On Reducing Risk (I know, what an awesome headline!)

Yesterday, I showed you the merits (and risks!) of why people would want to invest in a business (and don’t make the rookie mistake of thinking a website is any different to a business!).

Today, we talk about Risk, and more important how to reduce it.

Check out this cool email I received…

Uploaded with plasq’s Skitch!

In the Thirty Day Challenge, we spend a LOT of time on market research.

Why?

Because, as you must have heard me say 45 times during the challenge. 95% of mistakes and problems that you will have in a business online - could have been picked up in Market research.

Does it mean you will have a sure fire winner - sadly, no.

It does save you from wasting hundreds of hours and more importantly all of your enthusiasm on a total dog.

Well, guess what.

Buying and Selling businesses has it’s equivalent of Market Research.

It has the peppy little name of “Due Diligence”

If you have ever had the “privilege” of undergoing due diligence in a traditional business. You probably felt a small shiver up your spine when you read the word.

Due Diligence on a traditional business is , how do I put this…

A FREAKING NIGHTMARE!

But it’s crucial, By the very nature of the type of business that Warren Buffett buys. Simple, understandable business he makes sure the due diligence will be thorough.

For 30DC Inc, the awesome part of buying an online business is the due diligence process is so much easier and an extraordinary amount of it can be done without EVER SPEAKING TO THE SITE YOUR PLANNING TO BUY!!!

A quick example, a key part of the due diligence is obviously verifying how much money the business makes, take it from me, even a business as simple as a coffee shop this can be a nightmare. In large business, they could literally have thousands of items to check.

Think about an online business, all the money comes in from a merchant account or Paypal, Google Checkout or similar. It takes approximately a minute for our team to request two years of history and a simple phone call to the vendor to verify the report.

That’s one of the reasons I’m so excited about 30dc inc buying up great businesses, the due diligence which is usually a nightmare, is so much easier.

Anyway back to the page turning excitement of Risk Reduction.

Our business plan at 30dc inc is a simple one (It’s available at www.30dcinc.com). Buy established web businesses with long histories of profit and results. This is pinched strait from the Buffett playbook.

Why do we want to buy “boring”?

Reduce Risk.

Think about it. When we look to buy an online business at 30dc inc we want to see that it’s been around a long time and perhaps even more importantly, making money for a long time.

Why?

Remember yesterdays piece. I talked about our dear old Underwater kickboxing site, getting “google slapped” (Google Slapped is a term ,coined by me would you believe!, describing google changing it’s rules which results in a radical drop in traffic for your business)

Terrifying right?

Not really.

We have seen this happening for years now and good well run businesses hardly blink when something like this happens.

Sooooo, we look for sites that have been around for a long time, making money for a long time because by definition, they have had to make a number of adjustments based on adverse events that happen online and they keep cranking out the cash.

So being around, and being profitable, having a history is a great form of risk reduction for the potential buyer.

Another form of risk reduction is what Warren Buffett terms “The Margin of Safety” it’s a simple concept.

Using fundamental business principles, such as only buying a real businesses with real profits (this is shockingly rare!!), you can determine a fair value for the business you are buying. Sort of like a recommended retail price.

But as you well know, no one gets rich buying retail!!

When Warren looks at buying a stock he looks at what the business is worth. He formulates a price based on a “margin of safety” of around 20% below “retail”.

This builds a further buffer against some unforeseen business event.

Can you start to see how you can reduce risk yourself?

When we were buying our underwater kickboxing site. If we worked out the “retail” price of the site, it was $1000. We would look to buy the site for $800 dollars.

Building in that margin of safety.

CHECK, CHECK, CHECK

I have a huge checklist I go through when I look to buy a website. I check backlinks, domain ownership, traffic stats and a whole host of other things.

Here is the important thing…

I do this for a million dollar site, I do this for a $100 site.

The process is the same, the scale is different.

At a beginners level imagine building up a bank by creating 30dc websites and selling them. Just like Lee Cole did.

You use this as seed capital to buy into an established site that is already making money. To me this is even LESS risky than starting a site from scratch (AS LONG AS YOU DID EVERY LICK OF DUE DILIGENCE!!)

Now a couple of questions for you.

Is this stuff interesting to you?

Have you sold a site (or bought one?) I would love to hear about it.

Speak Soon

Ed

PS THE most thing about starting an online business is the LACK of RISK (when you have taken the time to check out everything market research/due diligence style)

Let me give you JUST one cool example before I go…

Let’s say your looking to buy a site, the site has an affiliate program. You fire up Market Samurai (of course if your serious about Internet Marketing you have Market Samurai set to open when you power on your computer)

Do your keyword research and have some test sites up thanks to the magic of Word Press Direct and Market Samurai in an hour or so.

Throw them into traffic bug, and enter in to your planner to come back in a couple of days.

Two Days later, throw-up the Samurai and using Rank Tracker take 60 seconds to check the status of all your sites.

If they are ranked, it’s time to test some PPC.

(why your site? not their site - Google does not like affiliate programs and will either make you pay through your teeth OR just flat out not allow you to)

Now you know the true cost of PPC and then you use the target site as the affiliate program.

What do we learn from this little exercise.

-The True cost of PPC in the niche
-How the site we want to buy actually converts interested traffic!!!!!
-What we can expect from SEO Traffic

How much does it cost? Let’s go crazy and say $50 bucks

How much time did you spend speaking with the owner of the site you want to buy?

…ummmm….that would be none.

I LOVE THIS STUFF!!!!

Seriously, imagine trying to this with Real Estate Investing, try finding out this crucial data buying a coffee shop.

THIS IS WHY THIS STUFF IS SO INSANE (and I mean the good type of insane)

I just realised this is perhaps the longest PS in human history…

Sorry about that.