This guest post is by Sunil of the Extra Money Blog.
Not long ago I wrote abouthere on problogger.net. Now that you know how a web property is or can be valued in the free market, in this article I want to discuss a practical strategy you can apply to increase the valuation of your web property.
The value of a website or blog, or any other business for that matter, is derived from its earnings or free cash flows before interest, taxes, depreciation and amortization—a term referred to as EBITDA in the professional sector.Therefore a web property’s value is predicated on its earnings, multiplied by a factor X called an earnings multiplier that is derived from similar transactions in the recent past.
For example, if a similar blog sold for four times its earnings couple months ago, there is a good chance you can count on a similar multiple when putting a value on your web property.
What do I know about website valuations? For starters, I sold an ecommerce website in 2007 for $250,000 to one of the top power sellers on Ebay at the time. Since then I have sold several niche websites for five figure cash out deals.
The best way to boost value
If valuations are based on earnings, it is obvious that earnings must increase if the value of your web property is to increase. Many online entrepreneurs take their time growing their web property organically, often on their own due to funding restrictions.
However, once the web property starts generating a little bit of money, one of the best investments you can make to increase its value is by reinvesting those earnings right back into the business.
For example, let’s assume you have a niche website that has 30 pages, each of which brings in $1 a day, roughly on average, from Google Adsense. If you took your earnings and invested in 30 freelance articles, you can hypothetically double the earnings from your website.
Let’s walk through this example with numbers. A 30-page website generating a dollar per page per day generates a total of $30 per page per month. $30 per page per month multiplied by 30 pages gives you a monthly income of $900. If you took the $900, or one month’s earnings, and invested it in 30 high-quality articles at $30 each, you would now have a total of 60 articles. 60 articles generating $1 each per day equates to an income of $60 per day, or $1,800 per month, which is double of the initial $900 you were making.
Now here is a question: since your income has now increased by $900 per month, or $10,800 per year, has the value of your web property also increased by that amount as well?
No it has not.
It has increased even more.
Let’s have a look at the reasons why. $900 generated per month equates to $10,800 per year. If you were to sell this web property at an earnings multiple of four, you could expect to get $43,200 for it. However, your web property now generates $1,800 per month, or $21,600 per year. At the same earnings multiple of four, we are looking at a valuation of $86,400, which is not just $10,800 more, but double the initial $43,200 valuation.
The math reads pretty simply. Assuming the same multiple is in place, double your earnings and it will double your valuation. This example is very simplistic in that it assumes no operating expenses, stable multiples, certain Adsense earnings correlations, etc.
A valuable concept
Even though it’s not always quite this easy, or simplistic in nature, don’t get fixated on the facts. Instead, keep the general concept in mind.
A web property may never grow, or may grow slowly if you were to work on it on your own, but hiring outside help can boost your earnings in the short-term and pay large dividends down the road if and when you sell your web property.
What do you think of this method of increasing the valuation of your business? Do you have additional tips or strategies that you can share with us?
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.