Forum Moderators: LifeinAsia
Mostly I found that the worth is about 12 months income for content revenue sites and 6 months for e-shops
What's the latest on this?
Anyone any ideas?
I 'm not sure I follow...
if a site brings in 50k, isn't the gross profit... 50k?
I'm not sure what the difference would be between gross profit and net profit on the web, however.
Actually the best rule of thumb is 5-7 times the gross profit
Hmm, so if I'm turning over $1,000,000 and making a million in gross but $0 in net profit I can sell my "business" for $5 -$7 million?
As someone who regularly buys and sells sites and sometimes consults on the subject I never ceased to be amazed by some of the figures I see.
I wonder how many people have been burnt on this basis
'it is worth whatever someone wants to give you for it', which is a pretty useless remark
As someone who regularly buys and sells sites and sometimes consults on the subject I never ceased to be amazed by some of the figures I see.
How about sharing your formula with us? If you do this so often I think we could benefit from your experience as opposed to simply telling us we are way off base.
FH
In summary
1. It's net earnings that buyers are more worried about, not gross. Net excludes all costs, from actual costs like advertising and hosting to less visible costs like a fair value for owner's time spent managing the site.
2. If people are using past earnings to price a site they are doing it in the expectation that those earnings are a guide to future earnings. The current price is then a discounted value of estimated future earnings.
3. Sites worth above a certain figure are better handled by an experienced broker than by the seller himself (Sorry, I don't make broker recommendations so no stickies on that, please).
With respect your "formula" (and the OP's "a website's value ranges from 0 to 5 times yearly earnings"), there isn't one. Each business is individual and the price it can command is a function of what the strengths of the business are, which prospective buyers it reaches, and when. Sorry if that's not helpful.
fair value for owner's time spent managing the site.
That's a very good and often overlooked point. One of my sites is netting around 125k/year however it currently has no employees. It has always been difficult for me to put a value on the site (not that it's for sale) because I do whatever needs to be done for the site. It's not time consuming, only requires about 7 - 8 hours a week to run but if someone were to purchase the site they would have to:
a. know everything I know.
b. subcontract out for maintenance, design, product development, programming, marketing, customer service, etc.
c. hire someone that knows everything I know.
There is an enormous value/cost in running your own site that many people overlook.
I have made numerous posts in WW on the subject of buying/selling and valuing sites
My bad, I wasn't aware of your previous posts on the subject. Thank you for posting the links to those. I will go read them over. In the meantime you mentioned above if we had a specific questions...
The current price is then a discounted value of estimated future earnings.
I have a degree in finance, so I am aware of the principle of discounting something, but typically I have seen this done in terms of discounting future earnings based on your rate of return. For example if I am looking at an annuity as an investment and it will pay me $100 per month for the rest of life I simply discount those future payments by the rate of interest I want to earn on my money (say 9%) to determine what I should pay for that investment in today's dollars to get that rate of return on the money I will invest. Is that what you are referring to here?
fair value for owner's time spent managing the site.
I agree this is a valuable thing to consider, but how do you put a value on this? Some people work faster than others, have better skills, more experience, etc. In addition, everyone values their time differently. I might charge $150 an hour for my time and consider that fair, but someone else might think I am totally off my rocker with such a rate. Therefore, what is a fair value for your time and who determines this value?
Last question, when selling a site, to some degree the past success of that site may have a lot to do with the current owner and his/her knowledge on a topic, the extent of their skills, etc. So how do you work around this when someone is buying a site so that the person buying it can have even a reasonable chance of duplicating your success with it? To some degree this is the same issue you run into when trying to sell a web development business, but if you don't have a team of developers and the company is "you" then "you" are the company so how do you sell that?
I find this topic extremely intriguing for a number of reasons so thank you for posting this.
FH
what is a fair value for your time and who determines this value?
If I were a buyer I wouldn't care much what you thought your time or skills were worth, I'd value them according to what it would cost me to replace them.
That could vary a lot depending on whether I had the skills myself, could learn them, could hire them, or maybe figure out a way to reduce the need for them. Another value to consider would be what else I could do with my time instead of running the site or managing help.
The same site could easily be worth very different amounts to different people.
but if you don't have a team of developers and the company is "you" then
buckworks has answered the other questions better than I could.
FH is right on the discounting. If you expect to earn $100 over the next five years how much do you invest now to reap that return?
Investing in business the investor has to see a way to recoup his investment if you showed me a business doing a million with no net I would walk as how could I recoup my investment.
How could I go to a bank and borrow the money to buy a business breaking even. I could if there were other variables mixed into this equation but it would take much more up front money to close the deal and much more work to get the deal closed.
I was giving him the easiest and simplest way to at least have a starting point to place a value on a business.
Now I agree in all casses that won't work take utube or myspace but they sold traffic volume and and don't fit the norm.
5-7 times the net lets the investor recoup his investment in 5-7 years and allows the ability to borrow money much much easier.
1) Your earlier post was about gross, not net (and you mentioned it multiple times so it wasn't a typo)
2) 5-7x profit in your example is $125K-$175K (not $200K); even your maths is wrong
3) 5-7x net: Hmm, how many businesses have you sold at that multiple? How many have you bought? Let me guess, if I had some fantastic web businesses I were selling at a "bargain" 4x net profits you currently don't have liquid funds to buy them ;)
To give you a better understanding we have just sold a site I manage for a 6 figure sum so I do have some knowledge in this matter, but since you are the self proclaimed expert in all sales please understand you have a wonderful formula to help you and that is good.
If someone has a different opinion please keep your arrogant remarks to yourself it just shows me you really are trying to show off in the forum and does have a negitive effect on anything you say.
I consider gross and net the same but you are correct I stand corrected they are different.
These are VERY different, you really need to understand this concept cold before you go into a meeting with a potential seller and/or buyer of a business or web site. I would recommend you get a couple of basic books on finance and accounting at your local library and bone up on this topic before going too far down this road. Mistakes like this could cost you a bunch of money. At the very least the other side will realize you aren't experienced at this which might end up costing you even more money.
When I said net I do mean gross profit as a company can adjust their net through better management.
You can also improve gross [profit] with good management as well, i.e. buying from a cheaper source, hiring cheaper talent, using lower cost inputs, etc. Again you really need to understand the differences between these and how you can manage each and what control you have and don't have over each before you buy. Believe me if you are selling and the seller knows what they are doing and is a sharp business person they will know this inside and out before you ever see a piece of paper with a written offer on it.
FH
If someone has a different opinion please keep your arrogant remarks to yourself it just shows me you really are trying to show off in the forum and does have a negitive effect on anything you say.
Here's one thing you'll find is absolutely, astoundingly, amazingly coincidental: People who claim 5x-7x is reasonable are never the same people who have money in their pockets ready to buy ;)
I would not buy any site for 5 years profit seems bad idea , the internet changes so quickly that who can predict those profits 5 years down the road .
I think if I was buying based on profit would be looking at one year to two years profit ( not going into Gross and Net to complicated for me ) because at the end of two years you would possibly have to look at re-design, re-moniterize using different model and a very different Internet than today.
Plus if I was interested in buying sites would be looking at vastly different matrix age, natural traffic, links, repeat visitors, growth potential, technical requirements and spec, bandwidth requirements ( any Video, Music type sites could have fantastic visitor numbers but high bandwidth requirements, Current Profit, Potential Profit, .
I suspect as a poster stated earlier once your into serious financial investment your best bet is to employ a professional for both valuation and contract.
steve
Valuation of any asset is complex and has a variety of changing contributing factors.
Using a simple multiple may work to an extent, but to truly realize a great investment, its a little more complex.
Would you trade stocks based only on a price to earnings ratio?
OddSod:then.... you have failed. You've created yourself a job, not a business.
That hurts, but true and something I needed to hear.
An exit plan is a good thing to have before you start a business ;) but it's never too late to plan this.
Given the variety of different websites around, with wildly different rates of growth and riskiness, trying to find a range of multiples of "websites" per se is probably a waste of time.
Even thinking of just plain content sites, there is a huge difference between the multiple (of profit) it is wroth paying for:
1) A spammy MFA that risks getting blasted into oblivion with every algo change.
2) A site with brilliant content that keep producing steady growth.
e-commerce sites, community sites, etc. are all very different beasts.
5-7x net: Hmm, how many businesses have you sold at that multiple? How many have you bought? Let me guess, if I had some fantastic web businesses I were selling at a "bargain" 4x net profits you currently don't have liquid funds to buy them ;)
True, but only because most websites that offered for sale are the sort of sites that tend to lose ground with every algo change.
If you can convince me that a site is really stable, I would snap it up at 4x, and would probably pay 10x, and even more if there is good growth (on net profit less value of time to run it). That would still give me a better return than other investments.
Think of all the well publicised big sites that have sold for high multiples. They did not get the high multiples just because they were big: they became big because they had a formula for success, and that is why they are worth a high multiple.
You might find the odd site that is high quality on a small scale (the best in a small niche, say). I think there are a good many of them around, but their numbers are far fewer than the other sort. They probably tend to be sold less frequently, because their owners know what they are worth, and will not sell into a market that wants to pay them low multiples: there is probably an information asymmetries here because it is difficult for the buyers to establish the real quality of a site (are there paid back links that will disappear? Are there links from the current owner's higher PR site? Is there paid traffic? Are the earnings faked? IS there some black hat SEO you have not spotted? ...).
and even more if there is good growth (on net profit less value of time to run it)
If you can convince me that a site is really stable, I would snap it up at 4x, and would probably pay 10x,
I agree that there are as many business models as there are wannabe millionaires, but a business is a business. Due diligence doesn't just involve ascertaining the profit; you need to know how that profit is achieved and the risks inherent in the business proposition. Sure, sites lose ground with algo changes (that's why you factor a bigger risk the higher the percentage of traffic from easily changeable sources like SEs). Sure, a business "model" (MFAs?) may fade into obscurity. There are a million other risks. The risks help determine the multiple.
are there paid back links that will disappear? Are there links from the current owner's higher PR site? Is there paid traffic? Are the earnings faked? IS there some black hat SEO you have not spotted? ...
the internet changes so quickly that who can predict those profits 5 years down the road
What you are referring to is risk, in this case risk that the market will change and no longer desire your particular product/service. Anytime an investor buying any business is asked to take on additional risk you demand a higher rate of return on your investment. For example, if I am buying government T-bills, which have very low risk I get paid 4% for my investment dollars. If, on the other hand, I am asked to invest in wild cat oil speculation in Alaska that might be considerably more risky hence I might ask for 20-40% return on the investment dollars.
When you are buying a web site you have to be able to make an educated guess about the market of said web site 5 years out and if the risk is high that the market won't want it any longer than you demand a high rate of return, which simply means when you discount projected earnings that you get a lower dollar figure of what that is worth today. If the risk is lower than your rate of return may be lower and once the same discounting is applied you might be willing to pay a bit more in today's dollars for that web site.
How you make the educated guess of how the market will react to that web site 5 years in the future is probably a good point to debate, any takers?
FH
Economically it is the correct thing to do, but it is not what GAAP or IFRS says.
If you're willing to pay 10x get your butt outta here quick and head off
I had a look at what is being sold at Sitepoint right now. Most of them are just like a million other sites (games sites for example). In fact, after looking though several pages I found one site that looked anything like decent. It has declining traffic, but a good position in a local area and good backlinks. This site has a current bid of about one year's REVENUES on an optimistic projection (it is probably making a loss after you deduct the value of time to run it) and a BIN of nearly four times that.
Now that is a site that is well short of what I would consider a quality site. The criteria that make something worth a premium, are the same as would apply to any business from a corner shop to huge listed companies.
Suppose you were considering buying a small chain of shops. Suppose it has little sales growth, few expansion opportunities, and Tesco (if you are in Britain, Say Walmart or similar elsewhere) have announced they are going to start stocking whatever the shop sells. You would play a very low multiple for it.
Now suppose that it is a rapidly expanding small chain. It has gone from five shops to ten in the last year, and it is easy to find hundreds of sites across the country for further openings. You might well pay say 50x profit for it, and still consider it a bargain, because it is that sort of chain that can become a huge national chain, like Bodyshop and Newlook did (sorry, UK examples only, because that is what I know).
You also need to think about barriers to entry (for most websites, none), how much it would cost a buyer to replicate the site for themselves (usually, not much), etc.
Compared with retailers websites are much more varied. e-commerce websites are on-line retailers, content sites are media businesses. Other sites provide services, others provide a medium to a community.
My point is that websites are too varied to value against each other in a simple fashion, as many people seem to want to.
Maybe due dil is a skill in itself and I should setup a business providing that service ;)
There is certainly a need for the service, the biggest problem I could see is persuading buyers that you are competent and trustworthy, when they may not know enough to assess your competence.
If, on the other hand, I am asked to invest in wild cat oil speculation in Alaska that might be considerably more risky hence I might ask for 20-40% return on the investment dollars.
Not quite true, as you may know. the risk on the oil speculation is almost entirely diversifiable, so you should calculate and expected return (taking the chance of nothing being found into account) and then discount at the same rate as other upstream oil.
There is certainly a need for the service, the biggest problem I could see is persuading buyers that you are competent and trustworthy
there is no accounting standard I know of
You might well pay say 50x profit for it...because it is that sort of chain that can become a huge national chain, like Bodyshop and Newlook did
Most of them are just like a million other sites.....well short of what I would consider a quality site... looking in the wrong places... are pretty low quality sites...I think you know why I do not ... You need to think about barriers to entry... websites are too varied to value
That was a joke. I've helped many people in WW and some of them have showed their gratitude for my several hours of help by sending me flowers or giving me the odd link.
I saw the smiley, but I thought it was worth a comment because the skills to do this are lacking.
I know a fair amount about accounts. You are plain wrong if you think that you think that you can deduct the value of your time, unless you actually pay yourself (not necessarily in cash, it could increase a debt to you for example, but something must go through the books). Of course that only applies if the business is incorporated, otherwise its profits are yours, and you cannot pay yourself so the question does not arise.
Now it is certainly right to deduct the value of your time, but that is very much a non-GAAP, non-IFRS measure.
Damn, if you're willing to pay 10x and willing to pay someone else for all the hard work you're going to be putting in to grow the business, you're every seller's dream
The main point is that what you are buying has a formula for growth that you cannot easily replicate. Why do you think Google bought Youtube? Big pharmaceutical companies keep buying small innovative ones?
Also you are double counting the value of your labour. If you deduct the value of it from the profits, and you are deducting it from the value of the growth!
Do you know what I hear? I can't, I can't, I can't. And, as someone who finds sites to buy on a regular basis, I have no problem with anyone who wants to opt themselves out.
That is why I think a lot of the best quality sites do not change hands that often!
It also means that if you had been offered stakes in some spectacularly successful businesses while they were still small, you would have turned them down. It does happen, like the man who got a big stake in Body Shop for financing their second shop. Now that is a bargain!
Now, it is fair enough for you to stick to certain types of sites because that is what is your business model - and I can see why it works for someone who know how to evaluate that kind of site. What I am saying is that there is a wide variety of sites out there that are worth more.
If someone offered me an years revenues for my site, me response would be that I might as well wait an year and collect those revenues, and still have the site at the end of it. So, I am never going to do business with you. That is fair enough. However, it does not mean that someone who bought the site off me at a higher valuation would get a bad deal: they are not going to find another investment that will give them a better return easily.
Valuation of any asset is complex and has a variety of changing contributing factors.Using a simple multiple may work to an extent, but to truly realize a great investment, its a little more complex.
As I've said before, I believe several elements constitute the price. But if you had to choose any one single metric it's what the site is expected to earn in the near future that matters. Very often the best guide to this can be found in what the site earned in the recent past. That's the major usefulness of past earnings. And pretty much the only use.
[edited by: Jane_Doe at 2:50 pm (utc) on Aug. 29, 2007]
