Buying Domain Names

When you’re investing in a speculative domain name, keep in mind that you could have your money on the sidelines for a long time. If you are paying registration fee, it’s not a lot of money to worry about. However, if you buy dozens or hundreds of domain names at registration fee, or if you buy a domain name for a lot of money, it could be burdensome.

This morning, I was reading an article in CNN about researchers at Florida Atlantic University who are currently in the early stages of attempting to generate power from the Gulf Stream. The project uses ocean turbines much like companies harness wind power with wind turbines, and if it’s successful, there could be many ocean turbines installed underwater throughout the world. Fellow domain investor had learned about this potential power source and registered OceanTurbines.com nearly a year ago. Smart thinking!

The only downside is that the article said “If the pilot program is successful, it could take another five to 10 years before the technology can be implemented.” In speaking with Stephen, I know he has a number of similar domain names – like SeaTurbines.com, and his company is all over the solar business. Stephen knows his names won’t be worth big bucks for a few years, but his well-capitalized company is able to hold out and wait for the value to increase.

If you are buying speculative domain names or an expensive speculative domain name, it’s important to realize that your money could be tied up in these domain names for a long time. You need to figure out whether you can afford to hold out or not. I know a lot of people own portfolios of these names, and each year it becomes harder to renew, but they do it because they’ve already figured the previous years are a sunk cost and don’t want to lose their investment.

If you are going to need the money in the short or medium term, perhaps it’s not a smart investment – even if you think it might be the next big thing. Every days something new is the “next big thing,” and you can go broke pretty easily if you are always trying to register everything related to it.

I know a number of companies and individuals that have spent a lot of money buying domain names based strictly on revenue multiples, and there are many reasons why I think this is a bad idea. I personally have never bought a name strictly based on the amount of money it generates because of the reasons I outline below. I am sure there are plenty of people who have done well buying on multiples, with the “industry standard” previously being 10 years, but I strongly believe much more money has been spent on bad buys than good ones.

1) PPC will probably continue to decline. A 10 year multiple last year is probably a 14-18 year multiple this year – if not more.

2) Revenue might be seasonal, so if you buy a winter-related domain name in the spring, the last few months of revenue will be strong, but it’s probably not indicitive of how the domain name will perform year-round. If a seasonal domain name is bought on a 10 year multiple, when you consider it could be most active just 25% of the year, the actual multiple could be 40 years rather than 10.

3) A domain name may have been a developed website before it was parked. As time goes on, the site will presumably steadily lose traffic as search engine links disappear, and the money won’t continue to be generated as strongly.

4) A developed website that generates revenue will have costs associated with that revenue, including inventory, hosting, fulfillment, website design/updates, and the time it takes manage. An affiliate-based website will have less upkeep, but there are still management issues that take time and effort.

Sure, if a generic domain name is making money, I will take the revenue into consideration and probably pay what would be a greater multiple than whatever the industry standard is. However, I don’t like the idea of buying a domain name simply based on the revenue it is generating in its current form. In my opinion, there are too many risks to buying domain names based on a revenue multiple, whatever that multiple may be. It’s too difficult to evaluate domain name values based on a fixed strategy like revenue multiples.

** I am out of town for the weekend, so comments may take extra time to be approved, and questions may go unanswered for a bit – but I will get to them of course **

When you are trying to buy a domain name and your offer is turned down, I recommend giving the owner one last opportunity to consider your offer, and add a time constraint to it to make him consider it quickly. Oftentimes when a person rejects your offer, it’s a tactic to increase the amount of your offer. If you specify that you won’t increase your offer and that you will give him a few days, he might realize that’s the best offer he will get from you and potentially change his mind.

When I was negotiating to buy Burbank.com, negotiations came to a head after a couple of weeks. I really wanted the name and had to increase my offer a couple of times. Finally when the offer was rejected, I replied that my previous offer was final and that I would move forward with another significant purchase if the owner didn’t change his mind over the weekend (it was a Friday afternoon).

Several hours later, the deal was verbally confirmed and all parties seemed happy. I don’t know whether the former owner was using his reply as a negotiation tactic or if he just didn’t want to sell until he realized that my offer would be off the table. However, putting a time constraint on a reply can get you a final answer.

Just don’t use this method if you made a lowball offer, because you will probably just get a snark reply   🙂