Acquisitions Anonymous - #1 for business buying, selling and operating - Should we buy 239,000 Domain names? - Acquisitions Anonymous episode 146

Episode Date: December 2, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://www.getrevue.co/profile/acquanon-----Michael Girdley (@Girdley) and Mills Snell (@thegeneralmills) discuss a leading domain portfolio with proprietary pricing technology.We talk about the business model, examine how intriguing and distinctive this deal is, and we will try to identify the potential buyers. Together, we understand the difficulties and competition that will arise as you proceed along this business path. We will also check to see if there is a moat around this one.Subscribe to our channel!-----Thanks to our sponsors!CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.-----Show Notes:(00:00) - Introduction(01:39) - Our Sponsor is Cloudbookkeeping(03:07) - Deal & financials: Leading Domain Portfolio with Proprietary Pricing Technology(05:07) - How does this business work?(07:25) - What value bet will you make if you invest in this?(08:24) - How is this deal similar to real estate?(09:22) - How do you manage domain inventory?(11:19) - Is there a Moat around this business? What is the domain arms race that is going on?(12:23) - Why do you need to think twice in choosing a domain?(14:10) - What kind of competition will you face when running this business?(17:23) - Who would make a buyer-business fit?(20:06) - What is so challenging about competing with Private Equity?(21:57) - Why are there no financials on this deal?-----Additional episodes you might enjoy:#143 - Is this cell tower business any good?#142 - Should we buy this Crossfit Gym?#141 - A very profitable B2B Internet Business in the Petcare Vertical#140 - Let’s SBA the heck out of this deal - with special Guest Heather EndresenSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back, everybody, to another episode of Acquisitions Anonymous, the number one podcast on Small Business M&A. I'm Mill Snell, one of your co-hosts, joined today by Michael Girdley. And this is the episode that Bill Di Alessandro missed. It will go down in history as the one that Bill missed. He's our other co-host. This would be, I think, right up his alley. This is a portfolio of, and a website of 239,000 domain names for sale. It is probably one of the more unique and interesting deals that we've looked at. We don't have a ton of information about their company financials, but we talk a lot about where is the real nexus of value for a business like this? What is this portfolio worth, hypothetically, under some different scenarios, who are the ideal buyers for it? And

what is kind of this universe of domain names? Like, we're complete outsiders. It'd probably be helpful to have an insider's opinion, but we banter about it. We talk about it. I think it's super interesting. And if you get the SIM on it, we really want to know what did you find? What did you dig in? don't have to share anything company specific or anything that's under confidentiality, but we just want to know more because this is not the kind of deal that typically hits the street, right? People don't usually see these businesses go to market because they are a 800-pound gorilla in their industry and typically they trade under the radar. So I hope you enjoy this episode and big thanks to our sponsor this week, SMBash. We'll see you there. Really great group of folks and a really

great conference. If you're in this segment of the market, if you're looking for a business to buy or you own a business, you'll be with like-minded folks and really get sharpened through your time there. Thanks so much. Hey, Michael here, want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner.

So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your QuickBooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about Cloud Bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie.

I know many of you have and see if he can help you, make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast. it would help us and help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. Some of the businesses we look at are really exotic. They're like cotton candy. Some of them that we look at are just like, you know, eating broccoli.

And this one, I'm not quite sure yet. This is a pretty interesting business. It took me a minute to actually try and figure out what they do. But this, we have a teaser. Are we putting this teaser up or no? Yeah, yeah. It's not under NDA or anything. If you want to, if you, if any of our listeners want to buy it, reach out.

So this is from Peekstone. It's called Project Site. I think we've talked about in this past, but what a lot of these investment banks do is they'll, you know, they'll give all their mandates a code name. And it's something kind of cute and creative. So this one is a, you know, leading domain portfolio with proprietary pricing technology. They sell websites. And so that's what's called ProjectSight. But this company owns 239,000 domain names.

names. And I'm not totally sure if they still own that many or if they just have owned that many in the past. But 2000, sorry, 2022, their average domain sales price is $8,100. And they say that they get on average three times more in a kind of per, you know, transaction per domain name sale than the market, which I'm not really sure how you determine market in this case. But they have nine million quarterly website visitors. So project site or the company was found. founded in 2008 and is a quote, next generation premium domain name marketplace and monetization platform dedicated to offering the world's best available.com premium generic domain names,

not totally sure how they could be premium and generic, but their domain name assets for use in any commercial or non-profit activities. The company has been developed by top industry experts as a destination for domain buyers, whether businesses or individuals, searching for validated premium domain brands to enhance the value of their business or to build new high quality businesses and also domain speculators in search of qualified premium domain name investment opportunities. So if you're a business and you really need, you know, like, you know, Al'scarwash.com and somebody else has it, chances are somebody like this might have it,

or these domain speculators are people who are like, you know what, I'm going to buy bobscarwash.com, Al'scarwash.com, Chris's carwash.com, in the hopes that at some point, somebody's going to be like, I got to have that. They squat on it in a way, and then they hope that you come along and pay them a little bit more for it. The highlights here are that they are the leader in the $8 billion revenue domain name marketplace. That would imply that this is a highly, highly, highly fragmented market if they're the biggest of $8 billion total. This company owns $239,000. dot com domain names. They typically sell for three times the market price.

Their average, we said, was just over $8,000 per site. They have 25 years of consistent and predictable value appreciation with accelerating recent trends for dot com names, best in class front end platform with differentiated and proprietary backend technology, highly experienced management team. They have kind of an interesting, I don't think these charts really tell us that much, but basically they say their average sale price for the domain names from 2019, 2020, 2020, 2021 and 2022. It's on an upward trend.

It's doubled in the last year. So I'm not really sure what to make of that. Maybe they had a couple really, really large transactions that skewed the average, or maybe they've just gotten better at picking them and buying them and selling them for more. But then they have their price distribution for the last few years. The vast majority of these, as would be expected, sell for between $1,000 and $10,000, but 1% of their transactions over the past few years have been over $100,000. That's kind of interesting.

I'd be really curious to see what their acquisition model is for these domain names. Like, how do you get them? And obviously, it seems like it would be really hard for new ones to come on the market. Like, they're probably all taken or most of them would be taken if I had to guess. So, Michael, what do you think about this? is more your cup of tea than mine. Man, so many things. So many things.

By the way, this is one of the coolest business we've looked at. So they own 239,000 of these.com names. And last year, the average selling price was $8,000 for sales. Now, that could be skewed a little bit based on what you said, because 1% of the domains they sold out of their portfolio were $100,000 plus. So anyway, but like if you just do some monkey math here and you do, you say they own 239,000 domains on average, the average value of each one is $8,000. Guess what that multiplication comes out to?

$1.9 billion. Billion dollars. So super interesting. Now, I think there's an argument to be said, unlikely you would be able to monetize the entire portfolio for $8,000 per. Some of these may be so stale that they never sell, right? Like, who wants, like, Kodakpictures.com anymore? Like, nobody, okay?

So there's some stale ones, but there's still pretty large, you know, total addressable market here if they just sell a small. Zunephoneaccessories.com is probably not doing very well. Yeah. So it's super interesting. You know, what's really funny as people are trying, always trying to replicate the dynamics that happen in the real estate. industry in the Metaverse or in the internet.

And it turns out if they just slowed down and looked at it, like so many, so many things have been created that looks very much like real estate. And dot com names are one of those things, right? It's like a land grab, right? You have a price, there's a land grab. So each individual location, each individual donating name is very, very unique. Just like, you know, if you think about McDonald's on the corner in your street, they have a monopoly on that corner. It's a pretty interesting way of thinking about it. So very similar there.

You know, real estate typically is speculated in or can be a yield-based product, right, in which you're getting rent. And ultimately, how do you get paid rent when you own a domain name? Like, there's a couple different ways. One is you can rent the domain name to other people. And when I had a domain name broker and investor on my podcast, like he said that's happening more and more where somebody won't sell you the domain name, but you sign a 10-year lease and you get to use it for 10 years. So very similar kind of there. You have people speculating around them. You have people trying to, you know, to rush out and then flip them over time. Like all that kind of stuff happens as well. The other monetization way that happens is a number of these domain names are just like random things, where

if you type in restaurant.com, that may be owned by a domain speculator. I will tell you, girdly.net for a while was owned by a domain speculator, and they were trying to get traffic. Good luck to them. I don't think they've any money. But if you show ads on your park domain, you can make money from that. People do that all time. And you'll hear these stories of somebody owning, you know, business.com or something random like that where they're getting 500,000 hits a week and, you know, making 15, 20 grand just because so many people type in business.com or misspelled version of Gmail. I don't know if you, have you ever seen that kind of idea? Yeah, there's a whole whole numbers of squatters that would go misspell.

big names and then use those there. Another really funny story is if you have a name that's potentially trademarked, but also as defensible as something else, so let's say Microsoft introduces a product called Office and like you just happen to own an office, well, Microsoft can't take office.com from you. They have to pay you for it. That's not like that they have an exclusive trademark over all of that. Though, of course, you can't get away with owning Coca-Cola.com and expecting that to work.

They will get that domain name from you over time. So super interesting. And I'll pause there, but I have like a bazillion thoughts about this business. Well, it's, I mean, to me, the real value here is they're not just a marketplace. Like, hey, come and, you know, trade on our marketplace. They actually own some of these. I would just be so, again, I would be so curious to see. It's like inventory, right?

How many, you know, how much of this is relevant inventory? How much of it is stale? What's their turnover like? And then if this business is going to stay viable, how do they, add new inventory, you know, what, or is it literally just like, hey, we've got what we've got, we don't plan to acquire anymore, we'll sell through it and there's probably like a real diminishing long tail of revenue. That wouldn't be a terrible scenario, I don't think. It just is, what exactly are you buying here? Is there a future or is it just a long tail? Look, I think you

got to bet that dot com is going to continue to be the thing. That's why I like I own gurdly.com. Check it out for all of your favorite business content that you want to read and stupid blockposts I've written. But like, and it's why I don't do gurdly.net or gurdly.org. Like that's not, it's not, it's not premium. What is shifting and has shifted over the past couple of years is, you know, the rise of all these alternative domains that aren't dot com and are starting to be seen as very much, very much acceptable. So have you seen those like, yeah, like dot co. Dotco is kind of one of the first ones. Because I think it, I forget which country it is.

It's like some random, you would think it's Columbia, but it's actually some. some other like random island in the South Pacific. And the most interesting one is, which one was it again? There was one of them that people used that was one of the top tier domain names that for a while, oh, you know what it was? It was dot LY. So you remember like bit. Dot LY and stuff like that?

And people were using LY. And well, there's a slight problem with that. That's actually the top level domain for Libya. And if Libya has a revolution, their domain name registry moves over to the new government, and they may just decide to change the rules on you. So all can be washed away as a very big problem for you. The other one is dotio. Are you familiar with this one?

It's very big in the tech community. Do you know what dotio stands for? Indian Ocean. So basically what it is is the little islands out in the island. the middle of the ocean in the Pacific, or in the Indian Ocean, get together and license the use of the dot I.O thing. So if you want to be gurdly.io or whatever, you pay them. So it's really, it's really interesting. And some of these little countries who have these top level domains make big time money just from allowing people to use their, use their extension. It's very interesting.

So anyway, the thing that's happened here is like dot tech, dot, dot, dot, dot, business. And, business.V.C., like, all of these, like, top-level domains have become very, like, it's caused an explosion in the universe of stuff you can do. So, like, my friend, for example, they just rebranded their business and they were trying to get ARI.com. And, like, we were talking to her, and they were like, okay, we want to change to ARI.com. And I was like, would you like to pay, like, $50 million? Like, it's just not going to happen. Because ARI was, like, some big government contract or something. It's just not going to work. So what did they change to?

ARI.Tech. So you didn't get like something something.com and they ended up going down this dot tech route. So there's a big competition going on right now against the dot com thing, which would have me worried here. So I'll pause there, but I was about to go on another tangent. No, I mean, it's interesting because I mean, I do think it is akin to real estate in that way that there's fixed supply. I think I remember at one point seeing somebody tweet about there's like a website. that will give you like all the random five-letter domain names that are still available. You know, like because all of a sudden, the longer that you get, right,

maybe the less theoretically valuable they are, unless it's hyper-specific. But you're right. You could almost, you know, strike oil, so to speak, to continue the real estate analogy. Like if you happen to have like Google.com before Google is a thing and they're like, hey, you know what, we got to have it. Absolutely. Absolutely. So, I mean, so the other thing about this space, you and I are wandering in here is like babes in the woods, right?

Like, we're talking to each other about, I'm spouting all these random facts I read on Twitter like are on YouTube. But the reality is this is a very established mature market with some very strong, knowledgeable people in it. And like, you know, I mentioned I did that, I did that deal with the podcast where the person came in and we were interviewed. I'm totally blanking on his name. but if you go check out the Michael Girdley show, it's one of the old podcasts. And like how deep that guy went like five levels below where you and are talking right now.

You know, it's like the equivalent of we had Chris Powers on the other week. Would you want to compete against Chris Powers and talking about Class B industrial real estate in Texas? Like, good luck. Like, just not going to happen. There is the same level of expertise here, which really scares me.

And this is a type of situation in which you either need to go find one of those people's people to be your partner to truly understand this space. and go through and do an analysis of 239,000 domain names and come up with an actual fair value for them and how much monetizable they are and have a thesis around this, or just go find something that you understand better. Because this is a marketplace just full of sharks that are really, really, really, really smart. And you either need to cheat your code your way there or decide not to fight against them. It's like going into the Bellagio to the $50,000 table in the back.

Like, don't do that unless you're really, really, really good at poker or you bring Phil Ivy with you. Like you just, those are your two options. So anyway, that's, that's my rant about this one. Super cool. But man, swim in more sharks here. Totally swim more sharks. How do you think this sells, Michael? Because to, again, I'm just going to belabor the point, but to use the real estate analogy, like I've looked at businesses before that are like, you know, we own the equivalent of $100 million worth of real estate, but it only generates, you know, a million dollars a year of earnings, but we want $100 million for it. And it's like, well, is it, is it worth the asset value? Or is it worth the cash flow that those assets generate? Like one, one business I looked at was

like a massive fish farm. And they had to have a ton of land. But at the end of the day, it was like, it just, they didn't make that much money. So the highest and best use of the land wasn't the fish farm. Do you think this trades for, you know, a multiple of, you know, revenue or most likely earnings? Or do you think they say, hey, look, we want the value of our inventory. the value of this stuff that's kind of theoretically irreplaceable. I think somebody who is, this smells like a private equity with a platform company goes to buy this. Like I bet there is somebody who, for example, is a private equity firm.

And there's tons of them that are, say, rolling up web hosting companies or that are building something kind of in similar spaces or already in the domain space and know how to go through and value this. And then secondarily, because you own a web hosting company. So let's say you have a web hosting company and it's doing pretty well. And there's, believe it or not, there are still generic web posting companies in the United States doing fine. Let's say you have the opportunity to go sell those domains to somebody else and make your

overall business kind of strategically better. This smells entirely like private equity with a bunch of recent MBA students who are going to work their ass off for the next six months as associates going through in partnership with one of their platform companies. and buying this. I don't think something like this gets underwritten by guys like you or me waiting into the space and be like, domain name. That sounds good.

Click the button. I have GoDaddy. Like, you're not going to do that at this point. But those guys, I think it gets underwritten and they model out what the portfolio looks like, the same way you would model out like a big portfolio of office buildings, right? So you're going to go buy a billion dollar portfolio of office buildings.

You're going to make assumptions around yield over time, how much debt's going to cost you and then dispositions over time, right? So you're going to make some assumptions about all those kind of things based on track record, ability to price it right, operate well, and then synergies. And that's going to be a very complex, like 45 tab Excel model that some guy from Columbia business school spends three months on figuring out how every single one of these things is done. So I think that's who buys this. This is definitely a private equity play, and this is hardcore quant.

kind of analysis stuff, that's where I would predict it ends up. Yeah, it's like, what's the probability of, you know, of values on these websites? And then what's the present value of this like weighted probabilities back into today's dollars? It would be very interesting to see somebody like scrape this and actually, you know, do that kind of analysis because my guess is that, you know, if your cost of capital is cheap enough and if you have a long enough time horizon, this is very lucrative. But the way I look at it, I'm like, man, there's just no way I'd be able to pay what these people want. And that's why people gravitate towards different types of investments and have different, you know, thesis.

Yeah. Well, and, you know, I mean, it's part of the challenge with competing with private equity, right? They are taking risk capital from, from institutions who are hoping to get low 20% IRAs after fees. and they know that the risk is going to balance out across them and the 18 other private equity firms that they gave the money to. And it makes it a difficulty, whereas, you know, whereas the risk of ruin for the private equity firm doing that is going to be different than you or I going. Let's say you try to put together this deal, you put your own capital in there. You know, you're not going to be able to underwrite it at those kind of risk levels just because you're only doing one deal, right? So it becomes a real competitive advantage for private equity and just ways that like, you know, because there's a law of large numbers going on here, the LPs are fine with it, private equity is fine with it, and regular Joe's can't compete. And that's totally fine. That's the way it should be. Like, go work on something else, buy a roofing company or whatever the hell I do every day. It's part of the deal.

One last thought on this one. I was like really bum that they didn't provide financials. But the more I'm thinking about it, it's because I bet that, you know, you could have just one little. of insider knowledge into this industry, and you know who this website is, right? You know who these people are. Like, you bump up against them and they are like, we know everybody knows us. Maybe they're not the 800 pound gorilla, but my guess is they're pretty significant. And they don't want anybody to know their stuff. It's like they're going to vet the, you know, folks who sign these NDAs pretty heavily, or at least if I was the seller, I would want to because I don't want, I don't want my business on the street. A million percent. And, you know, I think to, to be clear, I didn't get this teaser off of Buy Biz Sell.

Yeah, yeah. Biz by seller. By the way, we're still waiting for you guys to sponsor the podcast. Help us out here. Like, we need the help, guys. We would take it from Biz Buy Sell or BuyBiss Cell. Either one. We'll take sponsorship.

Man, you know what I'm really happy about for a while? Buy Biz Sell went to an adult site, and I'm just so glad that they've fixed that. Like something happened where it's no longer doing that. So I'm just so happy. But yeah, Biz Buy Sell, hook your friends up. we help you. But anyway, I didn't get this off there because these guys know exactly, I think, what I'm talking about. Like, this was sent to a private equity guy, I know. So, like, it was like pretty straightforward who they think the right buyer is. And it's not like,

you know, Joe the search funder. That's not happening. No, no. Anyway, so yeah, you can see this one. And we'll have a link to this one in the newsletter. So make sure you sign up for our newsletter on our website, AACUan.com. A-C-Q-U-A-N-O-N-com. And the newsletter, you know, we'll send you links to any and all the deals. Okay, anything else about this? If somebody gets the SIM for this and looks at this, like we're definitely curious. Like, let us know.

This is the coolest one.