Key Points From the Interview
oday's episode is for anyone interested in acquiring digital businesses.
Dom Wells has been building and acquiring businesses in the online space for a decade — generations in Internet years — and today Dom acquires internet businesses through his firm Onfolio.
Our conversation is less his story and more about the state of digital business acquisition today, in spring 2022.
Among the many topics we touch on are:
- affiliate, e-commerce, and SaaS businesses and each one's pros/cons;
- online course and content businesses;
- where Dom sees opportunities in digital acquisition;
- how to source deals;
- the leading brokerages of digital businesses;
- Flippa & MicroAcquire;
- and how to approach the digital space as an outsider.
Following are more highlights:
Affiliate Business Model - Pros & Cons
There was a time when you could quickly publish a informational website about a product category, populate it with affiliate links, rank in search results, and start generating revenue.
It was great: they cash flowed well, cost little to maintain, and the content was inexpensive to produce. Marketers rushed to stamp out sites like these for every conceivable product category, and they proliferated.
But their quality was low, and eventually Google started taking notice & penalizing them. Over time, they started dropping in the search results, which was often their sole source of traffic.
Today, Dom won't touch these types of sites. One minor tweak to Google's algorithm can cause a site to disappear from search results and its traffic to plummet, effectively killing its revenue.
There is also the risk that the vendor paying for the affiliate traffic will change its terms, which they can do unilaterally. Many affiliate sites link to Amazon, and in spring 2020 Amazon slashed its commissions on certain product categories from 8% to 3% without warning. Affiliate sites in those product categories saw their revenues collapse by over half overnight.
E-Commerce - Pros & Cons
One of the things Dom likes about e-commerce is that it doesn't suffer from the same SEO risk as affiliate sites.
Most e-commerce businesses rely on paid traffic, that is, pay-per-click ads on Facebook, Instagram, or Google. This traffic, while expensive and competitive, is easier to control and predict than traffic from SEO.
Still, Dom and his team have decided to stay away from e-commerce for one key reason:
The cash flow is terrible.
You're always taking the profits from products you sell to re-invest in acquiring new inventory of those same products.
As Dom says, "E-commerce is so cash-flow intensive, it's kinda like, what's the point in owning this business? The purpose of owning a business is to give you free cash flow, and e-commerce businesses are massive cash sinks."
Digital Product Businesses - Pros & Cons
What Dom and his team do like in 2022 are digital product businesses, which have the same benefit of e-commerce of more control and direct relationships with customers, but actually produce cash.
Examples are online courses, community memberships, and paid newsletters. Online courses in particular have Dom's attention.
There is little to no marginal cost with these product types, so profit margins & cash flow are great.
The negatives to courses are:
- they require more upfront investment to create,
- they require more effective marketing because the price points can be high and certain topics are crowded,
- and piracy (thieves rip off a course and sell it cheaper).
From the perspective of a business buyer, there is one more potential negative with online course businesses. Many of them are reliant on the founder, who may be the face or the brand of the course. So if you're acquiring a course, you have to figure out a way that it can continue to be popular without the founder.
Software-as-a-Service (SaaS) - Pros & Cons
SaaS has one of the most desirable characteristics of any business acquisition: recurring revenue. Customers are automatically charged month after month until & unless they cancel.
This one desirable trait has drawn huge acquirer interest, and prices for SaaS businesses are now very high — oftentimes unrealistically so, especially from independent developers who have built a small SaaS business themselves as indie hackers.
"A lot of SaaS founders are expecting Silicon Valley valuations. It's actually quite hard to buy a SaaS from a solo founder. There's like a cognitive dissonance between what they think their business is worth and what it's actually worth."
Dom also call out the high developer costs, which you'll have to pay to maintain the software and continue adding features.
And, SaaS businesses tend to have poor defensibility. He explains that if you look at any SaaS niche, you'll find a crowded marketplace.
"There's 50 of everything. Just choosing Riverside.fm to record this podcast, you probably had ten other options."
Where Opportunities Exist Today
Dom and his team like content businesses that generate revenue from advertising and sponsorships versus affiliate commissions.
"We have some content websites that just make money from adverts on the website. Google doesn't hate them as much as it hates the low-quality, crappy affiliate sites, so the SEO risk is lower."
And not just content websites; YouTube videos, podcasts, and other formats can also be great content assets.
"There is a side of content that's very much alive. The distinction is that you just need to really have higher-quality content, and content that people find educational or entertaining."
Paid newsletters is another content format that can be highly profitable.
But Dom worries that the space has become too hot.
"I do think there's a little bit of a gold rush with newsletters right now, in that everybody and his dog is starting a newsletter. I don't know about you, but I signed up for way too many newsletters, and now in my inbox I don't read half of them. So I think newsletters will go out of favor to some extent."
How to Find Good Acquisitions
One of Dom's biggest frustrations with the digital acquisition space is the deal flow. It's hard to find attractive acquisitions.
He keeps an eye on the big 3 brokers: Empire Flippers, FE International, and QuietLight.
He also watches the two well-known marketplaces MicroAcquire and Flippa.
What about proprietary outreach, contacting digital business owners cold to start a conversation about buying their business?
Yes, it happens. "What a lot of people do is just spam the internet, like, "Hey, are you interested in selling your business?" I know that because I receive a lot of those emails."
Is it effective? Meh. Like in the offline search world, "You have to kiss a lot of frogs."
Many of the owners that respond will be unsophisticated and therefore unreasonable.
Dom and his team have done proprietary outreach in the past, and to the extent they got responses, they had the character of: "Make me an offer so high I can't refuse." To which Dom responds, "Well, no. I'll make you a fair offer. But you need to tell me about your business." And then they'd never hear from the owner again.
If you're tempted by doing proprietary outreach yourself, Dom recommends having the right strategy — which most people don't. "People just do it for the wrong reasons, and they get crappy results."
"A lot of people do it thinking they can save money that way. Like, if you can get off-market deals, you pay like half price because you get an unsophisticated seller. And I think really the reason to do proprietary outreach is to get the better websites and just pay whatever they're worth."
Alternatives to Acquisition
In the world of search, it's not uncommon for an acquisition entrepreneur to buy a business in an industry in which they don't have experience.
Is digital an industry where someone without any experience can do the same?
Probably not. Don't rush to spend a $1m on a digital business if you have no experience. That business is probably much riskier than, say, a $1m HVAC business.
Dom and his team have managed this risk through diversification; they own lots of digital businesses, which has helped when one of those businesses declines quickly.
But diversifying intelligently also takes expertise (not to mention a lot more money).
So you might want to dabble at the other end of the spectrum first. The good thing about digital, unlike HVAC (again), is that there are businesses for sale at very low price points — think $5,000.
"You could buy a couple businesses for $5k each and just learn through skin in the game. Just buy your way into the space and learn by doing."