Once you’re confident in whom the seller is and the statistics are bona fide then you can move to formulating a deal. Most deals in the domaining industry are pretty straight forward. The domains do “Y” amount of revenue per year and the seller pays “Y” times years for the privilege of purchasing the cashflow stream.
This is all good but it supposes that the traffic, earnings per click and click through rate remain constant over “Y” time. Even if the traffic statistics are right there is still the risk that the numbers will change into the future and this is also when the seller is absolutely squeaky clean.A way of mitigating the risk is to negotiate a reduction in the purchase price. This is great for the buyer but the seller isn’t too pleased by this and the deal may fall through. The other option is to place representations and warranties in the purchase agreement where if the traffic is not sustained then the seller is paid less. This also means that the purchaser may pay a percentage of the agreed funds on signing the agreement and the balance at a later date.
The risk for the seller is that they are only in a downside situation. It would be better to negotiate a potential upside if the traffic increases for the seller and a downside if the traffic reduces.
Why am I talking about traffic? The reason why is that traffic is the one metric which is unlikely to be influenced by the purchaser when the transaction is completed. The purchaser wants to immediately work at increasing both CTR and EPC but traffic.....well......is traffic.
Another way of buying domains that is on an earn-out basis. For example, the purchaser puts down a small percentage of the money (eg. 20%) and the balance is paid over the term of the agreement.
Let’s imagine that a seller is asking for 18 months earnings for a portfolio of domains. On an earn-out basis the buyer may elect to offer 20 months on the following basis. They could pay 20% now and the balance paid over the 20 months. This means that the seller gets some cash now and more for their domains in the long-term. The advantage for the purchaser is that they are effectively only having to outlay and small portion of the funds and then use the domains themselves to pay the balance. This is a win-win scenario that I believe will become more popular into the future.As with all deal making in any industry there are a many ways of cutting them. The most important thing to understand is that a deal only works if it works for both parties. Deals that leave one party feeling a bit “ripped off” aren’t deals at all....they are transactions. Trust me when I say that in a small industry like the domain industry transactional purchaser gets a negative reputation pretty quickly.
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- March 31, 2009