Cosy! Flippa’s new friends and the “passive income” myth
It sometimes seems when I’m writing about online business that I need a shovel to do my research, not a computer and an Internet connection.
As some of you will know, I’m currently writing a book about buying websites. It’s long since ceased to amaze me how much bullshit is spouted about how easy it is to build up a successful business online, but it still manages to raise a jaundiced chuckle now and then.
By coincidence (I’ll explain why “by coincidence” later), early last week I was writing about some of the nonsense that’s spouted about “flipping” websites. One attractive and very plausible-sounding Australian couple, Matt and Liz Raad, reckon that there are a lot of similarities between the property market and the website market—but that there are significant advantages to buying websites that don’t exist for the property buyer. Here’s a quick summary of what they’re suggesting.
Matt and Liz’s claims
Buying websites can set you up with passive income for life
My view: Bullshit. By definition we’re talking about websites that are themselves the source of income (if the owner’s selling goods or services to generate income—even by drop-shipping—then that’s certainly not passive). But even websites that are purely vehicles for advertising require some maintenance—after all, something has to be done to keep visitors visiting. Without visitors, who’s going to click on the AdSense adverts, and who’s going to want to pay for advertising space? Sites that are neglected soon slide into oblivion on the web, at which point their income dries up.
So the idea of “passive income for life” is a nonsensical claim. And that’s without even considering all the work that goes into identifying a decent website before buying it.
(Mind you, judging by their video, Matt and Liz consider property flipping to be “passive income”. But house hunting and renovation takes a good deal of hard work. So maybe they’re using some new definition of “passive” that I haven’t previously encountered.)
Websites are a growth market
My view: Bullshit. The number of websites is growing so quickly overall that it would be almost impossible for the market not to grow. But many of the websites traded are either out-of-the-box turnkeys that have no track record and no established value, or MFAs that have had their day and are now well past their sell-by date. It’s sheer volume that’s driving any growth in the market’s value, not growth in the value of the businesses generally.
Websites are real assets
My view: Bullshit. A website’s value as an asset depends almost entirely on its ability to earn. The intellectual property assets associated with it—the content, any proprietary scripts, and the domain name—may have some additional value if a buyer agrees that they do. But if the site fails to earn, and the IP assets can’t be sold, the website’s effectively worthless.
Websites are going up in value all the time
My view: Bullshit. For every Facebook and Twitter IPO, there are innumerable failures. And even the big IPOs don’t constantly rise. Websites are certainly not more immune to falls in value than, say, commodities like oil or gold, or indeed property.
You can get the same monthly income from a $20,000 website as you would from a $400,000 house
My view: Probably true, but… They’re assuming that a $400,000 house will give you a 5% annual return in rental income, and that a $20,000 website is valued at 12 times its monthly income. But they’re only stating this as a preliminary to their next claim, which is a whopper.
A $20,000 website is a lot lower risk than a $400,000 house
My view: Multiple bullshit.
The Raads suggest that the house will result in you being saddled with debt, that the time at which you’ll make your return with the house is shrouded in uncertainty, and that there’s no telling what you’ll get when you sell it. All true enough, for most of us. But they’ve ignored the long-term capital appreciation of the property—and the possibility of selling the original property, either to trade up to a more substantial investment with bigger returns, or to cash in on the appreciation in value.
In any event, it’s the counter-claims they make for websites that really cause that fresh farmyard air to come wafting under my nostrils:
A $20,000 website won’t leave you in debt
My view: Bullshit. Many people don’t have $20,000 in the bank that they can afford to hand over just like that.
A $20,000 website will pay for itself after just a year—probably sooner
My view: Bullshit. It may do, or it may not. Matt and Liz are assuming that monthly income will remain unchanged or rise. But many websites are sold because the seller sees income declining, or foresees it declining. And what happens if some external event severely reduces or even wipes out the website’s revenue?
You’re likely to sell your website for twice its annual earnings or more
My view: Bullshit. The Raads say that the multiplier of annual earnings at which websites sell is rising all the time. You’ll remember that their opening premise was that a site that earns $20,000 a year is worth $20,000. However, they’re suggesting that the multiplier is rising so quickly that you’ll be able to sell your website for twice its annual earnings, or it might be three times, or even 60 times! But they don’t explain the cause of this rise, or put forward any statistics to support their claim—just one-off cases.
Run-down looking sites can be the best ones to buy
My view: Gilded bullshit. Why gilded? Well, it’s superficially attractive, especially to the enthusiastic and naive buyer. Yes, in some circumstances it may be possible to buy an established website that’s been neglected for a while and give it a quick overhaul. It may be that the seller’s ignored a revenue stream that you’re well placed to exploit.
But it may also be that the site’s recently been blown out of the water by a Google algo update, or that it’s based on a physical product that’s been discontinued. In cases like that, the decline’s likely to be terminal. And the only certainty you have with a run-down site is that its most recent history is one of losing value.
Sites with monthly earnings of over $1,000 are listed on Flippa for just $1
My view: Is it possible that anyone will swallow this bullshit? Any site that’s initially listed for $1 will soon rise to far higher bidding levels if it’s any good. Or indeed if shill bidders are enlisted.
Matt and Liz wind up by telling us that of course it’s not as easy as that. (Well, fancy that.) And you’ll need to do proper research and due diligence before you go out and buy your gem of a website. But they can teach you how in one of their workshops… which cost $2,000 a ticket. So much for “passive” income.
Here’s their 7-minute promo video, so you can see for yourself how plausible their spiel is:
Show me the money
Remember that at the beginning I mentioned that “by coincidence” I was writing about all this? Well, oddly enough, I’ve just found out that at the end of last week Flippa’s new General Manager, Nick Kenn, wrote a lovely testimonial blog post for them, paying tribute to their wealth of expertise and their ability to identify the “hidden gold”. He’s “very excited” that Matt and Liz will be sharing some of their strategies on the Flippa blog soon.
And guess what? Nick was at one of their recent workshops. Not as one of the punters, but on the stage with the Raads. While cross-fertilisation of businesses is all very well, this all seems just a little too cosy for my taste—in fact, it’s starting to sound like the MMO “Syndicate” that SaltyDroid is always writing about.
Here’s a little snippet from Nick’s blog post to show just how much it’s starting to sound like the MMO gurus’ mutual back-scratching:
I was inspired and excited to see over 500 people in a room learning how to accelerate their journey and actually achieve their dream of making passive income [my emphasis—Kay] online.
Which brings us back to the very first claim made by the Raads:
Buying websites can set you up with passive income for life!
PS: 500 participants, eh? Hmm. At $2,000 a throw, that makes $1,000,000. One million dollars. Even after you’ve allowed for discounted tickets and deducted the overheads—the costs of a block hotel booking at heavily discounted rates, plus the conference hall costs, plus any guest speaker fees—that should still leave plenty to buy that $400,000 house. (With no debt.)
2 Responses to “Cosy! Flippa’s new friends and the “passive income” myth”
Nice post and good stuff for a newbie like me
Hi Kasey, thanks for your comment. Sorry to take so long to reply. We’ve been moving house and everything got chaotic. Then I didn’t have a decent Internet connection for more than a week… that’s enough tales of woe. Normal service will be resumed very soon!