How I bought a website earning $1k/month for ~$2,700 upfront.
I hope you enjoyed last week’s recap issue: Six months of Alternative Assets. I’m kicking off the new year with a look at a website I recently purchased. From beginning to end, this site took fourteen months to close, and had some interesting ups & downs along the way. I figured the story was worth telling, as it involved both an earnout agreement and buyer-side financing.
Let’s dive in!
What website did you purchase?
There’s a really frustrating habit that most website investors have, where they don’t actually reveal the URLs of the sites they own.
Sure, they’ll tell you the general category, say “sports” or “music”, but that’s usually it.
This drives me bonkers. How can I learn from the world’s best website investors or follow a case study if the actual site is hidden? What’s the point?
As it turns out, investors can be very protective of their niches. There’s a “do your own homework” attitude amongst website owners; a fear (not entirely unfounded) that if a profitable niche is revealed to the public, other savvy investors will swoop in and suddenly become new competition.
I sort of get it. It bothers me, and I don’t think it serves the industry well, but I understand the reasoning. So while I won’t tell you the exact website I purchased, I’ll tell you the exact niche: Diamond Painting.
What the heck is diamond painting?
“Diamond painting” is a new hobby where artists use a special tool to apply small plastic gems (aka “diamonds”) to a canvas in order to create a mosaic. Think of it as “paint by numbers,” where certain colors correspond to certain areas of the painting.
If you’re really into arts & crafts, then you may be familiar.
‘If you haven’t, you’re probably a) male, b) under 40 years old, c) live in a large city or d) all of the above.
Either way, while diamond painting isn’t covered by Techcrunch or discussed by “coastal elites,” it’s already very popular, and growing fast.
Sourcing the deal
I first mentioned this website back in Issue #3.
I was casually browsing Flippa October 2019, just fishing for ideas, when I noticed a diamond painting website for sale that had pretty good numbers. I had never heard of diamond painting before, and didn’t know much about it. So I made the seller a lowball offer of $3,000, which he immediately rejected. I expected this to happen, and soon forgot about it.
A month or two later, I heard the term come up in conversation, and my ears perked up. Hmm, interesting…
I subscribe to The Hustle’s “Trends” for market research, and checked to see what they had to say. But to my surprise, they hadn’t mentioned it at all.
According to SEMrush, however, the search term had been picking up a little steam. So based on that, I reached out to the same seller and doubled my offer. Still a no-go, although this time I did get a reply back. So at least now we were in communication.
…Or so I thought. Every few months, I’d check in with the seller and see how his diamond painting site was doing. I emailed multiple times, but got no response. I even called a few times and left a voicemail. Total silence on his end.
Then, last June, I was checking my email, and nearly spat out my coffee when I saw an email from Exploding Topics:
Oh man, I thought… “Diamond painting is blowing up and I’m here eating dust!”
The moment I saw the graph above, I knew I had to try and get that site. Covid had hit just a few months earlier, and everyone was suddenly stuck indoors, looking for new hobbies to take up. It was perfect.
I emailed the seller one last time in desperation. Clearly he had wanted to sell the site at one point, so why not now? I don’t care if it’s worth more than it used to be. This trend is taking off! Let’s talk, man!
This time, to my surprise, he wrote back.
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Negotiating a price
It turns out the site had changed quite a bit since I first looked at it.
It was now profiting a solid $1,000/month on roughly 12,000 pageviews/month.
He had just gotten valuations from Flippa and Empire flippers, and had the site valued in the $24k – $47k range (2x – 3.9x multiple).
Analyzing the numbers
The first thing I noticed is that the site had both a nice upward-sloping organic traffic curve. Covid had recently caused a big traffic spike, which was already starting to die down a bit. But the site had strong traffic even before Covid, despite the fact that the seller had never done paid ads or purchased any backlinks.
It also had a nice traffic mix. 85% was free traffic from Google, Pinterest, YouTube, and Instagram. Social presence was high and also included a mailing list of 5,000.
Finally, the seller had done a great job managing affiliates. It had an excellent diversity of revenue sources. The $1,000 profit was split across no less than 7 affiliates, and Amazon represented almost exactly 1/7th of that. This is something I always look for when buying affiliate sites. Over-dependency on Amazon is a recipe for disaster.
Based on traffic and revenue, the site RPM was $83, which is excellent for an arts & crafts site (and a very good RPM no matter how you spin it)
For those familiar with Traffic Advantage, you may be wondering how the site ranked. As you can imagine, it ranked very well. ????
As far as I could tell, there were only three concerning things that needed to be factored in before making an offer:
- Covid traffic spike. What would traffic look like after the Covid spike ended? What level would it “normalize” to?
- Article dependency. While the site had pretty good traffic diversity, one single page was responsible for 35% of all traffic.
- Cost assumptions. The listing did not have line-item costs stated. What would reasonable active maintenance costs look like?
I’ll take you through my thinking on how to deal with these.
Establishing “normal” traffic & revenue
The goal here is to figure out what normal traffic & revenue looks like. Basically, all else being equal, as the world/site returns to a normal path, what would that look like revenue-wise?
First, I looked at all of the revenue sources, and determined the average revenue from each source over the past 9 months, including the big 4-5 month Covid spike.
Next, I did my best to bake in some assumptions around the normalization of revenue going forward. This part was a bit tough to do, as I didn’t have full access to the data. But I cobbled together my assumptions on the “spike months” based on what I saw in Google Analytics.
I cam up with a “baseline spike assumption” of 2x, meaning that traffic (and presumably revenue) had essentially doubled during the spike.
I then applied this assumption to most of the 7 revenue sources:
- Actual = $65/month, mostly flat, slightly up.
- Assume normalizing at $80/month.
2) Amazon Affiliate
- Actual = $124/month. Normalizing post-spike.
- Assume mean reversion to $62/month
3) Paint With Diamonds Affiliate
- Actual = $630/month
- Assume mean reversion to $315/month
4) Diamond Art Club Affiliate
- Actual = $71/month
- Assume mean reversion to $36/month
5) EasyWhim Affiliate
- Assume mean reversion to $118/month
6) eBay Affiliate
- $6/month, slightly falling, mostly flat.
- Assume continues at current level.
7) Shoutout.Global Affiliate
- $100/month, slightly falling, mostly flat.
- Assume continues at current level.
– – –
ACTUAL REVENUE: $1,232/month
REVENUE W/ NORMALIZATION ASSUMPTIONS: $717/month
How much will the site earn in the future? Nobody knows for sure, but it’s likely somewhere in between the current total, and the total with assumptions. So I simply averaged these two together. (I do that a lot)
AVERAGE W/ NORMALIZATION ASSUMPTIONS: $975/month
Establishing a “discount factor” for page dependency
Next, I tried to factor in the page dependency risk associated with the aforementioned critical page.
The top page ranks well currently, but it accounts for ~33% of site traffic, and thus, revenue. If this page’s rankings were to change (which they almost certainly will to some degree), the site revenue will fall – potentially even disproportionally so. Again, it’s not the end of the world, but definitely something that needs to be factored in.
To keep things simple, I baked in an assumption that there is a 25% chance that 33% of revenue will fall by 25% within the next 3 years. (Whew! That’s a mouthful).
In other words, for every $1 dollar of revenue, multiply by .33, then by .75, then by .75 again.
This leaves us with a discount factor of (1 – 0.186), or 0.814. It basically means that each dollar the site earns is, risk-adjusted, worth 81.4 cents.
Applying this discount factor to the totals above gives us the following:
AVG W/ NORMALIZATION ASSUMPTIONS & DISCOUNT FACTOR: $794/month
Establishing cost assumptions
There were no costs stated on the listing, but that’s okay. Clearly running this site as-is doesn’t necessitate huge costs, but I don’t want to maintain this site, I want to grow it.
Between content creation, backlinking, SEO, hosting, and VA tasks at about $8.22/day, or $250/month. I thought that was on the low side, but it’s a reasonable place to start. It will cover maintenance and reasonable growth efforts.
Applying these costs leaves us with the following:
AVG W/ NORMALIZATION ASSUMPTIONS, DISCOUNT FACTOR, & COST ASSUMPTIONS: $544/month
Finally, I simply applied a standard affiliate content site multiple of 2.4x. This leaves us with $15,776.
To sweeten the deal, told the seller I was happy to cover escrow fees, and would also round it up to $16,000 to make things easier.
He wrote back saying he liked my assumptions & valuation methodology. He explained, however, that my cost assumptions were a bit off, and countered at $18,500.
After some final math on my part, we settled on a price:
Final sale price: $18,241! (1.5x annual net profit) ????
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During the negotiation, the seller said something which I found interesting:
I’m not sure if you or your partner would be interested in some type of partnership? I have thought about possibly finding a partner(s) who would be willing and able to help maximize SEO and the site to generate more income to the base that I’ve built. I’m not sure if you would be open to or interested in discussing a possibility where I would still maintain some ownership of the site?
As a buyer, I’ll take an earnout agreement every time. (Align incentives, pay less upfront and protect myself later on? Hell yeah, sign me up!)
But parties don’t usually offer earnout agreements for purchases at this level, so I was surprised to hear this.
I told him yes, we could form a partnership that simultaneously keeps him vested in the site’s future success, protects us from downside risk, and provides additional rewards if revenue milestones are hit.
I proposed an earnout deal that would give him the right to subsequent financial benefits which are contingent on the performance of the business for a specified period after the sale. Essentially, this would give him payments on a sliding scale reflecting the percentage of the revenue actually attained each month. This means higher repayments in higher performance months.
PROPOSED DEAL STRUCTURE:
1. 70% of the purchase price is paid upfront ($12,768), and the remaining 30% is paid in installments over the next 12 months ($5,472 over 12 months, or $456/month).
2. We would agree upon and establish a Baseline Revenue Target, whereby if the monthly revenue exceeds a minimum set amount, 50% of the difference is paid out to the seller as a bonus, on top of the original monthly payment.
- For example, each month $456 will be paid, regardless of site performance, for 12 months. But since the site has been earning $1,200 per month, we shall establish a Baseline Revenue Target of $1,000 per month.
- If revenue in month 1 is $1,500, the seller is entitled to 50% of the overage. (50% x $500) + ($456) = $706
- If the site earns less than the target, then no bonus is paid out. The $456 monthly payout stands no matter what.
In a nutshell, if the business fails to perform to benchmark expectations, the final price paid remains the same. Conversely, if it performs better, then the seller receives more than initially anticipated. This would allow the seller to remain vested in the company and receive compensation that exceeds the offer price.
He loved the deal! We put the earnout agreement into the contract.
Final sale price: $18,241
Final upfront payment: $12,768 (1.06x annual net profit) ????????
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Financing the purchase
At this point I was pretty confident I was getting a good deal on a good site. But I wanted to experiment with a new financing idea that had been on my mind lately.
A friend (and Alternative Assets subscriber) had approached me a few months prior about going in on potentially a deal together. He had never invested in websites before and wanted to learn. There are some pretty interesting ways to do something like this, including joint owner-operator arrangements, and the group buys that Dom from Onfolio has been running.
But I didn’t want to do anything that complex. Instead I proposed something very, very simple: A $10,000 loan with a 10% interest rate. No risk on your part. You give me $10,000, I’ll give you $11,000 at this time next year. That’s it.
I’ll show you the ropes and give updates along the way. If the site tanks or takes off, you get 10% either way. After 12 months you can keep the loan rolling at 10% APR, or either party can call it in.
As it turns out, my buddy was looking for a safe, easy investing play like this. He sent the money and that was that.
Final upfront payment after financing: $2,768 (0.23x annual net profit) ????????????
There’s a lot of opportunities with a site like this.
After a much-needed site redesign, the first thing I want to do is some backlinking and on-page SEO, including category optimization. The previous seller did very little SEO work, and with a growing niche like this there’s an opportunity to own the long tail. Some of the most commonly searched terms in this category are stuff like “harry potter”, “starry night”, and “cat” but the distribution is significant — in fact there are over 100 unique queries with over 1,000 searches per month, all for specific types of diamond paintings.
But what I’d really like to explore is converting this from an affiliate content site to an ecommerce site. James Camp mentioned this recently twitter, and it’s something I’ve been thinking about for months. Ecommerce site RPMS are much higher than content site RPMs. They earn far more revenue per user. The problem is that revenue usually comes at a high cost — Ecommerce traffic is usually paid (and expensive!)
If you could leverage all that free & organic traffic and get RPMs that are 10x higher, suddenly you’ve got the best of both worlds.
Expect more writing on this topic shortly…
The holy grail of opportunities— James Camp ???????????? (@JamesonCamp) December 18, 2020
Is an eCommerce store that is getting organic traffic and conversions
Without any paid ads being run
If you find one of those…buy it
A big thanks to subscriber and (hilarious) friend Tom Ellsworth who sent me these other brilliant ideas:
- Wine paintings 2.0. Reach out to those group wine places where you make oil paintings as a group, usually with like 4 bottles of wine over the course of the day. My old office must have bought 30K worth of team-building nonsense outings at those places.
- Custom canvases. Advertise on DeviantArt and Reddit Art subs, maybe some podcast ads. Cheap and targeted. There are whole subs just filled with people who want to have their profile pictures drawn by others. So offer to make a diamond print out template of their art, color-coded or not, whatever. I guarantee the number of thirsty neckbeards looking to tip the camgirl they obsess over with something original would buy you a yacht.
- Advanced kits. See if any artists want to make something from your product. 3D resin is probably easiest, but there’s also 3D printer fanboys. Everything is so flat with this stuff. Make a canvas with angles, waves, curves. Simple tools to grind them into angles. People love shit like that.
- Glow in the dark diamonds. I don’t see anyone selling those.
- Custom print books. I love the books my wife makes for our family, but they are pretty dull on the outside. If you made a kit where you could have Costco/shutterfly custom print picture books but make a surround for the front cover where you can fill the front cover with diamond art.
- Diamond-covered floors. Ever seen a nice floor covered with epoxy covered pennies? It’s so awesome. How much would it cost to make a floor covered in these, then epoxy it? Not much more than the pennies, I’d bet. It would be trivial to make some LEDs or edge lighting. Could look incredible.
- The 8-bit crowd. Low res retro stuff. Thinkgeek DIY Mario kit. (Better call it Luigi just to be safe from lawsuits. No one cares about Luigi.)
- Art school gifts. Get in touch with some art schools. Give it away to them. See what they can do with it and have them all link to you.
Like I said, he’s brilliant. I’ll probably end up doing exactly none of these, but still. Follow Tom on Twitter, you won’t regret it.
And that, my friends, is how I purchased a growing site in a growing niche profiting $1,000/month for just $2,768 upfront.
Wish me luck with this site. I’ll be giving occasional updates and maybe even a case study in the future.
If you’d like help performing due diligence on any site, let me know. I created and manage Flippa’s Due Diligence program, and offer the same service to you.
How’d you like this issue?