Kind of an interesting thought here...I buy websites on a regular basis, usually hold them for some period of time (3-5 years) and then sell them after that period of time. I usually sell them when I get tired of working on them rather than when I have locked in a solid profit. I focus on websites worth $5-15K...and I have always bought them with 100% cash. I keep about 20% of my investment portfolio in HYZD, a free to trade zero-duration bond fund that yields about 4.5%. The money I keep in this is my website "play money". It's what I'm comfortable risking 100% of to invest in online sites. When I find opportunities, I liquidate X amount of this position and buy the site outright.
I interned for a PE fund a little over a year ago (now work in private banking) and am familiar and fascinated with the LBO concept. My question is: does it make sense to try to do an "LBO-like" deal on one of the websites I buy? Let's say I can borrow against my liquid portfolio at 10%, and I'm capable of borrowing 100% of the purchase price of the company (since I'm borrowing against liquid securities rather than a small online business).
So it would play out something like this: I buy a $15,000 website that free cash flows $600/month. I borrow the full $15,000 at 10% for 3-years which results in a $485/monthly debt service payment. This leaves me $115/month to pocket and reinvest in my portfolio, or to reinvest in the website.
Does this only make sense if my investment portfolio is going to return more than 10%? What else am I not considering?
Yea why not? You can use debt to buy pretty much anything and if the asset is generating cash then it should all work out. Just run the numbers on it and see what it spits out.
I think the biggest issue will be getting such a small loan, the only place I could think of off the top of my head is like a lending club or something, but the rates will be high.
Can't you get a margin loan on your securities from your broker? Or can you usually only do that to buy securities?
It wouldn't be a margin loan...margin is only to buy securities. But e-Trade for example will give you a line of credit against your portfolio. Unfortunately I'd have to go through a bank instead since I don't have the minimum collateral they require to get a line.
Yeah you definitely have to go through less traditional routes to get a loan this size, but I am pretty confident I can get a loan around that amount for 10% or less.
I think my main thought is that if I'm paying 10% for 3-years on a loan and lets say my portfolio averages 7% over the next 3 years, then I'm essentially losing 3% by not liquidating instead?
I guess it doesn't make as much sense because I wouldn't be capturing the leverage factor since 100% of the free cash flows would be hitting my bank account anyways. It would make sense if I didn't have a liquid $15K to spend on it I think, but since I do it doesn't make as much sense unless I find a really low rate and have a super high conviction in my portfolio over the next couple years.
Also, website has FCF yield of 4% a MONTH? Heck of a business...
Most websites will sell for 2-3x yearly profits...awesome ventures if they go well, but they're super high risk. Online sites are a beast of their own and one decision by Google to change their search engine algorithm and your site can literally disappear of the face of the internet.
curious what type of work you do on these sites to improve them? mostly back-end improvements, page/site structure and cleanup or also content and SEO?
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