Five Due Diligence Questions You Should Be Asking About Every Website Auction

Five Due Diligence Questions You Should Be Asking About Every Website Auction

Today, we’re featuring a guest post by Dave Rodenbaugh, an experienced Flippa buyer. His ebook, The Insider Guide to Buying a Profitable Website On Flippatakes off where our own Pro Guide to Buying a Website ends. This post isn’t just for buyers: sellers should heed this advice and make sure they provide all relevant information to potential buyers, for the smoothest sale possible.

Having spent a fair time on Flippa browsing auctions, talking to sellers and trying to find auctions of high value/low friction, I’ve found that only a few key questions separate the wheat from the chaff fairly quickly. These questions determine an auction’s viability on multiple levels– not just from the obvious answer they provide, but the subtext that comes along with it.

Without further ado, here are my five key questions to ask on any Flippa website auction that will help you get to the really interesting sites more quickly:

1. “How much revenue does your site earn in a month?”

First on my list of questions is money.  Everyone wants to know about the money, so I get that out of the way immediately.  I compare their answer to what was posted in the auction itself.  Often times, I find some discrepancies between the two, which leads to follow up questions like, “Are you including expenses in this number?” “For what time range is that number?” and so on.

The interesting part of this question is seeing exactly how their private answers line up with the public statistics and how quickly you can resolve the two.  When they line up easily, I know that I’m dealing with a transparent seller who is being honest and thorough. If I find that I have to do lots of follow up to get the “real answers” I become less and less interested in dealing with the seller, knowing that they might be hiding things from me.

2. “How long has it been making that level of revenue?  What is the trend?”

This isn’t as much a directly-asked question as it is one you observe by looking at the proof of revenue the seller supplies.  Sometimes this is easily displayed from the seller’s revenue disclosure on the right hand side of the auction.  Sometimes you have to get the numbers directly and do the math yourself.  I find it best if I take the seller’s numbers and put them in an Excel spreadsheet to make a graph over time.  Does the graph look like a positive sloping trend (going up to the right) or is it flat, or worse, negative sloping trend (going up to the left)?

Longer proof of revenue is always better and you should always take the sellers’ numbers and hand verify them– don’t rely on the Revenue Trend graph itself (sellers can always put in whatever numbers they like!). I find auctions that made only 3 months worth of revenue very suspicious indeed.  Auctions with long term revenue are the most valuable and anything else should be viewed with careful eyes such that you don’t end up with a lemon on your hands.

3. “What technology is your site based on?  What do you need to run it?  Can I see a sample of the code?”

Often overlooked in many auctions, particularly those with complicated SaaS (software as a service) sites, this question is really one of cultural fit.  Will the site be the kind you want to maintain yourself?  Are you capable of handling that kind of technology?  What kind of hosting do you need to support it?  Are there licenses that need to be transferred for you to run it? Or do you need to purchase software to even get started?

I also like to understand the quality of a site that I’m buying, so often I will ask for a code sample of the site that represents how its written.  No one wants to open the hood of a car they just bought and find it full of duct tape and bailing wire.  The same concern ought to be true for a site you’re actively looking at.

4. “What do you do to support the site?  What activities do you perform and how long do they take each day/week/month?”

Buying a site that requires 23 hours a day to support it would be a major mistake.  You need to know what you’re getting into.  Do you have to answer emails all day long?  Are you fixing bugs 90% of the time?  Sellers aren’t always candid about this and often underestimate their own time spent on it.  When they list a series of activities they perform, ask for a typical breakdown for the week on those activities, the time spent on each and how often they happen.  You want to be absolutely clear what you’re getting yourself into.

5. “How is the seller responding to your inquiries?”

Again, not something you ask the seller directly, but really one you ask yourself. This is my indicator about how easy the seller is going to be throughout the transaction. Are they being terse?  Do they give complete answers or very off-the-cuff ones?  Do you have to repeat the question to get it answered the way you want?

If you find yourself pulling teeth early on, that’s a pretty solid sign that this seller may not be all sunshine-and-roses later on when real money is on the table and you’re looking for certainty that you’ve covered everything and the seller will be helpful when you need it most.

For all sellers out there– now you know how you can make your auction literally fly off the block! Make sure your buyers have access to this information in a timely manner, be transparent and friendly and you’re sure to sell your site.

Think I missed a key question? Sound out below!

New Feature: Verified GoogleAdSense Revenue

Of the 1980 Flippa listings live as I’m writing this, 690 claim revenue from advertising. A quick perusal of this list indicates that the vast majority of these use Google’s AdSense program, arguably the biggest website advertising service. In the past, buyers had to rely on screenshots to validate this information. A few days ago, we added the ability for sellers to add Verified AdSense data to their listing. Here’s how this process works:

Easier to find

Know you’re looking for an AdSense site? You can now use our Advanced Search to only show auctions which offer Verified AdSense. Remember you can save this search for us to email you when new AdSense verified websites are listed. Here’s a quick video on using our Advanced Search function. While auctions that started less than 4 days ago typically won’t have Verified AdSense, all new listings that claim AdSense revenue should be able to provide Verified data.

When evaluating AdSense revenue, keep in mind that the three-month average we provide includes months with no AdSense revenue. This means that if a site made $100 in April, but $0 in March and February, the 3-month average will be displayed as $33.

Easier to evaluate

Just like Verified Google Analytics, the AdSense data we use comes directly from the Google API. When claiming AdSense revenue, sellers can log into their Google account and authorise Flippa to collect this data. This means that the data hasn’t been tampered with by an unscrupulous seller.

Easier for sellers

Adding AdSense revenue is as easy as verifying Google Analytics data. During the listing creation process, click on “Verify AdSense revenue”. Once you’re logged in, and have granted permission for Flippa to gather this information, your Flippa listing will automatically include your AdSense revenue and use it to populate your total revenue claims.

You’ll still need to complete the net profit section of your listing before it can go live. If your site makes revenue from other sources than AdSense, be sure to include that in the total revenue for each month. We’ll display the AdSense amount if your revenue claims are below what your AdSense records indicate. Note there is no need to include AdSense screenshots if you’re already verifying these claims.

Behind the Scenes: Meet Flippa’s Founders

Flippa’s founders,  Mark Harbottle and Matt Mickiewicz, with the Founder of the Internet, Vint Cerf, at the 14th Webby Awards

We’ve been getting a lot of questions lately about the people behind the scenes who make Flippa happen. There’s information about Flippa on our About Us page, but what about the individuals that bring it all together?  Today, we thought we would start by telling you a little bit more about the two people who started it all: Mark Harbottle and Matt Mickiewicz.

Meet Mark

Mark lives in the world’s most livable city, Melbourne, Australia, and is a regular fixture at our Melbourne and San Francisco offices.

Mark is one of Australia’s most respected start-up entrepreneurs. He was recently named 2012 Entrepreneur of the Year by BRW Magazine, Australia’s most prestigious business publication, and regularly advises (and sometimes invests) in startups in both Australia and the US.  Some of the more recent coverage on Mark includes this article in The Sydney Morning Herald and The Age Newspaper, and features on Shoestring Startups and Dynamic Business Magazine.

Like most Australians, Mark loves the beach and sport and can generally been found waterskiiing or jetskiiing through summer on his weekends or attending Australian Rules Football games through the winter.

You can follow Mark on Twitter at @daxatron

Meet Matt

Matt still lives in the second most livable city in the world (sorry Matt), but  equally beautiful, Vancouver, Canada. He regularly makes the Top 30 Under 30 lists, including Forbes Magazine’s Technology list,  Inc. Magazine’s 30 under 30, and the recent Smart Company 30 under 30. He’s a regular contributor to a number of business publications including Forbes,  Business Insider and Entrepreneur.  You can find links to more of Matt’s articles on his personal blog. He’s an avid wine collector (no word yet on whether he prefers Australian wines!) and traveller, who visited 9 countries in 2011, including Kenya where he watched a pride of lions take down an eland.

Over the past couple of years, Matt has spoken at numerous conferences including Affiliate Summit, PubCon, Underground Online Seminar, and Conversion Conference. Anyone in San Francisco next week can meet up with Matt when he teams up with the likes of oDesk.com CEO, Gary Swart, to discuss building online marketplaces – http://marketplaces.eventbrite.com/

Matt tweets interesting links about startups and business at @sitepointmatt.

How Mark and Matt Ended up Founding Flippa

Many of you know that Flippa originated from SitePoint and quickly became the #1 marketplace in the world for buying and selling websites. What you may not know, however, is that SitePoint was created in 1999 by Matt and Mark, and quickly became the go-to place for best of breed, cutting edge web development resources.

Sitepoint.com has consistently been ranked by alexa.com in the top 1,000 most visited sites in the world and has been ranked as high as the top 100. Matt was only 16 and Mark 26 when the pair partnered and decided to take Matt’s existing site, webmaster-resources.com, and re-launch it as sitepoint.com. In this interview for Entrepreneurs-Journey.com, Matt describes taking calls from ad buyers on his late-90s cellphone, between high school classes, and explains how the partnership came about.

Growing and growing

As SitePoint’s traffic went through the roof and its community forums grew, it wasn’t long before webmasters began offering their sites for sale to other SitePoint community members. This activity led to the creation of the SitePoint Marketplace, which in turn led to the launch of a new business, Flippa.com in 2009.

Flippa is not the only company to have grown out of SitePoint: 99designs, Learnable, and Wave Digital also started life at SitePoint.

The most well-known of these companies, 99designs, has attracted some great attention in the last few years, including winning the prestigious Webby Award in 2010, beating out Dropbox and Tumblr.  In 2011, 99designs announced $35 million in funding from the Accel Partners (Investors of Facebook, Groupon, Dropbox).  Investing alongside Accel were Flickr Co-founder Stewart Butterfield, SurveyMonkey CEO David Goldberg and ex-eBay exec Michael Dearing. This was one of the largest tech funding deals in Australia in recent times, and helped put the Australian startup scene on the map for international investors.

As you can see, Mark and Matt have been around, and know their stuff when it comes to internet startups and business in general. Want to take advantage of this? Leave your questions for them in the comments. We’ll pick the best ones for an upcoming Q&A session with them.

How to value a website: 5 popular methods

How to value a website: 5 popular methods

Today’s post is by David Gass of BuyingAndSellingwebsites.com.

Ask five website buyers what they think your website is worth, and you’re likely to get five different answers. Each buyer would likely have a different valuation number and potentially a different method for creating the valuation.

There are so many factors involved in determining the value of a website it’s easy to understand why valuations will fluctuate from buyer to buyer.

So what is your site really worth? “What anyone is willing to pay for it!” That’s the real answer. However, that’s not an answer you can put in your bank account. To make it a bit easier to learn how to value a website, here are five valuation methods to use:

Website Valuation Method #1 – Comparable Sales

In the real estate market, Comparable Sales are called COMPS. A comparable is found by searching for related sites in your niche that are as close to your site’s age, traffic and revenue as possible. The closer the numbers are for a comparable site, the higher relevance the site has in the valuation.

To create a comparable valuation on a website generating $250 in monthly income from Adsense, with 5,000 unique monthly visitors and a PR of 1, the first step is to search Flippa.com won listings for sites that closely match this criteria.

The following are six sites in the results that can be used for the comparison.

Domain                                                           Won Price       Profit   Mthly Unique  PageRank

Onlineincomeportal.com   (listing)                $2,950             $212             72,062                 0

Cheapholidaytr.com        (listing)                     $1,500             $229              4,200                 1

Theexpensivecars.com       (listing)                   $1,700             $300            45,000              0

Garnethillcoupon.biz        (listing)                    $2,450             $312                9,237               1

CnaTrainingSuccess.com    (listing)                $9,000             $366               2,523               3

Bankruptcy-chapter-7.org    (listing)                $3,700             $152              2,547                 0

A Formula for comparable valuation:

Step 1: Add “won price” for all sites sold in the comparable listing:

  • $2,950+$1,500+$1,700+$2,450+$9,000+$3,700 = $21,300

Step 2: Find the average price of comparable sites:

  • $21,300 divided by # of Sites (6) = $3,550

The comparable valuation would be $3,550 for the site.

In this particular case, I’d recommend dropping the highest and lowest priced sites that were sold to get a better valuation. If you drop the $9,000 and $1,500 sites, the comparable valuation is $2,700.

Website Valuation Method #2 – Revenue Multiple

The revenue multiple valuation method is to divide the monthly or yearly profit by the sales price. Although buyers use this method frequently, it’s not an exact science.

For example, the valuations should be different for two sites with $500 per month in net profit from the same revenue source (adsense for example) if one site has three months of history versus another site with three years of history generating the same income.

A site with just three months history might get 6 times monthly profit as the valuation where as a site with three years may get 20 times monthly profit.

Using the same six websites above from recent Flippa auction sales these are the multiples the sites sold for:

Domain                                       Won Price       Profit         Monthly Multiple

Onlienincomeportal.com               $2,950             $212                13.9

Cheapholidaytr.com                        $1,500             $229                6.5

Theexpensivecars.com                    $1,700             $300                5.6

Garnethillcoupon.biz                      $2,450             $312                7.8

CnaTrainingSuccess.com              $9,000             $366                24.5

Bankruptcy-chapter-7.org             $3,700             $152                24.3

The multiple valuation method results vary from 5.6 to 24.5 for these sites. Age isn’t the only factor in determining the multiple. The buyer could have additional sites in that niche or know ways to increase revenue for the site that the current owner isn’t using, which is why they will pay a higher multiple.

It’s easy to see with this example that using just the multiple as a valuation method can be deceiving.

Formula for Multiple Valuation Method:

Monthly Revenue divided by Sale Price = x

X is the number of months it would take to earn back the purchase price of the site with the current monetization methods.

Website Valuation Method #3 – Traffic Value

Another approach to determining the value of a site, specifically sites that have yet to be monetized but have traffic, is the Traffic Value Valuation Method.

This method is determined by researching the top key phrase or phrases that drive the majority of traffic to a website. Then find the Cost-Per-Click value of the keywords.

For example, the site we have used in other examples: Bankruptcy-Chapter-7.org has two key phrases driving over 90% of its traffic, the two key phrases are; Chapter 7 and Bankruptcy Chapter 7.

Once you know these terms go to Google Adword’s keyword tool and enter both terms. The approximate cost per click for each term will be found. For [Chapter 7] it’s $5.95 and for [bankruptcy chapter 7] it’s $11.44.

If the amount of traffic going to Bankruptcy-Chapter-7.org is 900 visitors using Chapter 7 and 500 using bankruptcy chapter 7, then you can multiple the cost per click with the visits.

Formula for Traffic Value Valuation Method

Cost per click x # of Monthly Unique Visitors from That Keyword

$5.95 x 900 = $5,355 + $11.44 x 500 = $5,720

$5,355 + $5,720 = $11,075

The value of traffic to the site is worth $11,075 per month if a site had to pay, for each visitor with a service like Google Adwords. The next step is to multiply $11,075 by an amount around 45%. Taking a percentage of the total traffic value creates a more realistic picture of what the traffic will cost if paid, since not everyone would pay the maximum cost-per-click.

Traffic Value ($11,075) x Percentage .45 = $4,983.75/month.

Website Valuation Method #4 – Reverse Engineering Cost

The Reverse Engineering Cost method formula calculates the price to build a site from scratch to match the site being sold.  The formula is:

Cost to Build Site + Cost to Drive the Same Amount of Traffic + Time Factors = Value

The cost to build a site is pretty easy to determine. It’s easy to go to developers and ask them to look at a site and give a fair quote for the cost of creating the same type of site with new content. Obviously, a complex site versus a simple site will require a higher cost to build.

The cost of attracting traffic to a site can be difficult to calculate. However, getting a quote from an SEO company may provide some good valuations.

The first time factor includes the amount of hours for the buyer to get the site built and driving the same amount of traffic, whether its outsourced or created on their own. The second time factor is the opportunity cost. How much money would the site make in the time frame it would take to build a new one?

For example, if the cost to build the site is $1,500, and an SEO company quotes $3,500 to build the same amount of traffic, the site is valued at $5,000. Then add the opportunity cost and hours spent by the buyer. If the buyer needs to spend 10 hours and their time, is worth $50/hour it’s an additional $500. If the time to build the site and traffic is six months and the original site would have generated $300 per month, the opportunity cost is $1,800. ($300 x 6)

The total cost to reverse engineer the site is $5,000 + $500 + $1,800 or $7,300.

Website Valuation Method #5 – Customer Value

If a buyer already has a list of customers or prospects, he/she likely knows what that list is worth. There are a few metrics list owners use:

LTV – Life Time Value of a customer

DPE – Dollar per email

To best understand how to calculate the life time value of a customer when taking into consideration other expenses in the business and the acquisition cost of a customer, download the Harvard tool that calculates the LTV.

Once a buyer understand the LTV they are able to determine how much they can spend for a site that will generate x number of customers.

With DPE (dollar per email), a list owner may know, for every email they have in the list that matches the current demographics of their list, they can generate $3 per email. If they can find websites to purchase that have lists with emails that match their demographics, that list is worth $3 per email.

A site with 2,000 emails could be valued at $6,000 for the buyer, without even looking at any other factors. If the site already generates income from other sources, add the value of income with the $6,000 valuation to determine the overall value of the site.

About The Author

David Gass is a serial entrepreneur who has started businesses with $200 and grew to multi-millions.  His companies have been listed on the Inc. 5000 list of fastest growing companies in the United States three years in a row and he has received several awards for his entrepreneurial efforts and commitment to giving back to his community.  He currently buys established websites as a business and teaches others to do the same at buyingandsellingwebsites.com.

How do you generally value web sites? Do you have any questions for David? Let us know in the comments!

Announcing our New Guide to Selling Websites

Some of the most-frequently asked questions on Flippa are on the topic of selling a website. What makes a good listing? How can sellers make sure that their listing is viewed by as many people as possible? What’s the best way to manage bids and questions from potential buyers?

After the success of our Pro Guide to Buying Websites, which is downloaded around 700 times per month, we gathered the best advice on selling a website into our new guide, How to Sell Your Website, available for download from our Guides page.


From A to Z

This guide takes sellers through every step of selling a website:

  • Ensuring the site is ready for sale,
  • Creating an informative, well-rounded listing,
  • Managing bids and questions,
  • Collecting payment from the highest bidder.

Together with our help pages, there’s now a wealth of information for website sellers on Flippa.

Something for everyone

While the guide is intended for first-time sellers, it also contains detailed information on how Flippa work, useful even for seasoned website-selling veterans.

We’d like to thank Thomas Smale of Flipping Enterprises, an experienced website seller who reviewed the book and helped make sure it covered every important topic.

Did we omit something important from the new guide? Do you have suggestions for our next guide? Let us know in the comments!