How to: Build an Affiliate Site You Can Sell for $1M

It takes strategy, tactics, balls, elbow grease, money, and smart planning. Mostly, though, it’s a matter of putting in a lot of time every day to “block and tackle” (a.k.a. “the boring details” or “content and links” or “the grind”).

Most people do not have the proper attitude, personality, or personal situation (kids to feed?) to grind it out for 3 or 4 years. You have to wake up, work the 8 to 5 job, come home, lift a few weights, eat dinner, then work 7 to midnight on the side project (which, if it yields any profits, are most likely reinvested).

So, if you can’t/are scared to/aren’t able to grind it out for a few years, this guide isn’t going to help you. Now, even if you are grinding it out, you still are unlikely to build a site you can later sell for $1M: most SEOs are applying their valuable tactics, sweat and money to bad business models.

And that is what this article addresses: making sure that you apply your grind to a site that can sell for $1 million USD in a few years(rather than $20 or $200k).

The Multiple: Why Some Sites Sell for 10x Yearly Profit, and Others Sell for 6x Monthly

To many readers, $1,000,000 sounds like a ridiculous sum to sell a website for (it would seem that way, if you’ve check DP for sites lately). Now, this is partly because “bigtime” websites are usually sold privately, so you’re not going to see the high-value ones listed at DigitalPoint or SitePoint.

But we’re also used to seeing low multiple sites for sale on these public forums. What do I mean by low multiple sites? These are sites that sell for somewhere in the neighborhood of 1x their annual profits. If these sites were stocks listed on the S&P, their P/E (price to earnings) ratio would be 1. (Hint: that is an absurdly low multiple for a stock.) Nevertheless, that is the multiple that the marketplace is willing to bear for these types of sites.

What sort of factors would discount these investments so much? (From an investor’s standpoint, that’s what a site is–an investment.) Why, when the investor is willing to pay 15x annual profits to own a share of stock, is he only willing to pay 1x annual profits for a site being sold at DP?

The main reason these sites are so discounted is that they are extremely risky. They generally don’t hold any strategic value for the acquirer (for instance, why Youtube commanded a premium valuation), so their value is solely a function of return vs. risk. The typical site sold at DP:

  • Yields revenue from only a single source (Adsense).
  • Receives traffic from only a single source (usually a site does well in Google or MSN).
  • Has search rankings which are likely not-defensible (based on low-quality links, DP co-op weight, links from the webmaster’s own network, etc.)
  • Does not have any other valuable assets to speak of besides the revenue stream itself (e.g., there is no newsletter list, no brand name recognition, etc.)
  • Overstates profits because the webmaster’s salary (opportunity cost) is not taken into account.

That last bit gets me all the time. First of all, I think it’s pretty hilarious when someone tries to sell a site based on its revenues. If your site brings in $20,000 a year, and you spend $19,000 on cost-per-click, the revenues aren’t really the relevant piece of information, are they? But even in the case above, it is misleading to state that the sites makes a profit of $1,000 a year.

We have to assume that the average webmaster’s time is worth something–let’s say, $30 an hour. If it takes you 2 hours a week to manage the CPC campaign in the example above, your opportunity cost for running the site is $30 x 104 (hours per year) = $3,120. So in fact, this site isn’t making $20,000 or even $1,000 a year… when the salary for the webmaster is factored into account, it is losing $2,120. Small wonder it is selling for such a low multiple! When you combine the overinflation of profit numbers due to ignoring the opportunity costs of running the site with all the high-risk factors (single revenue source, single traffic source, etc.) it isn’t surprising that the generally accepted fair valuation multiple at public site-for-sale forums is 1x yearly “profit”.

How to Build a High Multiple Site

The thing you need to realize is that there are plenty of websites out there that are actually selling for 5x, 7x or even 10x their annual profit (and I’m not just talking Youtube or Facebook–I’m talking real, everyday websites that a guy like you or me could actually build if we put in a lot of time and elbow grease).

When you take that sort of sale multiple–7x annual profit–building a $1M website is much more realistic and attainable. If you can clear $12,000 a month (in profit, after subtracting your own salary), that’s $144,000 a year; multiple by 7, minus a few thousand for the accountants and lawyers who do the deal–that’s how you sell a site for $1,000,000.

The trick is, it has to be the right $12,000 in profit per month. It has to be $12,000 a month that is defensible, sustainable, diversified, and strategically valuable to larger companies.

So what kind of site is defensible? The long version is here, but the short version is: good domain name, good brand, diversified traffic sources, diversified revenue sources, and measurable assets like RSS and newsletter subscribers.

What kind of site is sustainable? A niche where consumer interest is growing not shrinking, a site with low legal risk (e.g. you don’t host a bunch of copyrighted files or infringe on trademarks). I also personally believe that profit margins based on CPC campaigns are rarely sustainable over the long term.

What kind of site is diversified? Revenue: You don’t make most of your money from Adsense, and you are selling leads or acting as an affiliate to multiple merchants. Traffic: You rank well on all 3 search engines (or at least 2), plus get a majority of your traffic from non-search sources like direct links, RSS subscribers, bookmarks and type in.

What kind of site is strategically valuable? One that doesn’t reflect negatively on the entity who owns it, and one that exists in a niche with a mature lead marketplace.

Now, that latter statement needs a bit more explanation. Some people like to go after microniches (low profits, low competition). I take the exact opposite approach, for two reasons: Firstly, as I explained in Warren Buffet’s Advice to SEOs, it is highly profitable to be an average player in a highly profitable niche. (Not always the case when you’re the top player in a low-profit niche.)

More importantly (when discussing multiples), to extract full value when you’re selling a website you need to be in a market with an abundance of website buyers. To use specific examples (because boy does I hate generic advice!), if your website generates mortgage leads there are about seven hundred millions (roughly) mortgage affiliates, brokers, lead resellers and arbitrageurs who would just love to own your monthly stream of leads. This is going to create an efficient marketplace for when you try to sell your site and is going to extract the maximum multiple (price). Potential buyers know there are many other potential buyers out there, so they are less likely to lowball you. It would not be a stretch at all for a defensible mortgage site to sell for 7x its annual profit.

Conversely, when there are fewer buyers of leads in your niche, it is going to be very hard to receive an attractive multiple when selling your site. Let’s say there is only one large niche-widget-merchant in your little niche, and you are one of a few affiliates that generate leads for him. When it comes time to sell your site, who is going to buy it? Super-affiliates are going to heavily discount the value because selling leads to a single niche-widget-merchant is risky and not very defensible.

If he cuts his payout-per-lead in half, you don’t really have any option but to continue to sell your leads to him (now for half the payout!). Likewise, if you try to sell the site to the actual niche-widget-merchant, he knows he probably isn’t bidding against many (or any) other buyers, so he is likely to only offer a low multiple to purchase your site.

Here’s a little test to see whether your niche has a mature lead marketplace: Login to CJ, and search for your product/service name. Are there at least 5 merchants coming up for your product or service? If so, the lead buying marketplace in your niche is mature.

To summarize: If you want to build a site you can sell for $1,000,000, build a site that makes $12,000 or more in monthly profit, passes my 10 point defensibility quiz, and operates in a mature (large) lead-buying marketplace.

Back to the Grind: Getting to 12k/month

So we’ve covered how to make a site defensible, and how to pick a mature niche. Now we need to figure out how we can get to $12,000 a month in profit (realistically this is something like $17,000 a month in profit before your “salary”, since whoever buys your site will probably have to spend ~60k a year to get a webmaster to maintain the site).

The rub is, I don’t have a step-by-step plan to help you do that. Even if I did, it would be pretty useless–we all have different talents and resources, so the easiest way for me to get there is going to be very different than the easiest way for you to get there. Rest assured there are hundreds of different tactics, marketing channels, monetization strategies and options to get a site to 12k in monthly profit.

I actually recommend you start with what you know. Tactics: Do you know link baiting, how to program AJAX tools, or low-cost offline marketing? Niches: Where have you operated in the past? Do any of your past niches fit the definition of being a mature lead marketplace? Resources: We all have special connections that make things easier; is your dad an insurance agent? Is your college roommate good at manipulating large data sets? Or maybe your husband has a law degree.

No matter what your personal situation is, your strategy has to play to your own personal strengths. For me, these strengths have included:

  • Having a partner who is a lawyer
  • Being willing to work 12 hours a day
  • Being good at link baiting and social media optimization
  • Having a team of low-cost, talented writers in India

In the vein of Warren Buffet’s Advice to SEOs, I’ll admit that the following stratagems have also served me well:

  • Structuring sites so that the ads are the content
  • Building traffic of visitors who are in the buying cycle
  • Finding affiliate merchants who don’t operate at CJ
  • Partnering with reliable, honest people whose talents complement (not overlap with) my own

And Now: The Catch!

Let’s say that 3 years later, you have the site–it’s defensibly earning 17k in monthly profit (12k after your “salary”). A few things might happen. #1, some big company decides they just have to have your domain name or position in the SERPs or whatever tools/assets you’ve developed, and they offer you a 12x or 20x annual profit multiple to buy your site. That’s pretty much a no-brainer SELL, but let’s not count on that, it’s a (relatively) rare occurance. #2, let’s say God forbid you get sick or have some sort of misfortune, and you need to sell your site quickly–in this case you might get a much lower multiple than you otherwise would, but it can’t be helped.

More commonly, you are in a position where you can choose whether or not you want to hold or sell. And here’s the ironic part: you may very well find that the type of site you could sell for $1,000,000 (at a 5 or 6 or 8x multiple) is worth keeping! Personally, I feel like if I can get a site to 12k/profit a month in two years, I can probably get it to double or triple that given another year or two.

Why be in a hurry to sell? If you’ve developed truly premium virtual real estate, it’s only going to increase in value; meanwhile, despite your Aunt Gladys who thinks money earned online is “silly money”, if the site is truly defensible, it may represent an option that carries less risk than alternative investments (*ahem* Enron stock *cough* Las Vegas real estate).

If you take the proceeds of the sale of a 144k annual profit site–let’s call our sale price $1,000,000–first you’ll get hit with a long term capital gains tax (at least, us yanks will), and your after-tax pile of cash is now $850,000. If you put that into real estate, the (long term) average rate of return is 3%–you’ll yield $25,500 this year.

If you put it in an S&P index fund, you’d average maybe 12%–$102,000. So the alternative uses for our money aren’t even coming close to beating the $144,000 annual yield we got from the website. Meanwhile, most of us don’t have the talents to substantially increase the yield we get out of real estate or stock investing (like we would if we were maintaining/expanding a website we founded).

Of course, if most of your net worth is tied up in a single website, there is serious pressure to cash out and diversify that worth (and rightfully so). And most of us with the fortitude and personality to be an affiliate marketer/competitive webmaster in the first place realize that change is good for the soul (and often good for one’s lifestyle)–wouldn’t it be lovely to cash out, put most of the proceeds in an investment account, travel the world for a few months, and start all over again (with a brand new premium domain name)?

It’s a good problem to have. ;-) Whether you decide to sell, or hold, or hold then sell then start again, you’re still in a good place. I’m chasing the dream and I hope all SEO readers are, too!

Source & Written by Andy Hagans