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.

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

What I Want Thirty Day Challenge Plus To Be…

I have at least two lofty goals for you. None I have any control over but that’s ok.

I have two things to do.

1. I need you to do stuff.

Yep, every day, or for some specific period of time. I need to motivate you to get something done. To move your business forward.

This, of course, is folly.

Unless you move, I can give you all the techniques, strategy and stuff that will give you goosebumps when something really cool happens….

BUT

Unless your ready to move… not much I can do, I’m not Tony Robbins, the Dia Lama or even the guy from Fantasy Island.

I’m just a simple country boy from Beechworth who STRUGGLES EVERY DAMN DAY to get something done.

I’m sort of a recovering alcoholic, without the alcohol (if Pepsi max and Genevese coffee were alcohol, I would have had more trips to the Betty Ford clinic than the entire population of Beverly Hills.)

I’m no different to you, maybe with one tiny difference…no, actually there is no difference. I have this evil demon called procrastination and his horrible friend rationalisation sitting there much like the need for drink never really leaves the recovering alcoholic…

YAY.

Am I making you feel SUPER AWESOME yet…At least you can see why I’m no Tony Robbins….

I do have some good news…

I know how to tell if your ready.

Have you been putting off that article, ignoring the keyword research you KNOW you need to do, you get angry with yourself because you just spent 34 minutes watching those cute japanese puppies on USTREAM (I’ve been there sister, don’t worry…)

Seriously, you really get annoyed with yourself. Perfectly legitimate things (Thanks for nothing Mr Rationalisation!) just get in the way of building a business.

Are you angry, are you maybe, a bit disgusted with yourself, maybe a lot disgusted with yourself (That was me yesterday - so we’re pretty similar!)

The good news is your ready.

Your at the point where you can make this Internet Marketing thing really work for you. (Of course this also works for that book you need to write, that song you need to play or that medium format early morning sunrise shoot you always tell yourself you are going to do.

Your ready.

And together we are going to take this little thing called Thirty Day Challenge Plus and we are going to make it happen.

(Note the lack of trademark Dale exclamation point!!!!!! to end that last sentence - you don’t need exclamation points - you need detail.)

So how are we going to take this frustration and build a business out of it.

The awesome part is the secret to that is so easy!!!!

(ooops, sorry couldn’t help myself with the exclamation point thing…)

Are you ready to read what it is, you don’t even have to sign up for Thirty Day Challenge Plus to get this secret.

Are you ready.

Here it comes.

You may want to sit down (Oh, you are, cool, two steps ahead already!)

For the next five day period take a kitchen timer, set it to thirty minutes.

(For those of you blessed with the iPhone there is a handy function built in and you can set your own song as the end signal. My personal favourite “In The Air Tonight”)

Ok, got that timer, hit go.

Then work your ass off and don’t stop for the thirty minutes. Do hard core market research, get that blog up, create that adwords campaign, write the article, don’t edit, don’t stop and for the love of the deity of your choice stay away from those cute little Japanese puppies!

WHAT?

Not sexy enough for you, Not magic technique enough? Not darn , “doin it on the kitchen table in your underwear” easy enough for you!!!!!!

Let me ask you something….

How’s that stuff been working for you…

I thought so. Me too.

Oh, by the way, congrats for reading this far, your part of the awesome thirty percent who are fed up and want something different.

You and I, we can work together. Those others will be chasing down magic pills until hopefully they realize there just aren’t any.

Look, there are awesome techniques, using Market Samurai the way God and Nobel Samurai intended makes my heart sing. Creating a video that is fun to do, fun to edit and blow me if it didn’t convince a bunch of people to do something that they wanted to do but had never been motivated enough to do until they saw that video.

That’s all great, but…

You see Thirty Day Challenge Plus is full of those techniques, we cover the latest stuff first and more importantly rather than be the first to rush to twitter about this cool widget or this new content creation method. We take some time to show you HOW this fits into your marketing and heaven forbid actually use it and test it ourselves.

Just having a subscription to the latest hot toy feed or web 2.0 blog is NOT ENOUGH!

It’s UNDERSTANDING how these developments relate to you.

Is it going to be for Market Research…

Will it get me some more precious traffic…

Will this help show people why they want to do this NOW and help conversion…

Will this help me produce interesting content…

Or will it just suck your time and soul into a vortex of self destruction causing you and your life to turn to stone!!!

(For the record that last one has not happened as far as I’m aware…but it could…maybe…)

These techniques are IMPORTANT - Make no mistake.

But getting you to do them is tricky. Because I can’t get you to do anything.

Recently, I was sitting there watching those cute japanese puppies (That’s the internet equivalent of a druggie hitting rock bottom) and I picked up a book which rocked me to the core.

It’s called the “The War of Art” by Steven Pressfield

I was staying in Tokyo at the Mandarin Oriental and I always feel a bit weird eating breakfast by myself. So I grabbed this book to look “busy” while I was having breakfast.

After Page 2 I felt like I had been kicked in the head by a mule. I was floored.

It’s funny - I’ve had that book for ages. I’d never picked it up.

“When the Student is Ready the Teacher will appear” I’m not sure who’s quote that is but I believe it. I’ve seen it too many times in my life to discount it.

I had a similar feeling when I read Tribes, The Creative Habit and On Writing.

I reckon that “The Art Of War” might just trump the lot.

As I get older, and with a bit of luck wiser… it is so clear to me there are just fundamental principles and work practices that when you align with them you can move mountains (even if you didn’t mean to)

Take for example the phenom any new Internet Marketer feels after they write their very first blog post. The internal commentary is almost universally.

“that was ass.”

You see, your brain is comparing your first bit of writing with stuff that you read in the paper or your favourite books. Perfectly sensible.

But OH SO WRONG.

You see the first pass of anything that is created - Particularly when you start out - is what you would technically describe as

“Blowing Chunks”

What you should be comparing is your first draft with the first draft of another beginner.

You see anything that you read in print thats really good - has been edited and reviewed with in an inch of it’s life. Think about your favourite bands song - the reason they knock it out beautifully live is because well - they have played it HUNDREDS of times!!!!

The TRAGEDY in all of this is most people cant get past the “Blowing Chunks” period of their creative lives.

I’ve read dozens of books and highly creative people are not born. They are forged on the fire of hours spent blowing chunks, publishing doing it over and over and with time, getting better.

IT”S NOT YOUR FAULT!

Pro’s create content completely different to us amateurs.

First Up - They work to the clock!

How uncreative - wrong , quiet the opposite. they relies that creative work comes from producing a lot of content (aka coal) to produce the good stuff (aka diamonds)

Second - they never ever EDIT or JUDGE on the first draft.

Seriously this rule is just INSANE when you relies it’s power for the first time. It’s a bit like when I show somebody the “rule of thirds” in video and photography…BOOM - Instantly better pictures.

Pros don’t stop when they start writing , jamming, painting, taking pictures. They don’t make edits , don’t correct spelling, don’t fact check - they do it all in editing, all in post.

Because they relies one thing. Every time you edit, you break your flow and when that happens, you go back to the beginning and every writers first paragraphs of anything blows chunks!

Gary Halbert, my mentor used to throw out the first couple of paragraphs of his writing sessions because he knew instinctively what we now know as scientific fact…your brain needs to warm up.

Here’s the cool thing and it happens EVERY SINGLE TIME.

Let me repeat - EVERY SINGLE TIME.

You set a timer and start writing, after about ten minutes - if you haven’t stopped and tried to look up something or heaven forbid -watch japanese puppies on ustream - your writing will get better, you will start making sense.

You may actually write something great!

This is the new part of things I want to explore in thirty day challenge plus. Because what was “hippy science” and gut feel 15 years ago has been proved scientifically.

It’s a damn shame the schools have not caught up.

We are going to tackle this in 30dc plus. It’s not sexy but I reckon you might find it the damn most important thing you have ever learn’t

Just as a matter of interest - I’m writing this at 9.30 pm on a Friday night in a hot and steamy Tokyo summer - I have the timer set on my iPhone and I’m making myself do 30 minutes of writing without stopping.

I have committed myself to doing this every half an hour of a weekday and I didn’t do mine today.

but I’m committed - so I’m delaying watching “Fringe” to get this done.

You need to be the same way.

Thirty Day Challenge plus is going to make a difference

As long as your prepared to make some time.

Are you game?

Ed

PS: You can join me at www.thirtydaychallengeplus.com and for a limited time you can get a thirty percent discount that’s LOCKED IN - make sure you use the coupon code 30dc

PPS Love you tweet this/like and all those good things if it struck a chord with you.