Pricing Your Website For Sale the Right Way

How much do I sell my website for?

Whether you’re selling your hobby site or a bigger business with an established revenue stream, the price tag that you put on it is possibly the most important decision that you need to make. Price it too high and it won’t sell, price it too low and you’ll walk away with less than you could have.

Whilst a large number of very different valuation methodologies exist, arguably the most widely accepted methodology in the industry of buying and selling established websites is applying a multiple to the site’s Net Revenue (or  to be more accurate – to Seller’s Discretionary Earnings) to determine its market value.

This approach works well in principle, but what it doesn’t account for is that websites tend to sell for anywhere from less than 1 year of net revenue to over 4 years, meaning that determining the right multiple to apply to your property can be a challenge on its own right.

Determining the “correct” multiple can be rather tricky, but the easiest and possibly most accurate way is by comparing it against other sites that have recently sold.

Whilst this can be a little bit complicated, mainly because sale details (especially at the higher end) are rarely public, you can usually get a good ballpark-idea by taking a look around at public marketplaces such as Flippa itself, as well as looking at the asking prices of brokered sites. Just make sure not to confuse asking prices to selling prices – more often than not, the difference between the two tends to be as much as 10 – 30%, depending on the broker and their pricing strategy.

Compare Apples to Apples

When comparing your web business to other businesses that have recently sold, it’s important to make sure that the two businesses that you’re comparing are indeed similar to each other. The key areas to look for when determining such similarity, beyond traffic and revenue, are:

History – do the two businesses have a similar level of history?  A site that was established a mere 6 months ago will always sell for less than one that has been operating for several years or more.

Stability – Do the sites show similar stability levels? Stable (or growing) revenue and traffic always add to the valuation.

Sustainability – Are the business models of the two sites equally sustainable? Sites that depend overly on third parties or carry any other risks to their sustainability tend to be valued at much less than those that enjoy varied traffic sources and are likely to stay profitable for years to come.

Niche and Market – Investors always prefer “clean” niches and markets that are evergreen in nature. In cases where a website operates in a generally unattractive niche (some examples are adult-related sites and gambling sites), or an industry that tends to change rapidly (such as SEO, internet marketing or other industries that have an unknown future), the valuation is always going to be lower.

Barrier to Entry – Is it easy or difficult for potential competitors to enter the industry and take over some or all of the market share of the site?

Owner Operations – Do the compared businesses require the same level of hours and skills from its owner? Needless to say, a business that requires its owner to perform sales 40 hours per week will be valued at a much lower multiple than one that is nearly passive and only requires minor management and monitoring to be done.

Bear in mind that the above list is merely a generalization. There are many more metrics that need to be taken into account, but the above should get you started nicely.

Common Myth: Start High to Gauge Interest 

One of the worst suggestions that I keep hearing from sellers of web properties goes along the lines of: “Let’s start the listing at a high price and see if there’s any traction. If not then we can always lower the price later”.

Whilst an approach like this appears logical at first, it would only be true if we had an extremely large number of potential buyers to target.

Unfortunately, we’re operating in a relatively small industry where every eyeball counts, and therefore it’s crucially important to bear in mind that your listing needs to be attractive from the moment it’s launched, and that’s simply because the majority of buyers will only give you one chance.

This has to do more with human psychology than logics, though. While logics would say that it would be unwise for a buyer not to take another look at a listing when its price is reduced, the reality tends to be different. Buyers often completely ignore such price reductions for two primary reasons:

1) “I’ve already looked at this listing”

Most buyers look at a large number of listings daily. When they encounter your listing (with a reduced price), the first thing that crosses their mind is that they’ve already looked at your listing, and decided to pass for some reason. They won’t remember that the reason was the price, but rather that there was a reason – and therefore you will often fail to get a “second chance”.

2) “Something must me wrong

Bearing in mind that many buyers are also fairly new in the industry, they tend to trust the marketplace dynamics when making purchase decisions.

If the market appears to have a lot of interest towards your listing then it must mean that your listing is good/attractive. Similarly, if the market seems quiet then it must mean that something is wrong.

Because of this, lowering the asking price during the listing process often makes buyers believe that the market wasn’t interested enough in your listing at first, as well as giving them the impression that the price reduction may have been carried out as a “desperation move”, making them move on and not take a closer look at your site.

Prior Investments in Valuations

One concept that many sellers, especially those who are in the process of selling off their main business, often need to be reminded of is that any historical investments are irrelevant, as long as they don’t contribute to the site’s current revenue.

Over the years I’ve had a number of sellers tell me how there is no chance they would sell their business for less than $X, simply because of the amount of money (or time) that they have invested in it.

This is perfectly understandable. After all, who would want to sell their business at a loss. But unfortunately, this isn’t how buyers see it.

The harsh reality is that a typical buyer isn’t at all interested in how much time or money has been invested in the business previously – the only things that they care about are how much the business is profiting today and what are its future prospects, rendering the investment amount completely irrelevant when it comes to valuating the asset.

The simplest way to look at it is to always remember that what’s done is done. Similarly to having won a lottery 50 times in a row won’t increase your chances of winning again tomorrow, the amount that you’ve invested into building your business won’t increase its value unless the investment is clearly reflected in the site’s profit or has after-market value of its own.

Value Beyond Profit Multiple

Another aspect that is often misunderstood is when to apply value beyond the profit multiple. Many sellers understand the concept of profit multiples well, but tend to believe that their property is worth more than the multiple, due to some additional “assets” that it comes with.

This isn’t entirely wrong on its own.  In cases where there are real, tangible assets, that have value of their own, it’s appropriate to add such value to the overall valuation of the business. But it’s dangerously easy to go wrong in distinguishing whether such additional value really exists or not. To give you an example, some assets that do have independent value are:

  • Inventory
  • Premium domain name (if it can be sold on its own)
  • Tools & Supplies that have an after-market value

It’s however rarely the case that any of the above apply to an online business. More often, we see an “asset” list consisting primarily of things like:

  • A large mailing list
  • A Twitter profile with a high number of followers
  • A bespoke technical platform, made specifically for the site

While it may seem that the items in the above list, albeit intangible, are true assets and should add value, the reality is different. None of these items should be added to the valuation figure, simply because the value that they have is already reflected on the overall Profit & Loss statement.

Let’s take the large Twitter account or Facebook page as an example. As a seller, you would (rightly) claim that social media account is a valuable asset, simply because it helps the web property generate significant revenue. But there are two additional aspects that need to be taken into consideration:

1) Does the social media profile in question already generate revenue?

If the answer to this question is yes, then the value of the Twitter profile would already be reflected in the overall valuation, by applying a revenue multiple to the proceeds that originate from the Twitter profile. This means that adding separate value to the Twitter account would result in double-counting.

If the answer is no, then the first question each buyer will ask is why would the Twitter profile be worth anything if the seller has failed to monetise it so far?

2) Would the social media account have value on its own?

Odds are that, without the website to go with it, the Twitter account or Facebook page would have either no or very little value itself. This is the key distinction between something like this, and a true asset, such as a PC or a room full of inventory, due to the fact that the latter can be easily liquidated separately from the main asset if needed.

Conclusion

The valuation of web businesses is a difficult topic, and one that different people will always approach differently. The above should, however, give you a good starting point when considering listing your business for sale.

Let us know of your own thoughts with regards to valuations in the comments section below, and feel free to ask me any questions that you may have.

  • Cook_diesel

    This was a really great article. I just walked away from a deal where I thought the valuation was a bit too high for a website that I was interested in. I offered the seller 85% of their asking price which I thought was fair but the seller absolutely would not budge at all on the price. I do not believe the seller is going to be successful at selling at the price they want and if they’re really motivated about selling their website they will need to make a significant price reduction, despite what they feel the site is worth.