You don’t need to look far through websites for sale on Flippa to find a listing that mentions potential revenue or another “forward looking” claim about the value of the website.
This is understandable and can be legitimate, given that most buyers are looking to buy websites that represent opportunity.
If a website is making money today and key drivers such as traffic, engagement and CTRs are trending upwards, it’s probably reasonable to say that potential revenue is higher than actual revenue at the time of sale.
Where this becomes a problem, however, is when these claims rely on some future event or specific activity to be undertaken by the new owner—especially when the website has no real track record of attracting customers and monetizing this traffic.
Understanding Future Events
Future Events such as the site appearing on the front page of Google, being reviewed on Oprah or going viral on Twitter are not guaranteed to happen for any given site. Furthermore, these events are extremely difficult for any site owner to control. This creates a great deal of risk which needs to be taken into account as part of any website valuation.
The fact that such a future event probably won’t occur needs to be considered prior to bidding on a website, especially when it is the basis of claims for potential revenue.
Understanding Execution Risk
Execution Risk occurs when a site’s claim to potential revenue relies on the new owner undertaking a specific set of new tasks. No matter how competent the new owner might be, undertaking these activities may not yield the claimed “potential” results—even the best companies have trouble taking something from concept through to execution (think Cuil or Google Wave).
Activities such as getting more backlinks, more Twitter followers, more Facebook friends, email campaigning and implementing affiliate/AdSense monetization are all important. However the degree to which each of these will improve the website’s revenue position is almost impossible to determine beforehand. As such, any claims that they will create a certain amount of incremental revenue per month contains execution risk.
Naturally the execution risk rapidly increases with the complexity of the set of required tasks—adding Google AdSense is easier to nail than getting backlinks from a major site such as CNN.com or adding major new technical functionality to an existing website.
To address website buyers’ concerns regarding the reliability of potential revenue, a number of sellers have begun offering revenue “guarantees”.
Examples might include a refund if a site does not meet revenue expectations.
Any buyer looking to purchase a website based on such a guarantee needs to understand what is being refunded (ie purchase amount as well as Flippa buyer success fees?), the conditions for the refund to be claimed (eg if website does not generate $100 in the first month) and the conditions being placed on the buyer (eg guarantee is voided if buyer changes hosting service).
Also keep in mind that any guarantee is only any good if it can be enforced. Flippa can’t stand behind these guarantees so, assuming the worst happens, you won’t have any obvious channel to help you get your money back.
As with the age-old wisdom that a bird in the hand is worth two in the bush, so it is when buying a website where actual revenue is a much greater indicator of value than any claimed “potential” revenue.
Flippa’s terms of service are extremely strong on ensuring a clear distinction between potential and actual revenue. We act swiftly on any listings where we learn of the seller not making this distinction clear or where claimed revenue is found to be bogus.
Where the revenue is potential, buyers need to conduct intensive due diligence on the strength of the statements being made. This includes understanding the traffic volumes, CTRs and sales metrics required for potential revenue figures to be achieved.
As for “guarantees”, be wary of both accepting and providing them. We won’t be able to enforce a guarantee—so don’t make buying decisions based on these potentially empty words.
And for sellers. Providing guarantees leaves you open to buyers complaining that you’re not following through. If we can see that you’ve provided a guarantee, and the buyer is complaining, you’re likely to get a black mark against your name. Don’t provide guarantees unless you’re really sure all your customers are 100% happy, all the time.
How do you treat “potential revenue” when buying a website? Have you ever bought a website with potential revenue and seen it fully realized? Have you bought a website with a revenue “guarantee” and how has it worked for you? Let us know in the comments below.
Image: renjith krishnan