All About Multiples: How Much is a Website Actually Worth?

All About Multiples: How Much is a Website Actually Worth?

Everyone wants a good deal.

When it comes to a website, what is a good deal? How do you decide how much you are willing to pay, good deal or not?

We’ll start by looking at “multiples”, the unit of measure that is most often used to express the value of a website.

Multiples

When a website that makes $10,000 in net profit per year, sells for $20,000, we say it sold for a 2x multiple. The selling price was two times the annual net income.

Every website is unique. The “multiple” concept gives us a way to compare the value of sites that may have nothing in common except the generation of income.

Centurica publishes historical “multiple” data in its “Website Buyers Report”.  The table below shows multiples by asking price in 2016. Note: the 2016 data has not yet been officially released.

Centurica Website Multiple Values 2016

The pattern is that websites generating more net income, generally sell for higher multiples.

Why do smaller web business sell for lower multiples?

In short – they are riskier. Sites with less net income are typically younger. They haven’t proven that they can grow over a sustained period of time.

There is also a correlation between the business model of a website and the average multiple it sells for.

Average Multiple by Primary Business Model

Centurica 2015 Website Buyers Report

Why are multiples different for sites with different business models?

There are a lot of reasons why multiples vary by business model.

  • Buyers pay more for sites that require less work to operate. Some business models require less operational effort.
  • Buyers pay more for sites with a lower risk profile. Websites that have recurring revenue are a little less risky because when things go wrong, the future revenue stream gives the owner some time to fix the problem.

Conversely, websites that do not have recurring revenue may lose value quickly when they hit a bump in the road, like sudden traffic loss or a policy change by Amazon, Google or Facebook.

If a website requires substantial effort to operate and it doesn’t have recurring revenue, that doesn’t necessarily mean it is a bad investment. It just means that is likely to sell for a different valuation than a low-effort, subscription revenue site.

Cautions About Multiples

Multiples are designed to give us a nice rule-of-thumb to use in valuing a website. They do, but they can be misleading and insufficient. Why?

1. Every website is different

Let’s consider two websites that use the same business model. They are both content websites. They both earn about $10,000 per year net. You would think they would sell for roughly the same price.

That may not be the case at all. If one website is 4 years old with steady, consistent growth, and the other website is 6 months old and has made most of its $10,000 in the last 3 months, they are very different investments.

The newer website might sell for much less than the older one since buyers may believe the newer site is less trustworthy and riskier.

However, the newer website might also sell for much more than the older website. What if the new site is earning an average of $3,000 per month over the past 3 months. On an annual basis, if things continue at that rate, the site may earn $36,000 over the next 12 months. That would make the site worth around $100,000 based on the 2.9x multiple from the Centurica report.

That leads us to the next caution about website multiples:

2. Annual multiples do not adequately reflect recent performance

Screen Shot 2017-04-10 at 10.49.23 AM

Look at the two charts above. See how just looking at the total net income for the year might not tell you what is going to happen next year?

Will the recent upturn continue? Or is it a holiday sales spike?

Will the sales rebound from the downhill slide over the past 5 months?

3. The last 12 months doesn’t tell the whole story

This graph of traffic over the last 12 months shows a decline over the year with a rebound at the end of the year:

Picture2

Looking back over the past 3 years we see that the traffic is also declining year over year:

Picture3

Using the last 12 months of net income as a predictor of future results or current net worth, doesn’t take into account the overall downward trend of the website traffic.

4. Website brokers often base their quoted multiple on something other than the last 12 months of net income

Look at this broker listing:

Yearly revenue       $20,000*

Yearly net profit      $19,000*

Asking price            $44,000

* Profit and revenue figures are annualized on a last three month basis.

At first glance you might think this website is selling for a 2.3x multiple, $44K / $19K. But if you look at the footnote, you’ll see that the website didn’t actually earn $19,000 in the last 12 months. We don’t know what it actually earned, all we know is that the average monthly income over the past 3 months was:    $1,583 ($19,000 / 12)

The broker might argue that the last 3 months are a more important indicator of the website’s value than the past 12 months. He may be right. Or he may just be trying to get a higher price for the website than it is actually worth.

Flippa always shows 12 months of income in a graph and also in a table. Flippa also always displays monthly averages computed over the past 3 months.

People who have been buying sites on Flippa over the years have probably heard that you can find sites for multiples of 8 to 12 months times annual income.

While this is true in some cases, it is also true that many of the “low multiple” purchases are not actually computed correctly. Take this example:

Low Annual Website Multiples

Flippa displays the average net income as $2,000 (because it is the average of the last 3 months).  The seller says he is selling at a 2 year multiple – $48,000 ($2,000 x 24 months).

The truth is that a $48,000 asking price is actually an 8x multiple. The site’s annual net income was only $6,000.

Make sure you compare apples to apples.

How Do You Decide the Right Multiple?

So how do you decide which multiple to use and ultimately how much to pay for a website?

Website Buyer’s Hierarchy of Needs

You may have heard of Maslow’s Hierarchy of Needs which describes human motivation.

Here is my cut at the Website Buyer’s Hierarchy of Needs:

Website Buyers Hierarchy of Needs

Read this from the bottom up.

Our highest priority is to maintain our security by preserving our capital! Don’t lose the money that it took so long to earn and save.

Secondly, we want to generate cashflow. Passive income is what enabled me to escape the corporate rat race. That doesn’t mean I don’t work hard, it just means I work when, if and where I want to work. I define the priorities.

It is wonderful to preserve our capital with a sound investment and to generate cashflow with solid ROI’s. But you can do all that and still be bored and unmotivated.

So we want security and cashflow, but we also want to be doing work that we enjoy to the greatest extent possible.

A Risk-Based Valuation Method

Because my most fundamental desire is to protect my capital, I start my valuation analysis by analyzing risk.

I decide whether the investment is high, medium or low risk by analyzing the most important components of the business:

  • Traffic
  • Revenue
  • Product (or content)
  • Process
  • Operational effort
  • Dependencies on 3rd parties
  • Knowledge / Skill requirements
  • Completeness and accuracy of information provided by the seller
  • Etc.

Without diving into every category, here are a few examples so you understand the analysis:

  • High risk traffic: single source referral, no diversification, black/grey hat SEO has been used
  • High risk content: plagiarized, programmatically generated, low quality, short/thin
  • High risk product: something trendy that could go out of style
  • Low risk traffic: multiple sources, long history of steady traffic, proven process to increase traffic with specific SEO methods or proven ad campaigns
  • Low risk knowledge / skill: industry standard technical platform, easy to find resources, low cost resources

You get the idea.

If you determine that the website is Medium risk, all things considered, then begin with the Centurica multiple for the business model and size of the website.

If you think the website is High risk, then you need to reduce the Centurica multiple proportionately to the risk you feel exists. That might mean going from a 2.5x to a 1.5x or even 1.0x.

If the website seems to be Low risk, you can afford to add a bit to the Centurica multiple.

Accounting for Opportunity?

After you adjust the “market multiple” based on risk, do you also need to adjust it for opportunity?


Future potential or opportunity of the website is a good reason to buy, but it is usually not a good reason to pay more.


Another way to say it is “Choose to buy based on growth potential, decide how much pay based on historical performance and the risk profile.”

Having said that, sometimes opportunity is almost certain. For example, when I see a website with really poor ad placement, I know for certain, I can improve revenue by moving the ads or changing their size or color.

Sometimes there are websites that are excellent strategic acquisitions. They may have a product you know your existing customers would like to buy, or an email list you could sell other products to.

When the future opportunity has a higher level of certainty, I sometimes increase the maximum amount I am willing to pay for a website. But I still aim for the lower price of course!

A Valuation Example

A lead generation website earned $10,000 over the past 12 months in net income. I consider it “high risk” because the site is only one year old, it has only one buyer of the leads it generates, its traffic comes from a single source that is difficult to manipulate.

So I take the Centurica average multiple for a Lead Generation site of 2.59x (be sure to check for the most recent report), and I adjust it downward by 1.0 to get to a 1.59x multiple.

That means I am willing to pay $15,900 for the website.

The site looks like it will earn more than $10,000 next year because the owner raised his prices, and over the last 3 months, the monthly earnings are quite a bit higher than the previous months.

I would typically stick with the $15,900 price point, but if I am convinced that earnings will be $12,000 next year because of the price increases, I might be willing to spend as much as $19,080 ($12,000 x 1.59x) for the site.

Other Valuation Methods

There are many methods to value websites.

Some people don’t worry much about historical performance and buy purely on future potential. If you want to play the venture capital game, and can afford to be wrong 29 times, in order to be right 1 time and find a huge winner, go for it! But keep in mind that you aren’t only gambling with the money to buy the website, you are gambling with the time and effort it takes to run and grow it.

Others put a value on website traffic by assessing its source, geography and other quality factors. That’s not a terrible concept but it values theory over the actual financial performance of the traffic that visited that website.


Jeff Hunt wrote The Website Investor: The Guide To Buying Online Website Businesses For Passive Income. In addition to running his own portfolio of websites, Jeff helps entrepreneurs buy and optimize their web businesses. Learn more at www.OwnOptimize.com and www.HeckYeah.org.

Have anything to add about your own experiences with website multiples? Comment below!

Secrets to Making Website Investments Passive

Secrets to Making Website Investments Passive

Investing in websites is appealing for several key reasons. The first is the return on investment. High quality websites sell for three times annual earnings which means they are generating 33% profits each year. That’s pretty good right?

You are your own boss when you own a website. That means you have the flexibility to work when you want and as hard or as little as you want.

And finally, there is a pervasive narrative that websites can be passive sources of income. That begs the question:

Can Websites Truly Earn Passive Income?

Cash flow from websites will never be as passive as opening a savings account at a bank and seeing interest from your deposit year after year without lifting a finger. On the other hand, there are many web businesses that run with limited owner involvement because they use tools and methods to reduce or almost eliminate the workload. One of my websites takes no more than three hours per month of effort and consistently earns over $3,000 per month.

In this article I will tell you what to look for if your goal is to buy a passive website. Then we will discuss what you can do if you already have a website which isn’t passive now but could be in the future.

What to Look for in a Passive Website Investment

What Does the Seller Say?

Always look at what the seller has to say about how much work is involved to operate the website, but never believe it.

Is that a bit harsh? Only a bit.

A few sellers may actually remember everything they do and accurately estimate how much time it takes them to do it… but not many of them, I assure you. People are bad at estimating and worse at remembering.

Sellers may have skills and knowledge you don’t have. That means it will take you more time than it takes them, at least at the beginning.  On the other hand, I often buy websites where I have skills the seller doesn’t have and end up saving time because of it.

Nevertheless, talking with the seller about what they do, how they do it and how much time it takes is one of the most important things you can do. Not only will you get a much better idea of what the important tasks are, you will also begin to learn what it would take to make the website truly passive.

Hands-Off Transactional Websites

Many web businesses make their money one transaction at a time. When you are evaluating the business model of a website it is important to look at the steps involved in a transaction. Take an eCommerce jewelry site for example.

A customer visits the site, looks around at different products, adds one to their cart, goes to checkout, enters their contact information and payment method, and then waits for the product to show up at their door. All of that is what the customer does.

Whether that transaction is passive or not is dependent on the process and tools the website is employing. Here is a near worst case, least passive example of what could be happening behind the scenes:

The owner of the site hand makes the jewelry himself and keeps inventory in his home or office. If the jewelry is custom made, the scenario gets even worse.

So when the customer places their order, the owner packages the product for shipping, prints out a label with the customer’s address (or writes it, God forbid), applies postage, takes the package to the post office for shipping, comes home and emails the customer with a tracking number, orders more materials, inventory and shipping supplies to replace what was used, follows up with the customer some time later by email and who knows what else.

However another site might handle the same transaction in a completely automated fashion. The customer places their order in exactly the same way but:

The order gets automatically sent by the website to a manufacturer or distributor. The distributor packages and sends the order to the customer and also sends an email with a tracking number for the shipment. A system generated email is sent to the customer asking for a product review a few days after shipment.

Drop-ship isn’t necessarily more profitable than self-ship, but it is certainly more passive.

When you evaluate a website to buy, think through the steps involved to fulfill a transaction. Who performs each step? Are they automated? Can they be? This is a critical component of your due diligence, whether for an eCommerce site or any other site where a product is purchased one transaction at a time.

What About the Techy Stuff?

Look for sites that are running on industry standard platforms like WordPress, Joomla or Drupal. Many sites require very little technical support after they are setup. However, when something does need fixed or improved, it will be much easier and less expensive to find someone to do it if the site is built on industry standard tools. Beware of sites that say they were “custom built” unless you are prepared to pay to have it maintained. I’m not saying custom built sites are bad investments. They may have a unique differentiator that puts them ahead of the competition, but that does not mean that they will be passive plays.

Marketing and Promotion

In some unusual situations, sites have stable or growing traffic without much additional work. I mentioned earlier that I have a site that just seems to keep growing without much help from me. That is rare but I’ll tell you why it doesn’t take much support.

The site was old, almost 15 years old now. It is a content site with long and well written informational articles. The articles are linked extensively one to another. The original owner didn’t do any external link building, so all the authority from the site came naturally. Much of the content is interesting enough to attract comments from the visitors.

The site doesn’t do anything to make Google unhappy like having plagiarized content, paid links from other sites, too many ads, bad formatting for mobile users, old technology or manipulative keyword techniques.

Tip: Look for sites that are completely compliant with the rules of the big players they are dependent on. Content sites are dependent on Google. Amazon affiliate sites are dependent on Amazon.  Others may require ClickBank, Instagram or ShareASale for their survival. This doesn’t mean they will always stay in good graces with their benefactors because those big companies change their minds several times a year. However, starting on the right foot by following the rules puts the business ahead of the vast majority of its competitors.

Many sites operate on a business model that requires manual work. Product sites may get their traffic from PPC that requires campaign management. Services sites may require someone to answer the phone or chat in a chat box. Content sites may require social media promotion. Sales may be dependent on a steady stream of emails or newsletters. Despite these mandatory activities, a site may still be relatively passive as an investment if the tasks are outsourced to an existing team.

Phone numbers and chat boxes on websites are tell-tale signs that a human is at work. Sites that ask you to fill in a form and request a quote probably have to have a real person responding to that quote request. Be aware of those elements of the business model and ask the seller how those tasks can be outsourced or automated.

Growth or Stability?

Keep in mind that it takes less effort to maintain the performance of a site than it does to grow one. There are very few web businesses that will grow without active effort on your part. The trick is to automate, systemize and delegate as you grow. I’ll talk much more about that later on.

Don’t make the mistake of thinking you can buy and then completely ignore a website. Like any business, if it isn’t growing a little, it will ultimately decline.

Summarizing What to Look For

  • Manual tasks are outsourced or delegated and the resources are willing to continue working on the site after you buy it.
  • Sellers who understand their business model very well. Smart sellers have usually automated or at least documented the key activities of the business.
  • Sites that use industry standard platforms like WordPress or services like Shopify.
  • Sites that have integrated their systems with their suppliers, providers and partners.
  • Sites that have end-to-end self service processes for their customers.
  • Sites that don’t require extensive marketing or promotion to grow. User generated content, intelligent automated referral systems, long standing promotional mechanisms like permanent referral links and cross promotional agreements are examples of methods that reduce the need for manual marketing or promotion activity.
  • Simple business models like content websites that earn revenue from Adsense. Note that driving traffic to content sites may be anything but simple.
  • Sites that have automated maintenance tasks like new product uploads, comment moderation, credit card expiration notifications, etc., etc.
  • Sites that are less depend on customer communication in the pre and post-sale process.

There are many others, but you get the idea.

What if I’ve Already Purchased a Website, and it is NOT Passive Income?

If you are a dismayed owner of a website that requires more effort than you care to exert, you have a few choices.

Sell

I bought a site that sold software and, surprise, surprise, the customers expected the software to work, to be supported and to be upgraded from time to time. It was profitable but it got tiring pretty quick. I sold it after a year and a half.

It might be hard to sell to people who have read this article unless they have a particular interest in your niche or business model.

Delegate or Outsource

If your business has enough margin to cover the cost, almost anything can be delegated to an employee, outsourced to a freelancer or contracted out to a service agency. Many tasks may not be as expensive as you think, particularly if you go the freelancer route. Do this with your eyes wide open and choose your resources carefully or you could generate more stress than you avoid.

Change or Tweak the Business Model

Consider changing business models entirely or modifying the model. Consider these ideas:

  • Move from a self-ship to drop ship, or send your inventory to Amazon and let them manage fulfillment with their FBA service.
  • Instead of selling and servicing your own products, pivot and sell some or all products as an affiliate so they take care of customers for you.
  • Replace physical product sales with digital product sales.
  • Eliminate services or replace with simpler ones.

Automate

There is a plethora of amazing, readily available software that can make your life much easier. Finding, installing and configuring the software may be a chore, but ultimately well worth it. Even these activities can be outsourced if you spend some time looking for the right help.

I can’t begin to list the thousands of painful tasks that can be performed with a little automation and system analysis. Just search for “automate ________” and fill in the blank with your pain point like Facebook Posting, email management, order processing or ad creation and see what Google suggests. Talk to people running similar websites or at least visit their site and become their customer to see how they have automated processes.

Final Word

Passive income is a Holy Grail that we all seek and are willing to pay a little more for. Tell me your experiences with passive and non-passive website investments in the comments below!


Jeff Hunt wrote The Website Investor: The Guide To Buying Online Website Businesses For Passive Income. In addition to running his own portfolio of websites, Jeff helps entrepreneurs buy and optimize their web businesses. Learn more at www.OwnOptimize.com and www.HeckYeah.org.