The digital marketplace is in constant flux, offering a myriad of challenges and opportunities for entrepreneurs. In a recent interview, Greg Elfrink, who leads marketing at Empire Flippers, shared valuable insights about buying and selling internet businesses in 2024. Empire Flippers has helped sell over $450 million worth of online businesses and has many active listings that attract lots of buyers and investors.
This article explores the market conditions of 2024, examining the impact of recent economic changes, evolving buyer preferences, and the effects of Google's algorithm updates on various business models. We'll discuss the complexities of deal structures, the growing use of seller financing, and key considerations for both buyers and sellers in today's market.
If you're thinking about selling your online business or buying one, the insights from this interview are going to guide you through. They can help you make smart choices in today's market. We'll break down Elfrink's expert observations to help you understand what's going on in the online business world of 2024.
Greg Elfrink of Empire Flippers
Market conditions in 2024
The online business market in 2024 presents a complex field for both buyers and sellers. While overall sales multiples remain attractive, the environment has become more challenging and nuanced compared to previous years.
The industry experienced a significant downturn in 2022, which fully materialized in 2023 with the collapse of many acquisition funds. This shakeup caused a ripple effect throughout the market, leading to a period of uncertainty and readjustment. However, as we've moved into 2024, buyers have begun to return to the market, albeit with a more cautious and selective approach.
Today's buyers are primarily focused on high-quality, growing businesses. They're particularly interested in models where the owner has control over the entire customer lifecycle and data. This flux reflects a broader trend towards businesses with more stable and predictable revenue streams.
The recovery of the market has been gradual, with buyers now exercising more care in structuring deals and being more discriminating in their choices compared to just two years ago. This change has created a more competitive environment for sellers, but it has also opened up opportunities for well-prepared businesses to stand out.
For sellers, this means that while there are still plenty of opportunities to exit, the bar for what constitutes an attractive business has been raised. Potential sellers need to focus on improving their businesses' fundamentals, including consistent growth, diversified revenue streams, and strong customer relationships.
For buyers, the current market conditions offer both challenges and opportunities. While competition for top-tier businesses remains fierce, there's also a wider range of businesses available at more reasonable valuations. This environment rewards buyers who are willing to do thorough due diligence and who have a clear strategy for growing and improving the businesses they acquire.
Google's impact on different business models
Google's recent algorithm updates have had a profound and varied impact on the online business industry, with some business models feeling the effects more acutely than others.
Content sites have been hit particularly hard by these updates. Many site owners who relied heavily on organic search traffic have seen significant drops in both traffic and revenue. This has led to a reevaluation of the content site model among both buyers and sellers.
Elfrink suggests that this trend is likely to continue, with Google seemingly intensifying its dislike for certain types of content sites, particularly those that it perceives as not providing unique value to users. For content site owners, two main options are presented: sell now or evolve the revenue model towards e-commerce or SaaS.
Interestingly, many current buyers of content sites are pursuing the latter strategy, purchasing with the intention to diversify revenue streams. This approach involves using the existing traffic and authority of the site to launch related products or services, reducing reliance on ad and affiliate revenue.
In contrast, e-commerce, SaaS, and other business models have remained relatively unscathed by Google's updates. These businesses often have more diverse traffic sources and direct relationships with customers, making them less vulnerable to changes in search algorithms.
This situation highlights a key weakness in the traditional content site model: while they often boast excellent traffic from SEO, their revenue models (typically affiliate marketing and display ads) are among the least robust. The vulnerability of these sites to algorithm changes shows the importance of diversification and adaptability in the online business world.
For entrepreneurs considering starting or buying an online business, these trends suggest that building a model with diverse traffic sources and revenue streams is necessary for long-term success. It also highlights the potential risks of relying too heavily on any single platform or traffic source, even one as dominant as Google.
Selling a declining business
For business owners facing declining traffic and revenue, selling can be particularly challenging in the current market. The demand for distressed businesses has decreased massively, making it harder to find willing buyers.
Elfrink advises being prepared to accept a lower multiple and a deal structure where a significant portion of the payment is deferred over time, typically a year. While there are still buyers interested in such businesses, they're far less willing to pay premium prices compared to previous years.
This situation emphasizes the importance of timing in selling a business. Ideally, owners should consider selling while their business is still growing or at least stable, rather than waiting until a decline has set in. However, for those who find themselves needing to sell a declining business, there are still options available.
One approach is to focus on the potential turnaround story. Sellers should highlight any untapped opportunities or easily fixable issues that could quickly improve the business's performance. This could include unexplored marketing channels, potential product expansions, or operational inefficiencies that a new owner could address.
Another strategy is to consider partial sales or partnerships. Some buyers might be interested in acquiring a portion of the business or entering into a partnership arrangement. This can allow the current owner to benefit from the buyer's expertise and resources while retaining some upside potential if the business turns around.
Sellers of declining businesses should also be prepared to offer more comprehensive transition support. This could include extended training periods, ongoing consulting arrangements, or performance-based earnouts. Such arrangements can help alleviate buyer concerns and potentially improve the final sale price.
While selling a declining business is challenging, it's not impossible. Success often comes down to realistic pricing, creative deal structuring, and a focus on the business's potential rather than its current performance.
Popular business models in 2024
According to Elfrink, two business models are particularly attractive to buyers in 2024: marketing agencies and direct-to-consumer e-commerce stores (excluding dropshipping). These businesses are seen as more stable in the long term, better able to withstand the challenges posed by AI and Google's unpredictable algorithm changes.
Marketing agencies have gained popularity due to their scalability and the increasing demand for digital marketing services. These businesses often have recurring revenue models, strong client relationships, and the ability to adapt to new marketing trends and technologies. Buyers are attracted to the potential for steady cash flow and the opportunity to leverage existing client relationships for growth.
Direct-to-consumer e-commerce stores, particularly those with their own branded products, are also highly sought after. These businesses have control over their supply chain, pricing, and customer data, making them more resilient to market changes. The ability to build brand loyalty and expand into new product lines offers significant growth potential for buyers.
The appeal of these models lies in their ability to use multiple marketing channels, own customer data, and leverage various growth strategies. This versatility provides a level of security that content-based businesses often lack. Both marketing agencies and D2C e-commerce stores can diversify their traffic sources, reducing dependence on any single platform like Google.
Additionally, SaaS (Software as a Service) businesses continue to be popular among buyers, although competition for quality SaaS companies is fierce. The recurring revenue model, scalability, and potential for high-profit margins make SaaS an attractive option for many investors.
It's worth noting that while these models are popular, success is not guaranteed. Buyers should still conduct thorough due diligence and have a clear strategy for growth and improvement. The key is to look for businesses with strong fundamentals, loyal customer bases, and clear opportunities for expansion or optimization.
The growing trend of seller financing
Seller financing has become increasingly prevalent in recent years, reflecting significant changes in the broader economic environment. This trend has been driven by several factors, including tighter lending conditions from traditional financial institutions and a desire for more flexible deal structures.
In seller financing, the seller essentially acts as the bank, allowing the buyer to pay for the business over time. This arrangement can be beneficial for both parties. For buyers, it can make acquiring a business more accessible, especially when traditional financing options are limited. For sellers, it can lead to a higher overall sale price and potentially favorable tax treatment.
Elfrink advises sellers to be more flexible if they're seeking a significant exit. He notes that what constitutes a good offer today would have been considered less attractive two years ago when capital was cheaper. This means that it requires sellers to adjust their expectations and be open to deal structures that may involve deferred payments or performance-based elements.
Typical seller financing arrangements might involve the buyer paying 50-70% of the purchase price upfront, with the remainder paid over 1-3 years. The terms of these deals can vary widely, often including provisions like earn-outs based on the business's performance under new ownership.
For buyers, seller financing presents an opportunity to acquire larger or more established businesses than they might otherwise be able to afford. It also aligns the seller's interests with the continued success of the business, which can be particularly valuable during the transition period.
However, seller financing also comes with risks. Buyers need to be confident in their ability to generate sufficient cash flow to meet the payment terms. Sellers, on the other hand, need to be comfortable with the possibility that the buyer might default, potentially requiring them to retake control of the business.
The prevalence of seller financing also highlights the importance of due diligence and clear communication between buyers and sellers. Both parties need to have a thorough understanding of the business's potential and risks to structure a deal that fairly allocates risk and reward.
Key factors for buyers to consider
For those looking to acquire an online business in 2024, Elfrink outlines several important factors to consider:
1. Acquisition budget: Understanding the total funds available for the purchase is important. This includes not just the purchase price, but also any additional costs associated with the acquisition and initial operation of the business. Buyers should account for potential working capital needs, transition costs, and funds for immediate improvements or expansions.
2. Working capital: Ensuring sufficient funds remain post-acquisition for growth and maintenance is vital. Many new owners underestimate the ongoing capital needs of their acquired business. This can include inventory for e-commerce businesses, marketing budgets, or development costs for SaaS companies. A good rule of thumb is to have at least 10-20% of the purchase price set aside for working capital.
3. Personal skills: Identifying how the buyer's skills align with the business's needs can be a key factor in success. Buyers should look for businesses where their expertise can add value. For example, a buyer with a strong marketing background might be well-suited to acquire a business with untapped marketing potential.
4. Strategy and exit plans: Developing a clear plan for operating and potentially reselling the business is important. This includes both short-term operational strategies and long-term growth and exit plans. Buyers should consider how they plan to grow the business, what improvements they can make, and how these changes might impact the business's value in a future sale.
5. Industry trends: Understanding the broader industry context of the business is also very necessary. Buyers should research market trends, potential disruptions, and growth opportunities within the industry. This can help in making a more informed decision and in planning for the future of the business.
6. Scalability: Consider the potential for scaling the business. Look for businesses with systems and processes that can handle growth, or where implementing such systems could significantly increase the business's value.
7. Risk assessment: Evaluate the risks associated with the business model. This includes dependencies on specific platforms or technologies, competition, and potential regulatory changes. Understanding these risks can help in negotiating a fair price and in planning risk mitigation strategies.
Navigating opportunities and risks
While the current market offers numerous opportunities for buyers, it's essential to approach any acquisition with a clear understanding of both the potential upsides and the inherent risks.
Elfrink advises never investing more than you can afford to lose entirely, emphasizing the inherent risk in any business venture. This prudent approach ensures that even in a worst-case scenario, the buyer's overall financial stability isn't jeopardized.
One way to mitigate risk is through careful deal structuring. Elfrink recommends studying various M&A deal structures to protect capital through methods like earn-outs and stabilization payments. Earn-outs tie a portion of the purchase price to the business's future performance, aligning the seller's interests with the buyer's success. Stabilization payments can provide a safety net if the business underperforms in the short term.
Buyers should also consider the potential for growth and improvement in the businesses they're considering. Sometimes, a business that's underperforming in certain areas can present an opportunity for a buyer with the right skills and resources to significantly increase its value. This could involve expanding into new markets, improving operational efficiency, or leveraging new marketing channels.
However, it's essential to be realistic about the time and effort required to turn around or grow a business. Buyers should have a clear plan for how they will add value and be prepared for the challenges that come with taking over an existing operation.
Diversification is another key strategy for navigating risks. This could mean acquiring multiple smaller businesses rather than putting all resources into a single large acquisition. It could also mean diversifying revenue streams within a single business to reduce dependence on any one source.
Lastly, buyers should be prepared for unexpected challenges. Having a contingency fund and a flexible mindset can help navigate unforeseen obstacles. Building a network of advisors and fellow entrepreneurs can also provide valuable support and insights when facing challenges.
Preparing to sell: Planning ahead
For those considering selling their business in the next year or two, Elfrink stresses the importance of early planning. He notes that entrepreneurs often overestimate their business's value, leading to misaligned expectations.
To prepare for a successful sale, consider the following steps:
1. Start early: Begin planning for your exit at least 12-18 months before you intend to sell. This gives you time to improve the business and address any potential issues.
2. Get a professional valuation: Work with an M&A advisor to get an accurate valuation of your business. This can help create a realistic exit plan and identify areas for improvement.
3. Optimize financials: Ensure your financial records are clean, organized, and up-to-date. Consider having your financials reviewed or audited by a professional accountant.
4. Streamline operations: Document all processes and systems. The more turnkey your operation, the more attractive it will be to potential buyers.
5. Diversify revenue streams: If possible, work on diversifying your revenue sources. This can make your business more resilient and attractive to buyers.
6. Focus on growth: Maintain or ideally accelerate your business's growth right up to the point of sale. Buyers are often willing to pay a premium for businesses showing strong, consistent growth.
7. Prepare for due diligence: Anticipate what information buyers will want to see and have it ready. This includes financial statements, customer data, traffic analytics, and operational documentation.
8. Consider tax implications: Consult with a tax professional to understand the tax implications of the sale and structure the deal in the most tax-efficient manner possible.
9. Build a strong team: If your business relies heavily on you, work on building a team that can run the business in your absence. This makes the business more valuable and easier to transfer to a new owner.
Common pitfalls for sellers
Elfrink highlights two major mistakes sellers often make:
1. Taking their foot off the gas: Many sellers mentally check out once they decide to sell, leading to declining business performance. This can significantly impact the final sale price and make the business less attractive to potential buyers.
2. Trying to "squeeze the juice": Holding onto a business too long in hopes of a better valuation often backfires. The best time to sell is during a growth phase, not after. Buyers are more attracted to businesses showing positive trends and are willing to pay premium prices for growth potential.
Avoiding these mistakes requires discipline and a clear understanding of market dynamics. Sellers should aim to maintain or improve their business's performance throughout the sale process and be realistic about timing their exit.
Conclusion
The online business marketplace in 2024 presents a complex setting of challenges and opportunities. Sellers need to prepare carefully and have realistic expectations, while buyers must be cautious and do their homework. Success depends on understanding the latest market trends, like changes in Google's algorithms, the move toward stronger business models, and the growing role of seller financing.
Both buyers and sellers should stay flexible, informed, and strategic. Keeping up with these trends and being ready to adapt will help them succeed in the digital industry.
