Episode 243 Featuring Alex Bond

Buying and Selling Online Businesses with Blake Hutchison

Buying and Selling Online Businesses with Blake Hutchison

Blake Hutchison is the CEO of Flippa, the largest marketplace to buy and sell online businesses. Blake has seen more entrepreneurs exit than perhaps anyone else and he specializes in growth marketing, marketplace dynamics, and leadership. He eats, sleeps, lives, and breathes within the world of investment and digital acquisition, and he's excited to share his deep industry knowledge with the e-commerce community.

On this episode, Blake and I discuss some of the reasons why people sell their businesses, how Flippa accurately appraises a business, market fluctuations for online businesses, and much more.


What is Flippa

Blake Hutchison: Flippa is a marketplace to buy and sell online businesses and digital assets. So think about eBay, but for buying businesses and it's a little bit like a a dating website where they're to match business owners who want to exit with buyers who want to buy. We bring the two parties together using some AI smarts, as well as a bunch of connected data. And ultimately our mission is to democratize the exit and empower. 

Alex Bond: That's awesome. So you mentioned kind of being matchmaker for interested parties, whether they want for connecting buyers and sellers, is that by design or can some people kind of come in and it be a bit of an autonomous marketplace?

Blake Hutchison: Yeah, it's self service to the extent that a business owner knows their business best. We give them the tools to expose the qualities of their business, both objective qualities, so the financial data as well as opportunities for growth and therefore it's a little analogous to traditional real estate, like buying a house or a condo or an apartment.

Ultimately, there's some data which defines that house or condo or apartment, its location, its street address. How many bedrooms it's gotten? How many bathrooms it's got all those types of things, right? And so in a business, it's a little bit different, but you're still got metrics that relate to how the business is performing.

And then those metrics are used to showcase a business's performance and and. It's potential to be acquired by the value. And so what we do is we enable business owners who have worked on their businesses for some years, the average business sold on Flippa or digital businesses, by the way. So it's eCommerce, SaaS, apps and blogs. 

Although to some extent you could also sell a podcast. So as long as it's digital in nature, it lives and breathe. It can live and breathe on the Flippa website and we power and we plug into QuickBooks online and zero and Shopify and Stripe and PayPal and Amazon, all these names that you've heard of that power the e commerce revolutionary eCommerce economy. They're all connected to the system. 

And so a seller can connect the dots. Showcase their data and a buyer on the flip side can come in and peruse the assets that are available, assess those assets on merit and then decide to acquire or not. 

Alex Bond: That's very cool. And I'm glad that you brought up the real estate market because that was the first thing that it reminded me of, you know, and I was doing some research looking at the website. Obviously, you know, the name too, I think it's like a house flipper instead of flipping houses or flipping businesses a little bit.

And so I don't know the way the website is structured. One of these businesses pops up. It does just really remind me of like a real estate listing. Was that a conscientious choice? Is that kind of the rubric a little bit that you were looking at? 

Blake Hutchison: Yeah. Look, I think the name is probably we like the name we're proud of our brand. I think it's a bit different to flipping houses in the sense that when you buy a business, you're actually actually buying and acquiring a cash flow generating asset.

So we find that people tend to yes, improve them, but they're improving them for the benefit of improved cashflow versus improving them for the benefit and benefit of selling them on. But yes, it is analogous to real estate. It's analogous in many ways. Real estate is in many cities, many cities around the world.

And depending on the economy, of course, is an appreciating asset. And certainly digital assets are appreciating, there is a great deal of buyer liquidity and there's a large number of, of buyers who sit on those assets, knowing full well that over the next 5 to 10 years, digital real estate will be worth more than it is today. So you've got an analogy there. 

The other piece of the pie relates to, you know, how people appraise. Traditional real estate versus cashflow generating online businesses. People look at them in a very similar way. They look at them as to the quality of them today, the quality of them in the future. They look at them on the basis of their performance historically, much like a rental yield that you might get when you buy an investment property.

So it's certainly analogous. I guess, you know, most people are familiar with Zillow's estimate and of course, they can have such a debatable how accurate it is, but they can have an accurate estimate on the basis of so much data that they sit on and the benchmarks they can use to. To essentially create an accurate valuation flip is a little bit the same.

We trade over 12,000 online businesses each year. And so as a function of that, we know a lot about online businesses. And so for an online business owner, they can get a very, very accurate valuation from us. Given we sit on summit data and can use that data to make an informed prediction of the value of an asset. So, yeah, it's certainly analogous. 

Reasons Behind Selling and Buying Online Businesses on Flippa

Alex Bond: I kind of wanted to take a twin track and talk about, you know, selling a business and then, and then buying the business. So what are some of the specific reasons that people want to sell their business, their online business on Flippa? 

Blake Hutchison: Yeah, it's a great question. And it's actually not sinister which most people think it is, right? Why would someone want to sell something that's doing so well? So in the average life cycle of a business is actually about five years. And so if you think about that, that means they've gotten beyond that very tenuous period where they're looking to scale up where they've got to invest in marketing, where they've got to find their first hundred customers.

You know, these are businesses that are stable, sustainable, long term in nature. And the most common reason is I want to realize value in my hard work so I can do something else with that value. And so that could be, I want to buy a house that could be, I want to put my kid through college that could be, I want to buy another business that could be any number of things that relate to the financial flexibility you get once you exit.

In addition to that, it sometimes is about outliving the asset and so let's say for argument's sake, I create a business that is built around whatever, let's say personal training. Maybe it's home gym equipment. Maybe I'm an e commerce retailer, retailing home gym equipment. So maybe I am a gym junkie. Maybe I'm an enthusiast. 

Okay. Five years in, that may not be the case anymore. So I've outlived my passion. And that's a reason why people will sell sometimes people will also sell because the skills required to continue to grow and maintain the business and now different to the skills that I have and the skills I use to grow the business in the first place.

So that's another reason, right? They're the most common reasons and we see it time and time again. You know, people are looking for that financial flexibility and freedom you get from the exit. Or as I said, having outlived the passion or the skill set. 

Minimizing Buyer's Remorse: Strategies to Protect Your Brand and Vet Businesses on Flippa

Alex Bond: So how do you possibly protect Flippa and ensure as little buyers remorse as possible? How do you properly vet the businesses? You know, I mean, you've gotta obviously protect your brand. How do you do that? How do you properly vet these businesses? 

Blake Hutchison: Yeah. It's a really, really critical question. So there's a couple of things. One, yes, we're a tech company, but we don't discount the benefit of having a verification team. And so different price points call for more or less verification. 

But every single asset on our platform over the value of $50,000 as human level verification, where they go through the profit and loss statement, they go through the expense and revenue data and they validate and verify that it is in fact, as stated. So that's piece one. 

Piece two is what we call verification at the source. And so let's say for argument's sake, a business owner is looking to exit their Shopify eCommerce store. We enable business owners and they must, as per the terms of our platform, if they are in fact a customers of a customer of one of the platforms that we connect to, they must connect to that platform. 

So what that means is that they log into their Shopify account in this particular example, and Flippa will pull down the data from their Shopify store and expose that to the Biobase. And so we will expose the revenue data. We will expose the average order value. We will expose the refund rates. We will expose the top selling SKUs. So that data there is, you can't doctor that data. 

It's coming straight out of the platform that governs that and operates that particular store. And we then are able to not only validate and verify the data, but we then use that data also for comps and benchmarks. So you can actually see how that store compares to other stores like it. And then make an objective decision as to the performance. 

Alex Bond: That's all really great. Is the goal a lot of times for a seller to totally relinquish control of their business or are some of them on there kind of trying to look for capital backing a little bit?

Blake Hutchison: Yeah, it's a great question. So on Flippa, we sell the assets. We don't sell the shares that's not to say that in the future, we may not have a facility to be able to do that. We probably will, but at the moment, yes, they are absolutely selling the assets and a hundred percent of the assets in almost all cases.

There are some situations where the seller is willing to stay on it and operate the business on behalf of the new owner. Although I would say that that is rare and in most cases. They are relinquish, relinquishing 100 percent and they're also selling 100%. 

Alex Bond: Because I can imagine, you know, some people are kind of like, I built this business with my own hands for five years something's missed, but I'm not really willing to give up the reins on it. So if I just like, don't own it anymore, I can get the backing and convince them that maybe I'm like the CEO for them or I'm the COO for them. And I totally get that. Whatever grows from there, I won't get 100 percent of the profit like I initially intended, but I'm just not ready yet, you know. 

Blake Hutchison: There's certainly an aspect of that that can happen. They'll often negotiate that separate to the asset transfer agreement where they will agree to stay on board for a salary and they will agree to be part of profit sharing and or bonus payments. 

And use the platform as a means to match, make, to get somewhat of an exit, but then stay on board. That does happen. What I would say is it's rarer than a full trade sale and in that case, you know, the vast majority of people are just looking to get on with something else. 

The Advantages and Motivations of Acquiring Online Businesses

Alex Bond: Other side of the coin, why do people want to buy online businesses? 

Blake Hutchison: Yep. I think we should break up the buyer into two parts, so, there is the side hustler and the acquisition entrepreneur. And so in their particular case, what they're actually looking to do is buy something that is already cashflow generating, and they're essentially acquiring their next job, or at least part of a job because it's a side hustle. 

And so in that particular case, they are buying because they want the cash flow, they want the supplementary income, but they don't want the challenge of going from zero to one. Most people get caught up in the idea that platforms today make it super easy to start. It's not about the tech that makes businesses hard. It's about your ability to scale, acquire your first 10 customers, 50 customers, a hundred customers than a thousand customers, which is very, very difficult. 

So acquiring a business actually gives you so much. You know, the history, you know, the pain customers who the repeat customers are, you know, the products that work, the products that don't work, you know, your cost base. You know which staff are good, which staff are not good in the event there are, in fact, employees. 

You know which markets are good. You know whether Facebook works or doesn't work for advertising. You know whether Google works or doesn't work. So you get huge amounts of insight being an acquisition entrepreneur that you don't get when you start from scratch.

The second type of buyer is a company buyer or an institutional buyer. So that would be an independent company, a private company, or it could be an institutional investor like private equity, and they're buying for different reasons, but they're also coming down into the marketplace because they're looking for bolt ons, they're looking for inorganic growth.

So they might be just acquiring the audience. So for example, let's say you own 50 laundromats all over the East coast, or you could buy a blog. That is for sale on Flippa, which is all about clothing upkeep. It's all about how you wash clothes. It's all about laundry detergents and you're actually acquiring the audience as a means to win customers to your core business.

So that's a bolt on opportunity. And the most common reason for that is because you're trying to build your core business and drive inorganic growth without having to pay some other platform to acquire customers. They're kind of the two most common reasons, but the predominant reason is it's cashflow generating asset.

Alex Bond: Awesome. I really appreciate that we broke that down in kind of two different camps. You mentioned this earlier and I want to dive into it a little bit more. How do you accurately appraise a business? 

Blake Hutchison: The best way to appraise a business Is to look at the attributes of that business and compare those attributes to other businesses that have historically sold.

And so if an e commerce business operating on Shopify has been around for 4 years. It's in the fashion sector has an average order value of 150 a refund rate of less than 10 percent is growing at 20 percent year on year and has a cost of acquisition of 10. Then you take those attributes and you compare those attributes to other similar businesses, which have historically sold.

Ideally in the prior 24 months and you then can make an inference as to the value of that asset. You can also figure out which buyers and the extent or cohort of the buyer base that would be interested. So that's the best way to do it. Now, of course, what you've also got to factor in is. By side competition, which actually fluctuates from quarter to quarter, based on different trends and categories of interest.

And so you've got to factor in by side interest as well, because of course, where there's competition for an asset, the actual valuation can grow with that competition. So short answer is it's based on objective. Historical financial metrics and other business performance attributes that are then linked to similar and like assets.

Alex Bond: But then there's also got to be kind of that sort of addendum where it's like, if there's a saturated market in similar style businesses, that would probably drive the price down a little bit. I would imagine too, you know, if everyone's doing, you know, SEO, a website about SEO optimization or something like that three years ago, when there were two of them, it's going to be different now. Then when there's 28 of them, right? 

Blake Hutchison: That's right. And that's why it comes down to financial metrics, right? Because it's not about the idea. People do not buy businesses on the basis of the idea. People buy by businesses on the basis of historical performance. This is not startup investing. So you don't say, Hey, thank you very much for your wonderful story about how you're going to change the world of X as a function of that, I will value at X times 50.

That is not how this works. What you do is you look at the trailing 12 month performance. So your example of the SEO agencies, well, I accept that you're, you're right. What it actually comes down to is not the fact that there is so much competition for SEO agencies. It comes down to the performance of each given SEO agency.

And so if one is bad, then it's undervalued and one is really good, it's overvalued. And so it's a function of, well, not overvalued, but valued higher. And so it's a function of performance. And so, for example, you can have a review website and the review website only reviews pet related goods and refers traffic to Amazon and earns affiliate revenue as a function of that review website. Very common. 

That's the Amazon Associates problem. Amazon Associates program powers hundreds of thousands of blogs in the U.S.. Now, yes, pet review websites. That is a highly competitive niche. Because everyone wants to earn money from sending traffic to Amazon. So yes, I will accept that. Therefore you haven't found a gap in the market and you're, you're doing something particularly unique, but actually it doesn't matter.

What matters is of the a hundred thousand pet review websites, how much money do you derive and how consistent is that cashflow and if it is lots of money and it's consistent and you've done been doing that for a long period of time, hence you can understand the sustainability and scalability of the asset. And it's worth something. 

Flippa: Is it a Seller's Paradise or a Buyer's Advantage?

Alex Bond: I saw on your website. All right, that you aim to optimize for the highest possible sale price for the seller. So my question to you, Blake, is do you consider Flippa to be more advantageous for sellers than for buyers? Do you guys like lean towards seller market? 

Blake Hutchison: It's a really good question. So let's be transparent. We make our money when a seller sells. So it is in our interest to get a seller a deal. That they are content with, but we are not a brokerage. So we don't have the issue of biasing one buyer over the next to ensure speed of sale. What we do is we use technology to provide the best possible matches. 

And then we use notifications and competitive tension to drive buyers to get deals done. So as it works in the interests of both parties, a buyer gets a deal done and a seller gets a deal done, but let's not pull any punches. We make our money from when the seller sells.

So let's just play that out. When a business owner lists. Our platform goes to work and it will match as fast and as hard as it possibly can based on AI. There's two graph neural networks. We're trying to understand latent and hidden intent of the buyers and try to understand the relationship between the buyers so that we can push as many buyers into any given asset based on the likelihood of them having interest.

Now, once they have interest and demonstrate that interest, one of those buyers may submit a letter of intent. So of course, as a good marketplace, what are we going to do? We go and tell all the other buyers that a letter of intent has just been submitted. So would they like to issue one too? And as a function of that, you're then driving competition.

Now the good news there is that. More buyers get a look at the price. And the good news for the seller is that you've got buyers competing. Now, does that mean that we're not working in the interest of the buyers? No. Buyers are interested in seeing as much deal flow as possible. 

So we're going to serve them up those many deals as possible. So I would say if you want the truest version of events, The seller is our client and we are pushing as much energy into their asset as possible to maximize the opportunity of exit. 


Building a Robust Portfolio of Businesses Ready to Sell

Alex Bond: Now, speaking of seller first bit mentality, I'd really love to know how you developed the business, you know, not, maybe not the idea to conception but I'm even more interested in how you grew the portfolio of businesses who wanted to sell. 

I mean it's not an easy thing to just go around you know the e commerce industry and collect as many people as you can who were looking to sell their business. So what was that process kind of like?

Blake Hutchison: Yeah, and the processes evolved over time, but we were benefited from growing out of a community and communities are one of the best ways to test concepts, understand opportunities, and ultimately build off the back of, and so there was a developer forum called sitepoint.com. It's still around now, so it's 20 years old.

And sitepoint.com was a developer's community. And so developers would talk about what they were building, and they would share that insight. And as a function of that, we noticed that the developers were actually trading stuff. So much like on eBay, those developers were saying, hey, I built an app. And another developer would say, well, I did this.

And another developer would say, well, I've done this. And then they'd start to exchange them. And so we weren't arty to that. We were just the conduits of the community or conduits to the community. Flippa was spun out of that community. We basically said to the community, hey, we noticed you trading stuff.

Would you like to trade stuff here? And it was just initially it was the top level navigation of site point. So it said flip website, sell website, probably said sell website. If I remember correctly. And so as a function of that, you had some, had some people doing that. Now that's the cold start problem, right?

Where do you start? How do you get sellers? How do you get buyers? Short answer is in our case, we solve for that problem every day, but we were benefited and blessed with a community that was very active. Today, it's a bit different. We have some tricks up our sleeves. So whenever we see a new valuation and we see around three to 5,000 valuations a month, each one of those valuations gives us a huge amount of insight and data.

So obviously we see the asset that has been valued, but as a function of saying that asset, we can learn a lot about the competitive set for that asset. And if we can learn a lot about the competitive set for the asset, we start to understand the universe. And so we've started to map. The universe of digital assets and try to understand who owns them and what they look like and how they compare to each other.

And so behind the scenes, we are essentially figuring out the universe of assets that we can essentially attract and bring to our platform. Of course, we have a sales team now too, right? So we've got a sales team who is calling on business owners and saying, Hey, Flippa, have you considered an exit? We can give you a valuation. 

The valuation is really important for winning on the sell side because it gives you some data from which you can make an informed judgment about the quality of the asset. And from there, you can sell a market to that asset owner and convince them of your value proposition and ultimately win them on the power of our buyer base.

Now, I will say that Biobase is a piece of cake. There is a lot of liquidity. Buyers are everywhere, buyers are savvy, they want deals, they want lots of deal flow, they have the money to invest, and of course, in a tough economic climate like we're in today, I'm not saying that people are pulling the trigger as fast as they have historically.

Because they're a little bit cautious, there's less capital available to them, the cost of cash is more expensive. And then of course, there's the you know, the doom and gloom of the future that, that makes them a little wary. Regardless, there is a lot of competition for good quality assets. And so we tend to focus on the sell side, then we do the buy side.


Safeguarding Confidential Data: Flippa's Security Measures for Protecting Sensitive Information

Alex Bond: I imagine that security for something like this can be pretty tight at a company like Flippa. You know, I mean, there's obviously a lot of other people's, including your own financial information, what's the process of ensuring that that sensitive information isn't leaked to anyone, especially anyone that isn't a serious buyer.

You know, I came up immediately with this example of what if I'm this company's competition, I stumble upon their website and I can act like I want to buy the website so I could get financial information a little bit how do you prevent something like that from happening? 

Blake Hutchison: Yeah, so there's obviously the actual platform security itself. We have teams of security experts which are ensuring that Flippa itself as a platform is watertight. I think then there's the IP of any given business owner that is listed with us. And then the protection of that as confidential information, which may be more pertinent to your question. Let me know if I've understood that correctly.

And so there's a few things you do. I mean, obviously it's an opt in environment. So if you want to expose the data transparently and openly to the public marketplace. You can do that and we will explain to you that you have done that and that is there for all to see. You can also protect your data by way of a non disclosure agreement.

You can also leave your data behind a walled garden such that it's subject to funds verification. And so I could, for instance, list my asset on Flippa and say that the only people who can see this, one, sign a non disclosure agreement. Two, verify their LinkedIn. Three, connect to plaid and show me categorically that they have the cash and capital and means available to be able to afford my asset.

And three, I can, I can protect that data until there is permission granted by Flippa on the basis of the validity of the buyer. There's various protections and it tends to be that financial data in its own right isn't actually confidential. If I say I make $100,000 and I disclose that, I haven't given away any trade secret, there's nothing particularly exciting about the the six or seven figure denomination that I've just given you.

Right? And so a lot of business owners will say, I would like to protect my financial information. Like, hang on. We're not talking about credit card numbers here. We're talking about some reference to how you are performing on a webpage and. That in its own right, isn't confidential. So if someone was to say, this is the way I acquire customers, and that happened to be a particular technique.

That was confidential, then you just would not disclose that until you got to the point where you had signed the non disclosure agreement, you had a letter of intent, and you had validated and verified that the buyer that you are speaking to, in fact, is the buyer you want to do business with. But a little bit like selling your house, the minute you are open for inspection, and you open the front door, someone is able to walk through your house.

and assess whether they want to buy that house or not. And of course, your next door neighbor could be walking through your house. And so it comes down to, are you content with the idea that this particular buyer with this particular profile, with this particular ID verification, with this particular LinkedIn connected profile is now looking at your stuff? If yes, yes. Let them in if no, don't. 

Alex Bond: Because you know, according to the previous part of our conversation, you want to protect these sellers. You don't want them to feel like they're putting their businesses on flip to get poached to get like acquired. And then, you know, kind of bastardized a little bit in some sort of effect. You want people to feel comfortable to put their stuff on there.

So the more due diligence you do, and the more effort. You know, safeguards that you ensure the more people are going to want to use flip. So I could imagine that it's a pretty, you know, stringent process. 

Blake Hutchison: Interestingly enough, good businesses are built on execution. It's not actually trade secrets, which makes a business great. We're not talking about high tech here. So if a blog is winning tens of thousands of customers a month organically as a function of fantastically strong content optimized for the benefit of the Google search engine. That is outstanding execution.

There's no trade secrets in that. It's hire an SEO expert, write incredible content, do so for a long enough period of time, pick keywords where the competitive, where the competition is not as high as other keywords, and win traffic accordingly. That isn't the trade secret. What is the trade secret is that I've been able to do that consistently over time.

Or not even the trade secret execution. I've been able to do that over time consistently, and I've been able to plug in the revenue sources, which earned me the most money. And that don't want to do it anymore. And they don't want to do it anymore. 

Alex Bond
Alex Bond

Meet Alex Bond—a seasoned multimedia producer with experience in television, music, podcasts, music videos, and advertising. Alex is a creative problem solver with a track record of overseeing high-quality media productions. He's a co-founder of the music production company Too Indecent, and he also hosted the podcast "Get in the Herd," which was voted "Best Local Podcast of 2020" by the Richmond Times-Dispatch in Virginia, USA.

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