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 (getting a free professional valuation doesn’t hurt either). 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!
As the Director of Websites at Flippa, I thought it would be appropriate to share some insight into a few basic factors that can influence web valuations. After all, whether you are looking to buy or sell a website, you should have at least a basic understanding of website valuations. However, it is important to remember that a website’s value is based on both subjective opinions and objective observations. The big implication here is that the same website can be valued at different amounts depending on who is valuing it and what criteria they are using. Below are some widely accepted examples of basic factors that can influence website valuations.
Generally speaking, the older a website is, the higher the value. Of course, it is not just the age that is important, it’s the authority and reputation that come with the age. Older websites are more likely to have more established link profiles and brand loyalty, as well more traffic and financial data than a newer site.
Until it stopped being updated by Google, PageRank was the industry leader for establishing the authority of a website. The “authority” of a website determines the importance and trust a website has. In layman’s terms, you can think of it this way: the higher the authority, the more popular the site. And finally, with respect to this article, the higher the authority, the higher the website is likely to be valued.
Since Google PageRank is no longer a viable system, below are the best alternatives to calculating a site’s authority.
- Moz’s Domain Authority – Domain Authority (DA) by Moz is calculated on a logarithmic scale from 1-100. Think of a brand new website with no content as having a DA of 1, while sites like Facebook or Google will have a DA of 95+.
- Majestic Trust Flow – Since backlinks are one of the largest factors in determining a website’s authority, it is important to make sure these backlinks weren’t paid for. If they were, this site risks being blacklisted by Google and disappearing from Google’s SERP.
- Ahrefs URL Rank – Although Ahrefs is a paid service, the site pays back immensely, by detailing backlinks, content scores, and even calculating site’s traffic and its sources.
Traffic is one of the most significant influencers when performing website valuations. However, contrary to popular belief, it is not just a numbers game. High traffic certainly helps, but quality traffic is just as important. For instance, when performing a website valuation you might ask questions such as: Does the website pay for traffic? Is all of the traffic coming from a single 3rd party source (ex. Facebook)? What is the revenue per unique visit (RPU)? What is the bounce rate? The answers to these questions will influence the valuation. Of course, this goes without saying, the higher the quality of traffic the higher the value of the website.
As a side note, this is yet another reason why anyone seeking to sell a website should ensure that they have a comprehensive traffic analysis system such as Google Analytics installed. Without a reputable form of analytics, potential buyers will be unable to perform in depth due diligence on the quality of the traffic and the valuation will decrease as a result.
If you were forced to choose only one metric that you could use to perform a website valuation, then your best choice would be to examine the website’s profit. By and large, this is the metric with which buyers should be most concerned. Websites on Flippa typically sell for between 12x to 18x average monthly profit, with high-end sites creeping upwards of 24x. That said, I have seen sites sell on Flippa for as high as 72x, and I have obviously seen many sites sell for far below 12x. This is where the other factors (traffic, PR, age, etc.) come into play. Of course, beyond profit, valuations should also consider other financial indicators such as revenue and expenses.
5. Stability and Sustainability
Stability is an important valuation metric, because otherwise, a valuation could be heavily skewed by a few “good days.” To be clear, a website with turbulent traffic or revenue is a risky acquisition target, even more so when the seller is unable to explain the turbulence. Sustainability is another crucial factor that needs to be considered. A website that will become (or has already become) obsolete, is not worth as much as a site that has longterm growth opportunities. For example, a site that is dedicated to iPhone5 news is not sustainable. Sure it might make good returns for the time being, but in a few years when the iPhone5 is obsolete and completely phased out, the value of the site will significantly diminish.
6. Domain Value
I debated about whether or not to add this to the list because domain valuation is, in and of itself, a complex, cumbersome, and arduous undertaking. Many professional domainers (of which I am not one) will advocate using various methodologies and processes. However, the fact remains that a domain name does carry value, and so it should be considered when performing a website valuation.
It may come as a shock, but the simple reality is that no valuation method is perfect. The only way to get a true accurate valuation is to list your site for sale with a reserve that is the minimum amount at which you would be willing to part ways with the business. From there the market will produce an accurate valuation. In the end, your website is only worth what someone is willing to pay for it.
How much do I sell my website for?
Whether you’re selling your hobby site or a bigger business with an established revenue stream, the price tag that you put on it is possibly the most important decision that you need to make. Price it too high and it won’t sell, price it too low and you’ll walk away with less than you could have.
Whilst a large number of very different valuation methodologies exist, arguably the most widely accepted methodology in the industry of buying and selling established websites is applying a multiple to the site’s Net Revenue (or to be more accurate – to Seller’s Discretionary Earnings) to determine its market value.
This approach works well in principle, but what it doesn’t account for is that websites tend to sell for anywhere from less than 1 year of net revenue to over 4 years, meaning that determining the right multiple to apply to your property can be a challenge on its own right.
Determining the “correct” multiple can be rather tricky, but the easiest and possibly most accurate way is by comparing it against other sites that have recently sold.
Whilst this can be a little bit complicated, mainly because sale details (especially at the higher end) are rarely public, you can usually get a good ballpark-idea by taking a look around at public marketplaces such as Flippa itself, as well as looking at the asking prices of brokered sites. Just make sure not to confuse asking prices to selling prices – more often than not, the difference between the two tends to be as much as 10 – 30%, depending on the broker and their pricing strategy.
Compare Apples to Apples
When comparing your web business to other businesses that have recently sold, it’s important to make sure that the two businesses that you’re comparing are indeed similar to each other. The key areas to look for when determining such similarity, beyond traffic and revenue, are:
History – do the two businesses have a similar level of history? A site that was established a mere 6 months ago will always sell for less than one that has been operating for several years or more.
Stability – Do the sites show similar stability levels? Stable (or growing) revenue and traffic always add to the valuation.
Sustainability – Are the business models of the two sites equally sustainable? Sites that depend overly on third parties or carry any other risks to their sustainability tend to be valued at much less than those that enjoy varied traffic sources and are likely to stay profitable for years to come.
Niche and Market – Investors always prefer “clean” niches and markets that are evergreen in nature. In cases where a website operates in a generally unattractive niche (some examples are adult-related sites and gambling sites), or an industry that tends to change rapidly (such as SEO, internet marketing or other industries that have an unknown future), the valuation is always going to be lower.
Barrier to Entry – Is it easy or difficult for potential competitors to enter the industry and take over some or all of the market share of the site?
Owner Operations – Do the compared businesses require the same level of hours and skills from its owner? Needless to say, a business that requires its owner to perform sales 40 hours per week will be valued at a much lower multiple than one that is nearly passive and only requires minor management and monitoring to be done.
Bear in mind that the above list is merely a generalization. There are many more metrics that need to be taken into account, but the above should get you started nicely.
Common Myth: Start High to Gauge Interest
One of the worst suggestions that I keep hearing from sellers of web properties goes along the lines of: “Let’s start the listing at a high price and see if there’s any traction. If not then we can always lower the price later”.
Whilst an approach like this appears logical at first, it would only be true if we had an extremely large number of potential buyers to target.
Unfortunately, we’re operating in a relatively small industry where every eyeball counts, and therefore it’s crucially important to bear in mind that your listing needs to be attractive from the moment it’s launched, and that’s simply because the majority of buyers will only give you one chance.
This has to do more with human psychology than logics, though. While logics would say that it would be unwise for a buyer not to take another look at a listing when its price is reduced, the reality tends to be different. Buyers often completely ignore such price reductions for two primary reasons:
1) “I’ve already looked at this listing”
Most buyers look at a large number of listings daily. When they encounter your listing (with a reduced price), the first thing that crosses their mind is that they’ve already looked at your listing, and decided to pass for some reason. They won’t remember that the reason was the price, but rather that there was a reason – and therefore you will often fail to get a “second chance”.
2) “Something must me wrong
Bearing in mind that many buyers are also fairly new in the industry, they tend to trust the marketplace dynamics when making purchase decisions.
If the market appears to have a lot of interest towards your listing then it must mean that your listing is good/attractive. Similarly, if the market seems quiet then it must mean that something is wrong.
Because of this, lowering the asking price during the listing process often makes buyers believe that the market wasn’t interested enough in your listing at first, as well as giving them the impression that the price reduction may have been carried out as a “desperation move”, making them move on and not take a closer look at your site.
Prior Investments in Valuations
One concept that many sellers, especially those who are in the process of selling off their main business, often need to be reminded of is that any historical investments are irrelevant, as long as they don’t contribute to the site’s current revenue.
Over the years I’ve had a number of sellers tell me how there is no chance they would sell their business for less than $X, simply because of the amount of money (or time) that they have invested in it.
This is perfectly understandable. After all, who would want to sell their business at a loss. But unfortunately, this isn’t how buyers see it.
The harsh reality is that a typical buyer isn’t at all interested in how much time or money has been invested in the business previously – the only things that they care about are how much the business is profiting today and what are its future prospects, rendering the investment amount completely irrelevant when it comes to valuating the asset.
The simplest way to look at it is to always remember that what’s done is done. Similarly to having won a lottery 50 times in a row won’t increase your chances of winning again tomorrow, the amount that you’ve invested into building your business won’t increase its value unless the investment is clearly reflected in the site’s profit or has after-market value of its own.
Value Beyond Profit Multiple
Another aspect that is often misunderstood is when to apply value beyond the profit multiple. Many sellers understand the concept of profit multiples well, but tend to believe that their property is worth more than the multiple, due to some additional “assets” that it comes with.
This isn’t entirely wrong on its own. In cases where there are real, tangible assets, that have value of their own, it’s appropriate to add such value to the overall valuation of the business. But it’s dangerously easy to go wrong in distinguishing whether such additional value really exists or not. To give you an example, some assets that do have independent value are:
- Premium domain name (if it can be sold on its own)
- Tools & Supplies that have an after-market value
It’s however rarely the case that any of the above apply to an online business. More often, we see an “asset” list consisting primarily of things like:
- A large mailing list
- A Twitter profile with a high number of followers
- A bespoke technical platform, made specifically for the site
While it may seem that the items in the above list, albeit intangible, are true assets and should add value, the reality is different. None of these items should be added to the valuation figure, simply because the value that they have is already reflected on the overall Profit & Loss statement.
Let’s take the large Twitter account or Facebook page as an example. As a seller, you would (rightly) claim that social media account is a valuable asset, simply because it helps the web property generate significant revenue. But there are two additional aspects that need to be taken into consideration:
1) Does the social media profile in question already generate revenue?
If the answer to this question is yes, then the value of the Twitter profile would already be reflected in the overall valuation, by applying a revenue multiple to the proceeds that originate from the Twitter profile. This means that adding separate value to the Twitter account would result in double-counting.
If the answer is no, then the first question each buyer will ask is why would the Twitter profile be worth anything if the seller has failed to monetise it so far?
2) Would the social media account have value on its own?
Odds are that, without the website to go with it, the Twitter account or Facebook page would have either no or very little value itself. This is the key distinction between something like this, and a true asset, such as a PC or a room full of inventory, due to the fact that the latter can be easily liquidated separately from the main asset if needed.
The valuation of web businesses is a difficult topic, and one that different people will always approach differently. The above should, however, give you a good starting point when considering listing your business for sale.
Let us know of your own thoughts with regards to valuations in the comments section below, and feel free to ask me any questions that you may have.
Today’s blog post is by Mark Collier of DropMining.com. I love his insights into Flippa’s sales data, and hope you appreciate it as well!
Over the last several months I’ve been busy annoying the Flippa tech team gathering data on over 6,500 Flippa sales as part of a comprehensive study to determine what influences the value of a website and it’s sale price on Flippa.
My core goal was to develop a reliable website valuation model but additionally I wanted to delve into the data and answer some of the questions you might have about website flipping and selling on Flippa in general.
Note: this study was independent of Flippa, in fact they weren’t even aware I was conducting it and thus all findings are my own.
I looked at 52 potential influencers of a website’s sale price; mostly the data Flippa provides with their listings as well as some of my own.
I used a statistical analysis technique known as multiple linear regression to determine which of the 52 metrics of a website’s value are statistically significant influencers and which aren’t important.
The key thing to remember about regression is that it isolates each influencer and determines what the increase in a website’s sale price would be if you increased that influencer by one unit e.g. adding $1 to monthly net profit without changing any other metrics for example by cutting costs will likely increase the sale price of your listing by $3.50
I’ve summarized the major findings from the study below, you can find the full version on my blog.
It’s pretty easy to buy into a lot of the hype regarding what you can do to a website to make it more valuable.
But a lot of it is just that – hype.
Only 18 of the 52 metrics often used to measure a website’s value are actually statistically significant influencers.
That means that if you spend time and money improving on the other 34 metrics you will likely see no increase in your listing’s sale price.
Take a look at the below graph which shows the importance of the most influential metrics.
Importance is measured through a combination of both the amount a one unit increase will cause the sale price to rise by and the how what scale the metric can be increased to.
For example many Flippa upgrades cause a pretty large increase in sale price, but with many of them you can only buy them once thus their impact on sale price per unit increase might be quite large but the data only shows that metric as having a range of did or didn’t buy.
But while a one dollar increase in monthly profit might not have a massive increase in the sale price, it’s one of the most important metrics because profit can be virtually infinite.
Revenue, profit and traffic are clearly the most important factors influencing the sale price.
Holding everything else constant each dollar increase in monthly revenue and profit will yield a $2 and $3.50 increase in the site’s value respectively.
In practice often two metrics work together, for example a $1 increase in revenue may also lead to a $0.75 increase in net monthly profit thus having a double effect.
Or the number of inbound links to a website may increase the site’s traffic, which increases revenue which in turn increases profit, having a quadruple effect.
If you’re flipping a website, your sole focus should be to increase traffic, revenue and profits in a sustainable manner but with immediate effects.
Any actions that fulfill these criteria will have the maximum positive impact on your listing’s sale price.
I get really excited when data can find clear cut answers to people’s questions.
Let’s have a quick-fire round:
Taking advantage of Flippa’s feature allowing you to directly link your Google Analytics account to your Flippa listing is likely to increase the sale price of your website by $630.
Interestingly uploading Google Analytics PDFs of your traffic has little or no effect on a listing’s sale price.
While I didn’t have sufficient data to study all of Flippa’s upgrades I did study their screenshot, bold, highlighted and premium upgrades.
Each of the first three upgrades which cost $20, $5 and $10 respectively will likely increase the sale price of your listing by over $500.
While the data is less clear whether using the three in combination will be as effective due to the large margin of error I can highly recommend using each of these Flippa upgrades for what will be an easy win.
Very few people use the $250 premium website listing and as such the data is insufficient to render a concrete judgement, but nonetheless from the available data I would estimate that this upgrade will likely add between $6,500 and $10,000 to the sale price of a listing.
These were probably to two most interesting areas in the study but I also analysed the importance of domains, what listing types do best and more.
Mark Collier is the founder of DropMining.com, a soon to be launched start-up in the expiring domain space, offering premium data on 200,000 daily expiring domains. You can catch more of his data based posts on his blog.