Selling a Cash Cow

Is Value Similar to Annuity?

[Powdork]

I am considering the sale of a web site I have held for the past 6 years. Since the first year the revenue has been between 9 and 12 thousand each year, with 12 being the most recent. It is a content rich directory with 100% unique content, all by me. There is very little work involved (sending invoices and occasionally changing vendors). It would probably amount to less than 50 hours per year to keep things going as they are now.
There is some revenue risk involved as the majority of the traffic is from group of phrases for which the site ranks very highly on google. Only the adsense, which makes up roughly 10% of the revenue, is directly traffic dependent. Should the Google rankings change dramatically, the revenue stream would change only when listings become due (annually), and then only if vendors noticed. Additionally, there is upside potential as I have done nothing with online advertising and the site doesn't rank well on Yahoo.
So, given all this, would the valuation be based on something similar to an annuity.
The present value of a 10,000 annuity with payments lasting only seven years at 8% is 52,063.

Would that be out of line to start with as an asking price?

[edited by: Powdork at 7:22 am (utc) on Nov. 18, 2008]

[cabowabo]

With the economy the way that it is right now, you'd be fortunate to get 18 months worth of revenue as the sales price. Personally, if you need the cash now I would take. If you don't, I would sit on the site until the market recovers.

[Swanny007]

May I ask why you are interested in selling it? Is it feasible to keep it for another 6 years? The reason I ask is I too have a cash cow, 8 year old site making good cash. I wouldn't sell it for any price right now due to the fact that although it's not recession proof I know it will continue to make me money for as long as I have it. Why trade a great thing that took years to build for maybe 2 years' revenue?

[Powdork]

because i think right now would be a fantastic time to buy a house, but am in need of a downpayment.

[Jack_Hughes]

By your valuation it would take around 5 years just to get the investment back. That's a long time when you're relying on search engine rankings...

[Powdork]

^^that's a good point, and a way of looking at it I hadn't considered. Obviously, to make it attractive, the selling price would have to be less than the current value of expected future payments. I'm just wondering if the annuity valuation model is a good way of finding the site's value.

[Jack_Hughes]

Annuities are invested in things that are a lot safer than web traffic. In five years search engines as we know them may not exist and yet I'd still be waiting to get into profit from your site that relies upon SE traffic to earn its keep. So, no I don't think the annuity model works when valuing a web site. I've heard people quote as little as 6 months revenue when valuing a web site.

[HugeNerd]

I think the annuity value model fails to take into account your prospective buyers. My guess, based on your brief description, is that this would be purchased by an individual and not by a company. That greatly reduces the value of your site, IMHO, as I cannot see many individuals waiting more than a year to turn a profit -- I am thinking 6 months to 1 year revenue = sales value to an individual. You might be able to eek out 18 mo's if the buyer understands the potential of gaining rank in Yahoo (particularly in a post Yang Yahoo with ties to MS). Granted, I am projecting my own thoughts onto others; it may just be a matter of finding the right buyer!

Best of luck with the new house!

[Powdork]

There are several buyer options that would be obvious candidates and they are both individually owned companies. One is my biggest client and the other is my biggest competitor. I would say there are at least three other vendors that could justify buying it at 6-12 months revenues.
It sounds like it's not gonna happen since I would feel raped with anything less than 35K

[caribguy]

There are two other issues that lessen your ability to command a higher than market value (imo less than $20,000):

1. You are taking the initiative to sell and have somewhat of an urgency to sell (the house downpayment).

2. The ability of new entrants to eek out a comparable business. The only thing of real value to a prospective buyer is your client list.

I would hope to be totally wrong on this of course, and that tomorrow someone knocks on your door to make an offer...

[Powdork]

I disagree on point 2. The Google rankings and the Domain name, which is instrumental to those rankings, IMO represent the real value. It's a pretty competitive keyword that anchors the different secondary phrases.

Also, there is considerable upward potential as well, based on the fact that I have always only allowed three vendors in each category. Additionally, Adsense is only present on the homepage as well as those pages with no advertisers.
There is other unused ad space as well as well. I guess I better get working on that, then.

[Swanny007]

It sounds like you at least have a dollar amount in mind. FYI, the only site I bought (a few months ago)... I paid about 16 months' revenue. It consisted of about 120 static content pages. It was a competing site so it was worth every penny ;-) I actually managed to double it's monthly earnings in a few short months.

[eljefe3]

I've been keeping an eye out for a few years of sites being bought and sold. An older well established site that has been generating the same amount and traffic over time can get up to 3 years revenue, but generally it would be in the 20-24 month range.

[caribguy]

My gut feeling is that your revenue potential can grow quite a bit. Rather than selling the site now - bad economy, etc - why not build out for the next 2 years and milk the cow for real... That's max 24 rent payments of 2K = 50k, I'm guessing you could get that done with some effort.

Unless, of course, you have just found your dream house and something else keeps you busy 49 hours a week ;)

[herb]

The present value of a 10,000 annuity with payments lasting only seven years at 8% is 52,063.

Where would you find a 8% annuity that was rated anything but junk status?

Unless you are adding funds to the 10K annuity I think it would only grow to about 17K in seven years at eight percent...

[Powdork]

Where would you find a 8% annuity that was rated anything but junk status?

Unless you are adding funds to the 10K annuity I think it would only grow to about 17K in seven years at eight percent...

I guess i stated that wrong. I meant the present value of a series of seven 10,000 yearly payments, discounted at 8%. The rate was chosen because there is a much higher level of risk than an actual annuity. I probably would have gone higher given the level of risk, but there is also some upside potential. But it definitely is arbitrary.

[edited by: Powdork at 8:48 am (utc) on Nov. 19, 2008]