New owners, who just happen to also be Passionate Developers

In 2017, Gigalixir started as a simple idea to help make app deployments one-click easy for the growing Elixir community. 

After testing out that simple idea, the Gigalixir platform started to grow rapidly over the next 4 years. Today, Gigalixir supports app deployments for Elixir, Phoenix, Ruby, Python, Go, Closure, Rust etc. for over a thousand customers. 

Now, at the start of 2022, we are happy to announce that Gigalixir has a new pair of independent developer slash owners who are excited to bring their 20+ years of independent SaaS/PaaS business experience to the Gigalixir community.

Who is Behind This New Gigalixir Team?

Some of you probably already know us…We’re the same team that operates the QuotaGuard Static IP proxy service used by over 20,000 developers since 2013. 

This means that, not only is Gigalixir “not our first rodeo”, but we’ve also learned a lot of lessons about what it means to be a truly customer-first software platform serving the ever-expanding needs of the global app developer community. 

We’re a bit over-excited to bring much of what we’ve learned from working with QuotaGuard to expand the options available for application developers, provide an increased level of customer service, and help grow the app development community.  

What Can You Expect as a Gigalixir User in the Future?

Anyone that’s worked with our QuotaGuard team knows we’re a customer focused business first. 

Our primary day-one goal was to bring that same quick-responding, direct customer/developer interaction experience to the Gigalixir user base. No chat bots, no lengthy click funnels to submit a ticket, no outsourced call centers that ask if you’ve plugged your computer in and turned it on. Just real help from the real engineers that build the platform in (as close to) real time (as we can possibly make it). 

Additionally, by adding more engineering team members to support Gigalixir, we expect a shorter “feature request to production release” cycle for the Elixir / Phoenix community. At QuotaGuard, it’s not uncommon for a feature request to be submitted and pushed to production in the same week. We expect to be able to roll out the most requested features with that same speed.

Even before the QuotaGuard team was working full time on Gigalixir, we started reaching out to current customers to learn where Gigalixir was letting them down. Since then, we’ve been getting to know the community and building out a timeline to incorporate these new ideas into the platform.

If you’re a current customer, you can expect to hear from us directly in the coming weeks with a goal of learning more from you about what you need to reach your goals faster, easier, and hassle-free. 

What Did You Do to Jesse? 

Never fear, Jesse is doing just fine and is still actively involved in the direction of business. Once Jesse felt our team should take Gigalixir forward, we started working side by side in late 2021. 

But why sell? Well, by mid-2021, Gigalixir achieved a rate of growth that increasingly piled on more and more time obligations on Jesse. That started to pull him away from many of his other professional pursuits. In time, he started looking around for a larger team that could take on the responsibilities of the business without alienating or abandoning his current customer commitments and Gigalixir’s long term potential. 

A few months later, when our team and Jesse started to talk about our mutual vision for the future of Gigalixir, there was a recognition on both sides that he’d found the right team and that we’d found a great opportunity that matched our historical skill set.

And don’t worry, Jesse’s still helping with many of the most challenging use cases/questions. Additionally, he continues to act as an advisor on the future direction of the business. 

We are Looking Forward to Working with You

Clichés aside, it’s a real honor and privilege to be given the responsibility of guiding this wonderful business forward for me and my team.

We could not be more excited to work with current and future customers to see where we can take this company.If you ever have any questions, worries, compliments, or funny Gigalixir meme’s, you can always reach us at our Support site. 

We’re available all the time and would love to hear any feedback you wish to share.

Until we chat again, happy coding…

Michael

This Built to Sell book essay is part of a series of essays highlighting key aspects that impacted my career as an online SaaS/software business acquirer and operator. 

None of these book reviews are summaries. I am just highlighting items that spoke to me based on my experiences as an online business acquirer. There is a lot more to learn in these books than I cover here, but these are the main takeaways that helped me in my career.

The title of “Built to Sell” perfectly falls in line with my belief that buying businesses is the most reliable way to build and attain wealth. I wish I had thought of the phrase first! 

Jon Warrillow is a household name…in the types of households that talk about acquiring companies. The book Built to Sell is a cornerstone of that conversation and has a ton of useful information, not only for online business buyers and sellers, but for any business acquirer or investor. 

Although Jon’s book was written with the premise of selling an offline marketing and advertising agency, the overall philosophy closely follows what all online business owners need to keep in mind if they ever plan on selling their companies. 

Because online businesses aren’t quite as complex, there are some pieces of advice in Built to Sell that aren’t quite as relevant or applicable to the online business community. Yet another reason online companies are so much more enjoyable to run than a stand-alone retail outlet. 

The book is broken down into two parts – a story with some seller checklists – and told as a real life situation rather than a set of lecture chapters. 

The story centers around a business owner (Alex) who wants to sell his ‘unsellable’ business and the wise business mentor (Ted) who helps advise him to recreate his business so that it is sellable in the future. 

Personally, I find it a fresh and unique approach over the typical “7 things you MUST do to sell your business” style of books. 

But let’s make this fun, shall we? In that same vein, here are the seven most interesting takeaways that I learned from this book. 

Each is an aspect of keeping your business ready to sell at any time and should be in the back of your mind when you are making the typical day to day decisions with your company. 

Seven Lessons from Built To Sell 

“You should always run a company as if it will last 

forever….and allow it to be sold at any moment.”

This is easily the most important lesson from the book, hands down. 

You never know what might happen in your life where you either need to raise capital or divest your business assets in a hurry. Liquidity of your online business should be resident in your mind at all times with every decision you make. 

Prior to 2020, I think many owners ignored this advice, but now that we’ve experienced the recent global pandemic, owners know that unexpected events could possibly require each of us to sell and sell quickly. 

We also never know when those of us that operate as single-owners could be incapacitated or even pass away. 

You want to run your business in such a manner that you could call David up at Quiet Light, turn over your SOP’s, financials, etc., and  he could sell the business in 30 days. That’s a lot better than having to completely rearrange your business to make it palatable to buyers. 

In Built to Sell, John refers to this as the “options strategy” instead of an “exit strategy”. Always run the business as if nothing will ever change. But keep in mind you may need to sell really, really fast. Try and keep that option open. 

Might I add…with brick and mortar companies, selling really fast can mean selling in a year. With an online business, selling really fast can mean money in your pocket in 30 days. Yet another benefit to running an online business as a more liquid, wealth building asset. 

The idea of running a business with the “option” to sell became even more relevant and important to me once I got married and people depended on me for their livelihood. Imagine something terrible happening to you and your significant other suddenly having to not only run the business, but try to sell it at the same time. You want to give them the best chance to succeed in either venture. 

Consequently, operating your business as if you may sell also helps you run the business in a more organized and logical fashion too. It’s a win win. 

Some of the Best Businesses Are Also Worthless

“You need to demonstrate that your business can run without you” *

• I would add that you need to make sure you demonstrate the business can run without you and the people you contract or employ, as many times they leave upon a sale and a buyer can’t rely on them not to when negotiating.

When Alex first tells Ted he wants to sell the business, Ted quickly gets right to the point. “Alex, your business is virtually worthless today”. 

This statement is very true for a lot of online businesses that are sold in the under $1M market. Many of these businesses are successful due predominantly to the skills, talent, connections, or hustle of the original owner. A new buyer likely won’t be able to replicate those exact skills that made the business successful in the first place. In many cases, without the original owner involved, the business is actually worth a lot less than quoted in the sale price. 

Someone once told me that “Oprah’s talk show business was virtually worthless because Oprah is the business”. Sure, there are reruns you could sell as an asset, but who watches reruns of daytime TV from years ago? That’s the main reason she had to pivot to creating Harpo – as a way to remove herself as the main driver of the business value. Many online business owners need to do this too. 

I’ve purchased a business where I didn’t realize that the owner was so integral to the success of the business. It didn’t work out so well.  

Successful developers that create really strong software companies need to bring in a person or team to replace them before they try and sell the business. If not, it’s going to turn off a lot of buyers from exploring the idea of a purchase of the company. 

Patio11 did this before selling Appointment Reminder and I found it to be very reassuring. In the end, I brought in my own dev team to run the business. But knowing there was a fail safe in case of emergency helped him get above his selling price. 

If you’re selling, you need to “extract yourself from the epicenter of the operations” as John says in Built to Sell. This is the number #1 reason I shy away from many with SaaS/Ecom/Software businesses for sale. The owner is still integral to the success of the business and expects the buyer to pay top dollar, yet also find a way to replace the seller. 

Process Over Charisma

In the same vein of not selling a business where the owner “is” the business, Ted tries to get Alex to come up with a predictable, recurring, repeatable, boring, routine, and understandable system for creating his work product (logos, in this case). Of course, those types of processes are soul crushing for the artists and creatives that make the graphics designs, but necessary to make the business sellable. 

Remember…the people looking to buy your business likely aren’t driven by the same passion you had to start the business. In most cases, their passion is your cash flow. They don’t care very much about your original purpose. They just care that the business can continue to produce the cash flow they paid for. 

So cast aside those romantic visions of your business and make it a cash flow machine for a potential buyer. That doesn’t mean you have to drop doing what you love in the business, it just means you need to be able to flip the switch and hand over a set of SOP’s and repeatable processes that someone without your talent, skills, and purpose can pick up and run with to the bank. 

Not sexy or inspirational, but true. 

Don’t Generalize – Specialize

I’ve seen quite a few businesses that show up at a broker’s doorstep that have a whole host of distractions and “other opportunities” tied into the business. 

Many of them are half baked ideas the founder(s) had that they spec’ed out and then abandoned. They think that since they put time into it, someone should reward them when they sell, which is wrong. 

Brokers usually cast aside these ideas and leave in a line or two in the prospectus indicating there are other things one could pick up and run with. But in most cases, if you’re selling your online business, it should do one thing really well over and over repetitively in a manner that can be reproduced by anyone. 

Just focus on selling that one thing. Don’t try and tuck in all the abandoned domains you bought and did nothing with for the past four years. 

How Do You Make Your Business Less of a Cash Suck?

“If you get an offer, the second most important number may be the working capital calculation”

New buyers are going to look at the operating capital required to run the business. 

For many online companies, this really isn’t a large issue. When you’re sporting 50% profit margins, there’s more than enough cash flow to keep the business afloat, pay the new owners, and not cause wild fluctuations in cash on hand. 

Amazon FBA and E-Commerce businesses, on the other hand, have inventory requirements and can eat up cash quickly. Especially in times of uncertain supply – as well as the usual uncertainty of demand – capital can be tied up for long periods of time. 

New buyers are going to discount your business if it’s going to require a lot of capital just to keep it running. 

The more you can make your business less of a cash suck, the less pushback you’ll get on your price when selling. 

Resist One-Off’s, Custom Solutions, and Unique Payment Plans

“If you want your business to be profitable, enjoy fat margins, and thrive without you, you need to stop responding to RFPs and start carving out your own one-of-a-kind product or service”

This is a very important point in Built to Sell and I should have it higher in this essay. 

Resist customized solutions like they are the devil who smites strong businesses all day long.

Take it from any business owner that’s ever said “Sure, you can run on this unique plan I’ll make for you”, it’s a nightmare to keep track of…even when you’re 100% on top of your game.

New buyers do not want to find out that 95% of your business runs like clockwork according to the SOP’s and procedures put in place, but that there’s 5% of customers that each have their own unique payment plan, custom code, or infrastructure setup that you now need to monitor separately and maintain. 

Not only does that show a lack of discipline of the seller, it indicates that there are likely other misfit issues within the business, like more than one set of customers that always pay late or other users that expect a sit down meeting every time they have a question. 

When I was running an e-commerce software solution, I made this mistake repeatedly. Accepting customer requests for 5% of the users ended up taking 50% of our time to keep those 5% happy.

It was a nightmare.

Did the money we made from those unique customer solutions make up for the lost time? Not even close. 

I’d rather have 100 customers that all use my service in the exact same way than 500 customers where 50 have unique build outs and payment plans that I have to keep track of daily. 

Trust me, buyers want those 100 solid, predictable, and reliable customers over the 500 where 10% of them are a hassle. 

Honestly, what would likely happen is a buyer wouldn’t pay for those 10% of customers and then immediately tell those users to go back to using the service as designed or leave. At least, that’s what I’d do. 

If your software business has a component that builds out customized solutions, that’s fine. But it’s got to be financially viable and worth it for a buyer to inherit that aspect of your business. 

Think hard about this one before you set up a one-off payment plan for a customer. It might bite you down the road – not only when you’re running the business – but also when you try to sell the company. 

Is the Seller Running To or Away from Something?

A question you see a lot on Reddit is “why would someone sell a successful business”.  Especially something like a successful SaaS business.

It’s a really, really good question. 

A lot of online business owners will tell you that they’ve got too many irons in the fire and need to concentrate on the ‘new, new’ thing they got going on. 

That makes sense, I’ve had that same issue, I get the feeling. 

But I also know that it’s easy to say that because it’s impossible to prove if it’s true. 

The seller could also know something you don’t know. They may be looking to offload the business before a certain event either comes to light or transpires that hurts the business. 

Nobody knows a market or customer base better than a successful business owner in that space. They are going to see issues coming towards the business long before a buyer. This is all part of that ‘risk’ that buyers take on when they look to inherit a business. 

My recommendation is to ask the buyer to show you this new venture that is so important they need to sell their business to fund it and put time into it. Don’t just wave it off saying “oh, yea, I get why you’re selling.”  Make sure the seller really is moving onward to a real opportunity and not to avoid a train wreck coming down the tracks. 

Built to Sell Summary

Built to Sell is a great book that any buyer and seller should have dog-eared on their bookshelf. 

Hopefully these little tidbits help bridge the gap between the Built to Sell story of an offline advertising logo design service business and an online business you might look to purchase or sell. 

There are many similarities between the two types of businesses. Obviously online businesses are a bit different, so maybe I should write that book? 

What do ya think? 

Library and Books Photo by Alfons Morales on Unsplash

Whenever an online broker lists a business for sale, the prospectus will include the ongoing costs for the online business acquisition. These costs are what the current seller and broker believe the new owner will incur moving forward.

These costs typically represent the pure cash flow from the business. Yet, they do not tell the whole story. These numbers are sheltered from routine expenses in the real business world.

That doesn’t mean the broker or seller are trying to deceive you. They trying to remove all the costs that would be variable for different types of buyers. They are presenting a buyer-agnostic set of online business costs. It’s up to the buyer to add-back all the expenses that they would incur to know the true cost of running the business.

For example, business insurance is rarely included as an online business acquisition cost. Yet, most companies over a few thousand ARR a year need some level of business insurance. This is to protect the investment and shield the owner from some personal liability that you should keep in mind.

There is a healthy debate as to what expenses always should be included in an online business acquisition cost prospectus. My goal here isn’t to argue what should or should not be included. My goal is to highlight some types of costs that aren’t typically included.

The Red Flag Online Acquisition Non-Cost – Less than 10% Expenses

Before we go too deep into normal add-backs and costs you should consider, there is one flagrant red flag.

Removing every expense so that a business has almost no ongoing operational costs.

No names will be mentioned, but some very high profile and trusted brokers have started to list businesses that have less than 10% operational costs. 90% profit margins are attainable in some niches (advertising/content). But I doubt so many other niches can suddenly start coming to market with such low operational costs.

It is currently February 9, 2021 at 8:38pm PST. For fun, I’ll look at a few broker sites to see if I can find an example.

I easily found a business listed with revenue of $280,000 that claims their online business cost is $6,000 a year.

That means, for an ongoing expense of $500 a month, they make $22,833 in profit each month.

Of course, the owner claims to do nothing. That’s required, since this business must be ‘completely passive’ at $500/month. Yet, the business grew 50% in the last quarter without a penny in new cost. Does that pass the sniff test? If it does, why would the owner have an interest to sell a business growing 50% a quarter with zero effort?

I doubt both situations can be true at the same time.

I’m not saying the $500 is not true – even though they are omitting a lot of actual time and costs. I’m just saying that those numbers should immediately raise from a red flag warning when related to an online business acquisition cost structure.

Personally, I wouldn’t touch one of these businesses. If you want to purchase one, dig really, really deep into how the business operates. How much of that revenue is coming from legitimate, recurring, and sustainable traffic and customer sources?

Owner Compensation – Pay, Hours, and “Owner Time”

https://twitter.com/ariozick/status/1337035086152282112 

I’m the first to admit, I love running my businesses. I work on them all the time. Not because they need me (heck, they would likely do better without me in there mucking things up) but because I love working on them, talking with my customers, and operating in the online business world in general. It took 12 minutes to write this paragraph because I am task switching between business items and writing.

If you asked me how many hours I spend to keep these businesses going, I honestly wouldn’t have an accurate answer. I’d have to think about what I do that’s an essential cost and what I do just because I enjoy it.

Essential costs are creating new marketing goals or filing legal paperwork. Delegated tasks – that some owners do themselves – include customer service, advertising campaigns, and subscription management.

It’s not just that the cost of the extra help would put less money in my pocket. I just love the work. If I get overloaded in the future, I can always pass along my Work the System SOP’s and delegate these tasks.

When a business is ready to sell, brokers do a good job of segregating those activities to determine the time required to run the business.

Despite that, always 2x the number of hours a prospectus claims a business needs from the owner. Just like software projects take 2x longer than expected, you should 2x the amount of time an owner says they work on a business. At a minimum. If they say the business is between 15-20 hours a week, don’t kid yourself, you’re buying a full time job.

Should Brokers Include Owner Compensation? 

I appreciate that Owner’s Compensation is usually not included. My owner situation is different than your owner situation. By not including that cost, I can make an accurate judgement based on my own unique circumstances. I may hire someone, add the work to a current team, or do the work myself.

For a seller, if it’s included, it moves the price downward. This conditions the seller to be reluctant to accept any other reasonable price drops. For buyers, I don’t want it included because what I pay myself likely as little to do with the true value I add to the business. For example, the seller may pay themselves very little because they already pay themselves a solid salary in another business.

Personally, I want owner compensation removed. How the current owner pays himself has no bearing on how I will pay myself in the future.

The real issue is when brokers remove the salary of an employee based on the same reasoning. If you’re paying someone $250k a year to run the business, that’s a real expense. Changing it to $150k because you can likely run it with someone less expensive is not acceptable.

Overhead – Routine Online Business Acquisition Costs Not Included

There are a few routine online business acquisition costs that are not included on any financial prospectus. The reasoning is the same as the one for Owner Compensation. Mainly these costs are external to the business itself and completely dependent on the new owner.

An example list of these types of expenses, typically referred to as “overhead”:

• Business Insurance (multiple policies likely for online businesses)
• Office Expense (home or commercial location)
• Internet Access
• Computer and Technical Equipment for Owner and Employees
• Office Supply Expenses (pens, paper, phone chargers, etc)
• Payroll Tax
• Payroll Expense
• Preferred Software (for example, I use Baremetrics to easily monitor my SaaS metrics, but I wouldn’t consider it essential software to run the business.)

These expenses run into thousands of dollars a year. However, they can also be split up among multiple businesses. Your fixed costs per business decrease as your portfolio grows.

Investors handle these overhead expenses differently based on their own situations. Some skimp on business insurance or run their company out of their bedroom. Others have company cars and pay themselves very well. It’s entirely up to you, one of the benefits of running your own company.

Annual Plan Obligations

Many businesses offer annual plans to their customers. Those businesses may also operate on a cash-based accounting system. This means that when money is received or spent, it is recognized immediately for accounting purposes.

Many companies also offer a discount if you pay up front for an annual plan. By trading for less money today, companies use the upfront cash to gain more customers tomorrow.

When you sell your business, you’ve received the benefit of the annual plan – the money. But have an invisible liability within your company – the obligation to deliver the service.

Brokers do their best to adjust valuations if a business has a lot of annual plans. Yet, I’ve never seen a business listed at exactly 4x and then showing a subtraction in the purchase price for the ongoing obligation of servicing annual plans. I’ve heard “yes, we factor that into the sale price”, but can’t show where that was factored into the purchase price.

If you are buying a SaaS, it might be worthwhile to look at the number of annual plans. Then, adjust the value based on liabilities where you aren’t receiving the benefit.

Help is on the horizon, however. Stripe (and other payment processors) provide a Revenue Recognition feature. This can help illustrate ongoing pre-paid obligations for potential buyers.

State Business Fees, Taxes, and Other Incorporation Fees

A business does not exist without support from state and federal organizations. Think your local Secretary of State and the IRS.

Every business will require an entity for the assets, whether it’s an LLC, corporation, or partnership. (I don’t recommend a sole proprietor set up. It exposes the individual to 100% of the business risk).

Those entities cost money to set up and operate. You will have to pay state fees, state taxes in most states, and other taxes disguised as convenience fees.

Your state of business incorporation – many times the state you live in, but not always – will dictate the amount of paperwork and the costs involved.

There are also operational activities that each business must perform each month, quarter, and year. They can range from documenting an annual meeting with the managing partners (even if it’s just one person) and keeping track of operational documents. This demonstrates that the business is run “as a business” and not as a personal piggy bank.

If you’ve had an interest in owning a business for a while, you likely know most of the things you need to do to start your business. What most people forget is that you also have to operate the business correctly. I used the book Run Your Own Corporation as a starting point for what I needed to do to stay in compliance. I want to sleep easy at night knowing I can show any legal eagles that I’m operating my company professionally.

Discretionary Training, Certifications, and Conference Costs

I’m surprised at how many businesses leave out significant costs that aren’t operational costs, but are part of the “realm” the business operates in…for lack of a better way to say it.

Some scenarios I’ve seen:

• Many companies have “must go to” conferences, events, and trainings each year. If leads come primarily from attending conferences, is that included in the ‘owners hours’ and expenses?
• Does the business have ongoing compliance certification costs? For example, does the business need SOC-2 certifications? Those cost a lot of moolah and if an owner lets the certification lapse in the year prior to the sale – to lower costs and boost their sale price – is regaining the certification cost factored into the sale price?
• What is the cost to replace an owner with multiple relevant certifications and is well known in the industry?
• A company says they have “10,000 emails in their database” in the prospectus. Did the company recontact all email addresses collected prior to May 2018 to re-confirm the recipient accepts GDPR compliance and privacy restrictions? (I’ll save you the time, they did not.) Does the seller have GDPR record of consent for each email? If not, the emails are a liability, not an asset.

Under GDPR, email addresses are considered confidential and must be used and stored within strict privacy and security guidelines. Emails can only be collected through explicit opt-in, with a requirement to keep record of consent.

This section could go on for miles. I wanted to give you a little sample some of the more nuanced online business acquisition costs that don’t show up on the broker prospectus. I hope this helps you think through some of these online business operational costs next time you’re valuing a potential acquisition.

None Are Show Stoppers

None of these items are show stoppers by any means. They are just additional costs that don’t show up on the prospectus. It’s good to know about them before you invest rather than learning about them afterwards. Some companies may not look as exciting when you have to 2x the time it takes to run them, they have GDPR issues, and sell 95% of their subscriptions on annual plans. Maybe it will even keep you from ending up with a failed acquisition.

For more similar insights, please check my companion article 8 Buying SaaS Business Insights I Learned from David Newall’s SaaS Business Valuation Guide.

Affiliate Disclaimer: If you click on the Run Your Own Corporation or Work the System SOP’s Amazon links and purchase a book, I earn something like $0.13 – give or take a dime or two. So be forewarned, that’s an affiliate link and I will be compensated so handsomely that I may be able to retire.

Photo by Stephen Phillips – Hostreviews.co.uk on Unsplash

Want to learn more about my journey acquiring and operating online companies, including other failed acquisition lessons learned?  Check out Online Business Ride Along, a monthly deep dive into my journey, with actual online investments and monthly P&L’s for each businesses.

I’m continually surprised at how smaller project developers fail to understand what makes a purchase valuable to a buyer. Even worse is the disingenuous way these sellers try to trick buyers into purchasing their worthless code.

In this essay, let’s tackle one of the valuation methods that sellers attempt to use to value a project that is not worth anything at all.

Let’s call it the “I spent X time, so it’s worth Y price” fallacy. 

Time Invested != Value

One recurring theme I see from developers trying to sell small projects that “are ready to take off with just a little marketing” is a variation of the argument:

“I spent 600 hours building this next-gen CRM project.

At a cheap rate of $50 an hour valuation for my time, I’m selling this project for $30,000 as the minimum price.

Because that’s what it’s worth.” 

No, it is not.

If the project has zero revenue, no customers, and no media buzz, it’s worth nothing. It doesn’t matter how many hours were spent coding up the project or the hourly rate, it’s still not worth a dime.

Actually, it’s worth less than nothing because it has accumulated technical debt that a new developer would have to maintain to keep the project moving forward. You’re trying to sell something that would cost a buyer money to maintain it while delivering the buyer nothing in return.

That’s not an investment and buyers should never be tricked into this line of reasoning.

What if Time Invested == Value?

Don’t believe me? Then let’s keep the thought experiment going.

What if the developer put in another 600 hours into this amazing project before selling? Heck, why not an extra 1,000 hours?

Does that double the ‘value’ of this project that makes $0 and has no customers?

Of course it does not.

If it does, why stop there, why not make it a 10,000 hour project and retire on a beach somewhere?

Or just work on the project for 10 hours and say “as you can see, with another 590 hours this is going to be worth $30,000. So I’ll just sell it to you now for a little bit less than that price.”

Or, even more intriguing, ask the seller “would you buy this for $30,000 today if I were selling it?”  I’ve never tried that before, but it’d be fun to see the reaction.

“It Just Needs Some Good Marketing”

Does it now? Then wouldn’t even average marketing get the project at least a few customers? Even just one or two that would pay for what was created?

I’m amazed at the time sellers spend on Flippa arguing for this valuation model instead of taking that time to throw up a landing page, put some ad spend into Google or Facebook, and proving their product can land a few customers.

But maybe that’s a good thing for us buyers. If a seller is spending hours trying to offload a project that can’t get any customers, we don’t have to worry whether we’re passing up a good opportunity or not. We already know it’s not a good opportunity if the seller would rather spend 10 hours hawking the project to an unsuspecting buyer than spending that time on getting a customer. The seller is confirming by their actions that the product isn’t worth much at all in the first place. Much less with some good marketing.

Are All Zero Revenue Projects Worthless?

Also no.

When I bought PutsReq and PutsBox from Pablo Cantero, he never once quoted to me the hours he put into the project. These two projects were a learning and passion affair for many years for him and he likely has no idea how much time he’s spent on bringing them to life.

He never commercialized them and had no plans to do it in the near term, yet he and I both agreed that the two services contained value.

But why?

Well, it’s simple. Because they had traffic, backlinks, loyal users, and a customer base that trusted his solutions worked and would be available for free in the future. Those variables have value. It’s not the time he put into the project, but the output that came from that time.

Because Pablo is public with his work on Github, one could easily see that he wasn’t selling a pile of spaghetti code. His price was fair based on the business the two projects could generate for my complimentary products. His products and mine likely shared many of the same customers and that had value for me.

He sold his projects for a sum that did not in any way represent the time and effort he’d put into the project. Yet, it was a fair and equitable exchange and everyone on the transaction walked away happy.

Those two projects demonstrated value because they were more than hours put into writing code. If your code can’t validate the reason for its existence, it’s not worth the disk space it’s sitting on.

Pablo knew how to sell small software projects that don’t make money. Any developer that quotes you the time they’ve spent on the project likely does not.

Hours && Results > Hours && Code

Hours && Results > Hours && Code

Results > Code

Don’t ever let a developer tell you the price is worth the time they put into the project, that is not how valuations work on the small or large scale.

If the project has some cash flow and customers, then that’s what the value is based upon. But if it doesn’t, then you might be able to justify a price by demonstrating non-monetary value like Pablo’s projects. But if hours worked is your currency, it’s very hard to make a convincing argument that hours worked equals any real value.

If that were true, I’ve got a mountain of bad code to sell you that earns nothing, costs $40 month to host, but can be had for the low, low price of $150,000 any day.

Want to learn more about my journey acquiring and operating online companies, including other failed acquisition lessons learned?  Check out Online Business Ride Along, a monthly deep dive into my journey, with actual online investments and monthly P&L’s for each businesses.

Photo Credit to MRoz.

I have undergraduate and graduate business degrees, yet I never had a single class covering marketing automation, contractor hiring, cash flow management, online advertising tactics, distributed product development, remote team culture, multi-channel customer support, or converting email leads into online customers.

What if everything you’ve been told about starting a successful business, FBA Amazon site, web application, SaaS, or lifestyle business is wrong?

Maybe not 100% wrong… but at least super risky and prone to failure, especially if you’re thinking that starting from scratch will lead to a profitable business?

What if you knew you had over a 99% chance of guaranteed failure? Would you still try?

I bet you know the above is true, or at least said “yes” in your head, because you’ve tried to start your own business, product, service, or email newsletter and failed. I bet you’ve failed many times over.

I know I have. I have failed many, many times.

My Dropbox is full of archived projects, abandoned code, and dormant websites that were great ideas that never went farther than a few customers.

At least I wasn’t alone. Every message board, every discussion thread, every forum that talks about starting a business is overwhelmed with questions about what business, idea, or app someone should pursue.

All of my failed projects were quiet failures; none of these business ideas even got off the ground far enough to make even the slightest ripple across the ocean of commerce.

They don’t count in any organization’s statistics, but for me, they represented a 100% rate of failure.

And let me tell you, it hurts to say that, because aren’t I admitting that I’m a failure too?

Build It and They Will Come

Like almost every individual dying to be independent, break free from the corporate world, and be their own boss, I’ve lost track of the number of business ideas I’ve had, the number of projects I’ve started, and the number of stale domain names I’ve purchased that are still sitting at GoDaddy unused.

We all want to create something and become financially free. Or at least, calling our own shots enough to work for ourselves.

This is where we start searching for advice about “how to start our own business.”

Imagine the challenge to be number one for that search term?

Almost every single result from that search will assume you want to start from scratch with your own idea, and they will help guide you to your first customer, first sale, and first profitable dollar.

These are not bad programs, bad ideas, or bad people. The techniques and strategies they discuss are the building blocks of success for almost every business you could start.

These programs help you generate ideas, flush out a market for your idea to grow, and get you started building and marketing your product or service to a future customer base.

This is really great, isn’t it? People helping people….

Except that 90% of businesses fail in the first year. 95% of all businesses fail within the first five years.

And that doesn’t count the millions (likely billions) of small business ideas that never even get to the point where the SBA would even count them as a “business” to include in their statistics.

None of my dozens of failed ideas count in those numbers above because those projects never had a client, customer, product, or a dollar in revenue.

It would be safe to say that 99% or more businesses never make it to year five.

You can build it, but they likely won’t come.

Why Do People Keep Telling You To Start Your Own Business?

How many results do you get if you Google “start your own business” today?

Okay, I did not expect 7 BILLION results when I rhetorically asked that question in my head.

Yet, that goes to show how many people are possibly asking the wrong question, getting potentially the wrong answer, and not setting themselves up for long term success.

It’s no secret that many of the people selling you “how to start your own business” products are creating their own business from selling products teaching you how to “start your own business.”

Look at Ramit Sethi – a guy I very much respect and learned a ton from over the years – and what he is doing today. When I first started following him a very long time ago, his business was sharing financial advice for new college graduates.

One of his largest product offerings is teaching other people how to…wait for it…start their own business. (He still does financial advice, mainly because Ramit is an all-around good guy who shares his knowledge with customers to help them succeed.)

The reason these gurus changed their focus from their first successful business to selling information about You starting a business is that it’s a hell of a lot easier to make money selling the dream than realistically, predictably, and consistently succeeding in starting and building multiple different small business ideas in a row.

Once they realize that, they start packing up what they learned from one or two of their successful ideas and teaching what they believe are the principles that made those prior ideas successful.

That’s why you see so much information about “starting your own business” instead of information on why you should buy instead of build. It has nothing to do with the real reason you should be trying to build your business portfolio around cash-flow generating assets. If you want to be managing a profitable business, starting it on your own is easily the worst way to go about it.

Skip the Line In Good Company

The older I’ve become, the more I’ve realized that younger people are mostly focused on building a company. In contrast, older, more experienced, and successful people are more focused on buying companies. This is odd, as most successful startups are started by people in their 40’s and 50’s, but there you have it.

James Altucher, one of those old guys who’s been up and down enough times to ignore at your own detriment, always talks about skipping the line as a strategy for success. “The line exists for those afraid to skip it.”

Did Howard Schultz open Starbucks in his garage, or did he skip the line? You guessed it, he skipped it, bought Starbucks from their management team who wanted to concentrate on Peet’s Coffee and Tea, and made it a multi-billion dollar company.

Did Sam Walton set up his first Wal-Mart from scratch? No, he bought five-and-dime stores and skipped the line.

Warren Buffett was way too smart to build any business from the ground up. After Hathaway Manufacturing and Berkshire Fine Spinning Associates merged into Berkshire Hathaway in 1955, Warren bought stock in the company until he controlled a majority and moved the company away from the failing textile industry into the insurance and investment industries. The rest is history.

Don’t let the bombastic self-congratulatory rhetoric from Silicon Valley pull the wool over your eyes; young people aren’t very successful at starting new companies. Many younger career-oriented entrepreneurs would experience better long term success by saving money to make their first acquisition with the same focus many families use to save money for a down payment on their first house.

When you’re older with more experience and wisdom, you are in a prime position to choose between either acquiring an asset to manage or building one from the ground up.

So how should you choose?

Which Would You Choose?

This brings me to my final question, based on what I’ve described above, how should you approach your next business venture?

Let me propose a scenario…

Which would you rather have :

• Business A) A great idea, no product, no revenue, no market analysis showing anyone would pay for your idea, no website, no customers, and no prospects. A lot of startup costs offset by zero income.

• Business B) A tangible product or service, cash flow positive earnings, multiple engaged customers, functional website, profitable marketing funnel, growing email list, tax benefits, and SEO juice in Google.

If Business A is your preferred method for creating success, then there are many places where you can find more information on making that dream come true. Unfortunately, this is not one of them. This is a practical place, not one of fantasy.

If Business B sounds like a better idea, then you’re in the right place.

Buy Instead of Build

I am not going to spend much time on ideas or techniques for starting a business on this website.

This website will only be about acquiring appropriately sized businesses for your asset portfolio, keeping them manageable, scalable, growing, and positioning each entity for a potential acquisition just in case you decide to sell.

No slow ramp up like when you start from the back of the line; we’re skipping the line and investing, growing, and earning from day one.

If that might be of interest, I encourage you to look around at some articles and sign up for my newsletter.

Want to learn more about my journey acquiring and operating online companies, including other failed acquisition lessons learned?  Check out Online Business Ride Along, a monthly deep dive into my journey, with actual online investments and monthly P&L’s for each businesses.