Call for opinions: What are your thoughts on valuing a web site? I have developed a site for my clients: 40 - 50 000 visitors per month and sales of around $150 000 per month generatiing a net profit of around $10000 / month (growing monthly at a rate of around 5%). What do you think the site is worth to the client / a potential buyer? Difficult question to answer but would be interested in your thoughts and calculation techniques/multiples... (obviously pre-2000 it was worth billions!)
I value a site by these factors: * Profit - Usually 10-12 times monthly profit. Most Important Factor * PageRank - eg. A PR6 site is worth a premium over a PR5 site, for example. * Traffic - Amount depends on demographic. Legal site traffic is harder to get so worth more than the same amount of "free online games" traffic. * Age of site - The longer the site is established, the better. * The Domain Name - Cars.com is worth more than 123CarsWebsite.info for example. Cheers...
But if you sell a site at 10 - 12 x monthly profit, the buyer is getting ROI of 100% - 120% pa! And you've made the same money in the year as you would have anyway... but now you have no future! I'd buy it myself!! Often normal businesses (of course depending upon the sector) go for around 3 x annual net profit (i.e. a return of 33%, still very good)
Yep. Reason being that website businesses are not as stable. Things can change very quickly (eg. after a search engine rankings update and so on).
Also the Net Profit figure can be misleading by some people's estimation. ie Does the site need 2-3 people to run it, if so wages would need to be taken into account as well as hosting/advertising before coming to a net profit figure. Where the traffic comes from can play a part, a valuation of 10-12 x net income would be based on search engine traffic which could be hammered by an algo update, bookmarks/links giving a larger portion of the traffic would help more. The age of the site and consitent earnings over a period of time would also re-inforce a good valuation however 12-14 of net income would be a good ballpark estimation without full detail.
There are other factors needed to get an accurate valuation. The 12-14 months quoted is a good guide, but since were talking about a six figure net, I would say it is possible to get a valuation as high as 18-24 months of the net- and that would include paying a salary for any work done on the site (many times owners don't draw a salary for their work, and they are putting in 40-60 hours and you need to factor in a salary as if you were paying someone to do the work, otherwise you are paying to buy yourself a job). You would also add any inventory. Three years annual net is very high, imo, especially for a 5% annual growth. That type of valuation is sometimes, although not often, seen on brick and mortar, but not on a web business. Traditionally, 1 to 1 1 ½ net, plus inventory is common. Certain hard assets or intellectual property rights could also add to valuation. There is also a difference between an affiliate site and one that sells their own product i.e. a McDonalds franchise is worth less than a unique proprietary business that would offer more expansion possibilities. Yes, it offers a 100% ROI potential, but there is no guarantee that will continue. Rankings could fall, margins could decrease, or there could be a large increase in advertising costs that would cut into the bottom line. There is always the risk that new competition could come in and take the majority of the business. Call any large business broker and they can show you hundreds of businesses that offer 100% ROI in 12-18 months for low six figure nets. If the net was in the $500,000 to $1 million range, you could probably get a higher multiple because it would be more attractive to larger players. To get a very accurate valuation, hire a business appraiser that does valuations in divorce cases. Many appraisers don't do divorce cases because of liability- and the ones that do, usually have much more experience and will do a much better job of giving you a realistic number. They will look at all aspects of the business, check comparables, and have a CPA look at the books. You could get a free number by calling a business broker, but they will often blow smoke on the high side just to get the listing and you will never realize the number they throw out. It takes a lot of work to get an accurate valuation.
Yes, it should since NET profit is what's left after those things are piad for (and tax). But, you are correct, people don't always know this.
It's usually valued on a pre-tax net because some that is a variable that depends on the buyers tax bracket and location.