oddsod - 12:17 pm on Mar 12, 2010 (gmt 0) [edited by: oddsod at 1:00 pm (utc) on Mar 12, 2010]
is it a good idea to buy sites at 4x or more of annual revenues?
Yes. And no. It depends on the site. Buyers don't always do this calculation but ultimately the price they are willing to pay is based on the current value they attribute to future income (discounted for when in the future they're going to get it). There are accounting terms such as discounted cash flow and NPV for anyone interested and they'll go into further detail on how interest rates influence the calculation etc.
However, one big factor dampens the valuation of internet businesses: risk. Whatever the rate of return required and the expected future cash flows, in the end all of that has to be adjusted by the risk involved. We're not talking AAA government bonds here. Sellers don't like to accept this but because things change so much faster online the risk for internet businesses is generally much higher than it is for mom and pop cafes that have been going for the last 30 years.
I've seen websites perceived as low risk going for 48x and 60x.
(Convention with multiples: it's monthly not annual profits - another reflection of the higher risk they represent vis-a-vis B&Ms which are usually valued as a multiple of their annual earnings)
[edited by: oddsod at 1:00 pm (utc) on Mar 12, 2010]