Retirement Income Series: How to Buy an Online Business for Retirement Income

buying an online businessOwning an online business is a great way to earn an extra stream of income to fuel your retirement. But starting from scratch is always a challenge. A friend of mine helps people build online drop shipping businesses, and says failure is a big part of the process of success. And he’s right. A whopping 90% of all startups fail.

You especially don’t want to handle that kind of risk when your online business is supposed to boost your retirement savings. There’s only so many years left to make it happen.

Opt to buy an online business that is already running successfully, and you can avoid risk while reducing your initial time investment. You also get to leverage your skills and free time immediately while learning about the online business world.

Here’s how to do it.

Find Opportunities to Buy an Online Business

There are marketplaces all over the internet where you can find and buy an online business. But some are more credible than others, and take care in vetting the businesses they list. Before you start exploring a marketplace, make sure they are credible and guarantee their listings. Marketplaces like BizBuySell or BizQuest make it really easy for people to post listings, with little or no vetting process. Flippa is another option where businesses are sold through auctions, but again, you’re at risk to sellers misrepresenting their business.

I personally recommend professional brokers like Empire Flippers , FE International, Quiet Light, and Website Properties. Their brokers are all professionals who ensure their listings have a verifiable site history, stable income, and opportunity for growth.

Determine the Business Model

While you may initially want to browse for different opportunities, you can’t really shop until you determine what business model is right for you. This requires careful consideration of your abilities and risk tolerance. Here is a primer on eleven business models that are readily available in the market.

Once you have this determined you can shop knowing each of the required skills needed to be successful. You’ll know which activities you will do and which you will outsource. This allows you to dramatically lower your execution risk and is the first step on your shopping trip.

Evaluate the opportunity

After you’ve identified some opportunities to buy an online business, the next step is to compare and evaluate them. Just because a business is profitable now doesn’t mean it will always be. Here are some factors to consider for success:

  • Site traffic

Success in the online business world is all about site traffic. A healthy, viable business will have a lot of traffic from a variety of sources, including search engines, social media, site referrals, and more. The seller should be able to show you detailed reports of their site traffic over time by giving you access to their Google Analytics.

  • Maintenance requirements

For many people, their online business is like their baby. They are completely involved in the day-to-day operations to help it grow and prosper. When they hand it off to you, you need to be sure you’re ready to take on the job.

Before purchasing, you’ll want to discuss with the seller what kind of activities they perform and how. If you don’t have the time or skills to do this yourself, you’ll need to hire someone else to handle these tasks.

  • Expenses

Every business has operational expenses (hosting, web content, marketing, etc.) that you need to be prepared to take on. Your goal in reviewing any offering memo is to determine what expenses are understated. My experience has been that obvious operating expenses are rarely falsified, but owner’s time is always underestimated!  Always remember you will be shown the bare bones expenses and time to run the business.

  • Growth potential

Many online business owners choose to sell because the business has plateaued. You don’t want to buy an online business that doesn’t have identifiable growth potential. Identify some ways you might be able to improve traffic or conversions, like new products or upsells.

Ask the seller what they would do if they were to hold onto the business and why they are selling it. Listen carefully and you can judge well the reason for the sale and what the prospects for the site are.

  • Competition with the seller

You can’t enforce non-compete clauses with online business owners who live all over the world. This means you are at risk for competition with the seller — They could easily turn around after selling you the business and build a new one just like it.

Make sure you have a good understanding of why the seller is giving up the business. Take a look at their work history to see if they’ve created other similar businesses in the past.

  • Personal interest?

The online business you’re about to buy became successful because it was somebody’s brainchild. They had a passion for it that motivated them to succeed. If you want the business to continue to flourish, you’re going to need the same spark.

In other words, don’t purchase a business just because it’s profitable unless this can drive your passion. I have become quite interested in mundane products that provide a lucrative lifestyle for me and my family. Conversely, I have often struggled in products and services where I have much more interest. Hopefully you can find the intersection of passion and profits, but always choose profits in business decisions.

Ways to Finance Your Purchase

As you probably already know, purchasing a successful, profitable online business can require quite a healthy financial investment. Our first site cost $17,500 and was earning $750 per month. As this site had 8 years of operating history, I hoped we wouldn’t lose all our money too quickly. For us, this was a modest investment we could make with cash.

Should you want to make a larger purchase you don’t have to take these funds directly from your savings account. There are a few different funding options you can explore:

  • Cash

Cash is the primary way most people make business acquisitions. Relying on your liquid assets alone will seriously limit your purchase power, and it’s not the only way to raise cash for a purchase. You could cash out a portion of your 401K or IRA accounts, or borrow the money. You can borrow up to $50,000 from your 401K in the US. If you’re over the age of 59 ½ , you can take back a Roth Contribution. You can also develop a business partnership with someone who has more cash and experience in running an online business.

Of course, business loans are always an option. But if you want to buy an online business as part of your retirement planning strategy, more debt might not be wise.

  • Seller Financing

If relying on cash alone is not an option, the seller might be willing to finance a portion of the total acquisition. In this scenario, you pay off the total business price in installments. For example, say a deal is valued at $50,000. You could agree to pay half at closing, and the remaining $25,000 over the course of a set period of months. The seller would charge an interest rate on the outstanding balance.

This is a good strategy if you’re confident about future cash flows. If you fail to pay up, the seller may end up retaking possession of the business.

  • Earn-out

In this scenario, the buyer makes a deal with the seller, agreeing to pay out a certain percentage of the business’ future revenue for a defined period of time.

This is a great option if you still plan to have the seller involved in business operations in some capacity. This strategy also requires more risk for the seller, because they have to assume you won’t drive the business into the ground after taking possession. You can usually agree to offset this by extending the earn-out period (and thus increasing the seller’s profits from the sale).

Legal and the Logistics

You’ve performed due diligence by evaluating the business and the seller, and have agreed verbally on how you will finance the acquisition. Now all you have to do is designate the transfer process and make it all legal. You’ll do this with an Asset Purchase Agreement (APA). If you use a broker service, they’ll draw this up for you. It should include:

  • Payment procedure

Clear considerations for the amount of payment, structure of said payment, and timing of payment.

  • A non-compete agreement between the buyer and seller

Include a clear description of this category of business venture and what the seller is restricted from doing post-sale.

  • A clear description of assets for transfer

Online businesses have a lot of moving parts to function properly. You’ll want to include a full description of each of them, including domains, website content and codes, social media accounts, current client databases, etc.

  • A description of post-sale support

This explains how involved the seller will be in the business post-sale, and for how long. Describe specifically what operational tasks they will handle.

  • A description of the escrow procedure

Will you use a third-party escrow service or the services of the broker to complete the purchase process?  A clear, complete APA will show you exactly what steps to take moving forward with the transfer process.

Get to Work

Once you’ve taken control of your new online business, the real work starts. A lot of processes are automated with an online business, but not all. If you want yours to continue to flourish and grow, you need to invest. Now’s the time to start targeting new strategies that you identified in your evaluation process. Make sure to hold back some cash to capitalize on these opportunities and any unforeseen expenses.

Building an online business from scratch takes time, money, and quite a lot of risk for failure. If you buy an online business, then you can skip a lot of the struggle and focus all your energy on continuing growth. You’ll leverage your skills and learn new ones. By the time you retire, you could have a money-making machine that requires minimal investment to provide income for your retirement.

Established websites are cheap today as they are still not widely understood. This is an opportune time to be a buyer and take advantage before this changes. Remember, you’re just one deal away from quitting your job, funding your retirement, or living your dream.

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