Why Buying And Selling Web Sites Makes so much sense for us (and you to).

This is an article in two parts.

In the first part I want to explain why it makes sense for us to pursue a strategy of buying highly profitable web sites for 30dc inc.

The second part - why it makes sense for you as an individual to look at buying HIGH Quality web sites to improve cash flow.

The funny thing is - the strategies are pretty much the same. It’s only a factor of scale and experience that differentiates the two.

So let’s look at why 30dc inc is actively looking to buy web sites.

Why do we think this is the single best use of our time and energy to generate wealth for our shareholders?

It’s no secret that I am a voracious student and consumer of the wisdom of Warren Buffett.

(It’s worth taking a look at the the man who depending on the whim of the market is the worlds richest man - in particular given the fact that he didn’t inherit his wealth. He started from scratch. Something I can relate to, growing up in a trailer park in Beechworth does that to you)

Most people think of Warren Buffett as a share market speculator. Nothing could be further from the truth.

He is a buyer of great businesses.

The fact that his score is reflected in share prices is just that - it’s a score, the result of executing a process.

He looks for outstanding businesses with awesome fundamentals showing a competitive advantage.

(Buffett fanatics like myself please understand that I’m simplifying things a bit here.)

He would buy these businesses (which happened to be companies that were traded on the stockmarket) when they were out of favour in the market (but still doing well).

This simple strategy, which is unsexy and requires adherence to process and patience to ride out stockmarket perception made Warren the richest man in the world.

Here’s the thing - until the mega-crash of 2009 WB had not been buying stocks (There was nothing that met his criteria - mainly because of the insanely high stock prices of that same period)

Was he doing nothing?

No Way.

He was doing two brilliant strategies. One of which is hyper relevant to us here at 30dc inc.

While public listed business were going for insane prices, Warren Buffett started looking at PRIVATE businesses, ones that you would never consider listing on the stock market in their own right.

These businesses had the exact fundamentals that Warren was looking for, stable management, businesses that Warren could understand, wonderfully profitable.

He bought a furniture company, Sees Candy, a huge jewellery business and many others.

There was an elegance to these transactions (and for me as a direct marketer at heart) a wonderful approach to doing deals.

First, How did Warren find these deals?

Initially, they were businesses in his local community of that centre of high finance Ohmaha, Nebraska. (I’m being sarcastic, I love the fact that a business that is one of the most valuable in the world is headquartered there. In fact, I Think it’s a huge advantage to be out of the oxygen sucking marketing and tech centres for us. It gives us perspective, it’s not about if a company is sexy… does the darn thing make money!)

Then, and this is my favourite part. He would advertise in his annual reports for companies that met a certain criteria.

This was brilliant. The type of companies Buffett was looking at were typically family businesses that had really matured - none of the “hot” growth of a tech company nope, just reliable, consistent profits.

(I’ll explain why this is much better a bit further down. Stay with me!!)

It was a brilliant win, win situation.

For the seller of the business, selling to Berkshire Hathaway (Warrens company) mean’t a few key things that are vital to a seller.

1. The deal was super quick, from approach to contract often took a few days.

2. They were able to get more than they would if they sold to another private buyer for cash.

3. Berkshire Hathaway, knew great management when they saw it and took a steady as she goes approach to the newly acquired asset. It was not broke, they felt no need to fix it.

4. Being part of the Berkshire Hathaway family did give these company access to networks, contacts and experience from a bunch of well run companies. This synergy (I hate that word, but you can’t argue the effect) has huge advantages.

5. The deal was super quick

6. The deal happened really fast

7. Did i mention, the deal was able to be done quickly!

The buyer got a great price, does that mean Berkshire Hathaway got the rough end of the pineapple…

Not a chance.

Here ’s why (and this is one of the coolest lessons about how the stockmarket works)

But before I go on.

I need to say something about understanding accounts, numbers and financials - all of this money stuff…

You may be like me (well the old me) and figure, you know what I don’t need to understand this money stuff. Let me leave it to my accountant and the book keeper.

That would be a big mistake.

Just as big a mistake is not having a good accountant and business advisor (As I type this I’m hurting where the sun don’t shine because many years ago I thought I knew better!)

The good news is that there is a very easy read introduction to all of this “accounting” stuff, arming you with the basics and give you a thirst for more.

The book/audio (listen to the audio AND get the book!) is called “Rich Dad/Poor Dad” by Robert Kiyosaki.

It’s brilliant and teaches the basics in a fun and entertaining way.

Ok, unpaid commercial over (actually - before we move on, Robert Kiyosaki is a brilliant example of creating a niche and mining it for all it’s worth - but that’s for another time)

Now, we were talking about why this was also a good deal for Berkshire Hathaway and in the process show why it’s such a great option for us at 30dc inc.

There are two things two look at.

The first thing is return on investment - THE crucial metric (that’s so sadly ignored these days).

The second is the difference in valuation of a public company and a private one.

First (and ALWAYS the most important thing) is RETURN ON INVESTMENT.

Let me give you 1000 virtual dollars (Seriously, no need to thank me, I’m extremely generous with virtual money).

Now let’s look at what you can do with it.

Let’s walk into a bank and invest it for twelve months, in the safest investment we can, a t-bill (This is an investemnt that comes with a government guarantee).

Cool, after signing the paperwork, you deposit the $1000 and based on the current interest rate of 3.34% (for you wonks out there - that’s the 10yr bond), you would walk back in 12 months time, for the privilege of having your money for 12 months, they would pay you interest of $30.34.

Not sexy…but safe

There is little risk, so there is little reward.

This is a total FUNDAMENTAL (and it’s always the case…ALWAYS)

To state this another way, the higher the return, the more risk you have.

Lets take that virtual thousand bucks and put it in the stockmarket for a year.

And just for kicks we are going to invest at two different times.

The first time we try this, we are going to invest in October 30, 2007

Sadly our $1000 is worth just $666 (oooh freaky!) on October 30, 2008 (We were all acutely aware of the stock market crash in September of 2008

OUCH!

Now if, I topped you up and said “Go on, give it another crack!” and you invested $1000 on the 1st of November of 2008 and for the sake of argument I let you with draw it as i’m typing this. You get your thousand dollars back PLUS another $66!

AWESOME!!!!

This is what I mean by risk and reward. Your return potential is higher BUT
your capital is at risk.

(Don’t get me wrong, I love the sharemarket, I just think you have to look at it long term and back a great business with wonderful fundamentals, like 30dc inc - over time you will be rewarded.)

Now let’s take that $1000 one more time, this time we are going to buy a business (sure, a teeny,tiny one - but gosh, work with me people!!)

Typically a business at the moment would get 2 to 3 times earnings.

WHOA NELLY!! - Terminology alert - what’s earnings mean Ed? There are so many different definitions of this. I remember I was doing a broker presentation in New York last year and was amused to see two stock market veterans argue over the meaning!

Side Note - You’re probably like I was before I went on this twelve year journey. What could be more black and white than numbers. WRONG. The single most creative and grey part of business is numbers! Another subject for another time but know now that’s why I keep emphasising fundamentals, Warren Buffett has taught me to look past the fluff and understand what is crucial in a business.

This is also one of the reasons I am so damn proud of 30dc inc. Our fundamentals are wonderful.

So what are earnings? Let me tell you what they mean to me (and yes economic professors reading this, I’m keeping it simple)

My definition of earnings is this.

How much money is left after you have to pay all your expenses each year.

If I want to invest my hard earned $1000 dollars of virtual money with you. I want to see a return.

So, with my $1000, i’m going to buy a business (in fact it’s a website which is one of the worlds best resources on underwater kickboxing).

The website makes $500 a year pure profit (aka after all expenses are paid)

So we buy this website for two times earnings ( earnings = $500 a year, 2 times EARNINGS (2x$500) = $1000)

(BTW not for this article but people are selling websites like this for WAY less - again, another article for another time)

So we plonk down our $1000 bucks and lo and behold - we are in the “underwater Kickboxing” business.

Now, IF nothing changes, we come back in twelve months time and the site has made $500 profit!

WOW, That’s a 50% return on investment!!!!

But remember the golden rule…

The higher the return, the greater the risk.

Jut imagine that a month after we bought the site, it get’s “Google Slapped”

We come back after, twelve months and the site has made nothing and what’s worse, it did not cover it’s expenses so you actually have to pay in more of your virtual money or the business will be liquidated by the people it owes money to.

So not only can you loose your $1000 - you can lose a lot more by throwing good money after bad.

So the return of buying a business is just brilliant.

But the risks are high.

or are they….

Warren Buffet try’s to remove as much of the risk as possible.

At 30dc inc. we do too.

In Fact, you can as well, even buying a site off flippa.com

How - I’ll explain tomorrow.

Ed