|How Much is your Business Worth?|
How do you value it?
This is something that has been troubling me for ages. How do you value a website. to me there are several things I would take into consideration, but when I try to then evaluate what my site is worth, I come unstuck. The key parts are:
1 Natural links for good PR
2 Monthly profit.
3 Is there a valuable Brand (domain name)
ie, is the site in a bit of valuable internet real estate, and how quickly will it repay my investment.
Let us try to put this into an example:
Now, I know someone who recently bought a PR 6 site for £500. I thought that was Cheap. Let us say for arguement a site makes a profit of £5,000 per month, (a very nice wage for a one man site), is it worth 3 months profit, 1 years profit, or 3 years profit?
To me, I might say... I could set that up for £10,000 plus 3 months work. So it is worth about £25,500. But do nothing, and it would pay back in 5 months. Got to be a bargain at that. I will buy it.
But I would never sell a site performing like that for that price. But I would sell it for £100,000? And more to the point, would someone buy it!
So, how do you value a site?
Great post on this issue:
Great thread, but for me the whole thing is very domain based, probably because Lisa is probably one of the most knowledgable people on the forum ref domains.
That is part of the brand, but most "corner shops" do not work on that sort of brand identity, so the domain is only a part of it.
The key bit for a courner shop is:
Multiple yearly income of the domain by 2.5, add this dollar value to your final price.
I doubt there is anyone out there who would pay £150,000 for something bringing in £60,000 p.a. The internet space out there seems too fragile. In reality it is probably more stable than it seems at times.
What she is suggesting is quite right, widget.com is worth more than widgetstore.com, but wigetstore.com might be a business, while wiget.com is sitting there waiting for the right offer.
For the smaller business though, i think it gives a skewed result.
Anyone sold a small business?
I don't know if you can get a definitive answer about calculating a plausible price, but maybe someone on WebmasterWorld at least has experience with the process.
There are many theories of valuation taught in economics departments and business schools. There is an industry of appraiser and consultants who value different lines of business. And there's another industry of brokers, which would not exist if the appraisers for buyers and sellers left no room for arbitrage.
>>How do you value it?
Call Goldman Sachs, and if i want a higher price than it's actually worth i call JP morgan.
>>>Call Goldman Sachs,
Not sure he they would be interested in something that size :)
3-5 is the rule in small business sales [webmasterworld.com]. While I agree somewhat with your assessment of the "fragile" nature of web-based business models, if it has a profitable track record in these past (somewhat chaotic) years that says much for the business --unless, and this is a BIG one, the success rides largely on the ability of the owner/manager and that will not transfer when the business is sold.
3-5 rule. If I could find a buyer, I would sell up now :)
I just bought an affiliate site on 50% of the profit in the next 12 months. It is a long story, but he knows I will lift the sales from the level he has been running it at as I did some SEO for him in the past.
Seems like I got a lucky deal on that.
That said, I think you last point is the key rcjordan, and that is the bit I was missing. That site I bought was worthless without me. And that is probably true of many small business's on the web.
Thanks for the link.
George, you are talking about valuing a business, while Lisa's exhaustive list of factors are primarily geared to valuing a domain name with a web presence.
If a domain is home to a viable business, then I think traditional business valuation models are more relevant. Clearly, though, the domain name is one of the assets that must be considered in valuing a business. A business generating 10K a month with a name like cars.com is worth something more than a business generating 10K per month with a name like automotive-products-resale.com.
My thoughts precisely.
So how do you think a business should be valued? To a degree, all businesses are valued on their percieved value in the future.
If I sell cars online, then a car retailer might want to buy me out because I have a presence. But do they know how strong that presence is?
rcjordon says 3-5 years sales. I do not think I can get that in the UK.
I say 3 years profit is probably a max, but 6 months profit it more realistic.
Anyone else bought?
But then teh question is, couldn'T you wait 6month and jsut make that money? or 12 and do double?
Also Depends on how much work it is. Few profitable one-man sites are true full-time businesses.
Yup, so you never sell. But people do. The real way to find out is to put one up for sale but I am Paranoid, and think someone will come along and say:
"Hey that is a nice niche, I will set up another site doing that".
In the UK the 3-5 rule is on the high side.
Scanning through the small business ads locally (<£200,000 sale price) I see companies selling for 1.5 times net annual profit. The the market is low at the moment.
Other rule of thumb valuation methods for traditional companies I have seen:
Niche market business with competitive advantage:
4-5 times annual profit
Start up business with no current operating profit but with percieved competitive advantages:
1 times gross annual profit
That "net" annual profit is a funny one though. I know plenty of one man business's that make tiny net profits, but the owners are never short of money :)
Maybe this is the time to be buying small business's then.
There's the old saying that a business is worth only how much someone is willing to pay for it. You may have a niche site that a large competitor is keen to get into. They may be willing to pay way over the odds. I've known cases where businesses have cornerned themselves into a niche to become attractive as acquisitions.
6 months to 2 years is realistic. What is disappointing is that in several discussions I've seen here and elsewhere the emphasis is purely on things like track record, historical profits and projected earnings based on that. Nobody seems to talk about the value of the content itself. The golden rule seems to be that you have to come up with good content. Good webmasters take time and trouble to create that good content. While the transitionary nature of this new technology does limit the earnings multiplier .... what of the lifetime copyright that the buyer is acquiring?
> I know plenty of one man business's that make tiny net profits, but the owners are never short of money :)
Lucky for them the taxman doesn’t
> Maybe this is the time to be buying small business's then.
I think so, the problem is finding suitable sites for sale.
There is a financial tool called "Net Present Value" that allows you to determine the value of a project or business to yourself.
Basically that is the value of all future profits discounted to their present value based upon a rate of return. This rate of return is based upon the risk of the future money.
A key aspect of this is that $1000 in 2 years time is worth less than a $1000 today. The riskier the chances of that money, the less it it worth. If you have equal chances of $1500 or $500 it is worth less than a "for sure" $1000.
Risk then is a function of the perception of variability. Industries or projects with long term historical records are considered more predictible. For most people internet businesses, to say the least, are not predictible.
So, at least according to this tool, transfering the traditional business world's rule of thumb of "3-5 years profit" might not be accurate.
One issue that tends to get forgotten is that your time is worth something and has to be deducted from profits. If you were selling it elsewhere you would get cash. If you are selling it into your own business you are hopefully getting equity.
NPV is pretty easy on the math as far as financial tools go. Lots on the web about Net Present Value [computerworld.com] (NPV).
(Hope that link doesn't cause TOS issues.)
Something that always gets forgotten in calculating small business profitability is paying the owners.
Check for a salaries or owner's drawings line item. If a business is said to be making $60,000 profit pa without taking into account the $50,000 going to the current owner then it is actually only making $10,000 - and you should be looking to pay more like $25,000 that $150,000 for it.
Of course you need to consider what the business would be worth to you. If you are a retiree perhaps you'd be happy to pay yourself a salary of $20,000 instead. Maybe they are sitting on some poorly utilised assets that you are sure you could put to more profitable use.
The following site is a great resource for simply seeing what others are asking for their online businesses aswell as others. bizbuysell.com
[edited by: Travoli at 1:23 pm (utc) on Oct. 2, 2003]
Great thread so far.
The traditional methods as 2-4 times sales or 10-20 times earnings (price-earnings-ratio) should give a hint. For the earnings you must calculate what extra costs a buyer would have: Someone running the business, programming, making changes to the website - all sort of things that you as the owner and builder of this business are doing along the way.
For web based businesses you have to think of the risks for the buyer: Is the business model still working in two years? If the buyer is paying a price of three years sales, but there are no more sales within two years, then this is bad for the poor man who bought your business ... This is, why you (and I think most of the people) feel that nowadays internet ventures are priced less than what the traditional methods tell. (Just three years ago, it was vice versa though.)
Some one touched on risk earlier. It should be a factor in the calculation. So if the net present value of a company is $10,000 but I think there is only a 75% chance of the income stream continuing then I should only be willing to pay $7,500.
The internet is considered shaky, therefore the price goes down. It is the risk factor that is hard to determine unless you have detailed knowledge of the business. Look at the recent tremors around hotel affiliates.
Sorry to bring this up again .... but where does the value of the copyright come into all these calculations?
If you've developed good content for your site then how come nobody factors the value of the copyright into the calculation?
It is a good point, and one I think few understand, so it is often valued at zero. Content can I believe be bought quite easily from cheap sources... although it is often the basis of a site.
If you mean copywright of software, I think it is because we are talking about ecommerce generally,and the tools of the trade have been written so many times they are now "free". (Go to hotscripts).
bizbuysell is a handy example, thanks. Most sites seem over valued to me. If I could get those prices, I would sell :)
George, I agree completely. Some types of software generally do not have much value. MS Office, enterprise standard ecommerce software/CRM software copyrights would sell for millions.
And I'm not talking about the content you could buy cheap.
I'm talking about the content that webmasters come up with themselves. This has been the guiding principle. All the gurus here and elsewhere have been preaching for ages that you've got to have a lot of good content. I'm sure that many webmasters have come up with a lot of useful, unique and quality content for their sites.
My concern is that nobody ever talks about valuing that unique content when they are valuing websites.
So how do you value content? Someone started a thread earlier today saying they had spent 300 hours building a site.. so what? I cannot be time. It is a bit like good will perhaps?
|Someone started a thread earlier today saying they had spent 300 hours building a site |
That's irrelevant. 299 hours and 59 minutes could have been spent experimenting on design and colour of his pages. If however, he's written extensive reviews on - say - DV Pro and DVCam cameras (professional camera equipment), and his site has become an authority in that field, surely some value attaches to the expertise he has applied in all the work done reviewing various pieces of equipment and compiling detailed reviews. If he submitted that content to a magazine he would get paid handsomely for it. Many webmasters have that type of valuable content they've written. I have NEVER heard any mention of valuing the copyright of content on websites.
In another thread I posted the details of a buyer who works with the guy who will soon not be my client anymore when he sells the website to this co-worker. They are both head-hunters in the trucking industry for truck drivers.
The site itself has been promoted by me and my well established 6 year online trucking job websites that delivered to him an average of 1100 truck driver applications per month. His own site, which was advertised on my trucking job sites (I am not a recuiter but a recruitment online service to recruiters and trucking companies) my soon to be former client of 2+ years has done quite well and made himself 6 figures both years. He claims his co-worker will also as he is one of the top 5 recuriters on a consistant basis.
My client is asking $2,000.00 for the domain name and his developed 11 page website. His position in the SEs is not great but not shabby for a start up that he has invested only a couple of grand into. The success he has enjoyed has been dependent largely on the site promotion advertising and driver apps he has gotten from me along with one other similar website to mine who provided him with apps and advertising. I told him 2k was a decent price as the success of the site will also depend on the buyer, his ability to make new hires happen and he MUST find a good service like mine that is already generating driver applicants that is a well established website and a webmaster who knows the business of website promotion and knows the trucking industry and truck drivers' states of mind [I have over 20 years in the industry].
My client's advertising was cancelled last month because of his new promotion out of recruoting and instead of getting an average of 200+ driect apps from his website now and monthly average live traffic of 25K he is now getting only 2-5 apps per week and a pitiful 5K traffic.
A website is only as good as the one who works it and the one who promotes & manages it and both are not usually the same person. The value can be set for the unique domain name by the powers that be & it's popularity but without hard work on the owner's part, good promotion and management it won't be worth anything but the vlaue set on the domain name, whatever a buyer deems it to be worth. The money it has produced for whatever period of time has many reasons and if it ain't broke when you buy it then don't change the reasons it was successful, just maybe add to it if you have the cash flow but don't try to reinvent it if it is making a real decent income. BTW I am also his webhosting company.