A new wave is coming…
A new tsunami of opportunity is emerging in the online business world.
The ability to become The Banker in a sea of flailing Entrepreneurs.
This post outlines how I discovered this opportunity, that I did and how you can do EXACTLY the same thing.
TLDR: here are the 7 Simple Steps:
- Find them cheap – Find dirt cheap, revenue generating businesses
- Pay the right price – Use the Internet MBA Valuator to negotiate the right price for the business
- Strip costs – Ruthlessly strip all costs to “reset” operations
- Outsource effectively – Delegate low value tasks to a high performing virtual team member
- Laser focussed marketing – Select one marketing channel to focus on and don’t move on until you have proven it does/doesn’t work
- Systemise – Architect and remove yourself from the system
- Sell strategically – Find a buyer that values your system
It’s January 1st 2014, I’m angry and soaking wet.
I’ve just been on a new year’s eve holiday with my (now) ex girlfriend that, let’s just say… did not go very well. I’m walking back to my East London home in the pouring rain, facing the prospect of the corporate office the next day.
220 gruelling days of dispassionate work face me for 2014.
And I decided that enough was enough.
As soon as I got home I wrote down the following sentence:
“By December 20th, I will have replaced my consulting salary and will leave Accenture”
And guess what?
I did it. And have not looked back since.
But this post is not about me, this post is about you. About you and a new opportunity that I have spent the past 4 years perfecting: the ability to buy, grow and sell small online businesses.
More and more people are starting businesses, but many don’t have the ability or resolve to realise their full potential.
That’s where we come in…
As I outline in this post, there are a group of people that have been doing this for 00’s of years: The Bankers.
The Banker understands the importance of leverage, the time value of money and human incentives. They buy cheap businesses and sell them for considerable more.
This post is about becoming The Banker. I have refined these 7 Simple Steps over the 4 years since starting out in the game in 2014.
1. Find them cheap – Find dirt cheap, revenue generating businesses
I’m going to be real here…
There is a arbitrage opportunity going on RIGHT NOW. I’m not sure how long it will exist for.
There are a couple of marketplaces online where… if you know what to look for AND know how to not get scammed… you can find absolute bargains.
One of them is Flippa.
There is a lot of sh*t on there, you need to be careful not to get scammed… yet there is also some absolute gems.
I made a couple of acquisitions in 2014:
I got scammed hard on this bad boi… paid $2k for literally just a website as all revenue claims/videos were definitely faked. Tried to run it for a couple of months then gave up.
Purchased for $800, drove $14k worth of revenue over the next 14 months and sold for $5k. Here I got an ROI on my initial investment of $800 in 3 months…
These two examples show the variation in quality of sites listed on Flippa. If you know what to look for, there is some great quality businesses at fantastic prices.
The business we just recently purchased, also through Flippa… is an eCom brand in the male jewellery niche (click here to get the weekly update on how progress is going). We paid 3.1 times monthly net profit, again getting an ROI on the initial cash outlay in 3 months.
To clarify… if I asked you to give me $5k today in exchange for $5k returned to you 3 months along with a cash producing asset generating $1.6k in monthly profit, would you take that deal?
I think so…
So how do you find these bad boi deals?
You need to know what businesses suit you best… then be patient.
Head to Flippa and create a Saved Search for your criteria, here is ours:
We look for:
- Making between 0-$10k profit per month
- Dropship & eCom (For now, we will branch out to SAAS/marketplaces at a later date)
- Any age and any sale type
Then save the search:
Flippa will now send you an email with each new listing.
And then you wait…
You wait and use the Internet MBA Valuation tool as outlined in Step 2 until the right deal presents itself to you.
There are also places on the internet where you can list and sell businesses for much higher multiples… this is the arbitrage opportunity right here.
In summary, we buy CHEAP from the dark (e.g. Flippa) places… and sell expensive at the REGULATED (E.g. Empire Flippers) places or through a private sale (more on that in step 7).
2. Pay the right price – Use the Internet MBA Valuator to pay the right price for the business
When buying online businesses we look at a number of factors before determining the right offer.
As Ray Dalio outlines in Principles, computers are more reliable and less biased decision makers than humans… so we digitized the process of deciding which businesses to buy and how much to pay for them.
We created the Internet MBA Valuation Tool. This enables you to plug in a quantitative and qualitative data into a formula… giving you the exact amount to propose for your first offer for the business.
Here are the criteria we use and propose that you also use:
- Does the company have a purpose greater than just making ca$h?
- Do we have experience with the business model?
- Do we have experience with the niche?
- Is the niche part of an emerging trend?
- Has the revenue been growing or declining recently?
- Can the current marketing channels be easily reproduced?
- Does the business have a significant moat for new entrants to overcome?
- How many opt in email subscribers are there? (including customer list)
- How easily can competition be found by Googling?
- Does the business require particular skills/relationships that can’t be replicated?
- How many VA hours are required to operate the business weekly? (customer service, admin)
- How many owner hours are required to operate the business weekly? (marketing)
Each one of these questions is answered with a numerical value, given weighting and then the sum of these is multiplied by the verified monthly net profit of business. This gives your first offer price.
PRO TIP: make sure the number you have monthly net profit is ACTUALLY verified, request “Read Only” access to the Google Analytics account of the business or request videos/screenshots from the current owners payment provider.
You can access the Internet MBA Valuation Tool (and see the exact analysis we gave our last acquisition) by adding your email address here:
Calculating your first offer price is only the first step in the “buying cheap” process 😉
We need to negotiate.
The best book I have found on negotiation is Never Split The Difference.
And more specifically, this book outlines a proven bartering process called the Ackerman model:
- Set your target price (your goal), using the Internet MBA Valuator
- Set your first offer at 65% of your target price
- Calculate three raises of decreasing increments (to 85%, 95% and 100%)
- Use lots of empathy and different ways of saying “No” to get the otherside to counter before you increase your offer
- When calculating the final amount, use precise, non-round numbers like, say, $37,893 rather than $38,000. It gives the number credibility and weight
- On your final number, throw in a non-monetary item (that they probably don’t want) to show you’re at your limit.
Combining these two approaches will no doubt present you with an outrageous bargain.
One of my Internet MBA System students (a small group of people I am teaching this method to on live calls) actually went in with his first offer at 45% of the target price shown by the Valuator. He ended up coming out with a successful bid at 60%, so feel free to go in lower with your first bid.
As a reminder… the purchase process is not something to be rushed. If you can’t purchase a target for the right prices as per the Valuator, leave the deal.
3. Strip costs – Ruthlessly strip all costs to “reset” operations
You now have a business at a bargain! Great work! We now move into the transformation phase. The metaphor I would like you to hold in your mind for the rest of this post is that of the Diamond.
As we will be going from this:
We will be taking raw, unpolished potential and we reveal the beauty of the stone (read: system).
Less experienced online business owners invest resources in the wrong places.
It’s our job to an immediately reassess how resources are being invested and eradicate all costs that don’t immediately show a proven ROI.
We remove the inefficient spend and start building up from scratch.
This inefficient spend it usually found in one of three areas:
- Software – accounting, marketing, hr
- Advertising – ad spend on channels that are not producing conversions
- People – resources that are not providing value or roles that can be combined
As soon as you get control of the business, review each of these areas and look for immediate ROI, and if it can’t be found… cut the spend.
As an example, the previous owner of the eCom brand we just bought was investing YouTube remarketing with no clear ROI:
You can see that $2,212 was invested with no conversions tracked. We cut this spend immediately and re-assigned to our one marketing channel (see Step 5).
Over the first month or so… with your reduced cost based you should free up some cash to invest in Step 4 and 5.
4. Outsource effectively – Delegate low value tasks to a high performing virtual team member
I built, grew and sold online marketplace Virtual Valley (UpWork for Filipino virtual assistants) in 2016/17.
I spent time outsourcing in the corporate world, in the service business that proceeded Virtual Valley and have had a virtual assistant everyday since I started in the online business world.
It’s simple: if a task can be completed by a resource that costs less than your expected hourly rate… you are losing money by doing those tasks.
E.g. if you expect to earn $50 per hour from your businesses and there are customer support tasks that can be completed @ a rate of $5 per hour… you are losing $45 per hour by doing them yourself.
Each company in the Internet MBA Group portfolio has a CEO responsible for the performance of the business and an offshore Operations Manager that deals with the day to day running of the business.
The Operations Manager’s core responsibilities are:
- Marketing Support (the CEO is responsible for designing and creating campaigns/strategy)
- Customer Support
- Supplier/Distributor Management
- Metric Reporting
- Working Procedure Maintenance (see step 6)
This leaves you or your CEO to manage the high leverage tasks:
- Product Strategy/Innovation
- Marketing Strategy/Campaign Creation
Arguably your most crucial hire in this whole process is that of your Operations Manager. I have hired 00’s of VA’s over the years and of course… have formalised this process 😉
I have a 3 video series that outlines the step by step process I use to hire a new Operations Manager. It includes job description template, recruitment tracker, example test task and interview scripts.
5. Laser focussed marketing – Strategically select one single marketing channel to focus and don’t move on until you have proven it does/doesn’t work
It’s time to get the party started…
The highest leverage point when looking to buy, grow and sell online businesses is to improve marketing. Many new online business owners simply don’t know how to sell stuff online.
Though this is not a marketing post, we will cover the PROCESS to follow to blow up your new businesses sales… not the techniques themselves (I cover the marketing techniques in detail in the Internet MBA System itself).
The biggest mistake I see newbie online marketers make is a lack of focus.
The lightbulb and the laser actually use a comparable amount of energy… but when focussed the laser can cut through stone.
This is our approach.
We take the marketing channel that:
- Has worked the most effectively in the past
- We think will work most effectively in the future
And we focus on that channel for 3-6 months.
We know our average customer lifetime value and use that to calculate our target customer acquisition cost and then optimise over time.
Let’s take our recent eCom purchase…
In 2017, the average order value was $215:
Our return rate was also 12%.
Using these two numbers are can create the total revenue per customer over their lifetime: 215*1.12 = $240.
Assuming a 40% profit margin gives an average lifetime value of $96. Therefore we know that if first marketing channel can produce customers for less than $96, we are good.
The current channel of focus for our recent acquisition is Facebook Ads. You can see that we are not quite there yet (currently at $127 per customer).
But expect to be in the next couple of months 😉
Once we have that channel reliably churning out customers at an acceptable Customer Acquisition Cost (or we have proven that it cannot)… only then do we move onto the next.
Here are the channels we will focus on for our eCom brand:
- Facebook Ads
- Google Ads
And here are others that we probably won’t, but have used in the past:
- Offline Display
- Biz Dev/Sales
(Note, I haven’t included content, email or community marketing here as they integrate into each of these channels: you need to be creating valuable content, sending emails and building a community if you want to influence anyone to buy anything online)
6. Systemise – Architect and remove yourself from the system
Once sales are increasing, your next job as CEO (or for your CEO if you have one) is too systemise.
Let’s quickly take the perspective of a potential buyer…
Would you be happy to pay more for a business if:
- You personally needed to invest less time in the business
- You were confident that as the current owner exits, it will not impact the performance of the business
I think the answer is clear: you would.
To achieve those two point, we have systemise the business, removing its reliance on you.
(NOTE: these two questions included in the Internet MBA Valuator from Step 2 focus on this:
- How many VA hours are required to operate the business weekly? (customer service, admin)
- How many owner hours are required to operate the business weekly? (marketing))
The BEST book to read on this topic is Work The System by Sam Carpenter. It says that the secret to systemise a business is through the use of Working Procedures.
A Working Procedure is a living, breathing document outlining the processes that occur within a business.
Working Procedures remove key person risk as the knowledge required to operate the business is extracted from the employee and into the documentation. At the same time they create a culture of continuous improvement as the team see their processes (and their documentation) improve and evolve over time.
A Working Procedure needs to be created for each major process in the business and stored in a shared drive to enable collaboration and version control.
One of my mistakes with Virtual Valley was to connect my personal brand with the brand of the business. When the time came to sell, there was significant Key Person Risk for the buyer. I had to sign away the rights to the content and received a lower multiple for that business to account for that risk.
Fortunately my Operations Manager did move over with the sale and is still happily working with the buyer.
Therefore, our new eCom brand CANNOT be traced back to me… which will lower Key Person Risk and will therefore increase the multiple it will be sold for.
As you continue to operate the business, you must maintain a focus on improving the system whilst also removing yourself from the day to day processes.
If you do this… obtaining a high multiple for your business in Step 7 becomes incredibly easy.
7. Sell strategically – Find a buyer that values your system
Different people value things in different ways. Some people will pay more than others for your business, it’s as simple as that.
Your job as The Banker is to find those that are happy to pay a higher multiple of revenue or profit for your business.
Who To Sell Your Business Too?
Virtual Valley’s acquirer ended up being a marketing company based in Florida. They had a large customer base of small online business owners who could also become Virtual Valley customers.
They actually managed to recoup all the costs of the acquisition within a month or two of the sale through the revenue generated.
It’s also vital to start building relationships with potential acquirers as early as possible. Buying a business requires trust and trust is usually built over time.
With Virtual Valley, I was in touch the the founder/CEO’s of many of our potential acquirers (outsource service companies with operations based in the Philippines) and we almost sold to one before the deal fell through last minute.
How Much To Sell Your Business For?
When starting out, it’s important to have a goal monthly net profit multiple to aim for. With our new eCom brand we bought for 3.1 times monthly net profit and are confident we will sell for 8-10 times.
When listing your business, use your target multiple multiplied by your monthly net profit as your starting figure and the Ackerman Process from Step 2 in reverse to maximise your selling price.
I walk out of the Accenture office for the final time… and a wave of pure freedom envelopes my soul.
Becoming The Banker is not about the financial reward, it is about achieving freedom and control.
It’s about using the valuable part of life: time… to explore opportunities that excite you deep down.
And the real reason why I’m sharing this method? As a thank you… the past 4 years of my life have been a wild ride, I wouldn’t change it for the world… and long may it continue.
The goal of this post was to give you the step by step process to pick up an online business bargain… grow it and then enjoy the cashflow or sell at some point in the future.
If you want to see EXACTLY how we are doing this, I send an email each Tuesday @ 9am sharing everything we do, you can receive this by entering your email here: https://www.internetmba.io/weekly-email
And if you want to learn more about the Internet MBA System, go here: https://www.internetmba.io/steve-and-fred