When you list a website with the intention of selling it, a major concern for you is receiving bids that don’t truly reflect the value of the website. While it is normal practice for buyers to try and bargain for a price that is lower than the actual value of the product, a website with top value will eventually get sold on the higher end of the valuation spectrum.
If you plan on selling your website or blog, your principal objective should be ensuring that it is sold for the highest price possible.
Here are a few ways to improve the value of your website for prospective buyers:
Create Good Content for Your Website
If you want your website to be highly valued, you must invest in creating good content that will be both engaging and compelling. The expression, “content is king”, still remains relevant today since the content is the principal component that determines the success of a website or blog.
Regardless of the type of web business you intend to sell, whether it is a blog, a web application, or a service website, one way you’re guaranteed to increase its value is by adding relevant content that will actually be useful to internet visitors
Good content also increases search engine visibility and ensures that your web platform is highly placed on SERPs. If you’re unable to create the content yourself, you can simply hire an expert from freelance websites like Upwork Freelancer, and Peopleperhour that will handle the whole process for you.
The costs of content writing services are actually quite affordable due to the proliferation of freelance websites. On average, you can spend between $10 to $20 for a 500-word article, though articles of very high quality go for premium rates that reach up to $80 each.
One aspect of content creation you must also focus on is the proper use of clickbait titles. This practice helps drive loads of traffic to a website; hence, properly implementing its use will certainly increase the value of your website.
Establish Multiple Sources of Traffic
The amount of traffic a website receives is one of the key parameters used to determine its value, which is why sites with impressive traffic often get sold for lots of money. This is because traffic has a direct influence on revenue generation. In e-commerce sites, high traffic ultimately transforms into high conversion rate, which leads to an increase in sales. For blogs, traffic indirectly leads to the generation of revenue by various marketing and advertising mediums; hence, if the blog you’re selling has lots of traffic, then it is bound to be highly valuable.
If a website, however, doesn’t have much traffic yet, its value can still be raised by establishing multiple sources and channels that will bring in the desired traffic with little effort. Buyers looking to buy websites with huge potentials often look for those that already have traffic generation mechanisms in place. Whether it is setting up one or multiple active social media channels or having SEO tools in place on the web platform, you must ensure that your listed website has a traffic source that can be exploited to bring in web visitors.
Engage in Lots of Link-Building to Increase Backlinks Value
The value of a website can also be gauged by assessing the ease with which it ranks on the first page of Google’s result pages for specific keywords. This is usually done using the popular Moz metric, Domain Authority.
If the website you wish to sell has little or no inbound links pointing to it, then there is a good chance that its domain authority value will be low. Buyers who have a broad knowledge of SEO understand why it is important for a website to have a respectable DA value. Even if the website doesn’t receive much traffic, its high DA value still guarantees top placement of well-written content on result pages of the search engine giant, Google.
One proven method that is used to increase the DA of a website is link-building. By having numerous links from very reputable websites or blogs point to your website’s URL, you automatically increase its reputation and thus, boost its DA value considerably.
It may take some time for the effects of the link-building process to be noticed, but most often times, increase in DA value can be seen within a few weeks.
When engaging in link-building practices for your website, you should only ensure that white-hat techniques like guest posting, blog commenting, and defective link replacement is used to acquire links.
Guest posting remains the most effective link building method to date. As the name suggests, it is the process of crafting an article or blog post for a reputable website. Though the primary purpose of engaging in this practice is to inform and educate the site’s audience, you can also benefit from writing the content by inserting a link that points back to your site.
To begin guest posting, all you have to do is send outreach emails to multiple websites that belong to your site’s niche and ask kindly if they would like you to contribute with an article or a post. Doing this increases your chances of scoring very good link-building opportunities for your website.
Using any link-building method frowned upon by Google may lead to your website being at the receiving end of a penalty, which will only harm your DA value even more.
Make the Website Highly Responsive
Before listing a website, you should ensure that the site isn’t lacking in the area of website responsiveness. With mobile devices now accounting for nearly half of internet visits, responsiveness is a website quality that is simply non-negotiable. Buyers now also know the value of having a website that is optimized for mobile access, which is why it has become one of the principal components of the Flippa checklist.
If your website’s mobile display is very poor though, the chance of it being purchased drops drastically. Not only does Google prioritizes mobile-friendly sites when ranking web platforms, sites that are highly responsive are also likely to have and retain more traffic than those that are unappealing to mobile visitors.
Change Your Website’s Domain Name…When Applicable
There are times when a strategic domain name may be the factor that seals the deal on a website purchase. So you must not discard the idea of changing your website’s domain name when you want to sell it.
Unless the revenue generated by your website is attractive enough to bring in bids from buyers, the option of upgrading to a domain name that is commercially viable is always open. A catchy domain name can be a defining factor that compels a hesitant buyer to make a purchase; so do not just see it as expenditure but as an investment.
Improve Revenue Generation
Since generating revenue is the main goal of a website, listing a website that has consistently made lots of money is certainly going to see many buyers show interest. Website buyers, however, prefer the plug and play model when it comes to revenue generation, and many will turn down the chance to purchase a promising site in favor of a site that consistently rakes in money.
Depending on what the focus of your site is, you can improve its revenue generation with a little hard work and dedication. One way to boost your site’s revenue is by marketing affiliate products to visitors. Other revenue generation channels are ads, e-commerce, and sponsored content.
Study your website well and choose a revenue generation channel that will be perfect for it. You can also apply two or more channels together to further maximize the traffic your site receives and earn more money.
While you have the right to ascribe any value to your listed website, you must understand that buyers’ valuations are based on applicable factors that they can assess themselves. These steps may take some time to establish, but the end result can be well worth it if you want your website to meet and surpass these valuations, which is why upgrading it to its highest capacity is the best option for you.
We continuously listen to our buyers and sellers and your feedback is really important to us. As a result, we have some great news to share with our customer base. Now on Flippa, business owners can upload a Profit And Loss Statement (P&L), and Evidence of Revenue when building their listing.. While these fields are options we know that buyers are highly unlikely to consider a business that doesn’t have clear evidence of revenue and up-to-date financial records. e strongly encourage all business owners to spend the time to upload these verification sources.. You can download a free P&L template here or better yet use cloud-based accounting software like Xero or Quickbooks Online.
Why do I need to do this?
Flippa will not be able to match or market you to buyers without at least having a P&L or evidence of your business performance. This means that you will not be connected by Flippa, with buyers whose interests your business matches. This can make the sale time of your business a little longer.
The appeal to buyers
Critically, buyers want to see evidence of your business performance up front. Buyers are not inclined to inquire and ask for financials if they aren’t obvious. Business financials are considered to be basic and essential information that should be immediately visible when looking at your listing. Buyers are interested in profits and expect verifiable financial claims.
There is no shortage of motivated buyers on the lookout for great online businesses. While the stock market is highly volatile, there is increasing enthusiasm for investment or purchase of online businesses. So, the potential appetite for buying is enormous. However, by far the major brake on buyers committing to a final purchase decision is their uncertainty about pricing. There is little understanding of sound valuation principles and buyers are wary of what they see as pricing based on an arbitrary multiple of net profit. Not to put too fine a point on it, buyers believe that sellers generally over-value their businesses and they find it hard to define a reliable and objective valuation method. The outcome is that too often an enthusiastic and highly motivated buyer fails to follow through with a final purchase because of the understandable anxiety about paying more than the business is worth.
How to value an online business
Typically with an online business, there will be little or no inventory to value and only a very limited if any physical asset base. Accordingly, the business will generally be valued almost entirely on the projected profits, calculated on the basis of current and relatively recent past profits.
While there are various alternative techniques for valuing an online business, including the traffic valuation method for sites with high traffic as a business asset but with no or incomplete monetization, many of these methods are highly technical and yield disputable outcomes. They are often suitable only in highly specific situations, depending on a precise definition of the particular revenue model, current and projected OR you are the next Facebook which is highly unlikely.
For that reason, online businesses are almost always sold on a negotiated value based on an earnings multiple or a price to earnings ratio. While it is very common to define the ratio in terms of a multiple of average net monthly profit, it is simpler for most purposes to quote the ratio as a multiple of annual net profit. Using this basis, average asking price multiples have increased from 2.4 in 2010 to around 3.4 now (sourced from our good friends at Centurica), with final selling prices typically at around a 10% discount to the asking price. This suggests that generally speaking sellers who value their businesses realistically can expect to achieve a sale outcome within reasonable range of the asking price. But putting a realistic value on the business is complex and there is an understandable tendency of business owners to over-value their business.
The average net profit multiple varies markedly from one kind of online business to another and also depends greatly on the specific market niche. However, the absence of highly consistent profit ratios can cause buyers to be both surprised and sceptical about the valuation proposed by a vendor. On objective grounds SaaS and e-commerce businesses sell for a significantly higher profit multiple than content-based or media businesses, because of the higher reliability of recurring income in the former models and the generally much higher operational time demands in the latter cases.
As an example, a currently listed relatively small SaaS business (not on Flippa) with a claimed $55k net annual profit has an asking price of $250k, a hefty earnings multiple of 4.55. You would expect that ratio level to make any buyer hesitate. Let’s assume it doesn’t have rocket ship growth (doubtful because they are selling) a buyer simply will not pay that amount.
Vendors who are seeking to sell at an earnings multiple above the prevailing average need to factor in the understandable buyer nervousness and be sure that the audited income and expenses figures are going to stand up to serious interrogation. While there is never an absolutely guaranteed success in any investment decision very few buyers overall, and virtually none in the six and seven figure range, are interested in taking a wild gamble on getting value for money.
The valuation factors that buyers will weigh up
Because it goes without saying that buyers generally regard sellers’ asking prices as inflated, it’s important that the vendor has realistically priced the business having regard to all the considerations which the prospective buyer will be factoring in.
The income figures must be accurate and cover the duration of the business operation, including only those income streams which will fully transfer to the new owner with the sale. Gross and net income trends will be crucial to the buyer’s assessment. All expenses must be transparently declared in detail, including all payments made to service providers and suppliers of goods and expertise. It is vital to new owners that they will be able to maintain all of the necessary business operations within the same cost structure, or ideally achieve some savings where possible. Any outstanding expenses or other debts transferring with the business obviously must be declared.
Absolutely all operating expenses need to be disclosed, not disguised, by the seller and discoverable by the buyer. Often overlooked, the full value of any unpaid work which has been invested in the operation of the business will be accounted for in the buyer’s own valuation of the business. The predicted cost of the new owner’s time, and any specific technical expertise required, will significantly affect the buyer’s business valuation. It is absolutely essential to the prospective buyer to be able to rely on an honest declaration of the time and expertise required to manage the business, as the new owner will need to put a dollar value on this expense.
The prospective buyer will need to analyse all the financial indicator trends over the longest time frame for which the figures can be produced. Sources of customers and the cost of gaining them will be important factors for the buyer, as will the effects of any changes to attracting traffic such as Google algorithm changes or even penalties which may affect search traffic.
The buyer will need to assess how competitive the niche is and whether there are barriers to the entry of competitors, which raise the business valuation, or the likelihood of increased competition in the absence of any significant barriers to entry, which will lower the valuation. It is crucial to the buyer to ensure that any licences required are fully transferable, or readily obtainable by the new owner, and that any branding, trademarks or other unique advantages will transfer with the sale.
The seller needs to appraise the business through a buyer’s eyes
The seller will be keenly aware of the time, energy, money and vision which has brought the business to its current status and positioned it for a successful sale. Naturally the vendor wants to achieve the highest possible price. However, seller over-valuation is the prospective buyer’s biggest turn-off. It really enables the sale process if the current owner evaluates the business using the same valuation indicators that the buyer will be applying.
It is worth mentioning that some buyers will apply a discounted cash flow (DCF) measure in their valuation. This is a somewhat less relevant consideration in an era of low inflation as at present, but put simply the principle is that a dollar of profit now is worth more than a dollar will be in the future, so a formula is applied to compensate by lowering the notional future profit value, given that the buyer will be paying in advance the equivalent of some years of projected net profit.
The bottom line for the buyer is that the online business acquisition must be fully transferable, it must be sustainable, it must have scalability, and above all it must be purchased at a reasonable earnings multiple. While it is still relatively unusual for an online business to be bought using funds from an institutional lending source, lenders may place a ceiling on the multiple, determined by the actual business model and specific market niche.
Overall, to achieve a reasonable pool of potential buyers interested in undertaking onerous due diligence and finally negotiating a fair sale price, sellers need to keep their initial asking price close to buyer expectations. Avoid ambit claims with the view that eventually you will negotiate down. The process of carefully considering a purchase is time-consuming for the prospective buyer. The factors outlined above will determine where the buyer expectation sits in terms of an earnings multiple. There are so many variations in play that the ratios will vary between around 2 and 4. There would have to be exceptional circumstances taking a selling price outside this already wide range.
Know exactly why you have decided on your own seller valuation, and understand what the buyer will be factoring in. Your initial asking price should not be more than 10% higher than you believe on reasonable grounds the buyer will consider fair after all due diligence and consideration of all the factors covered here.
It is very clear that a reasonable seller valuation is always the key to a successful sale.
Most people get a thrill out of buying a business whether it be to expand their existing empires or as a stand-alone operation. Thrills aside it’s an investment so like any other, whether real estate, shares or traditional business, it is never totally risk-free. That said, our experience says it’s unwise to be tentative and overly risk-averse. Instead, go for the business you want and offer to buy the business on ‘creative terms’.
So, you have finally settled on an online business you’re really interested in acquiring. You’ve done your due diligence, meticulously analysed the net profit figures, and thought through the rightness of the ‘fit’. It all seems good and you’re ready to go ahead. Now it’s a matter of negotiating and deal structuring. This is the most critical part. How many times have you seen institutional investments and acquisitions go wrong? Even the most seasoned make mistakes so while it’s a time for excitement it’s not a time to become overly emotionally-invested in the acquisition. Be crystal clear on the value you are placing on the business…this should be on the basis of its analysed profitability and potential.
Get to know the seller
Good negotiation produces a win-win settlement in which both you and the seller come away with what you need. Understanding what the seller wants, including the reasons for selling at the present time, the seller’s valuation and reasons underpinning it, and the payment timeline wanted by the seller, are all critical to your effective negotiation.
Building trust with the seller is vital. Assuming you are acquiring an established business with a record of profitability and on a growth trajectory (and, if not, why are you buying it?), then the seller will have authentic reasons for the sale which are important to understand. Assuming, also, that you are looking at a high six or seven-figure purchase price, then the way the deal is structured is vitally important to its success and you should go to the negotiating table fully understanding what you want to achieve.
For obvious reasons it will almost certainly be in your interests to negotiate only a partial up-front payment. It would be unusual for a seller to agree to a 40% delayed payment, but withholding up to 30% until an agreed final settlement date is common. This is technically a form of balloon payment ‘loan’ as the seller continues their equity investment during an agreed period, characteristically only a few months, during which the seller continues to provide expertise, advice and training. It also enables testing of external relationships and links on which the business depends and which are supposedly being transferred with the business.
The Earn-out Agreement
A more complex form of temporary ‘seller retained equity’ is an Earn-out agreement. For substantial businesses with a high six-figure or higher purchase price, this form of arrangement may be essential to negotiate. (Ongoing seller retained equity arrangements are different altogether and are used to enable a mutually desired continued involvement of the seller in the business over the long term.)
So, what is an Earn-out and how does it work? Essentially it involves a partial upfront payment at the time of transfer to the buyer. The proportion of upfront compared to delayed payment is subject to negotiation, but around 70% is a general guide. The remaining 30% is then paid in instalments according to negotiated performance criteria such as achieving the seller’s predicted milestones, or minimum monthly profit projections.
To illustrate with a simplified example. You have agreed to purchase an online business for $300,000, based on an audited net profit averaging $10,000 per month. In real terms the monthly profit figure could be seasonal rather than regular, and this would be factored in to the agreement. But for simplicity here let’s assume a regular monthly net profit. It has been agreed that the upfront settlement payment will be $210,000. The remaining $90,000 will be settled on the basis that each month $15,000 will be paid, but entirely contingent on achieving the projected $10,000 net profit in that month. There are any number of possible intricacies, such as no payment being made in a ‘shortfall month’ or more commonly payment on a sliding scale reflecting the percentage of the projected profit actually attained. This entails a higher repayment in a higher performance month.
This may sound complex, particularly if we factor in that the total purchase amount in this scenario could be finalised earlier or later than the approximately 6-months timeframe envisaged for the Earn-out period in the situation described above. In a nifty variation on this approach, some Earn-out agreements fix the time frame itself rather than the instalment amounts, with the effect that if the business fails to perform fully to expectations the final price paid is somewhat lower than initially envisaged and conversely if it performs better then the buyer finally pays a little more in total than initially anticipated. Few buyers would be concerned about this as it is a win-win situation all-round.
Given the complexity of the Earn-out detail to be negotiated, why do it? The advantages for the buyer are immense. Firstly, the obvious one of delaying full payment and the interest costs of investing 100% from settlement day. But more important is securing the self-interest of the seller in actively ensuring that all goes to plan, the projections are achieved or exceeded, and there is a smoothing of any potential bumps created in the transition process while migrating service provider accounts and supplier and client relationships.
While a six-figure or higher business acquisition will always involve a legally binding agreement, at the end of the day if there has been a 100% purchase payment made at the time of transfer then it will be close to impossible in practice to achieve compensation for any shortfall in predicted performance or for any unanticipated hurdles in migrating accounts. Retaining a proportion of the final payout figure provides real leverage to engage the interest of the seller in ensuring the smoothest transition. Leverage beats lawyers hands down.
Finally, honest relationships are the key to success. If the seller won’t agree to an Earn-out provision find out why. There may be a compelling reason for the seller’s position. If so, then that loss of leverage at the very least justifies you offering a somewhat lower purchase amount to offset the downside of settling in full at the time of transfer.
Negotiation needn’t be stressful. It’s a matter of understanding the seller, while remaining crystal clear about your own needs as a potential buyer.
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!
Before you sell your website or web business, you should always perform a website valuation to determine how much your website is worth (get a free Flippa website valuation using our valuation tool). Having a strong website valuation going into a sale is important because it will provide a reliable guidepost and clear expectations. By reading this step by step guide you will gain access to professional website valuation methods so that you can perform your own valuation and be prepared to answer the critical question “how much is my website worth?”
Why should you read this guide?
- Improve your exit planning strategy
- Learn professional website valuation methods
- Find out how much your website is worth and what it could sell for
- Discover how to effectively convey the value of your website to potential buyers
Table of Contents
- Website Valuation as a Multiple of Earnings
- What determines the Website Valuation Multiple
- Evaluating the Risk of a Website Investment
- Finding Comparable Website Sales
- Getting a Second Opinion
- The Truth About Automated Website Valuations
- Exit Planning
Website Valuation as a Multiple of Earnings
Though there are certainly a wide range of website valuation methods (Discounted Cash Flow Analysis, Asset Value, Multiple of Revenue, etc.) the most widely accepted method in the website acquisition space has long been a valuation method based on a multiple of earnings.
How do you define earnings?
Most website valuations are based on an expression of profitability known as Seller’s Discretionary Earnings (SDE). SDE is effectively the net profit of the business (i.e. the difference between Revenue and Expenses) over a specified period of time, typically the trailing twelve months (TTM), and excluding income taxes, one-time expenses, and owner’s compensation. These aforementioned extraneous expenditures are typically itemized and added back to the net income of the business in the profit and loss statement.
Step 1 Calculate Net Profit: To start building your website valuation, calculate the net profit of your business on an SDE basis by filling out this profit and loss template. Have an eCommerce business? Try this eCommerce profit and loss template.
If you need help filling out your profit and loss statement, check out this article.
How to calculate website value?
Once you have the Net Profit (or Cash Flow) of your business, you can start to formulate a website valuation, which is expressed as a multiple of your annual net profit.
Annual Net Profit (Cash Flow) x Multiple (Years) = Website ValueThe multiple signifies the number of years of net profit that the business is worth. You may have heard a website investor say something like, “that website is worth three years.” What they are really saying is, “that website is worth three times the annual net profit.” Website buyers often view the multiple as the amount of time they can expect to pass after acquiring the business (and assuming income remains constant), before they recoup their initial investment. In other words, the buyer asks “how many years of annual cash flow would I pay for this business?” A 2x multiple would mean the buyer expects that it will take two years to recoup the initial investment, a 3x multiple means they expect it will take three years, and so on.
What determines the website valuation multiple?
The single biggest driver of multiple is risk. Generally speaking, risk and multiple are inverse. That is, the less risky the investment, the higher the multiple. The more risky the investment, the lower the multiple. Risk is perceived differently by every person, and because of this, you will always end up with mild variations in web valuation from one professional website appraiser to another.
Size does matter
An additional conclusion we can draw from the above graph is that as Net Profit increases, so too does the website valuation multiple. To illustrate this point, consider the 2015 net income of four publicly traded companies as compared to FightState.com, an AdSense based content website that sold for $300,000 (3.9x) on Flippa in October 2015.
To analyze the value of a publicly traded company, we can look at the P/E Ratio, a valuation metric that measures the current price of a share of a company’s stock divided by its current earnings per share (EPS) on a trailing twelve month (TTM) basis. Since the P/E Ratio measures the price as the multiple of earnings on a TTM basis, it is similar enough to compare to the multiple of net income methodology we have been discussing.
||P/E Ratio (TTM)
||Net Income (2015)
||Multiple of Earnings Valuation
|FightState* (Privately Owned)
*Sold on Flippa
When we compare the respective P/E Ratios and net incomes of each business, we can see that as the size of the company increases in terms of net income, so too does the multiple. There are other variables involved, but all else being equal, bigger businesses are typically perceived to be stronger investments (i.e. less risk), and that’s why investors are usually willing to pay more for them.
How do growth opportunities come into play?
Because they can influence the rate of return, growth opportunities are a crucial consideration when performing website valuations. For instance, consider a business that earns $100,000 net income in its first year of operations and promptly sells at a 2x multiple before doubling its net income the following year. The result is that the buyer breaks even during the first year of ownership, despite paying a “2x multiple.” You could almost say the buyer paid a 1x multiple for the business, as they recovered 100% of the entire $200,000 investment during the first year of ownership, during which, the website also doubled in value.
Clearly, in order to avoid undervaluing a website, it is important that growth opportunities be considered. Of course, just because a business is growing now or has ample growth opportunities on the horizon, does not mean it is guaranteed to grow. Because of this uncertainty, growth opportunities need to be valued on a scale. The greater the opportunities for growth and the greater the likelihood the opportunities will actually be realized, the more the scale should be tipped towards a higher website valuation multiple, and vice versa. Lastly, it’s worth mentioning that investors in this industry value results, “potential” is rarely enough on its own to warrant a sizable valuation.
Does business model influence website valuation?
In its 2015 Website Buyers Report, due diligence firm Centurica researched and analyzed public website sales data to determine the average multiple paid for websites by business model from 2014 to 2015. Although this data may be slightly skewed (as it was based on Asking Price & not necessarily Selling Price), the average website valuation multiple was 2.9x for Content, 2.8x for SaaS, 2.72x for Transactional, 2.7x for eCommerce, and 2.2x for Services.
Average Multiple by Business Model
(Source: 2015 Centurica Website Buyers Report)
The above results seem to line up with the industry standards for website valuations, which typically fall between 1x and 3x annual net profit. Within that range, business model certainly seems to have a significant impact. For example, Service based businesses typically have the lowest multiple of any business model. Why is this? They often have low barriers to entry and are heavily dependent upon human capital which greatly increases investment risk. On the flip side, business models with a high-degree of automation and high barriers to entry, such as Content and SaaS, tend to be valued higher on average. Based on these results, a better question than “how much is my website worth?” might be “how much is my business model worth?”
How to Evaluate the Risk of a Website Investment
We know that size influences risk, we know that growth opportunities influence risk, and we know that business model influences risk, but what other factors influence risk? And, how do we know how much risk warrants a 1.5x multiple website valuation vs a 3x multiple website valuation? The truth is, there are an almost infinite number of variables that influence risk. Luckily, it’s not necessary to evaluate every single factor to arrive at a logical valuation. Instead, all that is required is a structured diagnostic appraisal of the business, its environment, and its growth opportunities.
This can be accomplished through a combination of both qualitative and quantitative analysis and reasoning. We can break down this analysis into five key areas of website valuation: Business Overview, Financials, Traffic & Users, Operations, and Vertical.
Within each category we want to evaluate growth opportunities, sustainability, and strength.
- How old is the website?
- What is the primary business model?
- What was the site’s total revenue over the trailing twelve months?
- What was the site’s total net profit over the trailing twelve months?
- How many total users did the site have over the trailing twelve months?
- Any notable assets attached to the sale (i.e. social media accounts, IP, etc.)?
- Is revenue diversified?
- What is the YoY or MoM net profit growth rate?
- Has the rate increased, decreased, or flattened since the previous period?
- How is revenue trending over the previous 3/mo to 1/yr?
- How is net profit trending over the previous 3/mo to 1/yr?
- How are expenses trending over the previous 3/mo to 1/yr?
- Are sales expected to grow, decline, or flatten over the next 3/mo to 1/yr?
Traffic & Users
- Is traffic diversified?
- How stable is traffic overall?
- What are the main traffic sources?
- Is there a subscriber/customer list?
- If so, what is the current growth rate?
- What is the current customer churn rate?
- What is the lifetime value of a customer/subscriber?
- How have users trended over the previous 3/mo to 1/yr?
- How have pageviews trended over the previous 3/mo to 1/yr?
- How would you classify user engagement (low, moderate, or high)?
- How difficult will it be to transfer each traffic source to a new owner?
- Is traffic expected to grow, decline, or flatten over the next 3/mo to 1/yr?
- Categorize the transferability of operations (easy, normal, difficult)?
- Are there any employees or freelancers, and what are their responsibilities?
- Categorize the strength of the current supplier relationship (weak, medium, strong)?
- Is it necessary to keep inventory in a particular location to retain current profitability?
- How many hours a week are required for the owner to operate the business currently?
- Has this vertical been historically volatile?
- How would you characterize the barriers to entry (nonexistent, moderate, heavy)?
- How saturated is this vertical (Unsaturated, Moderately Saturated, Very Saturated)?
- How is the business performing relative to competition over 3 months, 6 months, a year?
This list is by no means exhaustive, and the process is admittedly subjective and up to a fair bit of interpretation. You may discover another format that does a better job expressing the website value of your particular business, which is perfectly fine. Simply use this as a foundation, and expand your valuation prompts from there.
Step 2 Determine Multiple: Use the following website valuation sheet to analyze your business and arrive at a multiple. Hint: If you get stuck, try moving to the next step and working backwards by valuing comparable websites that have already sold, and then compare these businesses to your own.
Where can I find comparable website sales data?
Historical sales data can often be a great source of insight when trying to value a website, as this data can help establish realistic price expectations and benchmarks. Flippa has the largest active database of website sales records. Some of this data is available to the public via the Just Sold page.
To get started, visit the Just Sold page and set the business model equal to the business model of the website you are evaluating. After you have done that, enter a range for the Website Age, Monthly Users, and Monthly Profit similar to the following:
- Your Website Age +/- 1 year
- Your Monthly Users +/- 1,000
- Your Monthly Profit +/- $100
If you had a 4-year-old eCommerce site with $1,000/mo profit on top of 10,000 users/mo, you could try the following search:
- Business Model: eCommerce
- Website Age: Between 3 & 5 y/o
- Monthly Profit: Between $900 & $1,100 Monthly Profit
- Monthly Users: Between 9,000 & 11,000 Monthly Users
Depending on the results you may need to either expand or shrink respective ranges in order to find a suitable match. The overall objective is to hone in on 1-3 similar website sales that you can use as a guidepost for determining the value of your website.
Step 3 Assess Historical Website Sales: Find 1-3 historically similar website sales.
Key Challenge: Lack of publicly available website sales data
One major challenge to assessing historical sales is simply a lack of available industry data. Even on Flippa, which is unquestionably the largest platform for buying and selling websites, many users choose privatize website sales data. Further challenges arise when we consider website brokerage sales, which currently make up the broad majority of upper-five, six, seven, and eight figure deals, but for which publicly available data is extremely limited. This is yet another reason it is highly recommended that you consult with a broker prior to a sale, as legitimate brokerages such as Deal Flow will have access to extensive private sales data.
Getting a Second Opinion
If your site is making more than $1,000/mo profit consulting with a qualified website broker to get a no strings attached professional website valuation is almost always a good idea. Website Brokers specialize in analyzing and evaluating web properties and often have many years of professional experience. Additionally, business owners sometimes let passion cloud their value judgement, and because of that, if you are valuing your own site, it is usually recommended that you get a second (and sometimes even a third & fourth) opinion to ensure your value analysis is in the same realm as industry experts.
Top benefits of Professional Valuations:
- Always free
- Performed by experienced professionals
- Use comprehensive website valuation methodology
- Have access to thousands of private high-end sales records
- Can give insight into sale options and offer help with exit planning
Website Brokers are generally regarded as the professionals best qualified to provide website valuations. Led by Director of Brokerage, Jamie Toyne, Flippa’s high-end website brokerage Deal Flow is a leader in providing professional valuations. The high-end brokerage valuation methodology is more complex than the fundamental techniques being mentioned in this article. For example, our Deal Flow Website Brokers analyze over 200 variables and use advanced business modeling techniques while performing website valuations.
Step 4 Apply for a Free Valuation: Get a free professional website valuation from an experienced Website Broker here.
Be aware of inflated website broker valuations
While legitimate website brokers have the necessary knowledge and experience to provide professional website valuation services, it is important to remember that they have an incentive to provide inflated valuations. Brokers provide free website appraisals as a form of lead generation. Oftentimes dodgy brokers will offer up unrealistic valuations, whether or not it is realistic to sell, in order to lock sellers into unnecessarily long representation agreements.
The truth about automated website valuations
Numerous sites provide automated website valuations. In addition to missing the human element that lends credibility to professional website valuations, most automated tools neglect critical data including financials, traffic, etc. in their valuations. The bottom line is that these sites are terribly flawed and inaccurate. To highlight this point, consider the chart below which compares four automated website valuations produced by popular automated valuation provider SitePrice.org, with the actual Flippa sales price below.
SitePrice.org valuations proved very innacurate, with each accounting for just 4% – 7% of the actual selling price.
Now that you have a professional website valuation, you may want to start planning an exit. Rather than a rushed sale of your business and its assets, exit planning is based on the idea that an exit should be meticulously planned and executed at the optimal time, so as to encourage the highest possible sales price.
The graphs above assume that both businesses were put up for sale in March 2016. Despite the business on the left having a Cash Flow of $67,000+ (TTM), the owner’s decision to shut the business down in October will likely result in a selling price of less than 0.5x, meaning this missed opportunity could end up costing the owner over $100,000 via a lower sales price. Conversely, the business on the right is well-positioned for sale, with strong, consistent, and stable financial performance over the trailing twelve months.
To plan for a successful exit, ask yourself three questions:
1. How much is my website worth?
2. What is my target selling price?
3. How can I achieve my target price?
Because internet businesses can change so rapidly, buyers typically place a particularly strong emphasis on recent performance. If your revenue is on the decline or your business is seasonal and sales have been flat, now is probably not the optimal time to sell. Patience is crucial. Determine what you need to do to increase your website value and achieve your target selling price, and then put things into action to ensure you can actually achieve that target.
Of course, some people simply find themselves in a position where they have no choice at all but to sell without a well thought out exit plan, and the consequences can be serious. As such, if you are fortunate enough to have the opportunity to plan an exit in advance, then it is highly recommended you consult with a qualified website broker and always keep an up to date exit plan in your back pocket.
Step 5 Develop an Exit Plan: If you have a website earning more than $1,000/mo profit and you would like to set up a free exit planning consultation, please get in touch.
If you have finished this guide and completed all of the steps above, you should be well prepared to exit your business with clear price expectations and a strategy to ensure you get the maximum sale value possible. Don’t be discouraged if you’re still feeling a bit unsure, just get started. The more practice you have evaluating different websites the more effectively you’ll be able to perform website valuations.
I hope this guide has succeeded in empowering you to uncover your website’s value and achieve a satisfactory target selling price. Let me know your thoughts in the comments below!