The online business acquisition market has undergone significant changes in recent years, presenting opportunities and challenges for investors and operators. Platforms like WebStreet have emerged as key players in this landscape, enabling passive investments in lucrative digital assets. During a recent discussion, industry experts, including Justin Cooke and Mike Vranjkovic of WebStreet, shared their insights on the current trends and strategic adjustments needed to navigate this evolving market.
Market Trends and Challenges
The online business acquisition market has experienced significant fluctuations in recent years, driven by macroeconomic factors, algorithm updates, and evolving business models. The boom periods of 2020 and 2021 saw a surge in acquisitions, particularly in the FBA sector, fueled by increased interest from private equity groups and roll-ups. However, the subsequent years have brought about notable challenges.
“2020 and 2021 were pretty heavy on the FBA stuff,” Justin Cooke noted. “All the roll-ups, all the private equity groups were buying up FBA like hotcakes. So we were selling lots of those in 2020, 2021.”
This rapid growth period created a highly competitive environment, with many businesses changing hands at attractive multiples. However, the landscape began to shift dramatically in 2022.
“A big pullback in 2022 coupled that with all the algorithm changes going on for the content sites,” Cooke explained. “We were pretty heavy in both FBA and content sites, and both of those have taken massive hits recently.”
Google’s algorithm updates, in particular, have had a profound impact on content sites, affecting their traffic and revenue streams. These factors have led to a scarcity of high-quality, growing businesses available for acquisition.
“We have a situation now where a lot of businesses that probably would have been middling or slightly increasing in 2021, 2022 are now not even good enough to be listed at Empire Flippers,” Cooke highlighted.
This decline in business quality has created a challenging environment for platforms like WebStreet, which prioritize high standards in their listings. Moreover, the overall market has seen a disparity between list and sold prices, reflecting the increasing difficulty in closing deals.
This has resulted in a market where lowball offers are common, and many deals fall through due to disagreements over price. The challenges extend to the operator side as well. WebStreet has a strict policy of not acquiring declining businesses, further limiting their acquisition opportunities.
Mike Vranjkovic explained, “We don’t buy anything declining. So, it has to be either stable or growing. We ended up refunding about 75% of the money that we raised because we couldn’t find enough stable or growing acquisition targets.”
Operator and Investor Dynamics
A cornerstone of WebStreet’s success lies in its robust operator and investor dynamics. By maintaining a high standard for operators and aligning their incentives with investor returns, WebStreet ensures that both parties benefit from successful acquisitions and growth of online businesses. WebStreet’s approach to selecting operators is rigorous and thorough, focusing on those with proven experience in building and managing online businesses.
“Our vetting process is pretty significant,” Justin Cooke stated. “We’ve made it maybe a bit too intensive, but that’s needed.”
This meticulous process involves evaluating potential operators’ track records, examining their previous acquisitions, and ensuring they have the necessary skills to grow the businesses post-acquisition.
Mike Vranjkovic elaborated on the importance of this vetting process: “We’ll look at their strategy to make sure it’s sustainable. We’ll look for a track record of the guys executing on it. This ensures that operators not only have the experience but also a viable long-term strategy for the businesses they manage.”
The goal is to find operators who have successfully navigated similar challenges and can apply their expertise to new acquisitions. One of the unique aspects of WebStreet’s model is the alignment of operator incentives with investor returns.
“The operators managing these businesses don’t take a salary. So their incentive is their carry,” Vranjkovic explained. “They’re not allowed to pay themselves a salary. They’re not allowed to pad team costs as a profit.”
This structure ensures that operators are motivated to maximize the performance of the businesses they manage, as their compensation is directly tied to the success of those businesses. The requirement for operators to have skin in the game further reinforces the alignment of interests between operators and investors.
“In terms of capital stack, the investors put in 95% of the money. And the operators have skin in the game as well. They’re putting in 5% of the cash on their first deal,” Vranjkovic noted.
This financial commitment from operators ensures they are fully invested in the success of their projects. WebStreet also fosters a collaborative environment among its operators.
“We have masterminds on the back end. And this is a cross route, where the operators both talk to each other and share their learnings in terms of what’s working, what’s not,” Cooke explained.
This cross-pollination of ideas and strategies helps operators learn from each other and improve their performance, ultimately benefiting investors. Despite the challenges in the market, WebStreet’s operators have continued to demonstrate resilience and adaptability. The platform’s strategy of not acquiring declining businesses while limiting acquisition opportunities has ensured that the businesses it does acquire are stable or growing. This approach protects investor interests and aligns with WebStreet’s commitment to high standards.
The careful selection of operators and aligning their incentives with investor returns are key factors in WebStreet’s ability to navigate the volatile online business acquisition market.
Strategic Adjustments and Future Outlook
In response to the challenges and shifting online business acquisition market, WebStreet has made several strategic adjustments to better position itself for future success. These adjustments are designed to ensure investors and operators can navigate the current market volatility and capitalize on emerging opportunities.
One significant shift has been the increased focus on more stable business models like SaaS and agency businesses.
“Longer term, we’re probably going to do a lot more SaaS and agencies,” Mike Vranjkovic mentioned. “And then it will get even though with time for obvious reasons… the recurring revenue is just a lot more collectible.”
The emphasis on recurring revenue models like SaaS offers greater stability and predictability, making them attractive investments in a fluctuating market.
WebStreet’s diversified fund approach is another critical strategy that helps mitigate risks. By pooling investments across various business models—FBA, content sites, SaaS, and agencies—, WebStreet ensures that investors are not overly exposed to any one sector’s volatility. This diversification strategy has proven effective, allowing WebStreet to adapt to market changes.
“Each round, we try to have a diversified fund or little portfolio of content, FBA,” Vranjkovic explained. “This approach balances potential risks and rewards, providing a more secure investment environment.”
Looking ahead, WebStreet is exploring new avenues to enhance its value proposition further. One potential initiative is creating funds for active investors who bring strategic insights and resources to the table.
Justin Cooke hinted at this future direction: “We’ve talked about making roles where the investors are more active or are bringing some strategic advantage to the table. This move could attract a different investor profile, diversifying WebStreet’s investor base and leveraging the expertise of seasoned professionals.”
WebStreet is also considering individual funds tailored to specific investors, allowing for more personalized investment strategies.
“We’re thinking about doing a test run with him to see if we can do a deal,” Cooke mentioned, referring to a potential fund for a single investor with unique tax and investment needs. “This flexibility in fund structure could open up new opportunities for institutional investors and high-net-worth individuals looking for customized investment solutions.”
As WebStreet continues to adapt and evolve, its strategic adjustments position it well for future growth. By focusing on stable business models, maintaining high acquisition standards, and exploring new fund structures, WebStreet is poised to navigate the challenges of the online business acquisition market effectively.
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