Seven Mile: Special Guest Post

This blog needed more of a numbers bent, but I know my limitations. The financier will be back each week (schedule permitting) to speak about financial aspects of the domain business. Thanks for doing this financier.. and no folks, the financier will not buy your portfolio... unless it makes a lot of money, then I will buy it :)

So, you have invested wisely and now you are admiring your years of hard work and skilful acquisitions. You are the proud owner of a portfolio of domains, which are generating solid cash-flows each month supporting your new found “domainer lifestyle”. And you think to yourself, what’s next?

It’s a question all of us, in a similar situation, are asking ourselves. After all, could this be too good to be true? Will this never end? What if it did end? Will I have to go back to my old career? Will I have to....work?

Whatever your situation and whatever you do eventually decide you should know one thing right now and you should be working towards it every day: your exit strategy. All good investors have one. If you have been shying away from deciding how you will cash-in on your Buffet-esque investment decisions then now is the time to put your plan together otherwise you may not have an “exit” available to you when your time comes.

One thing you need to know right now, domain names are a relatively illiquid investment. Allow me to explain. Buying, holding and selling a share of Google, for example is easy. Crucial to this is an existing marketplace made-up of millions of buyers and sellers of Google shares facilitating your desire to purchase or sell a share quickly, unencumbered by “transaction costs” . This is referred to as “liquid”. Performing the same transaction with a domain, or a portfolio of domains, is not easy and definitely not as transparent, it is “illiquid”. Whenever an illiquid market exists a cost is borne by the person initiating the transaction. For a seller, it reduces the value you can expect to receive for your asset. The take-away from this: the timing of your exit is vital to maximizing your sale price – you better make sure there are, or will be, a sufficient group of potential buyers.

Preparing your exit strategy will require you to forecast, guess, and predict. Asking your wife or girlfriend to adorn a see-through robe, slink around the house and whisper the future of the domain market into your ear ala the Oracle from the movie “300” just won’t do it. I know. I’ve tried. You shouldn’t make these predictions blindly, however. The first recommendation I have is for you to begin to analyze the current marketplace. Consider what is going on around you, identify trends, identify opportunities, and define yourself within the market. Are you the owner of a large portfolio of highly desired generic domains with traffic? Do you own a set of mostly brand-creation domains with little or no traffic? Are you a mix of each? Whichever group you align your business with will determine the liquidity of your domain portfolio. It will also help you to identify and target the potential buyer group that may be interested in your business. Absent of this analysis I would advise you revisit the wife-in-slinky-robe strategy.

You’ve defined your business, you’ve located your potential buyer group, you see the future, you like the future, now what? It is extremely important that you now begin to monitor the activities of your buyer group. Are they active or inactive in the market? Are new buyers entering the group? Are buyers exiting? One final litmus check would be to approach one or two companies within your buyer group to verify if they are indeed interested in companies such as yours. If they are not interested then you have most likely aligned yourself with the wrong buyer group. It’s better to know now or you may become a victim of “wandering-trade-show-attendee syndrome”.

It seems like at every domain name conference there are at least a few attendees walking the floor with a long list of domains ordered neatly, categorized, and priced. Unfortunately, they don’t know who their buyer group is or what their buyer group is currently doing so these attendees wander the floor trying to sell their domains to everyone and anyone who will listen. Admirable and proactive as it is I would recommend that you save your time and money and know (by name) who will most likely buy your company. You should have a list of these companies and follow them closely. The larger of these companies will send-off signals. Listen to what they are saying it will and should impact your decision-making. Look beside you also, a potential member of your buyer group may be a business similar to yours looking to grow. Recall, you want to increase the liquidity of your company which in turn increases the sale value of your portfolio. Accurately identifying a large buyer group will directly impact your final sale price positively. Inversely, if you have aligned your business with a smaller buyer group then you will most likely face liquidity issues.

I will refrain from speaking to the issue of “value” and “valuation” and leave it for a later post. One thing we have discussed here is how liquidity impacts value. A final thought for you to consider in planning your exit strategy is the idea of increasing your business’ value by making it attractive to more than one buyer group. How can you do this? Many companies are purchased for their pieces and not for the whole. Unfortunate for the seller, they are the ones who usually miss out on the value-creation performed from buying and splitting up assets. To take advantage of this and make it a part of your exit strategy, you should consider looking at your company in terms of the value of its pieces. For example, a group of domains generating cash-flow from traffic may be attractive to a larger buyer group while your brand-creation domains would be valued differently by another buyer group. Sold separately the total yield is greater than had you sold your company as one unit.

I have focused on the micro-analysis of exit strategy planning. However, an equally if not more powerful macroeconomic environment should be taken into consideration throughout your business’ life-cycle. We have all seen delayed or failed IPO’s attributed to the “market”. It is important to consider your exit strategy as it aligns with your buyers, industry and the economy overall.

Next week, I will speak to methods you can use to increase the liquidity of your business. Until then...