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Domain Tax Tip

Elliot Silver
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9

I should preface this post by saying I am not anything close to a tax expert, and in fact, I received a D in Financial Accounting in college (granted I was pledging a fraternity). Nevertheless, I want to talk about taxes with regards to your domain business. I know it’s barely September, but if there are things you can do to lessen your tax burden before the end of the fiscal year, now is the time to do it.
The tax problem I generally have with my business is that I frequently spend quite a bit on acquisitions after a big domain sale, and taxes are an after thought.   For example, after selling a domain name for $80,000 and making a $40,000 profit, I am often inclined to go out and buy a $70,000 domain name.   However, assuming a 35% tax rate (state and federal combined), I would owe the government $14,000, leaving me with $66,000.   Since taxes aren’t taken out at the time of the sale, I might feel safe spending $70,000, but if I develop the new name, I have to come up with the extra $4,000.
That said, there are ways to lessen your tax burden by spending money on expenses such as new computer equipment, office upgrades, web development, research, self-employment pension plan contributions… etc. All of those with the exception of the SEP contribution are things that need to be considered before the end of the year.   It doesn’t make sense to go out and spend a boatload of money in the middle of December simply to lessen your tax burden.   You will end up with lower quality things since you are essentially spending to spend.
My best piece of tax advice is to speak with a professional accountant. While an accountant may not know the ins and outs of your domain business, he should be able to understand the jist. Regardless of his experience with a domain-related business, your accountant can give you general business tax advice, including how to lessen your tax burden.
Again, I am not a tax expert, but I believe now is the time of year to have a conversation with your accountant to show him how you’ve done so far and see how you can run your business more efficiently.   As your business grows, you will want to meet with him more often, but at the very least, a once annual check-up is smart (aside from when he is doing your taxes). Also, now is a good time to teach him about your domain business, as he will have more time to learn now than in March or April.

Types of Domain Names I am Buying

Elliot Silver
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65

With as much uncertainty as there is in the domain market these days, I am being more selective about domain names that I buy. As PPC is dwindling, there is less money being reinvested into the domain market by domain investors. Since much of the domain sales market has been fueled by domain investors reinvesting their PPC income, that area of the market seems to be stagnant.   End users are still buying domain names, but as most people know, it’s a tougher sell.
In that vein, I am being more selective about the names I am buying. When I think about buying a domain name, on top of the standard research I do, I ask myself how the name could be developed into a website. If there is no obvious way that a business could be established on that domain name, there isn’t much of a chance I am buying.
I like geodomain names for this reason.   It’s fairly easy to imagine how a city names (in the .com) can be developed into a business.   While it’s not easy to generate sustainable revenue to make a living, knowing what the site should feature is a no-brainer.   Cities, regions, and countries are like brands with which people are familiar.   If you asked a random person on the street in California what Burbank.com would be without prior knowledge, he would probably say, “a site with information about Burbank, California.”
I also like category defining product related domain names like TruckRims.com (which will be auctioned off by Rick Latona at Traffic) or ComputerSpeakers.com (which I once owned).   If you know what to expect on a website before you’ve ever seen the site, the name is probably a good name. It’s important, however, that a business can be built around that concept – otherwise, how will you make money?
One problem I am having is that many end user companies also know how strong these product and service related domain names are.   I have seen quite a few Whois lookups lately where names are owned by CSN Stores or Net Shops.   These companies get it and they own some fantastic product-related domain names that probably won’t ever be on the market.
If you have great .com product related domain names, drop me a note in the comment ection.   I had once offered up to $100,000 for a city .com domain name, but that didn’t yield a single viable city .com name unfortunately.   I am not looking for anything other than .com right now, nor am I looking for brandable type names.   I am looking for names like WindowTreatments.com, Dehumidifiers.com, WashingMachines.com… etc.   If you have a fantastic name like this, I am looking – and if I can’t afford it, I know several friends who have much larger budgets for these types of names. The problem is that end users own most of these names.   Some are starting to understand the value – which ultimately is a very good thing for domain investors.

2008: Year of Uncertainty in Domain Industry

Elliot Silver
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5

I know it’s a holiday weekend, but I think everyone needs to take a few minutes to read Ron Jackson’s interview of Rick Schwartz. In the domain space, Rick has been something like a soothsayer, and when he speaks, I listen. While we don’t all own the same quality domain names as Rick, the things he is saying does affect all domain investors.

If or when Google decides to pull the plug and PPC as we know it drastically changes, there is going to be a lot of tumult in the industry. While quickly and efficiently monetizing domain names will be difficult and domain values will be impacted, domain owners need to keep the following things in mind:

  • Businesses who want to be online need a domain name
  • Advertisers will still want to advertise on relevant domain names
  • People will continue typing-in domain names looking for products or services
  • Easy to remember and relevant domain names are the most desired
  • Consumers typically have certain web browsing patterns, and many type in their keyword and .com as a starting point

The point is that while making easy money from domain names won’t be possible, there are still going to be plenty of opportunities in the domain space. Some people will have to sell more than they have in the past in order to maintain the same revenue levels, so some deals may be had.  I recommend buying domain names that would make sense to be developed. Just because a domain name did well parked, doesn’t mean that it would be good to develop.

I still believe the greatest ongoing revenue generating opportunity is selling advertising space directly to advertisers on developed websites. I believe websites are the newspapers of decades ago. Websites get the eyeballs that newspapers once received, and advertisers want to reach them. Motivated consumers are untapped leads that businesses would like to acquire.

I also believe that as companies continue to migrate their business online, more will get it, and more will want (or even need) the domain name that describes their business or industry. Generic and category defining domain names are rare, and they hold considerable value. Selling domain names to end users that get it will be the driving force behind the future growth of domain values.

Changing times call for changing strategies.  Those who adapt and adopt will survive, and those who sit back will not. Who knows when all of this will happen, but I think it’s important to be prepared for the worst. Read Rick’s interview and judge for yourself.

Things to Consider When Selling a Domain Name

Elliot Silver
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0

Some of the largest domain portfolio owners rarely if ever sell a domain name. They’ve built strong (and profitable) business plans that are effective by not selling a domain name, or only selling for a very, very compelling offer. While I would like to be able to keep every domain name I acquire, it isn’t feasible for me and my company. When I do decide to sell a domain name because of an unsolicited offer or if I put the domain name up for sale, there are several things I consider prior to the sale, and I thought I would share these things.
Is the domain name generating revenue as is?
Before selling a name (or before pricing a name), it’s important to calculate how much revenue is being generated and at what cost. If the domain name is generic and it’s parked, the name can typically be priced anywhere from 8 – 20 times its annual revenue, all depending on the name. For many category defining or product (non-TM) domain names, people have sold them for hundreds of years multiples. Most people with category defining domain names won’t sell simply based on a revenue multiple so this is a guideline.
If the domain name has a website, the owner should take the monthly hosting costs into account as well as other costs that are incurred, such as commission for advertising sales. Additionally, advertising agreements that are in place should be considered, since the new owner may not wish to keep the site as is, so contracts may have to be broken with advertisers once a domain name is sold. All costs and revenues should be considered when a domain sale is contemplated.
Are there plans to develop the domain name?
If the owner is planning to develop this domain name because of a particular interest in that industry/field, or development would be made easier because the owner has content or access to content, the price to sell the domain name could be higher. Sometimes a particular domain name fits well within the portfolio of a domain owner, so selling might not be in the best interest of the owner. A domain owner should think about what opportunity costs will be faced if this particular domain name is sold.
Can the domain name be easily replaced?
One reason why domain names are so valuable is because they are virtually irreplaceable. There can only be one ElliotsBlog.com, and likewise there can only be one of every domain name. If a domain name is sold, it might be impossible to find a similar domain name at the same price level. If you think you will regret selling a particular domain name down the road, you should probably hang on to it. In my opinion, domain names are going to continue to increase in value in the years to come, so don’t make a sale you will regret. However, don’t miss out on other opportunities because you became too attached to a domain name that you value more than the market – unless you have plans for the name.
Can the sale proceeds be used to reinvest in a better domain name?
On occasion, a person will want or need a domain name owned by someone else, and they will offer significantly more than the market value to acquire the domain name. While this might seem like a great deal if it happens, the domain owner needs to weigh whether he will be able to reinvest the money in a similar/better domain name. If the seller can upgrade, it might be worth selling the domain name. If the name isn’t easily replaceable and the owner has plans for it, selling might not be the best bet.
I’ve heard people praise others for passing on a $200,000 offer and selling a name for $300,000 4 months later. This is great only if the person couldn’t do something else with that money during the same period. If the domain owner could reinvest that money in other domain names and sell them for more in a short period of time, it might have been a better deal to sell for $200k, buy other names and sell those for more.
The one caveat is that the seller must be conscious of the tax implications of a sale/purchase. If the seller makes $100k profit on the $200k sale, he needs to be cautious when reinvesting that $200k because he is in the hook for around $35k of the $100k profit. If he buys a $200k domain name, he will still need to pay taxes on the profit.
Can the domain name be sold to someone else for more money?
The seller should analyze the market to see if he could get more money elsewhere. As any real estate broker will tell you, a home owner usually values his home more than the market would actually value it. Likewise, many domain owners believe their domain names are worth more than the market will yield. The domain owner needs to determine whether someone else would pay more than a current offer, and if so, what the effort to make that sale would be. Time is money in this industry.
Like with any negotiations, the dynamic of the negotiation really depends on whether the domain owner is actively selling a domain name or a potential buyer inquired to buy a domain name. In the first case, the seller may be the motivated party in making a deal, and this may somewhat dampen his prospects unless there is more than one interested party. When a domain owner receives an inquiry, the sales price really depends on the owner’s motivation for selling. If he has plans for the domain name or if he doesn’t need the proceeds from a sale but the buyer needs the domain name, the sky could be the limit for the price (just ask Rick Schwartz).
If the domain owner is actively marketing his domain name, he should strongly consider any offers before rejecting or counter offering on one. I’ve experience domain sales where I asked $25k for a domain name, and upon receiving a $20k offer, I’ve tried to counter at $22.5k. Sometimes during this period of negotiations, the potential buyer purchases another domain name, so his offer became voided.
From my experience, if you are the seller and you are the person seeking offers, if you receive a counter offer that is acceptable, you should consider accepting it rather than trying to make a small % more. Even major companies like Yahoo have overestimated the value of their assets, and they lost a sale they would be happy to have now.
As any domain investor knows, there are many other facets to valuing a domain name and negotiating a domain sale. These are just a few things I consider when selling, and I wanted to share them. As always, if you have questions or need help, drop me a line and I will do my best to respond shortly.

Domain Hall of Shame: Cuil.com

Elliot Silver
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0

This has to be one of the poorest naming/branding moves I’ve seen in a while. Cuil.com just launched, and apparently the term “cuil” is suppose to be pronounced “cool.” This big news is currently being covered on the homepage of CNN. My buddy Thunayan (who never sells his company’s domain names) already has a search engine on Cool.com.   Seriously, what were they thinking?   This doesn’t pass the radio/tv test.

Prenups vs. Wills – Which Would You Develop?

Elliot Silver
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0

I just picked up two pretty strong legal domain names. Chances are good that I will develop one of them using a legal affiliate relationship and possibly a directory, and I will probably sell the other one. Both domain names are common legal terms, and they both have fairly strong search numbers according to Aaron Wall’s Search Tool. Which do you think is the better domain name?
PrenuptialAgreement.com
1,200,000 Google results for “prenuptial agreement”
Many top and side advertisers several pages deep
Aaron Wall’s Keyword Tool – 173 daily count
LastWillAndTestament.com
1,120,000 Google results for “last will and testament”
Many top and side advertisers several pages deep
Aaron Wall’s Keyword Tool – 340 daily count
LegalZoom has a great affiliate program for these legal agreements
Which would you keep and which would you sell?

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