Why should you read this guide?
- Improve your exit planning strategy
- Learn professional website valuation methods
- Find out how much your website is worth and what it could sell for
- Discover how to effectively convey the value of your website to potential buyers
Table of Contents
- Website Valuation as a Multiple of Earnings
- What determines the Website Valuation Multiple
- Evaluating the Risk of a Website Investment
- Finding Comparable Website Sales
- Getting a Second Opinion
- The Truth About Automated Website Valuations
- Exit Planning
Website Valuation as a Multiple of Earnings
Though there are certainly a wide range of website valuation methods (Discounted Cash Flow Analysis, Asset Value, Multiple of Revenue, etc.) the most widely accepted method in the website acquisition space has long been a valuation method based on a multiple of earnings.
How do you define earnings?
Most website valuations are based on an expression of profitability known as Seller’s Discretionary Earnings (SDE). SDE is effectively the net profit of the business (i.e. the difference between Revenue and Expenses) over a specified period of time, typically the trailing twelve months (TTM), and excluding income taxes, one-time expenses, and owner’s compensation. These aforementioned extraneous expenditures are typically itemized and added back to the net income of the business in the profit and loss statement.
Step 1 Calculate Net Profit: To start building your website valuation, calculate the net profit of your business on an SDE basis by filling out this profit and loss template. Have an eCommerce business? Try this eCommerce profit and loss template.
If you need help filling out your profit and loss statement, check out this article.
How to calculate website value?
Once you have the Net Profit (or Cash Flow) of your business, you can start to formulate a website valuation, which is expressed as a multiple of your annual net profit.
Annual Net Profit (Cash Flow) x Multiple (Years) = Website Value
The multiple signifies the number of years of net profit that the business is worth. You may have heard a website investor say something like, “that website is worth three years.” What they are really saying is, “that website is worth three times the annual net profit.” Website buyers often view the multiple as the amount of time they can expect to pass after acquiring the business (and assuming income remains constant), before they recoup their initial investment. In other words, the buyer asks “how many years of annual cash flow would I pay for this business?” A 2x multiple would mean the buyer expects that it will take two years to recoup the initial investment, a 3x multiple means they expect it will take three years, and so on.
What determines the website valuation multiple?
Size does matter
An additional conclusion we can draw from the above graph is that as Net Profit increases, so too does the website valuation multiple. To illustrate this point, consider the 2015 net income of four publicly traded companies as compared to FightState.com, an AdSense based content website that sold for $300,000 (3.9x) on Flippa in October 2015.
To analyze the value of a publicly traded company, we can look at the P/E Ratio, a valuation metric that measures the current price of a share of a company’s stock divided by its current earnings per share (EPS) on a trailing twelve month (TTM) basis. Since the P/E Ratio measures the price as the multiple of earnings on a TTM basis, it is similar enough to compare to the multiple of net income methodology we have been discussing.
|Company||P/E Ratio (TTM)||Net Income (2015)||Multiple of Earnings Valuation|
|Facebook (FB)||87||$592,000,000||$51.5 billion|
|TripAdvisor (TRIP)||45||$198,000,000||$8.9 billion|
|Criteo (CRTO)||42||$62,276,000||$2.6 billion|
|Tucows (TCX)||22||$11,374,000||$250.2 million|
|FightState* (Privately Owned)||3.9||$77,000||$300,000|
*Sold on Flippa
When we compare the respective P/E Ratios and net incomes of each business, we can see that as the size of the company increases in terms of net income, so too does the multiple. There are other variables involved, but all else being equal, bigger businesses are typically perceived to be stronger investments (i.e. less risk), and that’s why investors are usually willing to pay more for them.
How do growth opportunities come into play?
Because they can influence the rate of return, growth opportunities are a crucial consideration when performing website valuations. For instance, consider a business that earns $100,000 net income in its first year of operations and promptly sells at a 2x multiple before doubling its net income the following year. The result is that the buyer breaks even during the first year of ownership, despite paying a “2x multiple.” You could almost say the buyer paid a 1x multiple for the business, as they recovered 100% of the entire $200,000 investment during the first year of ownership, during which, the website also doubled in value.
Does business model influence website valuation?
In its 2015 Website Buyers Report, due diligence firm Centurica researched and analyzed public website sales data to determine the average multiple paid for websites by business model from 2014 to 2015. Although this data may be slightly skewed (as it was based on Asking Price & not necessarily Selling Price), the average website valuation multiple was 2.9x for Content, 2.8x for SaaS, 2.72x for Transactional, 2.7x for eCommerce, and 2.2x for Services.
Average Multiple by Business Model
(Source: 2015 Centurica Website Buyers Report)
How to Evaluate the Risk of a Website Investment
We know that size influences risk, we know that growth opportunities influence risk, and we know that business model influences risk, but what other factors influence risk? And, how do we know how much risk warrants a 1.5x multiple website valuation vs a 3x multiple website valuation? The truth is, there are an almost infinite number of variables that influence risk. Luckily, it’s not necessary to evaluate every single factor to arrive at a logical valuation. Instead, all that is required is a structured diagnostic appraisal of the business, its environment, and its growth opportunities.
This can be accomplished through a combination of both qualitative and quantitative analysis and reasoning. We can break down this analysis into five key areas of website valuation: Business Overview, Financials, Traffic & Users, Operations, and Vertical.
Within each category we want to evaluate growth opportunities, sustainability, and strength.
- How old is the website?
- What is the primary business model?
- What was the site’s total revenue over the trailing twelve months?
- What was the site’s total net profit over the trailing twelve months?
- How many total users did the site have over the trailing twelve months?
- Any notable assets attached to the sale (i.e. social media accounts, IP, etc.)?
- Is revenue diversified?
- What is the YoY or MoM net profit growth rate?
- Has the rate increased, decreased, or flattened since the previous period?
- How is revenue trending over the previous 3/mo to 1/yr?
- How is net profit trending over the previous 3/mo to 1/yr?
- How are expenses trending over the previous 3/mo to 1/yr?
- Are sales expected to grow, decline, or flatten over the next 3/mo to 1/yr?
Traffic & Users
- Is traffic diversified?
- How stable is traffic overall?
- What are the main traffic sources?
- Is there a subscriber/customer list?
- If so, what is the current growth rate?
- What is the current customer churn rate?
- What is the lifetime value of a customer/subscriber?
- How have users trended over the previous 3/mo to 1/yr?
- How have pageviews trended over the previous 3/mo to 1/yr?
- How would you classify user engagement (low, moderate, or high)?
- How difficult will it be to transfer each traffic source to a new owner?
- Is traffic expected to grow, decline, or flatten over the next 3/mo to 1/yr?
- Categorize the transferability of operations (easy, normal, difficult)?
- Are there any employees or freelancers, and what are their responsibilities?
- Categorize the strength of the current supplier relationship (weak, medium, strong)?
- Is it necessary to keep inventory in a particular location to retain current profitability?
- How many hours a week are required for the owner to operate the business currently?
- Has this vertical been historically volatile?
- How would you characterize the barriers to entry (nonexistent, moderate, heavy)?
- How saturated is this vertical (Unsaturated, Moderately Saturated, Very Saturated)?
- How is the business performing relative to competition over 3 months, 6 months, a year?
This list is by no means exhaustive, and the process is admittedly subjective and up to a fair bit of interpretation. You may discover another format that does a better job expressing the website value of your particular business, which is perfectly fine. Simply use this as a foundation, and expand your valuation prompts from there.
Step 2 Determine Multiple: Use the following website valuation sheet to analyze your business and arrive at a multiple. Hint: If you get stuck, try moving to the next step and working backwards by valuing comparable websites that have already sold, and then compare these businesses to your own.
Where can I find comparable website sales data?
Historical sales data can often be a great source of insight when trying to value a website, as this data can help establish realistic price expectations and benchmarks. Flippa has the largest active database of website sales records. Some of this data is available to the public via the Just Sold page.
To get started, visit the Just Sold page and set the business model equal to the business model of the website you are evaluating. After you have done that, enter a range for the Website Age, Monthly Users, and Monthly Profit similar to the following:
- Your Website Age +/- 1 year
- Your Monthly Users +/- 1,000
- Your Monthly Profit +/- $100
If you had a 4-year-old eCommerce site with $1,000/mo profit on top of 10,000 users/mo, you could try the following search:
- Business Model: eCommerce
- Website Age: Between 3 & 5 y/o
- Monthly Profit: Between $900 & $1,100 Monthly Profit
- Monthly Users: Between 9,000 & 11,000 Monthly Users
Depending on the results you may need to either expand or shrink respective ranges in order to find a suitable match. The overall objective is to hone in on 1-3 similar website sales that you can use as a guidepost for determining the value of your website.
Step 3 Assess Historical Website Sales: Find 1-3 historically similar website sales.
Key Challenge: Lack of publicly available website sales data
One major challenge to assessing historical sales is simply a lack of available industry data. Even on Flippa, which is unquestionably the largest platform for buying and selling websites, many users choose privatize website sales data. Further challenges arise when we consider website brokerage sales, which currently make up the broad majority of upper-five, six, seven, and eight figure deals, but for which publicly available data is extremely limited. This is yet another reason it is highly recommended that you consult with a broker prior to a sale, as legitimate brokerages such as Deal Flow will have access to extensive private sales data.
Getting a Second Opinion
If your site is making more than $1,000/mo profit consulting with a qualified website broker to get a no strings attached professional website valuation is almost always a good idea. Website Brokers specialize in analyzing and evaluating web properties and often have many years of professional experience. Additionally, business owners sometimes let passion cloud their value judgement, and because of that, if you are valuing your own site, it is usually recommended that you get a second (and sometimes even a third & fourth) opinion to ensure your value analysis is in the same realm as industry experts.
Top benefits of Professional Valuations:
- Always free
- Performed by experienced professionals
- Use comprehensive website valuation methodology
- Have access to thousands of private high-end sales records
- Can give insight into sale options and offer help with exit planning
Website Brokers are generally regarded as the professionals best qualified to provide website valuations. Led by Director of Brokerage, Jamie Toyne, Flippa’s high-end website brokerage Deal Flow is a leader in providing professional valuations. The high-end brokerage valuation methodology is more complex than the fundamental techniques being mentioned in this article. For example, our Deal Flow Website Brokers analyze over 200 variables and use advanced business modeling techniques while performing website valuations.
Step 4 Apply for a Free Valuation: Get a free professional website valuation from an experienced Website Broker here.
Be aware of inflated website broker valuations
While legitimate website brokers have the necessary knowledge and experience to provide professional website valuation services, it is important to remember that they have an incentive to provide inflated valuations. Brokers provide free website appraisals as a form of lead generation. Oftentimes dodgy brokers will offer up unrealistic valuations, whether or not it is realistic to sell, in order to lock sellers into unnecessarily long representation agreements.
The truth about automated website valuations
Numerous sites provide automated website valuations. In addition to missing the human element that lends credibility to professional website valuations, most automated tools neglect critical data including financials, traffic, etc. in their valuations. The bottom line is that these sites are terribly flawed and inaccurate. To highlight this point, consider the chart below which compares four automated website valuations produced by popular automated valuation provider SitePrice.org, with the actual Flippa sales price below.
Now that you have a professional website valuation, you may want to start planning an exit. Rather than a rushed sale of your business and its assets, exit planning is based on the idea that an exit should be meticulously planned and executed at the optimal time, so as to encourage the highest possible sales price.
To plan for a successful exit, ask yourself three questions:
1. How much is my website worth?
2. What is my target selling price?
3. How can I achieve my target price?
Because internet businesses can change so rapidly, buyers typically place a particularly strong emphasis on recent performance. If your revenue is on the decline or your business is seasonal and sales have been flat, now is probably not the optimal time to sell. Patience is crucial. Determine what you need to do to increase your website value and achieve your target selling price, and then put things into action to ensure you can actually achieve that target.
Of course, some people simply find themselves in a position where they have no choice at all but to sell without a well thought out exit plan, and the consequences can be serious. As such, if you are fortunate enough to have the opportunity to plan an exit in advance, then it is highly recommended you consult with a qualified website broker and always keep an up to date exit plan in your back pocket.
Step 5 Develop an Exit Plan: If you have a website earning more than $1,000/mo profit and you would like to set up a free exit planning consultation, please get in touch.
If you have finished this guide and completed all of the steps above, you should be well prepared to exit your business with clear price expectations and a strategy to ensure you get the maximum sale value possible. Don’t be discouraged if you’re still feeling a bit unsure, just get started. The more practice you have evaluating different websites the more effectively you’ll be able to perform website valuations.
I hope this guide has succeeded in empowering you to uncover your website’s value and achieve a satisfactory target selling price. Let me know your thoughts in the comments below!