There’s a global health crisis going on, millions are out of jobs (and millions more will be before this is all over), and businesses are closing down left and right, many of them never to return.
In short, it’s a shit show.
Inside every crisis there is always an opportunity, and today I’m going to share some of my thoughts on whether it makes sense to try and buy an online/digital business while this crisis is going on.
The TLDR;
- I don’t really know.
- Definitely not if you’ve never operated online before.
- Definitely not if you need to take significant amounts of personally guaranteed debt.
- Buying shells of companies that have gone to 0 (Travel, events) is more akin to speculation and will either make you wildly rich or bankrupt.
- There is probably opportunity if you have the team and the chops and the problems are limited to the business and not the overall situation.
Contents
What you’re dealing with if you buy an online business now:
Unknown Unknowns
Donald Rumsfield is famous for talking about Unknown Unknowns. His original context was in the fog of war, but it applies just as much to business in the current operating environment.
We know that the current operating environment is bad, and we know that it will probably get worse before it gets better. We can also estimate to some extent that the economy will eventually recover, but we don’t know when (e.g., recovery in 10 years looks great on a graph but is unpleasant to live through).
Beyond that, there’s a lot we don’t even know we don’t know. Which is kind of the problem. When TravelZoo (NASDAQ:TZOO) bought 60% of Jack’s Flight Club for $12 Million dollars back in early January, the complete shutdown of travel was an unknown unknown to them.
My point is, there’s still a lot more that’s going to happen that we don’t know. What we do know is already bad enough.
Opportunity Cost
If you’re going to acquire an online business, consider your opportunity cost. The dislocations in public markets were pretty severe a week or so ago, and they will probably get worse before they get better. The same can be said for other business opportunities. If you’re not running a fund dedicated to online businesses, is this the best place you can put your capital to work?
Not Normal Distressed Businesses
The distress we’re seeing today is not just the result of too much debt or bad management. It is the result of a total halt of large parts of the modern economy. You can’t go into most of these businesses with a 13 week cash flow forecast and right the ship. At most you’ll end up buying the husk of a good business with the hope the economy returns to normal in time to get return on your capital. That sounds like a risky bet to me.
Valuations have not yet met reality
Most of the online brokers seem to be projecting business as usual. A few have privately reached out on some listings, but nothing out of the ordinary. If you’re buying some of these listings at asking in this market, I have a bridge I can sell you.
Future Revenue is a crapshoot
As I mentioned on Twitter, most of the major banks are turning off their credit card affiliate programs. That’s a huge loss of revenue for a lot of websites.
Expect to see a major drop in ad network revenue, affiliate programs, and any other type of partnership etc as the economic disaster widens. You can’t really functionally evaluate these companies based on TTM.
Businesses that thrive now will not be cheap
This is kind of obvious but functionally, anything that is doing really well now (Survival Websites, Work From Home SaaS, HomeSchooling stuff) is not going to sell for cheap and if anything will probably be overvalued once the world returns to normal.
Well, What Should You Buy?
You don’t need to buy anything. Not doing anything is also a decision.
I think most of the opportunities will be in good businesses that are either over leveraged, or the owner needs capital to meet other issues (margin calls, gambling debts, whatever). I haven’t seen too many of the first yet but a few of the second type have already started to pop up.
In the sub $5 million mark I doubt we’ll see too many over leveraged businesses just yet because they mostly have SBA loans, and the SBA will pay principal and interest on current loans for 6 months.
I expect to see opportunities among VC funded companies that are doing OK by normal standards but are burning too much cash to reach exit velocity.
How Will You Buy?
While the SBA is supposed to be lending on new loans, I really don’t know how they’ll lend on damaged goods going forward. Frankly, in this environment, I wouldn’t want the personally guaranteed debt either. My point is that you’re going to need to come up with your own funding options if you don’t have capital and hope for some seller financing on the back end. Honestly, if you have to raise capital right now to pursue these deals, it might be too late.
Other Options
You don’t necessarily have to buy outright either. For strong businesses going through temporarily tough times I think there’s a lot of value being an equity partner. This is a little bit more difficult with the smaller businesses you see online but it’s definitely doable.
[Disclosures: I currently hold no position in Travel Zoo and will not trade on it within 48 hours of this post going live].
