If you and your business are already big users of SaaS based tech then you’ll know exactly what that means and how you’re using it. If so, then you certainly won’t need to read this article. If at the other extreme you think you’re not using Software as a Service at all yet, you’re almost certainly wrong about that. At the moment Dropbox, just for example, is rapidly heading towards a billion individual active users globally, with most of them still on ‘freemium’ access. STOP STORING FILES ON YOUR DESKTOP. Given the stellar SaaS advantages, small business and corporate-based paid premium Dropbox usage is sky-rocketing. So the odds are that you are already, at the very least, using this particular iteration of SaaS very regularly. If your business or start-up enterprise is to prosper, then one key essential is to understand the benefits and costs of the numerous SaaS offerings and lever these to your best advantage.
How much time should you be sending on this?
Chances are that regardless of whether you are selling products, services or personal experiences, your business is based largely on your own and your team’s communication and people skills. So the question is, what proportion of your time should you be spending on managing your IT structures when this isn’t your core business, your passion or your skill set? The answer is obviously, as little as possible. And this is where SaaS comes in.
If you decide to go largely stand-alone or ‘on-premises’ with your IT management then you are committing a significant proportion of your available time and resources to maintaining the currency of applications; creating adequate, retrievable and shareable data; and ultimately taking on the burden of servers, storage and network sharing capabilities. That means you won’t have the time you need to develop your real business – or else you’ll need to hire a specialist in-house IT person or small team, which even if viable isn’t cost effective.
There are intermediate options such as Infrastructure as a Service (IaaS) which comes in at the network sharing stage and provides the external servers and storage. However, it is generally much better to commit from the outset to fuller scale SaaS, which externalises all applications and data management. This enables you to concentrate on core business and to be free of software access constraints so that with no downloaded applications to manage and keep updated you can work from virtually any computer or device in the world, along with other members of your team. The cloud application services, managed by a third-party provider, are run directly through the internet web browser and don’t rely on any downloads or installations by you at all. That means that ‘on the road’ functionality becomes exactly the same as ‘on premises’ functionality for you and every team member.
What are the main advantages?
So, the major advantage of using SaaS is that it frees you to devote your time to what you are really passionate about and trying to achieve in your venture. It’s a great way to launch e-commerce with no software or server issues, no need to buy expensive downloaded software programs, no problems with access from mobile devices, and unlimited capacity for real-time data and document sharing with team members.
SaaS takes on the management of virtualization, in which a local workstation operates exactly as if it was using an installed application without this actually being the case. Additionally it enables users to remotely access their own personalised desktops from any device in virtually any location. Hardware virtualization ultimately enables an off-site third party processor to behave as if was many different individual processors working on the same hardware from team members’ own locations. The advantages include greater efficiency and lower costs as team members can access the company’s networked information from anywhere, embracing the increasingly expected (because cost minimising) BYOD approach.
What about the cost?
The costs of using SaaS are generally very manageable with the key advantage that levels of service access, data storage limits and the like, can be adjusted at any time. SaaS is commonly used to deliver business applications such as accounting programs, customer records software including management of orders or bookings and, for larger businesses, HR management software. Automated multilingual versions of documents can be included. There is obviously much lower up-front cost, as you are essentially renting rather than owning the asset, virtually immediate set-up and access as the applications are already fully configured in the cloud, and there are automatic updates and easily managed scalability, with plan upgrades (or capacity downgrades) adjustable on demand. This flexibility is a great advantage and there is essentially no significant hardware, software or server depreciation to be factored in.
Are there any disadvantages?
There are really very few disadvantages of SaaS. The initially understandable concerns around data security breaches are not really well-founded, as the enormous success of cloud-based accountancy provision such as Xero attests. However, the dependency of SaaS on uninterrupted fast internet connectivity, plus the potentially lower speeds compared to on-premise user applications can cause some occasional headaches.
When you are ready to choose your SaaS provider, then as with any contract it’s a case of ‘buyer beware’. As with everything, it’s easy to enter into a provision agreement but it can be much harder to exit it. In particular, carefully check the provisions for exporting your data to another destination of your direction if you leave that provider – and ensure that the export will be in a standard format which will enable it to port over to another SaaS provider.
Migrating data can be very costly in terms of time and money. That’s why it’s a good idea to move your own business data to a SaaS provider from the very outset or as early as possible. There is no definitive list of pre-eminent SaaS providers, partly because most of them specialise in a particular market segment. Request Service Level Agreements (SLAs) from a few providers and carefully cross-reference them, as well as verifying the vendors’ reputations and their customer reviews. Try to make contact with a couple of their clients directly and find out what they have to say about their experience of service reliability and technical assistance. Compare pricing plans and remember that if a provider’s prices and the promises seem too good to be true – then they almost certainly are!
This week, Flippa CEO Blake Hutchison sat down with Matt Raad as part of our Influencer Series to discuss buying online businesses.
Matt is the CEO and Co Founder of eBusiness Institute and with wife Liz, they have been recognised as Australian experts in buying online businesses. Their courses help students to look for businesses that they can buy and build and their platform of choice is Flippa.
In this video interview (see below) he reveals some key insights. In referring to their live events Matt remarked about the ease of using Flippa. “When we run a live event, we love getting onto Flippa and we do it unscripted. We are pretty much guaranteed to find a good deal” (2m:34s).
What are your favourite types of businesses?
“We like sites that sell advertising and the next level (up from here) would be affiliate sites, so sites where we promote a product and then (earn money) get a commission if someone buys it.” (3m.40s). Matt also discusses Ad Sense websites and the success he’s had with those. “It’s where we started and we have made a lot of money. What we are seeing now is that where those Ad Sense sites are in good niches, there is a lot of opportunity.” (3m:15s).
Should you be interested in the subject matter?
“It’s nice to start out in your passion but the reality is you don’t need to once you know how the system works” (5m.00s).
When it comes to website audiences Matt mentions that he loves finding sites that he can drive traffic towards. “On Flippa if we can find someone that’s owned a website for years and they were really passionate about it (but couldn’t figure out how to make money out of it) and they have a bit of an audience following, that’s gold. That is what we want” (4m:28s).
Blake and Matt spoke a little about Amazon and the various business models.
Matt remarks that he’s less familiar with ecommerce but that doesn’t detract from his ability to make money from Amazon. He likes affiliate businesses. Matt gives the example of a dog products reviews website. He notes that an Amazon affiliate revenue stream, in this example, is where reviews of a particular product might convert to an interested customer. In this case, interested customers click off and buy. Where they do buy, the website owner is paid a commission. “A reviewer might do a review of a dog bed and (on that basis) say to customers, ‘BTW if you are interested in this dog bed here is where you can buy it on Amazon’” (9m.38s).” If the customer then clicks this link it is tracked and Matt is paid a commission on the sale of between 4-8%.
For more information around how Matt buys websites on Flippa and monetizes them, watch the full interview below.
Matt Raad is the CEO and Co Founder of EBusiness Institute Australia, a digital training organisation and is passionate about helping others to buy online businesses. Check Matt’s website to learn more or you can connect directly with him via Linkedin.
Buyer Due Diligence Checklist
Whether you’re a first-time website buyer or an experienced web entrepreneur, it is always important to perform proper due diligence before placing a bid.
For those unfamiliar with due diligence, it is the process of verifying that an asset is as it is claimed to be. In the case of due diligence on websites, it’s making sure that revenue and traffic claims are accurate and ensuring the online business isn’t fraudulent in any way.
With the help of our marketplace integrity team, we have pinpointed some of the top questions to ask and areas to focus on when looking at an asset for purchase. Below is the complete buyer’s due diligence guide and checklist.
One of the first things you should check is to make sure you understand the business model and how it operates. For example, is it an eCommerce site or does it provide a service? Does it carry any inventory or not?
If you’re unsure about the business model, make sure the owner clarifies:
- The hourly time commitment, broken down by task
- Any technical expertise required to operate the business (ex: knowledge of WordPress, Amazon Affiliates, etc.)
- Monetization Methods
You can verify the owner by checking the site through a WhoIs lookup.
Personally, we recommend whois.domaintools.com. From there, search for the domain and scroll down to whois history. Click through some whois records to see if the owner has changed recently.
For example, here is Flippa.com’s WhoIs history.
If the domain is under privacy, you can also check the hosting history and see if there have been any IP address, hosting provider and domain registrar changes. This will not tell you with 100% certainty that the owner has changed, but if all three have changed (around the same time, +/- 3 days), it is likely.
Checking for plagiarism isn’t just something college professors do. Verify that the site has original content will help confirm that the website is built using whitehat SEO tactics.
Our personal favorite tool to use is copyscape.com.
This will show if there are other copies of the site out there. If you spot very similar sites, it may mean that the site is either using someone else’s design, the theme is very popular, or the seller has other competing sites.
In case of blogs, it is recommended to check a random sample of 5-10 articles, to verify they are original and not stolen from elsewhere.
To verify if the business has been established for as long as the seller has claimed, go to: archive.org and search for the domain. Always check for more than one screenshot, something from the beginning, middle and end.
Note: If the business is very young (less than 6 months), archive.org might not have that domain archived yet.
One thing to look out for is big gaps in archived pages as this may indicate that the site was down during that time. Below as an example is Flippa.com:
You’ll notice that from 2005 to 2008 there’s almost nothing archived. In this case, you would need to take a look at the last and first screenshot from that gap. In many case this will show that the domain was parked, meaning that most likely it had not been used for the entire time.
In this particular case, it was parked and redirected to seeq.com.
Sometimes archive.org may show something like this:
In this case, click on the link to the robots.txt file. Sometimes the seller has blocked archive.org by mistake and sometimes it is intentional, if they want to hide the true age of the site for example. But in either case, you would need to be cautious.
If you see that robots.txt has disallowed all spiders apart from Google and Bing, it’s not a red flag. But if you see that they have disallowed archive.org specifically, this would raise a red flag.
A non-compete form prevents a seller from competing with the site you just bought from them for a pre-determined amount of time (typically 2-3 years).
If the seller says that they can’t sign it, find out why and if this can be negotiated. For example, in some cases, they don’t want to sign a very broad non-compete, which is understandable, but if it is very specific, most sellers are willing to sign it.
Another example would be that they have another similar site, in which case, ask if they would be willing to include it in the sale for the right price.
Check if there is a trademark for the business name or domain name. If there is a trademark in a similar niche, ask the seller if they own the trademark and will include it with the sale or if they have the right to use that trademark.
Also check that the domain isn’t infringing on any trademarks, for example, iphone7.com or theandroid.com. Note though that trademarks in names are fine if the site is in no way infringing, i.e iphoneyou.com is fine if it is a blog about phone calls, called “I phone you” but not fine if it is an eCommerce site selling iPhones (unless the have permission from Apple to use the name).
For more on trademarks:
US trademarks: https://www.uspto.gov/trademarks-application-process/search-trademark-database
Australian trademarks: http://pericles.ipaustralia.gov.au/atmoss/falcon.application_start
European trademarks: https://www.tmdn.org/tmview/welcome
For certain business models, such as eCommerce, it is important to check the refund and chargeback rate of the business. It should never exceed 2%. Anything over and the payment processor may terminate their account. Often this happens without prior warning, but usually a month of high refund rates is not an issue, only if it is a trend.
If the current owner hasn’t already disclosed the refund/chargeback rate, follow up with them to get an idea about the business.
Top-Level Domain Transfer
Check that the domain can be transferred to anyone. Some top level domains have specific registration requirements. Examples:
- .com.au – buyer needs to have Australian presence, either reside in Australia or have a business registered there.
- .com.mt – buyer needs to have presence in Malta
- .ca – buyer needs to have presence in Canada
You can check the requirements by Googling the top level domain. The Wikipedia page for a particular TLD will have the requirements. For example: https://en.wikipedia.org/wiki/.au
TTM Financial Trends
This one will likely be one of the first things you check, but in case you haven’t already, check that the trailing twelve months’ revenue trend seems reasonable. Both the net profit and gross revenue. If you see a sharp spike or large decrease, ask the current owner what caused it.
Make sure to identify exactly how the site is monetized, and if this monetization method has been changed in the last six months.
Revenue Account Transferability
Make sure that the revenue account can be transferred or that opening a new account is straightforward and easy. Easiest is just to Google for it and look at the terms for that particular payment processor. At the time of writing, PayPal and Stripe for example can’t be transferred, but it is fairly straightforward to open up a new account.
In case of subscriptions, unless the seller is selling the entire business, not just the asset, in most cases the subscriptions can’t be transferred over to a new owner. In this case all the current subscribers would be prompted to re-subscribe, but you would be sure to lose at least a portion of them, thus losing a portion of the revenue.
The only sure way to keep the current revenue levels with a subscription business, would be for the new owner to assume ownership of the entire business, therefore be able to keep the current revenue accounts.
Note: In some cases many payment processors allow transfer of subscriptions, but this is on a case by case basis and is rather the exception than the rule.
Google AdSense ToS Compliance
When a business is monetized with AdSense, it is very important to make sure it complies with AdSense terms. AdSense terms can change fairly regularly, so for the most up-to-date terms, visit their help page: https://support.google.com/adsense/answer/48182
One big change that Google did just recently, was to remove max ads per page limit. But instead they now just say: “Advertising and other paid promotional material added to your pages should not exceed your content. “
It’s important that the site complies because even if they have been running for years just fine with AdSense and breaking the terms, it may get a manual review at any point and get banned from AdSense. Usually manual reviews are done within 6 months to a year since implementation.
While Flippa does show Google Analytics stats from the listing itself, we highly recommend getting the full picture by asking for Google Analytics “read-only” access.
With this check you’ll need to go through all the top traffic sources and see if they make sense and are sustainable.
For example, if organic search shows as one of the top traffic sources, click on it to see the traffic graph for that and make sure there aren’t any drastic changes that may indicate a Google penalty, algorithm change or that the traffic is faked.
But if you see a traffic source that you can’t verify, (e.x. the source shows up “ads / 22media”), ask the current owner about this.
This is basically the same check as for revenue but instead of the revenue graph you look at the traffic graph for TTM and see if there are any odd spikes and if the revenue is declining or increasing.
Typically, high revenue months will also coincide with high traffic months. This is particularly relevant for content sites that make money via advertisements.
Now that you have access, click through all the traffic sources and see if you spot any that may be bought traffic or from ads. If the seller has not disclosed any expenses for Google AdWords but you spot cpc traffic from Google, ask for explanations.
Also be on the lookout for odd referrals. If you spot anything suspicious that you wouldn’t expect to be sending traffic to that site, check out the URL and if it still doesn’t make any sense, it is most likely paid traffic.
Example: The seller is selling a blog in the pet grooming niche but you spot that 30% of traffic is coming from getfreebitcoinsinstant.org and it’s a random low quality site, with no links to the site, it is almost certainly paid bot traffic.
If the business is selling subscriptions or products, ask the seller where his customers are from and see if it matches the top traffic countries, if not, try to understand why/ ask the seller and see if makes sense.
Make sure visitor engagement seems natural and sustainable. If engagement is very low, i.e bounce rate is around 99% and returning visits are less than 5% and time on site is only a few seconds, it is highly likely that the traffic is faked. But if the engagement is a bit higher but still on the high side, it means that visitors for some reason do not want to stick around on the site.
And on the flipside, if engagement seems too good to be true, i.e bounce rate is only 10%, it may mean there is a tracking issue. Or in very very rare cases people find the site so appealing that most tend to click through to another page.
Make sure to get a clear understanding of the owner’s responsibilities, including the time to perform the tasks and the technical experience necessary.
As always, if you have any questions, make sure to ask for clarification from the current owner.
Live Revenue Verification
After you’ve done a majority of the heavy lifting, one final thing to do would be to prove that their financials are as claimed.
While screenshots can make for excellent revenue proof, one way to quickly verify all the data is to ask the owner about live revenue verification.
Live revenue verification would involve doing a screenshare through a service like Skype, where the current owner would navigate around the account financials and proving that these claims are accurate. Typically this is verified by looking at the Shopify Analytics, WordPress plugins, or just going through the businesses PayPal account.
If everything checks out and you have no further questions, it’s time to place your bid! The whole process may be exhausting, but it’s necessary to ensure the authenticity of your asset.
If you ever uncover anything suspicious, please use the report feature, which can be found on every listing.
Head to the Flippa Marketplace and check out our Editor’s Choice listings.
Anymore enquiries, reach out to us here.
With the launch of our new Shopify marketplace comes the ability to find the hottest Shopify stores for sale! Now you can quickly sort through top Shopify stores for sale and find which store is right for you.
Want to jump right in? See all current Shopify stores for sale.
Why Shopify Stores (over WordPress)?
If you’re unfamiliar with Shopify as a platform, you may be a bit skeptical on how Shopify performs over, say, a WordPress site powered by WooCommerce. So why should you consider buying a Shopify eCommerce store? Because Shopify as a platform is both simple and powerful.
Everything from themes, to analytics, to payment processing, is handled seamlessly through the Shopify platform, creating an easy-to-use platform with strong analytics.
To put it simply, Shopify has eCommerce down to the tee, which is why Shopify powers over 400,000 active eCommerce stores worldwide.
How to Browse Shopify Stores on Flippa
To find all Shopify stores for sale, navigate to our websites tab and click on Shopify.
Alternatively, you can click this link!
Once there, we recommend filtering your search options, to find the asset in your price range and that fits your needs.
Shopify Due Diligence
Now that you’ve found an asset that you like, it’s time for due diligence. Due diligence is an important process when buying any digital asset, including Shopify eCommerce stores. That said, Shopify does make it easy for potential buyers to verify the income and traffic of a Shopify store.
What questions should you ask?
The goal of due diligence is to verify everything that the owner has said to be truthful, and to make sure that the asset is what you think it is. Never be afraid of asking questions!
Some things you should be looking for include:
- Verified revenue (such as screenshots of the Shopify revenue dashboard)
- Access to Google Analytics or screenshots of Shopify Analytics
- Understanding the time commitment of operating an online business
- Asking about their return rate
These are a few of the questions you should be asking. If you ever had a bad feeling about an asset, please report the listing immediately and our marketplace integrity team will investigate further.
Purchasing a Shopify Store on Flippa
Once you’ve done your due diligence on an asset and you would like to purchase it, it’s now time to place a bid!
If you’re not sure how much a Shopify eCommerce store may sell for, we recommend reading this blog post about website valuations from Jeff Hunt, a serial website investor.
The Flippa bidding process works the same as other online marketplaces, but in case you’re unfamiliar with the process, you can learn more about bidding here.
Upon winning an auction, it’s now time to make the payment. Whether the transaction is done through PayPal or Flippa Escrow, you can start by proceeding to the sales completion area, which is only available to you and the seller.
If you have the option, we highly recommend using Flippa Escrow as the transaction is the much more secure compared to PayPal.
Once the money has been sent over, the seller will now transfer the assets over, and you now own your very own Shopify eCommerce store!
Have you bought a Shopify store before? Comment below with your experience!
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.
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.
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.
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
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:
Looking back over the past 3 years we see that the traffic is also declining year over year:
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:
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:
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:
- Product (or content)
- Operational effort
- Dependencies on 3rd parties
- Knowledge / Skill requirements
- Completeness and accuracy of information provided by the seller
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!
The Website Acquisition that Boosted Revenues by 4x with no Additional Traffic
In the Summer of 2015, MonetizeMore purchased a polling site called MisterPoll.com, a website that enables users to create polls, share them and then provide the statistic results. At the time of purchase, MisterPoll.com was only running AdSense directly on-page, which MonetizeMore saw as a huge opportunity to increase MisterPoll.com’s ad revenues without even increasing traffic. MonetizeMore has been in the ad optimization industry since 2010 and has some of the best ad optimization tech and experts in the industry. In this case study, the team at MonetizeMore reveals just how we were able to take a site, and within one month, grow the site’s revenue by 4x.
The MonetizeMore team started by implementing the most widely used ad server in the world called DFP (Google owned). The implementation of the ad server enabled the team to run many revenue sources at once, include direct sales ads and incorporate complex ad optimization techniques. The first technique that was implemented was integrating Google Ad Exchange (AdX). Google Ad Exchange is the best performing demand source in the world. It is even more powerful when integrating in DFP using a technique called dynamic allocation. Since Google owns DFP and Ad Exchange, the two technologies are able to communicate with each other so that DFP always knows what AdX will pay for each impression. As a result, the publisher can be confident that AdX only serves when it is the highest paying demand source. This is a very important part of ad optimization and realizing a publishers’ ad revenue potential.
Once DFP and AdX were implemented, MisterPoll.com saw a revenue increase of about 50%. This was a nice increase but MonetizeMore was not done there. The next step was to implement managed demand ad networks. Managed demand ad networks are traditional ad networks that send ad tags to publishers that have passbacks if the ad network is not able to payout on a minimum RPM for that ad impression. They are implemented in DFP at price priority level and the priority levels are adjusted on a daily basis based on past performance. Six managed demand ad networks were implemented and after a month of optimizing, the ad revenues more than doubled.
The last and most important step to ad optimization was implementing header bidding. Header bidding is a similar process to dynamic allocation for non-Google demand sources. Each header bid network makes a bid via an API, then the highest header bid will compete against Google and the managed demand sources. It is called header bidding because it is enabled via a header container technology which is implemented in the header of the page and the auction happens within the browser before the DFP auction. MonetizeMore has a header container called PubGuru.
Header bidding dramatically increases ad revenues and page RPMs for similar reasons that AdX implemented via dynamic allocation increases page RPM. The technology ensures that the highest bidder wins the ad impression. When you maximize the ad revenue for each ad impression rather than educated guesses via managed demand, you see some incredible increases in ad revenue. This boosted the MisterPoll.com revenues to 4x compared to the monthly revenues before the site was acquired. PubGuru header bidding not only increased the ad revenues but it also:
- Eliminated passback ad impressions which improved site speed
- Decreased blank ad impressions
- Increased the accuracy of DFP reports
- Decreased the daily hours needed for ad optimization
There is no doubt header bidding was the most important implementation on MisterPoll.com that contributed the most to the ad revenue increases and additional benefits. However, the previous 3 steps were integral to the success and also enabled header bidding. If you are considering to purchase a website on Flippa that monetizes via programmatic ads, it is in your best interest to follow the four steps that MonetizeMore followed.
You can complete the four steps on your own or outsource it to a company like MonetizeMore. If you decide to do it on your own, you can use the PubGuru SAAS solution to guide you through each step at your own pace. If you don’t have your own direct account with AdX, you would need to use a company partnered with Google (Like MonetizeMore) to offer AdX demand. If your site gets over 5MM page views per month, you can qualify for a free DFP implementation. If you get more than 20MM page views per month, you can qualify to become a premium publisher and MonetizeMore will handle all ad optimization for you so you can focus on the more important parts of your business.
Whether you decide to outsource your ad optimization or do it in-house, make sure to make a decision and stick to it. The worst thing you can do is ignore this low hanging fruit. Do not settle with just running AdSense. Otherwise, you are leaving a significant portion of revenues on the table, just like MisterPoll.com was.