get paid a percentage of revenue over X number of months. Sometimes you can tie a balloon payment at the end, where the buyer has to pay off the remaining balance. Sometimes the total payment amount isn’t capped. If the business does better than expected, the seller has a potential to earn more. So that’s one way to handle seller financing.

The other way to do it is to just make a loan—let’s say, $100,000 over the next 10 months. The buyer will pay the seller $10,000 a month. It’s an easy way for buyers to get financing. Not all sellers will go for it, but we tell buyers that it doesn’t hurt to ask. Sometimes sellers will ask for an interest rate; sometimes they won’t. Free money is definitely worth asking for.

In the last year-and-a-half or so, we’ve seen the market open up to SBA (Small Business Administration guaranteed bank) loans. So we’re seeing the SBA loosen the purse strings for e-commerce businesses. We’re watching that trend in 2018.

Common Misconceptions

Dave: When you look back at the transactions you facilitated, what have been the biggest misconceptions buyers and sellers have about the process?

Justin: The fact that there are so many misconceptions allows us brokers to exist, right? You’ll have buyers who are shocked that someone is willing to sell an asset that’s generating a good return year after year. They’ll think, “It’s crazy to me that someone is willing to sell this cash flowing business that I can run from anywhere in the world.” This is often the take of someone stuck in a corporate job who wants to practice their surfing skills in Bali. They want to buy an online business that will help fund that lifestyle. It’s an amazing opportunity for them.

On the other hand, you have a seller that thinks, “I’m pretty confident of my skills. I’ve been doing this for years. I can build businesses. I can do it again in another industry or niche. It will take me two or three years to get up to speed and get rolling but I can do it again. It’s not this particular asset that’s my golden goose. This is the egg from my golden goose. I can keep popping out new eggs every couple of years and do quite well.”

The misconceptions of buyers about sellers and the misconceptions of sellers about buyers define the space in which we operate. We put a lot into educating through our blog and podcast. We talk about where people are coming from, why they might want to sell, and why people might wish to buy.

Building Brand and Customer Lifetime Value

Dave: What trends are you seeing in the kinds of online businesses being bought and sold? You’ve touched upon the topic but I’d like you to elaborate if you would.

Justin: One of the things we noticed over the last few years is building businesses that have brand recognition within their niche. When we were first building our sites, which we no longer do, it wasn’t that important that you had a brand that would bring customers or visitors or readers back. It was more important that you were sucking up organic Google search traffic.

People were capturing value in other ways, too. They were generating traffic using paid Facebook ads. They didn’t really have a brand that people would come back to. However, they were able to pay Facebook for ads and get the clicks that would earn a nice profit. It was effectively an arbitrage play. A lot of businesses a few years ago were arbitrage businesses.

A lot of entrepreneurs are realizing that if you want some long-term value, you need to build more of a brand. You need repeat visitors and repeat customers. (As the cost of new traffic goes up) a cheaper way to get traffic is to build a brand that people recognize and come back to.

We’re seeing buyers interested in brand-based businesses. We’re seeing sellers get better multiples on those businesses. That’s where I think the industry is going.

A Matter of Trust

Dave: In any service business there’s an element of trust required. People want to make sure they’re not going to get ripped off. That may be particularly true in an online context. How do you convey to prospective buyers and sellers that you and your team are trustworthy?

Justin: We’ve run across this recently. If you look at our blog, at our podcast, at the business we’ve done, this would be an awfully long con, right? It would be an awfully long con for us to continually talk about where we’re at in our business and what’s going on.

But I’ve noticed there are some competitors that are popping up that are faking their numbers. When it comes to testimonials, you can pay someone on Fiverr to do a video interview that’s fake. You can publicize whatever number you want regarding how many years you’ve been in the business or the volume of transactions you’ve completed. I’ve asked myself the question, “How do we combat that?”

New buyers say to us, “I’m potentially interested in doing business with you, but you want me to pay a deposit—a refundable deposit, but a deposit nonetheless—before I can see the details about a business listed for sale. I’m uncomfortable with that.” Our response is, “I completely understand. Take your time. Check out our content. Read reviews about us. See what other people are saying. Listen to our podcast. Get a feel for us and the way we do business. Then see if you’re ready to move forward when there’s a business that interests you. If not, no problem, best of luck to you.” That’s our best answer to potential buyers.

On the sale side, it’s a little easier. We have a track record. People who have sold their business through us can provide testimonials. A lot of our sellers come to us through word of mouth. They have a friend or colleague who sold their business with us. So, establishing trust with sellers is much easier, because they’re usually coming to us from someone they already know, like, and trust.

Learning by Doing

Dave: Where does the name Empire Flippers come from, and what does it connote to your audience?

Justin: We started off as a company called AdSense Flippers. My business partner and I had an outsourcing company, and we had started a side project building small websites. The sites made money, and we started selling them. As a fun project, we created a site called AdSense Flippers. We started talking about the exact process we used to build our sites, how we get them earning, and the exact steps we used to build the sites on WordPress—keyword research and everything. It was an open kimono approach.

That really resonated with people. People really liked the fact we weren’t hiding anything behind a paywall. We weren’t selling a course. It was just, “Here’s how it works. Here’s what we’re doing. You can try to do it too. We’d love to hear about your journey.” When we started brokering businesses rather than just selling websites on our own, we were opening up to more than just AdSense. We concluded we needed to move away from the Adsense Flippers moniker.

We said, “Look, these sites are mini assets, right?” You can build portfolios and hold portfolios of them. Eventually, the portfolios turn into empires. So why don’t we call ourselves Empire Flippers?” “Flippers” refers to the fact you can buy, sell, and trade these businesses. “Empire” means you can own multiple businesses and build your online empire.

Extending Reach with Technology

Dave: In the past, business brokerage and mergers and acquisitions, in general, has largely been conducted in person and face-to-face. Technology, obviously, is changing things. How do you see technology having the biggest impact on your business?

Justin: Previously, when you were buying and selling, particularly with small businesses, you might be stuck in a geographic location. If I’m selling a nail salon in Sacramento, California, and you want to buy it from me, you’re going to be tied, at least to some degree, in Sacramento, California. With online businesses and technological advances, you can run an online business anywhere. That’s a huge advantage for a number of reasons.

First, there are the lifestyle reasons. You can live and work from any state or country you choose. Aside from that, you get access to deals from anywhere in the world. There may not be a business that’s in your county or state that appeals to you, but I promise you there is some business online somewhere that would be an absolutely amazing fit for your set of skills and your interests. Having access to a global marketplace of small to medium-sized, online businesses has changed the game. There’s a really great opportunity for people to get involved who might not have wanted to own a local business.

The Potential of Portfolios

Dave: When I was exploring your website, I found several references to something called the investor program. That really grabbed my attention. What was that? How did it come to be, and what’s the current state of the program?

Justin: A few years ago, we said, “Look, we have these online businesses. What if we were able to raise a small fund—a test fund—and put some of these businesses together in a portfolio and see if we can get some returns for these early investors?” If it worked, the idea was to roll the program out to multiple portfolios. The advantage it offers is that it gives us many exit opportunities. We can build up portfolios and sell them off—Portfolio A, Portfolio B, Portfolio C, etc. The strategy gives us many exits for us and our investors.

The first portfolio was right around $800,000. We really tried to diversify the sites we owned. So we put together a membership site, some Amazon Associate sites, and some AdSense sites. It went well for maybe six months. Then we ran into some problems. One of the problems was that we had a growing marketplace, so we had competing interests. That is, we had the brokerage, and we had the management of this fund. While we did our best to make that work, we found our time and attention divided, which was problematic.

I think one of the mistakes we made was that we were too diversified. I think we would have been much better off focusing on a particular type of business model. Maybe there would have been more risk, but I think that it would allow for economies of scale and the benefits of having a specialized team.

In the end, it was either running portfolios or running a brokerage. The brokerage was doing so well we said, “Let’s stick to that.”

So, we weren’t able to make our portfolio investment program successful. It didn’t work for us. But there are some other people that have had some success. So I’ll give you some examples. One of the groups would be the team at Wired Investors. They’ve run a couple of portfolios. We do business with them. Another is Today’s Growth Consultant. They have some portfolios of businesses, and we’ve done business with them as well. A third is Ace Chapman, with whom I co-host a podcast called the Web Equity Show. He’s been buying businesses with investors, effectively as partners, for years. We’ve done business. He’s getting into funds as well, not just buying but also raising money to build out portfolios.

Global Citizen

Dave: Let me switch gears and get more personal. How did you get into this business, and why do you find it attractive?

Justin: We were on a path toward this business whether we knew it or not. We became more intentional about it later in our entrepreneurial career. My business partner and I were both in the U.S. We were working for a mid-sized SEO company, and both of us had traveled around the world. We’d always said, “It would be amazing to live in a country where you’re spending pesos or whatever, and making U.S. dollars. That’d be an amazing experience.”

At the SEO company, we were hiring a lot of people both locally and in the Philippines. We had a connection in the Philippines from the previous company we’d run. As we started hiring people in the Philippines, we said, “Wow, I think we have an opportunity here.” We pitched our CEO and CFO on the idea of outsourcing ourselves to the Philippines and setting up an office there. So we ended up going to the Philippines and running an outsourcing company from there.

That was the first step. We were overseas earning dollars and getting more bang for the buck there. After that, when we were running AdSense Flippers and, later, Empire Flippers, my girlfriend at the time and I said, “Look, we are home-based in the Philippines. We don’t necessarily need to live here. What if we just sold our stuff and started traveling around?” So we made a decision. I think this was in 2014 before we were married. We sold our stuff in the Philippines, left our home base, and started traveling.

We would stay a month in Thailand, and we would do a couple weeks in Hong Kong. Then we started expanding. We went to Europe for a month. Then we would go to the U.S. I’m in South America now. We realized that I can run a company from anywhere. I don’t have to be home-based anywhere at all.

That’s been one of the drivers for Empire Flippers. You’ll notice that in our company, we’re all big travelers. We travel worldwide pretty often.

A Distributed Team

Dave: I noticed that. You are a really distributed team.

Justin: My business partner, Joe Magnotti, is one of the few of us that actually has a home base. His home base is in Manila, Philippines. He likes that. He’ll travel a bit and then go back to his home base. The rest of us travel pretty regularly. Right now, I’m in Medellín, Colombia. I’ll be in the U.S. next month. The month after that, I’ll be in Vietnam, the Philippines, and maybe Japan.

It’s an interesting world where we can do this. If you have a business—or even if you have a job, the people that work for us are in the same boat—and you have access to the internet and you can do phone calls (the time zones can be a bit of a pain sometimes) you really can work anywhere.

We have some of our guys here in Medellín, Colombia right now. We just hired eight new people and wanted a place for them to train. So we rented an office, and we have this whole new team of eight people training at a Regus office in Medellín. They’ll be here for a couple of months with their managers getting up to speed.

Then I think we’re all going to Boracay, Philippines in April. Every three to four months we do a meetup and work together in an exotic location. Sometimes that’s Saigon, Vietnam, sometimes it’s Phuket, Thailand, sometimes it’s Manila or Boracay, Philippines. It’s a chance for us to build camaraderie. It’s a chance for us to work closely together for a few weeks—knock out some of those cross-ops projects we’ve been putting off. Then we can go back to our traveling lifestyles.

Regus Offices

The Purpose of Business

I think it’s a best of both worlds scenario for us. People have asked me, “If you just set up an office in the U.S., would your business make more money? If you just set up an office in, wherever, Hong Kong or Vietnam, would your business be more successful?” Well, I don’t know. I think that people are successful when they’re happy, and our team’s pretty happy with our current arrangement, as am I.

Joe and I asked ourselves, “Would it make us happier? Would the business be serving our interest if we established a single office?” Ultimately, we concluded, “No, it wouldn’t.” We enjoy what we’re doing. We might as well build the kind of business that we want. Even if the business were to make more money by setting up an office in the U.S. or somewhere else—if we wouldn’t prefer it, what’s the point?

The Types of Online Businesses Served by Empire Flippers

The types of online businesses served by Empire Flippers might be arranged on a spectrum from “low-touch” to “high-touch”. Low-touch online businesses include advertising-based or affiliate niche sites. High-touch businesses own their own inventory and often have developed proprietary products and brands. E-book authors and drop-shippers inhabit the middle ground.

Low-touch Sites Perform Marketing Functions

Low-touch sites generate revenue from online visitors (i.e. they “monetize” traffic) by serving third-party advertisements (e.g. Google Adsense) or by earning affiliate referral fees (e.g. Amazon Associates). Advertising-based sites include blogs and forums that attract an audience and provide a conduit for advertisers. Cat Forum is an example:

Ad-based Site

CatForum.com is an example of an advertising-based site.

Advertising-based websites are analogous to roadside billboards. They perform basic marketing functions on behalf of sellers of products and services. Affiliate sites go a step further in that they link a target audience with a pre-selected category of products. An example is Juicer Fanatics:

Low-touch Online Business

JuicerFanatics.com is a low-touch affiliate site.

Through specialized product reviews, articles, tips, and assiduous search engine optimization, Juicer Fanatics seeks to attract visitors. The site directs those interested in making a purchase to Amazon. Juicer Fanatics receives a sales commission on consummated transactions.

Low-touch businesses perform marketing functions of a distribution channel. Low-touch businesses leave logistical and transactional functions to others. In the case of Juicer Fanatics, Amazon warehouses products and fulfills customer orders. It also manages payments and assumes responsibility for customer service.

The Functions of a Marketing Channel

High-touch Sites Perform More Logistical and Transactional Functions

High-touch sites perform transactional and logistical functions in addition to marketing functions. For instance, WP Standard designs and manufactures its own line of leather goods and apparel:

Example of High-touch E-Commerce Business

WP Standard is an example of a high-touch e-commerce business.

WP Standard is responsible for owning and warehousing inventory. It also manages the fulfillment of orders, payments from customers, and customer service. In short, high-touch e-commerce businesses are more complex and difficult to manage.

Because they tend to have relatively long cash cycles, high-touch businesses are more capital intensive. It usually takes more money to grow a high-touch business than it does to grow a low-touch business.

Understanding the Cash Cycle

A Question of Value

How much is my online business worth?

It’s a question that is front-and-center for prospective sellers. Empire Flippers addresses the question head-on by providing an online valuation tool:

Empire Flippers' Online Valuation Tool

Empire Flippers’ Online Valuation Tool

Theory aside, Empire Flippers focuses on what counts: the price at which you are likely to be able to sell your business. After all, anything else is just tawk. Nevertheless, a little theory can help you understand what you might do to make your business more valuable.

Cash Flow Drives Value

Many factors determine the price of a business at a given point in time. Long-term value comes down to the cash it can generate. So, figuring out value means answering a handful of questions:

  • How much cash has the business generated in the past?
  • What kind of cash flow might the business reasonably be expected to generate in the future?
  • How likely are future cash flows?
  • What kind of effort and investment is likely to be required to achieve those cash flows?
  • To what extent is the business and associated cash flows transferrable?

Empire Flippers’ approach to valuation implies that the best predictor of future performance is past performance. So, every listing includes a graph showing historical pageviews, revenue, and net profit.

Below is an example of the monthly historical performance summary of a six-year-old seller of snacks. The business sells via Amazon and its own online storefront. Over the past year or so, monthly net profit (i.e. seller discretionary income) has averaged $61,577. However, the business has experienced a recent uptick.

Sample Empire Flippers Listing

Sample Empire Flippers Listing

The listing price of just over $2 million represents 33 times average monthly net profit. In Empire Flippers’ experience, most businesses it helps sell are priced between 20 and 35 times monthly profit. There may be several reasons why the price of this business was pegged at the higher end of the range:

  • It has a substantial track record—particularly in the context of e-commerce.
  • The niche is easy to understand.
  • With 1,480 SKUs, there is a lot of product diversity.
  • Fulfillment by Amazon mitigates operational complexity.
  • Although most sales are through Amazon, the business does have its own sales channel.
  • Financial performance is steady-to-up.

I’m just speculating. Many factors influence the ultimate value of a company. Most relate to judgments regarding the amount and likelihood of future cash flows.

The Promise and Pitfalls of Idiosyncrasies

Idiosyncratic understanding of a market is good in that it can translate into competitive advantage. That enhances value. On the other hand, such individualistic insight can be very difficult to explain and transfer to others. Restricted transferability impairs value. This contradiction is common among more complex, high-touch e-commerce businesses. That puts a premium on creating systems that are transferable. As Justin explained:

With larger, more high-touch businesses, there are more moving parts. There are more things of which to be aware. The better sellers are at setting up processes and having a team in place to do the work, the more attractive an acquisition target the business becomes for buyers.

The Trend Toward Human Scale Businesses

Justin learned his trade by building, selling, and buying low-touch online businesses based on advertising revenue. He refers to such businesses as an arbitrage play. People like Justin understood online marketing better than incumbent retailers and makers of products. So, they could “suck up some of the organic Google traffic” in order to make a living. However, as e-commerce know-how has spread, competition for traffic has increased, and margins have narrowed.

You can also think of low-touch online businesses as marketing services. After all, they exist to cultivate an audience and generate demand for products. Ad-based businesses don’t involve designing, manufacturing, storing, shipping, and servicing products—the hallmarks of what we call human scale businesses. Business owners have adapted by doing more as the margins and, possibly, lifecycles of low-touch businesses have been squeezed. Justin sees this in a relative shift in the businesses marketed on the Empire Flippers platform. More businesses are at the high-touch end of the spectrum.

A lot of entrepreneurs are realizing that if they want long-term value, they need to build more of a brand.

Brands take time to build, are complex, and can be a source of substantial value and gratification.

Buying and Selling a Small Business

A Personal Human Scale Business Story

I really appreciate how Empire Flippers grew organically out of Justin’s personal interests and experiences. It started as a side project—what my friend Mario Schulzke calls a “5 to 9er”. The business concept wasn’t fodder for some bullshit pitch competition. Furthermore, Justin developed a relationship with his audience by freely giving away his insights into how Adsense-based sites can be built. That generated the opportunity to sell online assets—first his own then those owned by others. In the meantime, Justin and his Empire Flippers colleagues have continued to publish useful content regarding the market they serve. That includes a growing database of valuation and transaction data.

Importantly, Justin and his partner are clear about the purpose of their business. Sure, they are in it to make a buck. However, profit is merely a requirement. It’s not an over-riding objective. The business serves to enable a way of life marked by creativity and freedom.

That’s a human scale business story worth sharing.

Mario Schulzke on 5 to 9ers