This guest post is by Sunil of Extra Money Blog.
I have sold an ecommerce website for $250,000 and several other niche websites for a five-figure price tag. I want to share with you one valuation method you can use to put a price on your web property today.
Whether a website owner or a blogger starts with the initial goal of selling their site one day, it is my belief that every successful blog owner has at some point thought about the potential of selling their web property. At least they will have wondered how much their web property is worth—especially when it begins to generate a decent amount of money.In fact, I think almost no one thinks about a sale as an exit strategy when they first start. It’s usually a passion, hobby, or something other than a potential sale that motivates a person to get started making money online—unless of course they run an online business, such as an ecommerce website, from day one.
When a website becomes profitable, it has the potential to become saleable. You may deliberately be contemplating selling either because of boredom, because you’ve found a better alternative use of your time, because of a potential use of the financial proceeds, or any of several other reasons.
If so, do you know what your website is worth?
When a web property starts to generate profits, it becomes an income-producing asset, much like a rental property or a small business. Just like property and businesses are valued and sold in the open market, a website or blog can be too. Therefore, valuing a web property is not much different from valuing any other income-producing asset.
The quantitative aspect of web property valuation
The quantitative aspect of valuation is not rocket science, in my opinion. You take a site’s current earnings and expenses, figure out what the net cash flows are, and then project a value based on an earnings multiplier.
The net earnings, or cash flows, is commonly referred to as EBITDA in the business world. That means: earnings before interest, taxes, depreciation, and amortization. The multiplier is applied to this number to come up with a value, or price, for the property.
Earnings and expenses are what they are: they are not subjective by any means. But where do you get an earnings multiplier from? Evaluate recent sales of websites that are similar to yours to get an idea of what kind of multiplier was paid for each one. This number will be larger in stronger economic times, and smaller in weaker economic times like those we’re in today.
There is no standard multiplier, however. Similar to real estate, if figures are available from recent blog sales, great. But if not, your website’s value is only as much as someone else is willing to bid for it. Obviously you have the option not to sell for what you might feel is a low-ball offer.
One more thing to consider is whether the website is as monetized as it can be today. Is there opportunity to add more private ads to the sidebar, and generate more profits on a residual basis, for example? A buyer would definitely evaluate this monetization potential and factor it into their purchase decision.
The qualitative aspect of web property valuation
Here is where the subjectivity in blog valuation comes into play. An active business sold at an earnings multiplier of two may not be comparable with a same-size passive business, because a passive business requires a lot less effort to manage and sustain. Consider how much cost and effort the owner of the web property will have to invest in the passive business to generate a dollar in profits. Then ask how this compares with an active business.
Factors such as effort, operating cost structure, sustainability, long-term relevancy, and prospects all play an important part in determining what the reasonable value of a particular web property should be. At the end of the day, none of this is exact science, but these are some ways to arrive at a justifiable or rational price.
For example, no one knew the long-term scalability of Google or LinkedIn. In fact, no one knows today. The market had a certain estimate (multiplier) set at the time each company went public, and has a different one today. It will likely have another one by the time you are done reading and commenting on this post. Expect the multiplier to evolve, especially in an ever-changing and dynamic industry like this one.
A practical example
When I was initially solicited by an Ebay power seller to potentially sell my ecommerce business, the business was generating roughly $60,000 annually in profits. After weeks of discussion back and forth, we settled at a sale price of just under $250,000, or roughly four times the annual earnings of $60,000.
The quantitative piece of the deal was straightforward. The qualitative piece is what dragged out the negotiation. The power seller had previously purchased a similar ecommerce business at an earnings multiple of three. They had paid $90,000 for a business that was generating $30,000 in annual profits. However, I was not willing to accept a price of $180,000, which was three times the annual earnings of my site. Further, my business showed a consistent rising trend in terms of web traffic, customer acquisition, sales, and profits. These qualitative measures needed to be “baked” in to the deal for it to be viable for me. I was able to persuade the buyer of that, and we sealed the deal at four times the annual earnings.
The key lesson here is that although acquisitions based strictly on earnings multiples sound good in theory, they rarely work out practically, whether at my level or at the Fortune 500 level. Our repeated attempts to narrow the nature of deal making to a pure science have never worked, and likely won’t in future. Valuations, although driven mostly by the underlying financials, rely heavily on qualitative aspects that are subjective and unique to each buyer and seller.
What do you think of this valuation method? Do you have any alternatives to share? Is this a fair way to value your web property? I’d love to hear your thoughts in the comments.
If you want to be brave and bold and open your kimono to me and fellow readers: what do you believe your web property worth is today in the open market, if you use this valuation method?
Sunil owns over a dozen profitable niche websites and is the author of How to Go from $0 to $1,000 a month in Passive and Residual Income in Under 180 Days All in Your Spare Time, a FREE report you can download instantly from his Extra Money Blog, where he discusses how to create multiple streams of passive and residual income, entrepreneurship, internet marketing, blogging and personal finance.