Interview With Avid Amiri
Avid Amiri is web entrepreneur with a strong background in website acquisitions and valuation. He shares some guidance and his internet expertise as well as some helpful tips in the below interview:
Could you please tell us more about your thoughts and methods on website valuation?
I have been told that ecommerce valuation is both an art and science. My perceptions on the valuation of ecommerce companies is that while this may be true it is substantially more science than art. I feel it necessary to examine web companies with exactitude and to use key data points to determine appropriate multiples. If one assesses the right metrics one can formulate the appropriate multiplier to apply to cash flows. This would suggest discounts to multipliers for any liabilities to the site going forward as well as premiums to the multipliers for benefits or value adding characteristics that range outside the traditional offerings for the subject sites peer group.
What types of factors do you consider to make multiplier adjustments?
There are qualitative factors that are helpful in the valuation process. I often hear of individuals or potential website buyers who are hyper-concentrated on things like historical profit and loss. My comment is the internet landscape is far too dynamic for this type of activity to be meaningful. Financials that may have been relevant years ago may not have an influence on today’s performance for that business. For instance, a firm that may have had strong sales based on key rankings may have seen a sudden decline as a new algorithmic shift has impacted its former placements. This can happen almost overnight in some cases. In addition, a key vendor may have been lost or pay per click bid rates may have escalated substantially. I always encourage looking at the most recent financials as a basis for valuation, particularly those financials that go back over the past 6 months with specific focus on the last 30 days.
What suggestions do you have for first time business buyers?
The internet world is not for the faint of heart. My feeling is that it offers key advantages for certain types of buyers. It is absolutely not for every investor. However, I am very bullish about the segment and the data consistently demonstrates that it is a field where substantial surplus or excess returns can be generated by even home based investors. What is most impressive about this segment is that is one of the remaining investments landscapes where I have seen clients and investors generate appreciable gains on their investments by applying hard work and effort and following the analytics on their site to help guide management decisions. However, my caveat is that it is not just this notion of a buyer going out and buying a web business. I would stress finding the right business with the correct platform characteristics for growth.
What would say are the chief characteristics to look for?
There is a macrocosmic view that I encourage investors to maintain while seeking out the right online investment. If one maintains this approach it will radically streamline the selection process as well as accelerate the process. If one loses this high level vantage point one will rapidly lose site of the bigger picture with these assets and that is where I think mistakes are made. In particular, one should look at two initial metrics as they separate wheat from chaff in their website hunt. These primary drivers are traffic and conversion. Starting with an analysis of these will rapidly expedite the search process.
Can you tell us more about these terms and how they can be applied in assessing website?
Traffic is a simple metric and is also self-explanatory. In short, what kind of unique visitorship does a website receive daily. However, one needs to ask is this traffic relevant (i.e. is it coming from industry related key terms or unrelated key terms) and then what are the sources of this traffic. The two online sources are organic and inorganic traffic. Organic traffic is traffic being derived through natural search engine results. The website will have rankings for the related industry key terms. The other form of traffic is inorganic, which within the internet lexicon is a denotation for traffic coming through paid sources. These may include Pay Per Click, or external advertising or marketing. My feeling is that investors should focus on websites with a strong organic traffic base. This organic traffic should be well distributed through a variety of terms (not just one ranking for one terms on one search engine), but also relevant and commercial. I am not an advocate of websites where the site is selling telescopes, for example, but the traffic is coming for an expression that is informational only. This may be something like “how was the moon formed”. This visitor may be a grade school student writing a report or dinner party guests looking up some interesting cosmological information, etc. This is generally not traffic that will convert into a sale – in short is not commercial traffic. Having said that, the traffic is fine to have but is going to be very low converting.
Can you tell us more about the area of conversion?
The concept of conversion is one of the most important metrics to evaluate. It is a term that defines what percentage of your existing traffic end up making a buying decision on your site. The industry mean is about 1 percent. This would suggest that 1 out of every 100 visitors industrywide end up buying on website before leaving. The paragon conversion levels are around 5-7 percent. This would be analogous to an amazon.com. The critical thing to understand about conversion is that this is a simple mathematical calculation that a buyer can perform at the outset of any web transaction. However, it is an important indicator about the potential of a business and whether the business has more upside potential or downside risk. What I mean here is if you are evaluating a business with strong traffic and the website has a very high conversion, while that is a sign of a healthy business, it also implies that the current owner of the website has maximized conversions already. A buyers opportunity for conversion improvement is limited. These conversion activities may be things like the quality of customer service, adding new products to the store, offering specials or discounts to stimulate sales, benchmarking pricing against that of the competition. The unfortunate thing about this type of business is the seller has already maximized value and therefore you would be purchasing that company at a premium. I think the sweet spot for a savvy investor is to find a high traffic, low conversion site. This is a site where the visitation is already in place but the sales potential of the site is not being maximized. An investor could then put on a ‘retail management hat’ and focus on the kinds of things designed to get conversion rates up. In my experience this is an area that is more commonsensical and requires less specialized knowledge. This is also a function of hard work. When buyers acquire websites with conversion rate already in excess of 1 percent they will then need to look back toward traffic to gains to build their business. That is based on the sites SEO and that tends to be the more enigmatic or abstruse segment of the industry. There are quite a few strong investments out there where site owners have developed strong traffic over time but have not worked on conversion. Those are the sites to focus on in my view.
You mentioned the SEO for traffic production, can you tell us more about that?
SEO can be the more thorny or challenging part of this industry. I think it is also a part of the industry that most first time investors don’t know much about and may perceive as a black box. After several major algorithmic events, many sites that Google did not regard as compliant or authoritative have fallen off the rankings or have been heavily penalized. In short, they have lost their ranking and therefore much of their traffic. Without this traffic many sites were forced to shut down or attempt to create new traffic through pay per click. Ironically, I perceive this as a good time to make a web investment because so much of the risk and exposure has been sustained by previous owners. What I mean here, is that Google has already performed its task of ‘shaking out’ sites that did not meet its requirements. Therefore, site that have rankings today are the stalwarts that will likely continue to be around these are the sites that Google has already “signed off” on.
Could you please describe what you mean by the algorithmic ‘shake out’, and what it means to new investors?
One way for me to communicate this point is to analogize to seismic event. In an earthquake, depending on its severity (and assuming the tremors are equally distributed), you will see many structures or properties leveled after the tremors. However, other properties remain standing. This may have to do with the quality of their construction, the strength of their foundations, etc. In the internet world, the sites that are still standing today and have maintained their SEO and keyword rankings are those structures that have sustained the shocks and were built correctly. I do not anticipate any new algorithmic events of the magnitudes we have already seen.
Tell us more about your experience working with client to revive sites that may have been penalized?
I am not currently accepting new clients. However, I would say that in many cases reviving sites that were non-compliant is not possible. I am more optimistic about Yahoo and Bing rankings but you cannot bypass or ‘cheat’ the search engines. Those third party companies that promise SEO services in exchange for a monthly fee may generate some traction at first but Google is looking for these types of ‘on-site’ optimization techniques and will find these sites over time and penalize them. I think that investors need to focus on legacy based assets where the previous owner has engaged with the site to build an authority platform over time. These assets are harder to find but they do exist. I would encourage buyers to remember that finding the right internet business can take months. If the site you are considering has been languishing with business brokers for some months chances are that the site has been reviewed and rejected by myriad other buyers. Just stay patient and wait for the right opportunity. This can be a lengthy process.
Any tips for investors along the way to help them in their search?
I feel like one of the most important ways to accelerate ones search for a web business is to focus on the big items first. I mentioned this above. One metaphor for this might be considering the process associated with real estate investing. If one is looking to purchase a new home, they will probably look at things like location and square footage to get an initial sense for value. This is where one starts their analysis. In short, about 80 percent of your buying criteria may be tied up in about 20 percent of the data points. The mistake a lot of buyers get sucked into is looking at things like vendor relationships or customer service before they have done the high level analysis first. It is easy to waste a lot of time that way. Also it is easy to make bad buying decisions when you are focused on the minutia. Remember, traffic and conversion as the essential place to start.
Do you provide additional information or give speaking tours to those interested in learning more?
No, I do not. I have listed what I feel is important information on some websites online and hope that can provide investors with meaningful material to guide them in their search.