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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.
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:
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:
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.
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:
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.
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:
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.
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.
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.