|Does valuation of website include income?|
I've read with interest all of the posts about putting a value on a website for the purpose of selling it. What I'm not clear on is whether the value of the website includes the money that the website owner has been taking from it as income.
I know it sounds stupid, but I've often assumed something only to find out I was wrong.
So, if a website has, say, $500,000 in gross sales, and the owner takes the profit of $100,000 a year in the form of a salary, is the site worth some multiple of the $100,000?
That's a good point because semantics are involved here. Some people refer to net profit and then value a website as a multiple of that. I'm not sure if net profit is the profit before or after your drawings are taken into account.
Semantics aside though, people generally calculate the profit figure as income less expenses and the expenses don't include your drawings.
There are other factors in the calculation as well. Depreciation is one of them. Lots of other factors need to be considered if the income is large
I'd valuate a site based on how much the site earns annually - which means total income minus total expenses. But you may also add the value of the site's other assets.
Re other assets: a site may earn $x a year net, but the site may have other assets that contribute to its valuation. Most of the time, that's not a factor. Sometimes it is.
For instance, owning licensing & publication rights to a site's branding or content can be worth $, if&when the content is republished as a book, turned into a movie, spawns a line of snowboarder fashions, or whatever.
case in point [imdb.com].
When someone tells you the value of their site, be sure to find out what that number really means. And if you're selling, you may show them a really large number, but you must (ethically) also communicate clearly to the buyer what that number means.
It depends on the situation and the motivation of the buyer , in my view.
For example small business people often consider the value of personal income. So if your website is a small proposition a seller and buyer will look at the profit / loss plus personal income + the value of the assets .
The seller and buyer may then factor in " potential " and work out how they can increase the value in a negotiation.
More structured business' will work along similar lines. Personal income is more likely to be recognised as a cost of running the business and not considered , unless there are above market rate benefits flowing back.
You need to factor in how much time you spend maintaining and running the site as an hourly rate. This is considered an expense since the new owner may need to hire someone to replace what you do every day to keep the lights on.
|You need to factor in how much time you spend maintaining and running the site as an hourly rate. This is considered an expense since the new owner may need to hire someone to replace what you do every day to keep the lights on. |
That's what I was thinking. Without me doing what I do, the website wouldn't earn. I can (and hopefully will) hire employees, but that will simply increase costs.
This isn't something that's going to happen any time soon, but I'm thinking ahead.
There are Assets and Liabilities. Liabilities cover all expenses involved in maintaining business (which includes draws, salaries, costs, materials, accounts receivable, etc.). Assets are either fixtures, vc capital, or income. Subtract Liabilities from Assets to determine Net Worth. Whoever buys the site will have their own liabilities to continue operation. So the question is which valuation? Gross or Net Worth?
Just to clarify what Tangor said: income and expenses go on your Profit & Loss statement. The difference between the two ends up on your balance sheet as retained earnings at the end of the accounting period (one of your assets).
The balance sheet consists of all assets and liabilities, the difference is your company's Net Worth.
I'm not familiar with the term Gross Worth, you probably mean Net vs Gross Revenue?
Good question but the real answer is that the owners income is irrelevant, it's an arbitrary figure that doesn't impact the site in any way.
To figure out what a site is worth you need to figure out how much it can reasonably be expected to earn and subtract what it would reasonably cost to run it. These figures are worked out for various amounts of time, 6 months, a year, 2 years and 5 year forecasts are a good idea.
Next you need to figure out how unique the site is and determine how much competition it has. If the site is similar to other sites expect to pay less, perhaps 6 months revenue for it. If a site is one with authority, in a tough sector to gain ground in and hard to duplicate expect to pay more for it, perhaps 2 years gross revenue.
Only the best of the best sites will fetch crazy values, the rest will get more reasonable valuations and as always it pays to sell where there is a lot of demand or buy when there is little demand if you forsee an increase in future demand.
caribguy... sorry Gross Income and Net Worth (which we know are two entirely different things!) Sorry for the non-typo which left out a word. :)
JS_Harris... costs of doing business are essential to determine a site's worth, as you stated, but the owner's income from same is part of that valuation, which is where we appear to disagree and is part of the OP's question. I suggest it must be included.
I tend to agree with JS: the amount of cash flow that the site will generate is key (what comes in minus what goes out). Etceteris paribus (all else being equal).
Next, look at exclusivity and barriers to entry: if you have agreements with suppliers, content providers, etc that nobody else can match, you might be able to get a premium price.
The owner's income as a standalone factor is not very relevant. The replacement cost is more important. If the site makes 500K in sales, how much is the cost of goods sold? That's a factor that is most difficult to influence...
|the amount of cash flow that the site will generate is key (what comes in minus what goes out) |
That's not cash flow but profit. Cash flow is often only a measurement of liquidity, not of profitability of a business. Banks like cash-flow because if the business fails, intercepting the cash-flow is a method of them to pay of debts. Entrepreneurs should be more concerned with profitability in the long run.
Selling a working website is not much different from selling a normal business. The main thing the buyer looks at is ROI, but from a different perspective than the seller. The buyer my have plans for a site which the seller may not have thought of, and be therefore willing to offer more money than the seller expected, but it may also be that the buyer is only interested in 10 or 20% of the site (for example a large database with email addresses) and accepts that he has to buy the other 80% just to obtain the thing he wants.
Then there is the problem of costs. As a one-man band with a part-time website and other sources of income, there are almost no direct costs involved other than the costs for hosting and bandwidth. Spare time in the evening or weekends is invested in a site and more often than not that time is not counted as business expenses. But if a site is run by a professional company, many other costs are involved. Parts of the maintenance work may have to be outsourced, and all work is done by paid employees, totally changing the earnings/expenses ratio.
Therefore there can not be a uniform valuation of a website, especially not because a seller will always leave things out of the calculation--often just because he doesn't recognize them as costs--and a buyer will see more costs because he may have to use expensive labor to the things done, or because he has to pay for parts of the site he doesn't really need or want.
It's beginning to sound as though the value of a website can't really be determined until both parties sit down to negotiate.
I could increase my site's profit by taking a smaller income, but then I'd be paying double in taxes, as I'm a corporation. As it is now, I take any money left in the bank account at the end of the year and write myself a bonus. If the business needs the money after the first of the year, I loan it back to the corporation.
A website value is more prone to speculation than the value of many other businesses. There are no or few fixed assets, no or few people to pay salary to and no inherit capacity limits on future growth. In the end it is what the buyer wants to pay for it, and what the seller is happy with.
Re cash flow - thanks for the correction. Fingers were still typing while the brain was on the next subject...