Buying/Selling a large site.

I'm curious if anyone here has ever bought a large site? What I mean is one that has ad revenues of 250k per year. How would a buyer determine a fair purchase price? I thought I heard once that if you double the price it would make in one year.

 

Normally the price is about 10x the monthly revenue.
But for such large sites you could get more.

For 250K a year I would guess that lawyers are involved and so on.
I doubt DP is the place for such large sites, but I could be wrong.

FFMG

 

A fair purchase price is what you are willing to pay for it and the buyer will let it go for. Large sites often go for more than double of a years income.

 

If a site is considered an "authority" in its area of expertise it could fetch considerably more than what some would think that it is worth. Personally, if I was involved in a large transaction I would retain a financial attorney to help me close on the deal.

 

I'm sure lawyers come into play at some point but determining what a site is worth is the question. Of course whatever both parties see as agreeable but there must be some sort of basis for arriving at that value.

 

One of the biggest basis in my opinion is, will the site continue to make money once it has switched hands.

 

That is indeed a big question because there is always a remote chance that the site in question may not make as much with the new buyer. I mean the old owner may have pointing his whole network of sites at the site, blogging and article writing every day, google adwords, etc that may not be easily duplicatable.

 

Agreed. The new owner must have a real passion for the site or will otherwise bomb. We've all supported our own sites by blogging, cross linking, exchanging links, etc. Thus, it is extremely important for any potential buyer to make certain that what he or she is buying is worth it to them.

 

agree with that

 

You have to look at many factors when sites get to that size.

- Cost of development/design/coding.
- Uniqueness/ease of copying
- Potential/future proofing
- Time spent on maintenance/updating (most webmasters do not factor in a 'wage' for themselves. If this site made $250k profit, it is realistic to say that you ought to deduct $x for a salary and other related expenses before deciding on worth).

Part of the problem with sites this large is the smaller number of potential buyers. Once you get into the half a mill mark, it's getting more likely that the purchase would need to be by an organisation rather than an individual.

 

I have been involved in such deals.

Valuing is done using several well established principles (in business acquisitions) over the ages. NPV is a "today" figure of estimated future income streams, discounted for time (as it won't be realised till the "future" there is a cash cost/interest component to not having the money now).

Lawyers do come in, yes, but most of the due diligence work is done by accountants as a lot is dependent on the audited P&L statements and balance sheets from previous years.

The seller also puts together a sales memorandum and is required to disclose, among other things, the risks to the business. So, for example, if the business was getting 20% of their traffic from Google SERPs he'd have to disclose the risk of losing all rankings. If he didn't disclose something as obvious as this he could be sued for fraud/misrepresentation.

Accountants/consultants do more than the due diligence. For example, if a web business bought servers worth $60,000 they could have allowed depreciation of 1/3rd of the value in the first year (depreciation laws vary across the globe). But did those assets really lose $20K? Will they really have to be replaced in 3 years? No, that 1/3 figure was used only because it was allowed by law and reduces the declared profits and allows the business to pay less tax. Accountants recalculate the profits / cash flows and provide stats and management accounts breakdowns.

Large businesses don't always go for a multiple of last year's income. It could have been a bad year. They could have had exceptional costs or regulatory requirements to write down the value of their stock. In fact, they could have made a loss! A large UK business (Rover) was sold for £10, about $20 (but it was saddled with a lot of debt and other problems).

I don't believe I've seen sites like these in DP but business brokers are the ones to approach if you wish to dabble in this market and you have a few spare coins. You'd normally retain one to find you a business that meets your preset criteria.

You're thinking about the smaller sites where the buyer is the webmaster. At profits of $250K the business has staff. The new owner doesn't need to have a passion for anything except money. He doesn't need to understand the business, he just needs to be a good manager (of staff/resources/finances etc.)

 

I would do your due diligence thoroughly. I bought a site like this and it is very easy to add sales along the way and fudge records. It is also easy for the seller to know something is going to change (market news) that you don't know about and a few months down the road sales drop for reasons other than ranking. Not to say all or even many people would do this but you can be sure they will give you the most optimistic picture possible to fetch the best price.

 

Sites with that much revenue and clout are hard to come by for a number of reasons. First of all, with that kind of revenue, the seller will want to move very carefully and not give away too many secrets, especially to competitors. Secondly, very few owners of high-income web sites actually need the money and choose to sell. Thirdly, even if the owner needs the money, he might very well be better off getting a loan and using the web site revenue to service the payments. A loan at 8% interest would still leave a lot of revenue after making payments.

 

That's why people use this (to not give away secrets)

The reverse may be true. The more clued up business person has an exit plan in mind, he doesn't hold a business forever. In fact, he's always looking to sell (provided the price is right).

I don't mean to be nasty to you but that's a bit naive. You can't usually secure a loan against a site.

 

NDA's, while offering some protection, do not eliminate the risk of revealing too much to competitors. There are many looopholes and ways around this. That is why most astute sellers of high-revenue businesses on this board do not simply reply on a NDA. They carefully screen each buyer. You can sign a NDA saying you will not compete, but your distant cousing can be given the info and can easily start the competing business. Come on, way too easy.

I do agree with you that many business owners have an exit strategy. But I also know quite a few who are quietly making a ton of money with very low overheads and very little competition. These people have no need nor desiire to sell since they are raking in the money. But I do not concur with you that every business has a price, and it will sell if it is high enough. It all has to do with opportunity cost.

With all due respect, you may be the naive one as banks, especially commercial banks, as well as private lenders, lend money to businesses and businesses owners all the time based on revenue/net income history, as well as using corporate assets and title as collateral. Some are bridging loans, others are long-term loans. If a business is earning $250K Net per year, and has done so for a while, there are a ton of lenders who will gladly issue a loan at a profitable interest rate, especially if the business has a good credit rating and/or is in good standing with the banks. And the owner of the business can acquire the lump-sum he was looking for in the way of the loan while still having a large sum of cash left even after making periodic payments of P and I.

 

Nope, they don't lend on the security of websites. LOL, you obviously haven't tried. You'll have to go to prosper.com, gobignetwork.com types of places! Feel free to post links to your local bank's list of acceptable security for commercial loans.

Based on your logic they'd never be an acquisition of a listed company. Ever! It's looking kinda obvious that your experience is limited to the smaller web businesses sold at places like DP. The larger the business the larger the entry barrier (generally) and the less you need to worry about an upstart opening a new shop.

I won't get into explaining opportunity cost...but if your meaning is correct then every site that has an opportunity cost (is profitable) has no reason to sell? You do not agree that every business has its price and go on to contradict yourself that there's "opportunity cost" and therefore always a price at which selling becomes an option.

 

You are right, I have not tried to obtain a loan based on the revenue I generate from my company''s web sites. But I have been approached by commercial lenders and know their requirements. These lenders look for businesses with steady revenue/net and sound business credit to lend to. Of course, factors such as income/debt ratios, existing debt, etc, still apply, as in most loans. You obviously have not been similairly approached, so it is understandable that you are not familiar with this type of lending. Also, I never said 'local banks'. Those are consumer banks! LOL. As I said beore (read above), you might want to look into COMMMERCIAL banks and private lenders (yes, Prosper.com matches private lenders) who specialize in making loans to companies. In fact, if a company is earning $250K per year from web site operations and you cannot get a loan from a commercial bank or private lender, Foggy, then there must be something seriously amiss.

If you feel an NDA is the all-protecting document you claim it to be, then I have a bridge in London to sell you! As I said, it is only 1 tool and any wise entrepreneur would be a fool to rely on that. By the way, do you have any profitable businesses to sell? I will be happy to sign an NDA!

You said previously that "The larger the business the larger the entry barrier (generally) and the less you need to worry about an upstart opening a new shop", and I have no argument there at all. That is the result of barriers of entry and competition, not the NDA.

You do not seem to understand the meaning of opportunity cost, a common economic term. Economics 101, in fact. Opportunity cost refers to an opportunity forgone (including the gain/benefits that could be received from that opportunity). It can also refer to the next best forgone alternative. Therefore, if a seller of a business does not have the ability to earn a similair or better return on his 'lump-sum' payment from selling the site than what he is currently earning keeping the site, he often decides that he is better off keeping the web site and milking it for its income. That is why so many owners of profitable web sites do not wish to sell.

I enjoy your banter. Please feel free to perpetuate this discussion. Thanks!

 

A great deal of info in this thread is incorrect. Let me just state that if you are buying or selling a site with revenue in excess of 250K a year you'll want to find better sources of info that some random people on an internet forum.

 

Actually, I've worked in a commercial bank for many years and have formal qualifications in banking.

There are times when it's best to stop educating an idiot. I'll stop now.

Absolutely.

 

totally agree with you, alot of nonsense being talked about in this one.