Acquiring highly profitable online businesses demands a precise methodology or rating system to ensure a track record of robust returns while mitigating potential risks.
For those navigating the vast landscape of internet business listings, the sheer volume of options can be overwhelming.
As of today, a simple search for an e-Commerce business for sale yields over 50 listings from various brokers and platforms, valuations spanning from less than 12X to well over 48X multiples on monthly earnings.
Within this multitude of choices, it’s easy to encounter overpriced gems and seemingly attractive, yet fundamentally flawed opportunities with low multiples.
A well-structured rating system or methodology serves as our compass, guiding us toward unbiased evaluations of each opportunity, and leveraging data to make informed investments. It not only brings consistency to our investment strategy but also diminishes the sway of emotional impulses.
When that rare, ideal opportunity does emerge, a robust rating system empowers you to act swiftly and confidently, securing a remarkable deal.
Rating System
My rating system systematically evaluates various critical attributes in each deal, assigning them a score of -1, 0, or 1.
- A negative (-) 1 indicates that the attribute is less favorable.
- A score of zero implies that the attribute doesn’t influence the buying decision.
- A positive 1 highlights that the deal excels in that particular attribute.
The cumulative scores of these attributes enable us to confidently decide whether to delve deeper into discussions for a given opportunity or proceed to the next one.
Attributes and Scoring
Creating a personalized rating system is a confident step to align your unique goals, motivations, and requirements with your investment choices.
Recognize that everyone’s criteria vary. What holds paramount importance for one person, such as minimizing time commitment, might not be a priority for someone facing job loss. For them, cash flow could reign supreme within their rating system.
The list below serves as your guide to crafting your individualized rating system, considering the following elements:
1. Asking Price
Base this on your available budget. For instance, if your aim is to acquire a site under $100K, you might structure your scoring model as follows:
- Less than $75K = +1
- Between $75K – $100K = 0
- Over $100K = -1
It’s worth noting that creating an “over $100K” category, even with a $100K budget, is strategic. Sellers often entertain negotiations, allowing you to secure a site listed for more than $100K within your budget. Be generous with your initial ratings.
2. Valuation Multiple
This factor revolves around the multiple of Monthly Seller Discretionary Earnings that the site commands. Typically, most internet businesses hover around a 36 multiple (equivalent to 3X the yearly earnings). Your rating system might take shape as follows:
- Less than 24X = +1
- Between 24X – 36X = 0
- Over 36X = -1
Remember, a listing above 36X shouldn’t automatically deter you. There might be compelling assets or factors that make the higher multiple worthwhile.
3. Years in Business
An established business often equates to greater stability, providing valuable insights into seasonality and trends. Consider this scale:
- 5 years old or more = +1
- Between 3 – 5 years = 0
- Less than 3 years = -1
4. Hours Devoted to Running the Business
This aspect is subjective and hinges on factors like your available time, access to virtual assistance, hiring capacity, and outsourcing capabilities.
Valuing my time highly, I rate this criteria assertively:
- Less than 2 hours a week = +1
- Between 2 – 5 hours = 0
- More than 5 hours = -1
These hours represent the actual time I would personally invest, excluding any outsourced tasks.
5. Selling Urgency (Motivated Seller)
Identifying a motivated seller holds significant value compared to one merely seeking profit and willing to wait. Assessing the seller’s motivation is a pivotal element in any scoring system.
Look for catalysts such as medical issues, debt challenges, divorce, or a failing partnership. Rate these as a +1. If the seller’s motive is boredom or retirement, assign a 0. When the seller primarily seeks profit, rate it as a -1.
6. Growth Trajectory
Historical performance serves as a cornerstone metric when determining valuation. Therefore, assessing whether the site has been in decline (over the past 6 months), remained stagnant, or is on an upward trajectory holds paramount significance.
Rate accordingly, aligning with your specific goals and objectives.
7. Growth Opportunity
When acquiring a business, the aim is to swiftly expand it, typically within the first 3 months. This strategy enhances the business’s value promptly, ensuring a profit or at least a safety net in case of a future sale.
Although the quantitative calculation for this attribute is somewhat subjective, you can apply a rating system like this:
- Growth Opportunity with minimal investment = +1
- Growth Opportunity with investment required and a timeline of 6 months or longer = 0
- Growth Opportunity demanding significant investment and a defined timeline = -1
Opportunities for growth always exist, be it through tapping into new markets, introducing new products, acquiring synergistic businesses, establishing brick-and-mortar presence, or exploring new sales channels. However, there’s always a trade-off in terms of time, finances, or other resources. Your chosen scale should align with your specific objectives.
8. Pride
While this attribute is highly subjective, it remains profoundly important to most individuals. Essentially, it answers the question of whether you take pride in owning this asset and if you’re comfortable sharing that ownership with family, friends, and others.
This could be as simple as a 1 or -1 scale, reflecting your personal sentiments and values.
9. Additional Factors for Deliberation
Several other attributes merit thoughtful assessment, including:
- Growth Potential
- Cash Flow
- Brokerage Involvement vs. For Sale by Owner
- Seller Financing
- Intellectual Property / Proprietary Assets
- Marketing Lists
- Customer Base
Ultimately, your choices should align with your objectives and aspirations.
An Iterative Approach
Scoring a deal should be an ongoing, iterative process that adapts as more information becomes available.
When I come across an intriguing listing, I record the initial score in my system (I prefer using Google Sheets). I focus on the highest-scoring opportunities and request additional details. For attributes where I lack information, I assign a neutral score of 0 to avoid undue influence on the overall rating.
Subsequently, as I review the prospectus with more comprehensive data, I incorporate these details to update the scoring. If the opportunity still stands strong, I arrange a call with the seller to further refine the rating based on our discussions.
Based on where I stand at this point, I determine the offer to propose. Should the scoring fall below my established threshold at any stage, I halt pursuit of the deal.
Conclusion
The introduction of a rating system aims to provide a reliable framework for consistently evaluating highly profitable online businesses. This approach allows you to swiftly pinpoint the most promising opportunities among numerous listings. You can easily distinguish those worth deeper exploration and investment of your time from those best left behind.
Remember, this rating system should remain dynamic, with scores evolving as more information surfaces:
- Initially upon listing discovery.
- After reviewing the prospectus.
- Following each conversation with the seller.
Use this methodology as an ongoing validation tool to ensure that an opportunity aligns with your investment objectives and merits your pursuit.
I trust that this guide will aid you in uncovering your next highly profitable online venture with confidence.