If you are looking at where to buy an amazon affiliate website and what to watch out for this post is for you.
These online entrepreneurs continue to adapt. Although the future is difficult to predict, many are now comfortable with their new direction after all the world changes. Many have found success in catering to their customers’ new lifestyles, which includes a lot of staying at home!
Should you get an SBA loan or any other form of debt to buy your first online business? The math and potential is undeniably attractive! But at what risk?
My strong and unpopular opinion…
I strongly believe buying most online businesses (especially your first) with personally guaranteed debt (SBA or other) you can’t afford to pay back without the business is a VERY BAD idea!
Despite my strong bias, I will try and present both sides of the borrow, or not question.
The SBA Loan Dream Being Sold…
In one purchase you can transform $100k of your money (or even an equity partners money) combined with a loan (SBA or other financing) for 90% of the purchase price and have a Million Dollar online business with ~$300k+ in discretionary earnings.
You want out of the 9-5, be your own boss, have financial freedom and be location independent? Great… just one business purchase away… right?
Hack the startup process and live the successful entrepreneur lifestyle immediately all while running a fully remote business.
Sounds pretty great… in fact, it is a great way to live… as I write this I am at my Cottage during the workweek loving my new 2 days entrepreneurs schedule
No path in life provides a greater ability to engineer your own lifestyle then as an entrepreneur, so I definitely get the desire!
But what are the risks and is it worth it?
This post will look at the risk vs reward of purchasing an online business (especially your first) with an SBA Loan or any other form of debt.
The Benefit of Buying with Debt
As mentioned above if you can successfully pull it off the results are incredible. Shortcut YEARS of hard work and buy your way with leverage to the entrepreneur lifestyle.
A fantastic book that looks at buying businesses and then building them is Walker Diebels book Buy then Build. In this book, Walker makes some great arguments in his book for the use of debt. I just finished it and its great… I agree with much of what he says and specifically the application of the margin of safety when using debt to buy a business.
Compared to traditional financial investment alternatives with bonds at incredibly low returns and the stock market typically returning 4%-8% the ability to get 100%+ ROI using debt is attractive.
So if it works out and the business even stays flat you can achieve full financial freedom at a cost of under $100k! Very incredible.
Before I dig deeper into the downside there is one scenario when I think adding debt into the equation of an online business acquisition makes sense. If you have…
- successfully run online businesses before
- adding in debt to “juice” the returns
- not risking more than you would be capable of paying back if the business went to zero
Under that very restrictive model I believe it is not fiscally irresponsible to borrow.
However, I would ask someone in that situation if the juiced returns impact the quality of your life or would needing to pay off the debt impact the quality of your life. If borrowing risks your chosen lifestyle then you are trading financial security for (I hate the word but…) greed? I am not anti-greed and there is nothing wrong with a person that makes that decision as long as they are aware of it.
So why do I think if the debt you are taking out would risk your family’s financial security it is a terrible idea?
Downside – Margin of Safety when there is a Single Point of Failure
In value investing a popular term is margin of safety.
The margin of safety is when the market value is significantly below the intrinsic value of a company.
So what is intrinsic value? In financial analysis this term is used in conjunction with the work of identifying, as nearly as possible, the underlying value of a company and its cash flow per Investopedia
For a high margin low overhead online business with no assets beyond the domain name and some content (ie affiliate site) the intrinsic value includes no “real” assets and only the present value of future earnings (ie the value is set at some multiple on the websites income 3x annual income as an example).
Many online businesses have a single point of failure that can send the business to ZERO. Some of the common single points of failure for online businesses include…
- Google – Any business dependent on Google Traffic is one update/penalty away from going to zero
- Dropshipping – Paid Traffic Channels can turn unprofitable turning the business negative
- Amazon FBA – Suspension or Amazon mistakes can send the business to zero (at least temporarily)
- Any business with 1 primary monetization source – Amazon Affiliate as an example
- SAAS Business – If tied to a marketplace they don’t have control over (Shopify app etc)
So if the amount of money being borrowed is more than is capable of being repaid then if the business fails you are taking a SIGNIFICANT risk with your family’s financial future for years(decades) to come.
Thought Experiment on Volatility
Not all online businesses have a single point of failure, but many/most do.
Let’s estimate the stability of an online business based on both SBA loan defaults and the volatility of online businesses.
- The failure rate for SBA Loans = 17.4% went into default 1/6 out of all SBA loans (NerdWallet)
- The failure rate for online business = Hard to estimate but look at the history of Google Updates at SearchEngineJournal.
I would argue that the volatility of online business is higher than the typical SBA eligible business, but even if not many people are going in with a 20%+ chance at a negative life-changing financial consequence. Granted a <80% at a positive outcome.
Lets use a couple gambling analogys…
- What would the payout and odds need to be for you to play 1 round of Russian roulette? For many, an SBA loan is significant enough it is financial Russian roulette with decades-long potential consequences if you default.
- Most SBA loans come with a business that becomes your single means for achieving your financial goals. This lack of diversification coupled with a 20% failure rate is a problem. If you walked into a casino and there was a coinflip game you knew had an 80% chance of heads and 20% chance of tails the optimal strategy would not be to bet 100% every time on heads. Within a handful of bets, you would likely be at zero.
If it is so risky then why is most of the content discussing SBA loans being used to buy online businesses positive?
There is a Strong Bias in the Ecosystem
The majority of the information out there that is pushing the mandate of borrow money and buy an online business is coming from the ecosystem that benefits from the liquidity being injected into it.
I am not immune, I contemplated not posting my strong views as less liquidity could drive down multiples, the value of my businesses and the number of deals done at MotionInvest.com would be negatively impacted.
For anyone that is selling you the dream make sure to separate out their bias… SBA lender, business broker, accountant, lawyer, seller or investor not on the hook for the personal guarantee all benefit when a deal gets done. If your source of information is someone who benefits from the transaction then do your own research (DYOR always a good principle with money to be able to avoid the worst scams like IncomeStore).
What is the Alternative
Don’t you hate people who point out a problem without a solution, I will try not to be a debby downer.
It sounds like I am saying I am not a believer in this asset class of online businesses if I don’t think they are credit worthy. That is definitely not the case, they provide an unparalleled opportunity for income scale while operating them efficiently fully remote. As an example of what is possible one of my former employees has scaled his commerce business to half a million dollars in monthly sales with reasonable net margins within ~1 year!
What I am a believer of is finding exposure to this type of business that is a fit for your unique situation. Everyone coming to this asset class has some combination of…
- Time & Skillset
Based on where you sit between those 2 factors should dictate where you are prepared to start. If you have limited time and loads of money with the ability to get a manager than looking at larger deals may be the right decision. If you have <$100k but want out of your day job…make a multi-year plan and start off with what you can afford.
Invest the money you can afford to lose (this might mean starting from zero), grow the crap out of the business then scale up to bigger sites!
I tried to layout the landscape of the online business buying world on a graph with capital on one axis and time/skills on the other to paint a picture of where people can start their online business search.
MotionInvest Buying Guide…
Summary & TLDR…
- The dream of buying an online business and immediately achieving the desirable online entrepreneur lifestyle is appealing
- Many online businesses have a single point of failure
- The risk of an online business going to zero is NOT insignificant and CAN happen
- ~20% of SBA loans go into default
- There is bias in the system with most people you interacting with benefiting from a transaction occurring and not being exposed to the risk
- So what to do? Start with the optimal combination of the resources you have…
- Time and Skillset
I hope this article has been helpful in presenting a different view point than the common view being shared online currently.
Many of these entrepreneurs continue to work at the strategies that they adapted during these turbulent months. Although many of them found different methods to succeed, it definitely helped that they were in the world of online commerce and content. They have taken advantage of a time where many people were on their computers, and have found a way to shift their offerings to cater to people’s specific wants.
#1 Takeaway – Stay the Course – In the past few months, we focused on how these online entrepreneurs shifted to the changes in the world economy. Now, they are sticking to these strategies and seeing their efforts pay off. Sometimes, success is all in the follow through. Keep doing what’s working, and you’ll see it pay off.
- Don’t Be Afraid to Stay Put – Sometimes, there is the constant need to always adapt. Always try that new thing, or move in a new direction. But if something is working, why change it? Often, your best bet is to continue doing what made you successful. This is not to say that you can’t continue to innovate, but sometimes the best innovation is to recognize what’s working and keep doing it.
- Constant Evaluation – Of course, this strategy comes with a requirement. You need to be able to recognize the reason for your success. You should be constantly evaluating your own strategies, so that you can recognize what’s working and what isn’t. This is a major reason that these entrepreneurs write these income reports in the first place. Not only does it hold them accountable, but it forces them to dig deep into their business practices each month to see what’s working and what isn’t.
Quick May Update on my End:
- Posts at AuthorityWebsiteIncome.com
- Lots of family bike rides and first swims in the bay, although much turmoil in the world it is great to get out and enjoy the outdoors
- MotionInvest – We worked on the plan to launch the Marketplace which has us selling sites for people that meet our high standards but we don’t buy ourselves. This combined with our Dutch Auction approach to site valuation has resulted in a record number of listings available for sale at MotionInvest!
- ContentRefined – Maddie is off on Mat Leave (congrats) and the new team has done an amazing job transitioning into her role. Narcis in particular has taken on some additional responsibility and is performing extremely well.
- LightningRank – We have soft launched to a small group an ecommerce focused network of real sites (traffic, earnings etc) that are available for relevant links. Response has been great and
- BrandBuilders.io – A big giveaway is being planned that is going to be exciting. Brady has done a great job increasing the rate of marketing content creation with a growing YouTube channel.
- Super Secret Software Project – It is coming soon 🙂
- AdBank – Relay.digital was launched off the back of the adbank tech to help work from home companies continue to communicate the important but never urgent messaging around company culture and values.
My Reason for This Round Up:
When I started my online entrepreneurship journey I took a lot of inspiration from others that were sharing everything they did online. Seeing that people like me were making REAL money and that the opportunity to replace my day job was possible.
It has been 3.5 years since I left my day job – https://websiteincome.com/quit-my-job/
The more transparent the report the more I appreciated and was motivated by it.
Over the years I have tried to be as transparent as possible sharing along the way my goals, business successes/failures and the ultimate results(profits).
After years of sharing monthly income posts I decided that it made sense to stop these… a decision I actually regret as I wish I had found a way to keep sharing some of what I was doing.
My reason for stopping was my online world and “real” worlds became more connected and it was becoming very odd to share these numbers.
Looking at many of the people that originally had an income round up posts they have also stopped. Namely the most famous in the space Pat Flynn no longer does income round ups.
In this post I will cover…
- List of inspiring income report posts and how they earned their profits
- Recognize motivating people showing not just telling people the results they are achieving
- Learn from others – What the key learning is from the people
Last Month Profit – $13,246.20
Name – Ron Stefanski
Website – onehourprofessor.com
Business Model – Authority Affiliate Site
Income Report – https://www.onehourprofessor.com/may-2020-monthly-income-report/
- Ron had a bounce back month, and he expects the growth trend to continue in June.
- Most of his websites bounced back, but two primary Amazon affiliates continue to suffer due to low affiliate commissions. He also struggled with the new Google algorithm.
- Ron continues to focus on his YouTube channel, and it continues to grow. He now has a positive ROI.
Checkout the video I did with Ron and be sure to read his gripping story here!
Last Month Profit – $8,738.29
Name – Johnny FD
Website – johnnyfd.com
Business Model – Mixed – Dropshipping & Investing
- Johnny continues to live in Sri Lanka.
- Johnny had a great month and actually made the most money he has in a while.
- Johnny has seen his dropshipping stores make great sales this month. He still attributes his success to Anton’s Method of Dropshipping, even seven years later.
- Johnny was doing so well this month, and living the easy life on the beach, that he decided to create a 100% free dropshipping course just to give back.
Last Month Profit – $28,152.62
Name – Ryan Robinson
Website – ryrob.com
Business Model – Authority Website (affiliate earnings)
Income Report – https://www.ryrob.com/blog-income-report-april-2020/
- Blog income rose a good deal for Ryan in May, primarily due to increased affiliate commissions.
- Ryan gave his writers as much work as they wanted to take on, which is keeping him stocked on content for months.
- Ryan expects traffic on his blogs to keep increasing into June, which should see even more increased profits.
- Ryan invests in long-form, in-depth content, which is what he attributes to why it is so actionable.
Last Month Profit – $5407
Name – Anne
Website – www.yeys.com
Business Model – Web Publishing Blog
Income Report – https://yeys.com/may-2020-traffic-revenue-report/
- Anne finally made a profit in May, after months of hard work on her project.
- She saw traffic go up 52%, and revenue go up 54%.
- Three of her blogs make up the majority of her growth, and continued to grow into May.
- She makes money with these blogs primarily from display ads and Amazon affiliate links.
- This month, she experimented with a/b testing on call to action links. She enjoyed this strategy for gaging the success of her links.
Although they don’t do exactly income reports, there are a few reports that are worth mentioning and when they publish new reports I will be sure to include.
Am I missing any I should include? Please drop a message in the comment section below with anyone I should include next month!
Several this month didn’t publish so I wasn’t able to include but will again when they publish.