Note from Dan: This is a detailed guest post from website valuation expert, Jock Purtle. I’ve had lots of chats with Jock around the question of what is my website worth. In this post we wanted to delve right into the detail of how to value a site and how to sell it for as much as possible. I hope you like it. Over to Jock.
Each year we produce a valuation report on all the public Internet business sales that looks at what businesses sold for in the last 12 months. Dan happened to mention it in a forum thread a while ago. He had this question:
I proceeded to then ask him the reasoning behind the question, specifically and he came back with this:
“If you invested your life in building an asset wouldn’t you want to track it’s value? People value their houses they check their bank accounts and their stock prices. Doesn’t it make sense to track the value of your business?”
The end outcome over some emails, back and forth was that it is a little more complex than just throwing out a multiple or rule of thumb. While valuations aren’t straightforward because value is subjective, you can apply certain generalizations to valuation based on a few facts. That is what we will be discussing today.
What makes websites valuable?
The main reason your website has value is because a willing buyer looks at it as a way to make a return on investment. That’s it.
You might be thinking to yourself that your website has lot’s of potential, but that’s flawed thinking. Buyers look for their money back in the quickest time possible and will pay a higher or lower amount for a website based on the risk they perceive in getting their money back.
What is also flawed thinking is that the money you’ve invested in your website adds extra value. Some website owners make the mistake of thinking that because they invested $15,000 into the making of the website, $10,000 for the domain name, $50,000 value from the websites traffic then it should be worth an extra $75,000. Which is incorrect. All assets (domain, design, traffic, list) combine to generate profit. It is the profit that gets valued, not the assets.
How website buyers perceive value?
Buyers are usually willing to pay a multiple of the earnings of a business to acquire it. A quick example: a website making $200,000 a year may be valued at a 1x multiple, to be sold at the same 200k. If the multiple offered is 2x, the website will be sold at $400,000.
This multiple is usually determined by the amount of risk involved, so the higher the risk your site holds and the lower the multiple.
So how do buyers perceive the value of a website? To answer that, let’s consider those factors that would make your site a less risky investment:
- Solid, consistent earnings
- Increasing growth
- Automated systems in place
- Multiple revenue streams
- Diverse traffic sources
- A unique selling proposition (USP)
- Market leadership and branding
Traditional Valuation Methodology
Traditional valuation methodology can be simplified down into three types pf methods. They are:
- Earnings multiple – what we’ve just seen. A buyer applies a multiple, usually in the range of 1-3 and multiplies it by the annual profits. If you are working with monthly statistics, the multiple can be in the range of 12-36. Counter wise this can also be a multiple of revenue (total sales) for larger fast growing businesses. However for the average Internet business valued under $5 million, this is generally not used.
- Comparable sales – The buyer may decide to find data on sites similar to yours that have sold in the past. This method is not necessarily accurate, but it creates a clear range within which your website should be sold.
- Asset valuation – some sellers, or buyers, prefer to look at a website’s value in terms of the assets tied to it. Assets can be traffic, quality of this traffic, a huge mailing list, a premium domain name, a recognizable brand name, or any other thing that can be leveraged to make bigger profits and achieve a quicker return on investment for the buyer. This is usually applied by strategic buyers for sites that are making little to no profit.
More on valuation methods
A traditional business valuer is going to use a discounted cashflow method, which is a future earnings calculation. However because there is such a high level of good will in Internet businesses, the generally accepted methodology is a multiple of earnings.
Remember these facts when it comes to site valuation:
- A valuation is really just an opinion; so different buyers may not have the same opinion about a particular site.
- Your site’s real value will only materialize once it’s sold
- Sellers are usually at fault for overvaluing their website
- There’s no perfect or correct valuation model that applies to all websites
- In valuing a site, you are combining subjective and objective tasks
- Higher quality stats (such as proof of traffic, income) are more likely to result in higher website valuations
Let’s take a further look at the earnings multiple methods, which is the most common method. This approach usually assumes that your website has been in existence for at least two years, since we apply a multiple to the average yearly earnings (earnings being profit not revenue).
How’s that? Since website buyers pay a multiple of the yearly profit (1-3) the same can be done for monthly profit. For instance, a website making $60,000 in profit per year may be sold at 2.5X, which is $150,000.
It’s vital to note that all along, we’ve made references only to the PROFITS, not sales (revenue). It’s the net profit that counts here and it’s easy to calculate it: the total earnings minus expenses. You need to account for the cost of doing business, website maintenance fees, taxes, depreciation, interest and all other expenses incurred. Deduct all of those and you have your net profit.
The multiple to be applied usually varies based on supply of sites for sale and their demand (as you would expect), market sentiment, where you place your listing (marketplace) and even the buyers’ mood! Generally, you should expect a 1-1.5x multiple if your website isn’t very well established, while your established counterparts should expect a 1.5-3x multiple.
Why online automated valuation tools can’t be trusted
The first thing you might type into Google is something like “what is my website worth” when selling. What you will get, is a whole lot of free website valuation tools. If you use something like www.mywebsiteworth.com and type in google.com you get an arbitrary value of $1,000,000,000 (1 billion) dollars. Now we all know this to be way off the mark. So we might then type into Google “what factors determine a websites value” and when we collate all the information we are going to get a long list of different things to look for when valuing a website. Things like domain age, page rank, google rankings etc.
But what these articles fail to identify is the single most important factor in valuing a website and that is the future maintainable earnings of the site.
What needs to be understood is that the assets of the business are only indicators of future maintainable earnings and do not add any extra value to the site. This will be explained more in detail below.
Take for instance what the following tools estimate the value of Google.com:
- Sitevaluecheck.com – $700
- Digsitevalue.org – $1.3B
- Worthofweb.com – $78.6B
- Dnscoop.com – $2.2B
These automation are poor indicators of value. Google’s current worth is $375 Billion dollars.
Why One Company Is Worth More Than Another?
Let’s take the example of company A and company B and dive into why they have different values.
|Trends||Flat||Room for growth|
|Largest customer list||No||Yes|
|Traffic||Heavily reliant on seo||Multiple source|
|Income source||1 Source||3 Sources|
|Complex to operate||Yes||No|
|Low barrier to entry||Yes||No|
|Business Level||Mature||Growth stage|
|Owner help after sale||No||Yes|
|Quality and diverse links||No||Yes|
|Repeat and direct traffic||No||Yes|
|Solid page rank||No||Yes|
|High levels of traffic||No||Yes|
|Partnerships and JV's||No||Yes|
|Solid sales presentation||No||Yes|
|Final sale price||$100,000||$435,000|
What we can see is that by having different value criteria for the same type of company with similar revenues, we get a totally different valuation.
The Not So Good News
Using the example above, let’s say you have a large advertising website with 3,000 pages of unique content, great search rankings for high value keywords and a really brandable domain name. The site earns a net $100,000 per year from banner ads and we use the above valuation of $100,000 based on similar site sales.
- Yearly Revenue x Multiplier = Sites Valuation
- $100,000 x 1 years = $100,000
But the seller thinks the site is worth more because of the good domain, all the unique content and the great rankings.
They calculates that to start the site from scratch it would cost:
- Content – $55,000
- Domain – $8,000
- Top Google Rankings – $25,000
- Total – $88,000
So they think that the real selling price should be:
$100,000 + $88,000 = $188,000
However here is the bad news: $188,000 isn’t the real value. The assets of the business (content, rankings, domain) add no more value than what has already been calculated.
The assets of the business form the structure for its revenue generating capabilities. It is important to understand this principle when valuing your site. Even though it might have for example, cost you 100k to get the site up and running it is no more valuable then what a potential buyer can see the site making in the future.
Why You Can’t Sell Potential
As a website broker that provides a free valuation service, we get a lot of valuation requests and what we see a lot is half finished projects with “lot’s of potential” where the owner has started an online business, got some traction and then dropped the ball.
In both these scenarios, there is very little to no value in the assets because the site is not producing income. A buyer is going to pose the question “if there is so much opportunity why haven’t you gone and taken advantage of it yourself?”.
Don’t be offended when someone values your business at zero if it meets the above criteria.
What has the market been paying for online businesses?
There are two different metrics that the market has been taking into account when buying online businesses. The first metric is the business model (e.g. ecommerce store vs. software business) and the second is the price point or total valuation of a business (e.g. sale price of $200,000 versus $3 million)
For more details check out our:
Price by business model
Price by price point
Summarizing this data, we can see that different business models are selling for different prices. We have a lot of buyers on our database at the moments that are seeking ecommerce stores.
How can I increase the value of my website?
If you are wondering if there’s anything you can do to get more money the answer is a resounding “Yes”! If you are not desperate for a sale, it may be a wise thing to hold on to your website for a little while longer while you improve it’s value.
There are a few the key things you should do to get your website ready for sale, but let’s first take a peek at the variables and questions a buyer will ask during due diligence that can alter a site’s value.
- Is the income stable?
- Is the income diversified?
- What is the cost to profits ratio?
- Are the finances clean?
- Is there growth in income?
- How much traffic?
- Multiple traffic sources?
- Quality of traffic?
- Is there a large reliance on SEO?
- Email list
- Contracts with suppliers
- Premium domain name
- Premium quality content
- What is the age of the website?
- Unbroken whois history?
- Technical know-how required to operate it
- A positive growth trend
- Strong brand
- Unique selling proposition
- Automated processes
- After-sale support
Other ways to increase value
Setting up some type of seller financing arrangement can help you get more money for your website.
- Performance goals – you agree that the buyer will make payments on certain milestones being achieved.
- Support – offering to give them after-sale support
- Part ownership – if you as the seller still want a stake of the website, the website can be perceived by the buyer to be of higher value
- Financing – an incentive, the seller offers to finance the purchase
No competition – including a clause in the sale agreement that rules out you competing in the same market in the future
What Do Buyers Look Like?
Buyers are going to come in the following forms:
- Corporate – This buyer is generally a successful corporate employee that has saved up some cash and is looking to get out of a job and into their own business. They are specifically interested in buying a website because of the freedom that it allows them.
- Baby boomer/retiring – This buyer is looking for a) something to fill their time with and b) most importantly a better asset to get them through retirement. Baby boomers are soon realizing that their few hundred thousand invested or saved is not going to last them long.
- Internet entrepreneur –This buyer either already has an online business and wants to expand or has existing skillset in online business and wants to have there own business.
- Offline business entrepreneur – This buyer has generally either sold their offline business or are looking for a new business to invest in
- Institutional buyer – these companies buy companies for a living and are looking for solid investments to add to their portfolio.
- Strategic buyer – This buyer is generally a competitor, supplier or synergistic buyer that is looking at the acquisition as a bolt-on to their existing business. A small amount of sales happen in this way but when they do the price paid is generally well above market rate.
How To Sell A Website?
Step 1 – Preparing Documentation
The first document that you need to prepare when selling you website is an information memorandum (also known as prospectus or book). This document outlines what your business is, how it operates, how it makes money, where it gets it’s traffic and any frequently asked questions that a prospective buyer will have. There are 3 different sections of information you should have prepared, the general information, legal documentation, as well as the marketing information.
General information consists of the regular information and is usually the first thing potential buyers will be looking at if they are interested in your website. Here is a short list of some of the things you will be expected to have ready:
- Fact summary sheet, gives the most important information about the site all on one page
- Website traffic history
- Programs that the site uses and how to work those specific programs
- Security reports
- Index of every single page
- Media mentions, such as awards or publicity
- List of employees
Marketing information is going to be a big part of the buyer’s decision. The marketing information will show them how you brought your website traffic and also how your overall brand is looked at by the public. Some marketing information you should have ready is:
- Overall marketing strategies used
- Statistics within search engine rankings
- Keyword research completed and keywords that have already been targeted
- Visitor statistics, that includes their demographic information
- Competitor information and research
- Sales history and information regarding your conversion rates
Legal information to provide proof of ownership, transfers, history, and all other legal information your buyer might be interested in. Some of those documents are:
- Expense reports
- Profit reports
- ROI analysis
- Any appraisals
- Any contact regarding the sale
Step 2 – Finding Buyers
Once you have developed your prospectus you will use that to shop your business to buyers. The following places are where you will find prospective buyers of websites:
- Your private network (friends, family, business associates)
- Your competitors or suppliers
- Business for sale classified sites
- A website brokers database
- Searching Google for terms like (websites for sale etc.)
Step 3 – Receive Offers
As you approach buyers they are going to have initial questions about the business. You will need to answer these questions prior to receiving an offer. Generally an offer will come in the form of a letter of intent. This is a document that says that a buyer would like to offer $X price at Y terms for the business and by you accepting that document you allow them an exclusive due diligence period
Step 4 – Closing The Sale
Just because you have an offer on a business or letter of intent does not mean that it is a guarantee of closing. You might run into the following problems closing the sale.
- Your business fails due diligence and the offer is reneged
- The buyers funding falls through
- The buyer makes a counter offer that you don’t accept
If you are successful getting to the final stages of a sale the final stage is providing training to the new buyer. This involves generally a 60-90 day process of walking the new buyer through how to run the business on a day-to-day process.
Can I Just Pay Someone To Do This All For Me?
Yes, there are services out there that assist online business owners sell their business. You are either going to hire a broker or a mergers and acquisitions firm to manage this process. Some services these professionals provide are
- Makes sure that the website is correctly priced.
- Value your company for you
- Find Potential Buyers.
- Educate the buyers about the site and show them all aspects of it.
- Will assist in the price negotiations.
- Assists with completing all of the due diligence involved with the sale.
- Protects the identity of the seller if they don’t want to be revealed.
- Provides post-sale assistance if it is needed.
Online businesses fall into three categories and each category requires a different skillset.
Small (smaller than $100k)
If your site is valued under $100k it is probably making between $50 and $4,000 per month in profit.
Medium (between $100k and $5 million)
If your site is valued between $100k and $5 million it is probably making between $5,000 per month and $200,000 per month ($50k to $2 million yearly net profit).
Our recommendations is digitalexits.com – this is my business so I’m a little biased
Large (greater than five million)
If your site is valued at greater than $5 million, then your business is probably making at least $2 million dollars per year in EBIDTA or net profit. At this time it is best that you engage the services of a middle market mergers and acquisitions company. At this level the multiple you are likely to receive is going to be much higher and the demographic of the buyer is going to have more cash and be a more experienced investor.
Our recommendation in this case is foundersib.com.
What do you think?
Let me know if this post was useful for you. I’d love to know what you think about the topic so please reply in the comments below.
The post What is your website worth and how to sell it for maximum value appeared first on WP Curve.