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I spoke with her for a while, and I would obviously consider selling up if a good offer was made.
Over the past couple of years, I have built a network of several hundered sites representing various markets - financial, medical, cars, gifts, flowers, hosting, books, music, dvds, adult, hotels, flights, real estate and so on.
The entire network consists of a) lots of sites, b) a lot of knowledge all encoded into scripts and databases which run the sites. All I have to do now is ensure I have incoming links, and the search engines do the rest. I therefore have lots of free time to either increase traffic (a task of which I am now getting bored) or build new businesses.
I am therefore developing a formal business structure to cover everything. I am collating statistics, and making every element of the business manageable by non-technical staff. My question is - how would one value a business that derived all of its income from capturing search engine traffic and converting it to sales - ie all of the technology and the "goodwill"?
What do you think a buyer would pay? If the company makes X per year, do you think 6X is a reasonable price to pay for something so intangible? Incidentally - I would happily sell today for 5X. I have many things I wish to do and there's never enough time to do them all!
When I buy retail firm bricks and morter - Its one years profits plus stock at valuation i.e cost.
Ive seen really silly prices added to web sites. Why should the price formula be diffrent than in the real world?
how would one value a business that derived all of its income from capturing search engine traffic
Therein lies a problem. SERPS cannot be relied on. Goodwill can, but SE traffic does not equal goodwill. A database of existing customers can be attributed a value. Your own copyrighted content that you are syndicating and charging for can obviously be reduced to a NPV. A large number of opt-in subscribers to your ezine will have some commercial appeal to some buyers. Thousands of non-reciprocated inward links can be considered valuable. But Google could stop sending you traffic in a flash. As a purchaser I would look at the negatives and argue that there is no long term guarantee of SE traffic so I'd offer to pay you deferred amounts contingent on continued good SE results.
The database - Id be very reluctant to pay an extar for these, I mean what are they worth really? How many are out of date, dead or are one off buys....
Id still stay with my valuation. At least you would have all of your purchase price back in a year so the search engines can go and sing. Although if you were to buy an ecomm shop Id hope to god that you knew about SEO etc....
Very worrying if you didnt.
If somebody offered me such a business, first and formost I'd have to wonder, why would the want to sell?
If I want to do something new today, I could simply stop working on this and continue collecting the money. All I work for is to increase income, not to maintain it.
It's just frustrating that publicly traded IT companies have always had P/E ratios of 20+, and in my experience, many of those companies ultimately have no firmer business foundations than those of SE-reliant affiliate marketing sites. The potential for growth remains grossly overvalued, in my opinion.
It's just frustrating that publicly traded IT companies have always had P/E ratios of 20+, and in my experience, many of those companies ultimately have no firmer business foundations than those of SE-reliant affiliate marketing sites
I find that frustrating too BUT they have size. And if your business is big enough you'll get high PE ratios too. The actual PE you'll be valued at would depend on market sentiment and confidence. It's that same sentiment and confidence that sees larger companies as less risky than smaller ones - all other things (like PE) being equal.
What would you estimate the true market value of a business with those stats?
An important element to consider would be the expected value of things like your ebay rating and your client list. If I sell a similar product, these are more valuable to me than if I merely continue doing what you are doing.
Future earnings are usually predicted based on an extrapolation of current earnings. The key factors here are growth and variability. A company that is expecting to grow profits at 40% per year for the next few years is worth more than one with prospects for static earnings.
Variability is the killer for many web businesses. Any smart buyer will look at various scenarios and develop a range of earnings forecasts. Business owners often present buyers with an "everything goes right" forecast, while a buyer has to look at the "everything goes wrong" scenario.
The ideal situation from a buyer's standpoint is a high degree of predictability. For example, a firm that sells product via multi-year contracts to stable firms would have excellent earnings predictability. Similarly, a firm with superb brand recognition in an industry with stable prospects and no technology changes might also have fairly predictable earnings.
Web firms driven by search engine results have the opposite situation. If update Hermione wipes out the firm's great rankings, will the firm's earnings go in the tank? Can other firms offer a similar product or service with little difficulty? These are questions a buyer will ask, and to the extent that they are true he will reduce his offer. In the simplest terms, a firm making $100K this year is worth more if next year's range of earnings is $80 to $120K vs. $10K to $120K.
What would a buyer LIKE to see in a web firm? This isn't an exhaustive list, but here are a few ideas:
- Barriers to entry by competitors (product expertise, exclusive vendor relationships, etc.)
- A large portion of revenue from repeat customers (vs. fickle SE visitors)
- Ability to make money on PPC ads (vs. a situation in which only free searches are profitable)
- Diverse traffic sources: links on other sites, type-ins, directories, etc. (vs. 80% Google-driven traffic).
- The business's success isn't reliant on continued involvement of a key individual (e.g., SEO specialist or product expert) who won't be under contract after the sale.
Web businesses may be affected by lack of buyer understanding. This could work both ways - some buyers may be afraid of such businesses, while others might be excited by the perceived high-tech aspects of the industry. A smart buyer, though, will work through the numbers for a variety of conditions to arrive at a price.
Our advertising expenses are relatively low. In fact the only advertising we do is "pay for performance". So we only pay AFTER we make a sale. Affiliates generally receive 28%. Our product cost is 8% of our sale price, so we have a lot of flexibility when it comes to affiliate commissions and advertising possibilities.
To answer your question, I am only looking to sell if the price is right. I am not actively seeking a buyer. Plus, I would only be willing to sell if the price was in the seven figure range, which to everyone else may seem overpriced. However, the room for growth in my opinion would definately warrant a 7 figure asking price. For example we recently released a few additional products that virtually cost us $0, and almost double the average sale price. Plus for any new buyer, marketing additional products to our past & future customers, would allow for virtually unlimited revenue.
tomld2- if you want to sell for 7 figures, I believe you'll need to wait a while. If your new product does sell as well as you hoped, and you show strong growth in '04, it would be possible.
Given your cost structure, I would probably be looking for every possible way to invest more money in the business or increase the product list. How much can you expand before saturating your market? Can you expand internationally? etc... If you can grow my 1-300% this year, 7 figures becomes attainable. An enviable situation! :)
Where the business has various "key men" who are invariably the ones who have created and grown it, it is quite common for the deal to provide for these individuals to stay on on a consultancy basis. A typical scenario would be that the price is agreed as a fixed sum today, with the balance being a percentage of revenues over the coming three years, during which the key personnel work within the newly owned business. As the balance is dependent on the future success of the business, which in turn is the sum payable to the key personnel, there is a vested interest in future success.
This type of deal works exceedingly well and generally makes more sense for all involved. The worst type of deal, where a buyer stumps up a lump sum and the key personnel walk away, almost always ends in disaster.