Website Valuation 101
There are many different aspects to selling a website. Among them, website valuation is the most important and sometimes the most challenging part.
This is because factors pertaining to both the business itself and its monetization method can affect how the business is valued, and at which multiple.
If you’re getting ready to sell your online business, it’s a good idea to get educated on valuation methods, profitability and the different factors that could affect a multiple.
First, let’s look at valuation methods:
Methods You Can Use for Website Valuation
There are four basic ways to value a website, though the best way to derive the value of an internet business is through the earnings-multiple. Most experienced brokers use this method, while others may go the easier (but less accurate) route. Here’s a breakdown of different valuation methods.
Discounted Cashflow Analysis
One method used to value a business is the discounted cash flow analysis. This is a process by which a company’s present value is determined by future projections. The reason it is called a discounted cash flow analysis is based on the notion that cash today is worth more than cash in the future.
For example, if you invested $2,000 today, you could earn interest on that money and have more than $2,000 in a year’s time. As result, $2,000 in your pocket today is worth more than $2,000 in your pocket one year from now. Once you calculate the amount of cash you expect a company to produce in the future, the analysis is essentially complete.
A discounted cash flow analysis is rarely used with startups and online businesses, and is typically applied to more established businesses. However, it can be used in conjunction with other valuation methods as a system of checks and balances.
Another traditional method of valuing a business is identifying precedent acquisitions for businesses that are similar to yours. However, it is usually used in conjunction with a DCF rather than a standalone method, and may not form the foundation of a valuation.
With this method, it is necessary to examine comparable metrics, which often means multiples of earnings or revenue. The valuation parameter of a comparable business may be earnings before interest and tax (EBIT) or earnings before interest, taxes, depreciation and amortization (EBITDA). By determining what parameter was used to value a similar business, you can gain a better idea of how that company was valued, and the same method can be applied to yours.
Without access to transaction data, it is difficult if not impossible to do an accurate precedent transactions analysis. In a public company, it is relatively easy to gain access to the needed information. But in private mergers and acquisitions, or internet business M&A, much of this data is kept private.
The bottom line is precedent transaction analysis is tricky at best, unless you are familiar with the comparable businesses being analyzed.
In Internet business, the most common form of valuation is the earnings-multiple analysis.
In a public company, price-earnings ratio (P/E ratio), enterprise multiple/EBITDA, and enterprise-value-to-revenue multiple/sales, or some iteration of these metrics would be part of the valuation.
But earnings-multiple is a straightforward and reliable way of determining the value of an internet business, especially if there isn’t enough financial or comparable data to make a fair evaluation.
By multiplying the seller’s discretionary earning (SDE) by a multiple that makes sense for the business, you can arrive at a valuation. The multiple is something the buyer and seller will have to agree upon before they go through with the deal. The factors affecting this multiple are discussed in more detail below.
If your website isn’t monetized yet, but has traffic, the traffic value method can be applied to your site. First, you need to take a look at the top key phrases that are driving the majority of your traffic, and determine the cost-per-click value of those keywords. In most cases, a simple analysis will show that a small number of keywords are driving the majority of the traffic.
The CPC value can be found in Google Adwords. When you multiply each phrase by the number of visitors being driven to the site by the search terms, you can figure out the overall value of the traffic.
This method of valuation should only be applied to a site that has yet to be monetized. Meaning, it’s to be used only as a benchmark before you start growing a business, rather than a method by which to obtain an asking price for a business.
How To Value A Business Using An Earnings-Multiple Analysis
As we’ve already seen, the earnings-multiple analysis is the most popular, relevant and reliable method for internet business M&A. First, it is necessary to determine your seller discretionary earnings, and then to evaluate the different factors that influence the multiple. Let’s take a look.
The number most relevant to a multiple-based valuation is the SDE, which is the amount of money left after all expenses have been accounted for and deducted from the gross income. SDE is ultimately subjective, and can vary depending on interpretation. The good news is that internet businesses have simple cost structures compared to traditional businesses. This makes arriving at accurate SDE estimates much easier.
There are a limited number of valid add backs, which include owner compensation, depreciation (uncommon), travel expenses, and office rent. Ultimately, you will only want to include legitimate add backs so that you can arrive at the right number.
Once your SDE has been determined, you are ready to move onto the next step.
The 6 Major Factors That Can Influence The Multiple
The six major factors that influence the multiple include:
- Financials. There are several factors here, such as the age of the business, its income trends, its earning power, the transferability of the revenue streams, stability and so on.
- Traffic. Traffic sources and trends, search rankings, key terms, the impact of algorithm updates, industry trends and referral traffic all need to be evaluated.
- Operations. This would include time commitments and responsibilities of the owner, technical requirements and knowledge, employees and contractors.
- Niche. How competitive is the particular niche your business is in, and are there any major barriers to entry? Is the niche growing, are there any recent trends and developments that could affect its future, and are there sufficient opportunities for expansion?
- Customer Base. How do you get customers, how much does it cost to acquire them, what is the lifetime value of the customer (if applicable), how active are the customers, and is it possible to remarket to existing customers?
- Other. Sometimes other factors might affect the multiple. Physical assets, regional responsibilities, licensing requirements, trademarks and unique advantages would all fall under this category.
It’s important to keep in mind that this isn’t necessarily a definitive list of variables. The previously mentioned items are the most prominent factors, but there can be other influencing parameters. It really comes down to: transferability, sustainability and scalability of revenue. These items should be considered the most important in determining a multiple.
Multiples can range from 1x to 5x, but most fall between 2x and 4x. Generally, we find that SaaS businesses are valued at higher multiples, while lead generation and content sites tend to have lower valuations.
It shouldn’t come as any surprise that SaaS, subscription and e-commerce businesses tend to be valued higher, as the income tends to be more reliable. E-commerce sites often attract a lot of interest from different investors and buyers. Content and media sites typically require a lot of work to maintain, and can be heavily reliant on search traffic, which may pose a risk.
Naturally, no two businesses are exactly alike, so while the above may serve as a general guideline, it is not a thorough assessment of the value of your website.
In the end, it all comes down to due diligence. Astute buyers always do their homework on a site they’re looking to buy, and will do a thorough investigation of your business to validate the financials, traffic and operations.
If it is determined that your site is too heavily reliant on one source of traffic, or an unsustainable traffic source, its value will likely be less. Other common problems include: poor backlink profile, insufficient or poor quality revenue proofs, competing sites and social accounts, or an inaccurate view of owner responsibilities and operating costs.
You should now have a better idea of how your website will be valued and the factors that come into play. When you know what buyers are going to be looking for, you can take accurate measures to prepare for the sale of your website.