Do you dream of owning your own business but don’t know how to make it happen? What about buying one that’s already made? Here’s why buying an online business is a good investment.
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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 is 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 “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. We’ll 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, who’s 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.
Summary
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?
Topics: Investing • Smart MoneyThe post Why Buying an Online Business is a Good Investment appeared first on The Dough Roller.
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