This guest post is by Jock Purtle of digitalexits.com.
If you are selling your blog, the first thing you will want to know is how much it is worth. You type into Google is something like “what is my website worth?” What you will get is a whole lot of free website valuation tools. If you use something like www.mywebsiteworth.com and type in “google.com” you get an arbitrary value of 1 billion dollars.
Now we all know these tools are can’t be right. So we might then type into Google “what factors determine a website’s value?” and when we collate all the information. we are going to get a long list of different things to look for when valuing a website. Things like domain age, PageRank, Google rankings, and so on.
But what these articles fail to identify is the single most important factor in valuing a website, and that is the future maintainable earnings of the site.
What needs to be understood is that the assets of the business are only indicators of future maintainable earnings, and do not add any extra value to the site. Value is determined by whether the site will make money in the future, and what level of risk the potential buyer is willing to take.
Let’s take the example of company A and company B. Each company has the same income and same net profit for the year. However, as we will find, their value differs completely.
How values can differ
|Company A||Company B|
|Trends||Flat||Room for growth|
|Largest Customer List||No||Yes|
|Heavily reliant on SEO||Multiple Source|
|Income Source||1 Source||3 Sources|
|Complex To Operate||Yes||No|
|Low Barrier To Entry||Yes||No|
|Business Level||Mature||Growth Stage|
|Owner Help after Sale||No||Yes|
|Old Site with unbroken Whois||No||Yes|
|Quality and diverse Links||No||Yes|
|Repeat & Direct Traffic||No||Yes|
|Solid Page Rank||No||Yes|
|High Levels of Traffic||No||Yes|
|Commercial Target Audience||No||Yes|
|Partnerships and JV’s||No||Yes|
|Solid Sales Presentation||No||Yes|
|Directories (Yahoo and DMOZ)||No||Yes|
|Strong Alexa and Compete rank||No||Yes|
|FINAL SALE PRICE:||$100,000||$400,0000|
How value differs
The market has a strong opinion on what a site is worth. Buyers are looking for a good return on investment and the value is based on what they are willing to pay. That is why valuation is really only educated guess-work about what a site will sell for.
From the above example you may think that your blog meets all the criteria of company B, but that doesn’t mean that you are going to sell it for that amount.
The reason company B is deemed more valuable is because, from the information available, the site looks like it will continue to increase in revenue every year and there is a lower risk that the site will fail. Thus there is less risk for a potential buyer, and they would be willing to pay more to acquire it.
The table represents a rule of thumb that you can apply to any website. The factors listed represent the variables that should be considered in any valuation. There may be some outlying factors that skew the data if either site were to be purchased and that is why true valuation is only represented by the final sale price and the money has been exchanged.
An explanation of valuation: How to determine risk
The risk a buyer is willing to take in purchasing a website will determine the multiple of earnings that they’re willing to pay.
The general rule you will find in valuation follows something like this:
Net Income x Some Multiplier = Your Website Value
Here is a breakdown of those two factors.
Net income is represented by a company’s total profit for the year and is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses, or in accounting speak, EBITDA (earning before interest tax, depreciation, and amortization).
A web business normally doesn’t have the usual expenses that an offline business has, like rent, office space, and so on, and this is reflected in the financials.
A simple multiplier will be based on an expected Rate of Return. This is used to calculate the final sale price and is reflective of the risk that the purchaser is willing to take.
Consider these multipliers:
- 12 times Monthly Multiple = 100% return (your money back in one year)
- 24 time Monthly Multiple = 50% return (your money back in two years)
- 36 times Monthly Multiple = 33% return (your money back in three years).
You are beginning to see why Internet businesses are a good investment. With low staff and expenses and less hassle than a traditional business, they can offer much better value than putting your money in the bank and getting 1-5% interest.
What doesn’t count as value?
“But what about the value of my domain, and the rankings in Google, and the cost of the web development? Why isn’t that included in the site?” you may be thinking.
Unfortunately, the market doesn’t look at your site as a sum of all its parts. So even if you site cost you $15k to develop, and the domain cost $12k, if it only makes $10k per year, you are only likely to get $10k—$30k for the site, even though it cost you $27k to develop.
The assets of the business (content, rankings, domain, and so on) add no more value than what has already been calculated. The assets of the business simply form the structure for its revenue-generating capabilities.
It is important to understand this principle when valuing your site. Even though it might have cost you $27k to get the site up and running, your blog is no more valuable than the income a potential buyer can see the site making in the future.
Have you had your blog valued? Tell us about your experiences in the comments.
Jock Purtle is a Senior Broker at Digitalexits.com. They are a full-service website brokerage specializing in website sales and acquisitions. If you are curious as to what your business is worth checkout the free in-depth website valuation guide.