Why Buying an Online Business Could be a Good Investment

More and more, we are trying to break free from the proverbial rat race and become our own boss. In fact, one study shows that nearly a third of millennials have started some kind of business and about 26% of millennials have lived entirely off the income of a small business. These numbers will continue to increase as more millennials are ditching high-paying jobs to do things like travel and start their own businesses.

But here’s the thing:

Nobody wants to be stuck in a retail store that gets little to no business, and will soon be run out of business by Amazon, do they?

No.

People want to own online businesses. And there are plenty of reasons why it makes sense.

So in this article, I’ll cover why buying an online business is a good investment. From there, you can make the decision on whether or not it’s a good fit for you.

An Online Business Provides Passive Income

An online business is a great way to earn passive income. That is, income that comes in on its own. A great example of this is a blog that earns revenue from ads. You aren’t actively selling anything, but the money continues to come in.

The opposite of passive income, of course, is active income. Active income is when you’re actually doing work that produces the income. A good example of this is freelance writing. While the income is there, you’re spending time doing research and writing content, so your time is limited for tackling other income-generating ventures.

Passive income allows you the freedom of time, so can diversify your income streams or do other activities that you either need to or want to do. For me, this is spending time with my family. For others, it might be traveling or building even another business.

Earning passive income also reduces the stress that most full-time business owners end up experiencing. Whether you’re a freelancer or an owner of a brick and mortar business, relying on customers to come in and purchase your product or service causes anxiety. You never really know when or where your next dollar is coming from. Sure you can make assumptions, but with this type of business, it’s not guaranteed. While passive income isn’t guaranteed, if diversified and managed correctly, it can provide a steady stream of income that reduces this stress.

Appreciation in Value

According to James Morrish of FE International, a professional website broker, ...you can buy an online business for 2.5-3.0x (a 30-40% ROI). He also states that ...[online businesses] are becoming more valuable each year with the average asking multiple now 3.0x; in comparison to 2.4x in 2010. This data, combined with the fact that more people are buying online, indicates a strong future appreciation in value for your online business.

Outside of services and intangible things, such as ads or affiliate marketing sales, online purchases of physical goods are increasing. Last year, Americans spent about $5 billion online during Black Friday. Millennials also make about 54% of their routine purchases online now. So there’s a market for physical marketplaces, too.

You’re also starting to see more and more people share their online income - so you can see the appreciation in the value of their business. If you don’t already know who he is, Pat Flynn from Smart Passive Income is a prime example of this.

Pat started out getting laid off from his job and making a website that was for his use only--to study for an exam. After seeing more and more people want to get to that information, he saw a business opportunity. To make a long story short, he’s now a millionaire and makes an absurd amount of money online. His business is worth exponentially more than it was when he started it. This is just one example of the sights you can set for yourself.

Liquidity

One of the hardest things to do when you run a business that doesn’t operate online (like a brick and mortar retail store) is selling it. Especially when a company like Amazon is putting major stores out of business, your average mom and pop shop may not stand a chance to find a buyer--especially at a good price. It could take years, if you ever sell it.

Having an online business is different though. Unlike a physical business where you’d have to break your lease, sell your physical inventory, and lay people off, an online business operates much leaner (more on this below). This means you can unload it if and when you want to relatively easily.

Major online brokers like Empire Flippers and Flippa do nothing but serve as a marketplace for people buying and selling websites. And those are just two examples of some of the biggest brokers. If you have a profitable online business, selling it should be no issue.

And at 3x multiple of your annual revenue, it’s lucrative. Using the figure above, if your online business made $10,000 per month, a realistic asking price might be $360,000. Crazy.

Scalability

Scaling a brick-and-mortar business can be nearly impossible if you don’t have significant investment dollars coming in. Think about it--if you owned a store and wanted to scale it to reach more customers, you’d either have to open a new location (which would require hiring more people, finding an affordable location, and filling it with inventory) or you’d have to expand your current one. Both of those require a significant capital investment.

An online business, on the other hand, is much more scalable. If you want to expand your business to reach new customers, you can do something as simple as changing your marketing strategy.

For example, if you’re a Boston-based bakery that specializes in a certain type of cupcake, you might find that you’re missing a big opportunity in other areas of the country. If you were a physical business, you’d have to open a new location, but if you operate solely online and find a way to ship your products instead, you could begin marketing anywhere in the world.

The cost of doing something like this is fractional compared to the cost of opening a new bakery, which emphasizes how important online businesses are when it comes to scalability.

If you don’t have a physical product, it makes this process even easier. A consulting firm, for example, just needs to begin marketing to a new demographic area. Even though their home base might be in a particular city, because they’re not strapped down by a physical office, they may have the financial flexibility to market to, and visit, clients anywhere in the world.

No Physical Location Needed

Building off of the last point, having an online business allows you to be a digital nomad. Whether you are a consulting firm that needs to travel on a weekly basis, or you’re a solopreneur who owns a few websites, you don’t have to own or lease a physical office if you don’t want to.

This single benefit is what draws many people to buying or starting an online business. One of my favorite examples is a guy by the name of Ryan Biddulph. Ryan is a blogger, author, web designer, teacher, and probably a host of other titles. He does all of this work remotely. Better yet, he does it while traveling the world.

Who the heck wouldn’t want that kind of lifestyle? If you’re bogged down by owning a building where you operate your business, or your clients MUST have you physically present at all times, you’re missing out on a big opportunity to work wherever you want. In addition, you’re spending extra capital on a lease. Online businesses allow you to break free from a physical location and make your office wherever you want it to be.

Low Overhead = High Margins

Online businesses typically have little to no overhead. Overhead includes things like inventory, employee salaries, and a lease. Let’s think about this for a minute using my example from above--the Boston-based bakery.

Brick-and-Mortar Model

For illustration purposes, I am going to keep things simple and say the business has only two costs--rent and supplies. Well, assume that only one person works there and does all the baking.

Let’s say rent costs $2,000 per month (hey, it’s Boston and that’s pretty affordable) and on average, the baker is spending $3,000 per month on supplies to make cupcakes, and that’s all they make. This cost is primarily because they have to be ready for a busy day, but they often find they’re throwing away baked goods that don’t sell during the day. But if they have a busy day and don’t have goods to sell, it can be detrimental, so they continue to produce a consistent amount of goods and spend $3,000 per month. So their total costs (again, a simple example) are $5,000 per month.

On average, the bakery does about $10,500 in cupcake sales. Each cupcake costs $7 (they’re big cupcakes), so they’re selling about 1,500 cupcakes per month. Monthly profits are about $5,500. Keep in mind, the only market this bakery is serving is a busy Boston area.

Online Model

Now let’s say they change their business model completely and operate entirely online. Let’s assume they can rent out a small kitchen outside of town that costs only $500 per month where they can do all of their baking.

Because they take orders online, they don’t need to worry about busy days and can plan ahead with more flexibility (they take an order online, make it, and ship it). Because of this, supplies go down to $1,500 per month. They have to pay to ship the cupcakes overnight, which costs $3 per cupcake, so they raise their price to $8. Total costs are rent for the kitchen, supplies, and shipping ($500 + $1,500 + $3 per cupcake shipping).

Now that they’re operating online, people all across the country have heard how amazing these cupcakes are, so they begin ordering online. Cupcake sales jump from 1,500 per month to 5,000 per month since there’s now a wider market. Total costs are $17,000 including shipping, but sales are now $40,000. Profits have jumped to $23,000 per month because they’re now operating online.

This is just one silly example of what an online business with low overhead can do for your margins and your business. Oh, and by the way, something like this did actually happen.

Less Risk

The cost of starting an online business can be as low as starting a blog--which means paying for a domain name and hosting. That’s less than $50 in most cases. While that example may not resonate with some of you looking to start a business online, it’s an example of how cheap it can really be.

If you want to start an online retail store, you don’t need to buy and house inventory. You can partner with a drop-shipper and sell products that are shipped by someone else. The cost of doing this is very little.

Flexibility

Aside from the location flexibility, you have flexibility in how you operate your business. If something isn’t working--for instance, a product isn’t selling or nobody is buying your service, you can quickly shift your business focus without a ton of cost of reputation damage.

Can you imagine changing what your business is about after a couple of months with a physical store? You’d have to tear your sign down and change the name (possibly), re-stock it with new inventory, and come up with a new marketing strategy. You’d probably lose credibility too.

If nobody is buying from you online, odds are they haven’t found you yet. So if you change things up, whos really going to know?

More Control

Finally, when you own an online business, you have complete control over what you do. You’re not chained down by a landlord or physical product that’s collecting dust in your store. You are in control of what you do and how you do it.

What Are the Tax Benefits of Buying an Online Business?

The income you earn from your online business is taxed. However, you can claim tax deductions for various business expenses.

Depending on the business, you can claim most of your operating costs. Things like bank fees, payment processing fees, advertising, shipping, and more can be deducted to help reduce your tax burden.

Here’s a little more detail on some of the most common ones you’ll run into, having an online business:

First of all, you can deduct the cost of online goods sold. For example, if you own an e-commerce business, the cost of acquiring, packaging, and shipping your products can be deducted.

Advertising is another necessary expense for any online business. In most cases, your advertising budget is deductible. This includes things like the money you spend on business cards and promotional merchandise such as branded pens and mouse pads.

Many costs related to owning and managing your website are deductible, too.

The costs of website hosting, web design, and mobile app development can be deducted from your taxes. Depending on how you file your taxes, some of these items may be considered part of your advertising costs or your operating costs.

And what about accepting payments?

Online transactions typically include fees. You may need to pay a fee to process credit cards or accept payments from your customers.

There are also bank fees and the fees you pay to use online platforms. While most of these fees are small, they can add up throughout the year. And yes--these are usually deductible.

Resource: Need a Bank? Novo is a fintech bank designed specifically for small businesses with a low fee structure.

Then there’s the argument of how involved you want to be.

When you own an online business, you can choose your level of involvement in day-to-day management. To generate passive income, you can hire virtual assistants and contractors to handle most of your business. The money you spend on these workers is tax deductible in nearly all cases.

You’ll have office expenses, too. You may find additional tax benefits from those home office expenses. Office supplies, computer equipment, software, and other items can be claimed. However, these items typically need to be used exclusively for your business.

While these are some general guidelines, I always recommend you check with a tax professional before you start deducting business expenses. It can quickly become complex, and you may be hit with additional costs, an audit, or missed deductions if you don’t know what you’re doing.

How Do You Make Sure That the Business Is a Good Investment?

Before buying an online business, you need to evaluate its stability to ensure its a good investment. The net profits provide a general indicator of earnings you’ll receive. However, you also need to consider the profit margins.

Explore the operating costs of the business. Determine how much the owner spends each month and how much he or she earns, as it may be difficult to scale a business with a small profit margin.

When buying an established business, you have a lot of details you can review. Besides the sales and profits, you can examine the social media presence and online reputation. Make sure you’re purchasing a company with a good track record and solid reputation among the public.

A good investment should also have room to grow. Learn more about the market and whether it is expected to grow. For example, if the business sells products in a niche category, determine whether consumer demand is expected to increase or decrease in the coming years.

Online businesses should also have multiple income streams. Instead of focusing on one product, the business should offer a variety of goods or services. The website should also receive traffic from various sources such as organic search traffic, paid advertising, and social media sites.

If you want predictable, passive income, the business you choose should also show consistent income from month to month, or at least a gradual increase.

Researching the business requires work, but it is a necessary step to ensure that it’s a good investment. You should never move forward with the purchase of a business without understanding every detail of how it works and the possible return on investment.

Please know that this is an extreme oversimplification of business valuation. Placing a value on an established business is complex and Id recommend working with a broker or other professional if you don’t know what to look for. For a quick start, check out this guide and video on a quick way to value a business.

What Should You Look for in an Online Business?

The main features to look for in an online business include the starting costs, level of involvement, and potential return on investment. These details vary based on the online business you purchase.

The most common online businesses include:

Online advertising
Affiliate marketing
E-commerce stores
Downloadable software
Software-as-a-service
Subscription services

You can manage many kinds of online businesses with complete control over every detail. Alternatively, you can outsource work to virtual assistants and contractors. However, some of these businesses have higher starting costs while others require more of your time.

For example, online advertising and affiliate marketing businesses don’t typically require you to purchase any physical equipment. You also don’t need to develop any products or services, reducing the cost of entry. The drawback is that it may take longer to earn revenue unless you purchase an existing affiliate website or high-traffic blog.

Downloadable software, software-as-a-service (SaaS), and subscription services typically require more initial work and a more considerable initial investment. However, online business brokers can help you find established businesses that offer these services. These businesses also tend to provide the highest margins and potential for growth.

E-commerce stores often involve more hands-on involvement from the investor. You may need to arrange the shipment of physical goods from a third party to the buyer. E-commerce stores also require market and product research to find the right items to sell.

When purchasing an established online business, review its operating costs and revenue to determine if it’s a good investment.

What Should You Stay Away From?

While there are many solid investments, there are online businesses you should stay away from. For example, avoid businesses with low sales volume or small profit margins.

If the business generates little income, it may not be sustainable. A small profit margin can increase the risk of failure. When the operating costs rise or the business experiences a slow sales period, it may fail to make a profit.

Also, avoid businesses that cannot produce detailed sales records. Before purchasing an online business, you need to review its financial information to determine whether it is a good investment. If the owner doesn’t disclose all the information you require, take it as a red flag that he or she is trying to hide something.

You may also want to avoid newly established online businesses. You really should look for an existing brand that already has a steady flow of income and a large customer base.

Businesses with a lot of negative comments on social media or review websites may also be bad investments. It's hard to recover from a negative online reputation, and it may not be worth your time and effort to fix the problem.

Another consideration is the versatility of the business. Remember, a good investment includes multiple revenue streams. Stay away from businesses without a plan for continued growth. If the business is solely focused on one product, it may not have a sustainable business model.

How Do You Go About Looking for an Online Business to Buy?

There are several ways to find established online businesses. The first option requires you to find a business, research it, and complete a private sale between you and the current business owner.

Finding a profitable online business on your own can be difficult. There are specific details you will not have access to until you contact the owner, such as the sales figures and operating costs.

Another option is to use an online business marketplace such as Flippa or Empire Flippers. There are websites dedicated to the sale of established businesses. These marketplaces include many businesses from e-commerce stores to affiliate marketing blogs.

The marketplace listing may provide a more detailed look at the business. For example, you can typically examine the business valuation, net profits, revenue streams, and sales volume.

When using a marketplace, you still need to perform research and determine if the business is a good investment. This may require you to search online and learn more about the reputation of the business and quality of its products, services, or website.

If you need help finding a legitimate business opportunity, you may also consider working with an online business broker. Brokers regularly work with buyers and sellers, ensuring that they have a steady flow of new online business opportunities.

Brokers can also help you find an online business that meets your specific needs. For example, if you want a hands-off business, your broker can find suitable opportunities. Your broker can also handle negotiations, ensuring that you get the best value for your new investment.

Bottom Line

Starting an online business isn’t a walk in the park--it’s still a business. In most cases, you will have to invest a good amount of money to make them successful out of the gates--but it’s not a necessity. Your risks are lower, your overhead is usually non-existent, and you have tons of flexibility. So what’s stopping you from starting an online business today?