“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
—Warren Buffett
I determine the price I’m willing to pay for a website business based on three factors:
1. The risk profile. This is a high, medium, low risk assessment that reflects the stability of the business and probable life span.
2. The average monthly net income. Revenue minus expense equals net income. For very seasonal businesses, this needs to be averaged over a full year. For businesses with limited seasonality, an average of the past three to six months is useful.
3. The future potential. Future potential includes every change I might make to the website that has the potential to increase revenues and profits or reduce risk.
Website valuation is almost always expressed in net income earnings multiples. So if a site nets $1,000 per month and sells for $24,000, it is said to have sold for 24x earnings. If it continues to earn $1,000 per month, then the payback period on the investment is twenty-four months.
Because we speak in terms of multiples, we are often tempted to value sites in terms of multiples as well. We are tempted to think that a site selling for 10x monthly earnings is a three times better deal than a site selling for 30x monthly earnings. That would be true if the sites were exactly the same. But, of course, the risk profile and future potential of the sites could be quite different.
Admittedly, I have aggressively pursued the purchase of sites at low multiples. I’ve often tried to get my money back in less than a year, and I have succeeded on many occasions. But the truth is that it is increasingly difficult to do this. The vast majority of sites sold at low multiples have a high-risk profile.
The vast majority of sites sold at low multiples have a high-risk profile.
One way to value websites is to decide how soon you want to get your money back and focus on opportunities that meet your target payback period. This is dangerous because it doesn’t account for the fundamentals of the website, be they weak or strong.
Assess the Risk Profile
A better way to value websites is to first categorize them by risk profile. The purpose of the chapters on evaluating websites was to identify risks and opportunities. There are an endless supply of risks, but consider these examples to get a feeling for risk categorization:
High Risk |
Medium Risk |
Low Risk |
TRAFFIC |
|
|
Organic search Social media Link schemes Single source |
Referring sites Mixed organic/paid Direct traffic Content marketing |
Paid Ads (proven campaigns) Email (proven list) Direct mail (proven campaigns) Diverse proven sources |
STAFF |
|
|
Highly specialized |
Available, unstable situation |
Low cost |
PRODUCT |
|
|
Easy to duplicate Single source New/unproven |
Semi-difficult to duplicate A few sources Emerging |
Difficult to duplicate Multiple sources Proven market |
FINANCIALS |
|
|
No formal tracking |
Rudimentary tracking |
Fully controlled process |
BUYER SKILL |
|
|
Inexperienced |
Semi-experienced |
Experienced, knows niche |
As part of your risk assessment, determine how the risk can be mitigated. Often, you as the buyer may bring assets to a website that change the risk profile completely. Consider a buyer who, by virtue of experience, is able to introduce low-risk traffic sources to an existing website. Or, consider a buyer who has deep and specialized knowledge in the business niche of the site she is acquiring. Think of a buyer who already has technical or marketing resources that can be leveraged across the new site to transform a high-risk category to a medium- or low-risk category.
When you make your risk assessment, factor in what you can do to mitigate the risk, but be realistic.
Understand that websites with lower risk will have longer payback periods (and will sell for higher multiples of earnings). Websites with higher risk profiles should have shorter payback periods.
Risk |
Earnings Multiple |
High |
6x – 14x |
Medium |
12x – 24x |
Low |
18x – 48x |
Risk and time are intimately related because the probability of negative events occurring increases over time. Earnings multiples in the table above are strictly from my own experience and analysis. There is little hard data in this industry. Regardless of the specific multiples, the principle that you should pay less for riskier websites is ironclad.
Does this mean that you should never by a high-risk, low-multiple website? Some would say you should never do it. But the purpose of the table is not to say never. Rather, it is to suggest that you limit your personal investment risk by varying the amount you are willing to invest based on a site’s risk profile.
Adjust for Future Potential
If you have uncovered specific untapped treasures in the website, then you will probably be willing to increase the multiple you are willing to pay. As I mentioned earlier, it is important to quantify your estimates for being able to grow revenues or reduce expenses. If you think you can increase the click-through rate on ads by changing their sizes and locations, then you need to extrapolate that potential increase in ad revenues and estimate the change in net earnings. Likewise, if you have devised a way to reduce expenses, you must adjust net earnings by that amount and recalculate the multiple you are willing to pay.
For example, let’s say you have determined the website is medium risk and have decided to target a 20x earnings multiple. You have also found ways to increase monthly net income by 30%. You would adjust your earnings multiple upward by 30% and be willing to pay 26x the earnings (20 x 1.3).
What Multiples Are Sites Selling For?
You might ask, the valuation method is fine and good, but what are sites actually selling for? What multiple of earnings are sellers willing to sell for in today’s market? I might want my money back in twelve months, but are sellers willing to let their sites go for 12x monthly earnings? It depends.
Website business brokers tend to sell sites for higher multiples than marketplaces like Flippa. A quick browse through some brokers’ listings will show 36x monthly earnings average asking prices. Other brokers tend to lead with a predictable 24x across the board. Others seem to have more variable pricing, in which you see a range of 12x to 40x. Keep in mind that the average asking price is always higher than average final sale price.
“Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
—Warren Buffett
All things considered, website brokers are able to get away with higher prices because they typically offer high-quality properties for sale, having weeded out some of the low-quality ones. They offer higher value properties because it is not worth the cost of their time to list low-priced websites. Some handle only $10,000 websites and above. Others won’t touch a website priced less than $50,000 or even $200,000. There is an element of personal selling involved. They foster customer loyalty among a set of investors who can afford to pay and are willing to pay higher prices because they expect to be presented with better-quality opportunities.
All that being said, the trap many brokers fall into is pricing the majority of their listings at the same earnings multiples, with little regard to the risk profile. Granted, there may be some pressure from sellers to go for higher prices, but when I see twenty listings all selling for almost exactly the same multiple, I know the broker doesn’t understand or believe that earnings multiples should correlate to site quality and risk profile.
Marketplaces like Flippa sell websites for any price the seller is willing to offer. Earnings multiples vary widely, but it is possible to pick up legitimate sites for as little as 5x multiples of net monthly earnings. Average multiples are more like 10x to 14x. There are plenty of sites on Flippa with numbers in the 18x to 54x range as well.
Your Time
Don’t forget to value your personal time investment when you calculate net income. Sometimes buying a website is like buying a job. You might be able to pick up a service-based website for a very low multiple of earnings. Let’s say you buy a website that performs resume writing for $15 per page. The website is quite good at delivering customers at that price point, so you can basically earn as much as you have time to write. If it takes you an hour to write each page, then the website becomes an at-home job for you in which you earn $15 per hour. You can still compute a purchase price based on net earnings multiplied by the number of months required to get your money back. But if you value your time at $15 per hour, then net earnings will be zero, and the equation is not very helpful.
Sometimes buying a website is like buying a job. That’s okay—if you want a job!
So, in that case, you might consider the purchase in a different way. You might instead view it as a $30,000 per year ($15 x 2,000 hours) job and ask yourself how much you are willing to spend to buy yourself a job writing resumes.
A more typical scenario is that you calculate a website’s net earnings not taking into account your own time and then ask whether those earnings are worth the time investment. So if net monthly earnings were $300 and you are willing to pay 12x earnings for the site, then you would offer $3,600 for the website. If you also know that it will take about six hours per month to operate the website and you decide to value your time at $25 per hour, then your net monthly earnings will really only be $150. You would then only be willing to pay $1,800 for the website.
I work to drive the highest monthly earning potential, with the least time commitment, out of every website in my portfolio.
If you are valuing your own time at $25 per hour but someone else bidding on the website is valuing their time at $0 per hour, you may be willing to spend only $1,800 for the website, but all things being equal, they would be willing to spend $3,600. Obviously, you would not be the winning buyer.
Smaller time commitments are easier to write off as hobby hours or as a learning experience. Larger time commitments start to cut into career and family obligations. Full-time commitments become careers. I make my living and support my family through the investments I make on the Internet alone. Therefore, I work to drive the highest monthly earning potential, with the least time commitment, out of every website in my portfolio. I do put a rough per-hour value on my time, but I don’t use that estimate to alter the amount I will pay for a particular site. Instead, I use that knowledge as a criterion for selecting sites to buy.
Other Valuation Considerations
Assets sometimes come into play when valuing websites. By assets, I mean physical property that will hold much or all of its value over a long period of time. This includes typical business assets, like facilities, automobiles, tools, machines, computer equipment, and inventory. There may also be digital assets, like software, or intangible assets, like patents. However, if a piece of software purchased today with the website won’t be able to be sold a year from now, either with or apart from the website, it may not have any current appreciable value.
Only ascribe value to assets if they can be sold quickly.
Only ascribe value to assets if they can be sold quickly. If you can’t sell it today or a year from now on its own, you should not consider the value of the asset in the amount you are willing to pay for the website. If there are assets of value, then your valuation equation might look like this:
Asset value + (Earnings Multiple x Net Monthly Earnings) = Offer
You may also buy websites for reasons other than simply monetary ones. Here are some examples of motivating factors:
• Buying a website purely to educate yourself about a niche or a particular business model
• Buying a competitor’s website to reduce competition
• Buying a website that is complementary to your own so you can exchange traffic between the two
• Buying a website to create a sales channel for an offline business
• Buying a website to establish credibility
• Buying a website to harvest its tools or systems for use in another business
In such cases, the amount you are willing to pay is much more subjective, but it is still a good practice to attempt to place a dollar value on the benefits you expect to receive and use that as a basis for your offer price.
Other Valuation Methods
Many methods for assessing the value of a website business have been espoused. These include classic capital budgeting methods utilizing Net Present Value, Internal Rate of Return, and the like. They also include methods that attempt to place a unit value on traffic, on an email, or on existing customers.
Unfortunately, these methods rarely prove useful to the website buyer, especially when they are considering sites on the low-end of the spectrum. Many web businesses simply don’t have accurate, complete financial information available about the past—much less reliable cash flow projections for the future.
Methods that attempt to put a value on such things, like traffic statistics or email list count, almost always fail because there are dramatic and substantive differences between one email list and another or one visitor to a website and a visitor to a different website.
Market-Driven Comparisons
One approach that does have some theoretical reliability involves analyzing actual sale prices of comparable web properties. Websites with similar characteristics should sell for similar prices—assuming a frictionless market. This process works because, at the end of the day, a site is only worth what a real buyer is willing to pay for it. So, given enough transactions by real buyers, one should be able to deduce going market rates.
This is how it works when you are buying a house. Homes in the same general location with the same number of rooms, square footage, and amenities are considered “comparable.” Their sales prices constitute a good rule of thumb for purchase of a similar house.
Website businesses are much more difficult to compare than houses, but sometimes there are enough similarities to make this a valid approach. Use this technique if you are well versed in a particular category, niche, or business model.
There was a time when freshly approved Google News sites where selling in a very tight range from $2,500 to $4,500. I tracked these sales carefully. I owned some of these sites and was qualified to distinguish differences between sites that would affect the value of those sites.
My friend Peter T. Davis is an expert at acquiring and operating forum websites. He can assess the value of forum websites very accurately by comparing them to the many similar sites he has encountered.
To use the market-driven comparison model, list characteristics like revenue source, traffic volume, income level, number of sales transactions, etc. Search for sites that are similar in regard to these characteristics. Look at the average sales price. If prices vary widely in your sample, you can assume that either you missed an important characteristic or this method is not a good one for the kind of site you are evaluating.
The limitation on this approach is that the kind of information that is required may not be available. This kind of analysis may be performed on Flippa because of the number of transactions and diversity of websites. However, that won’t help you much with high-end sites that are typically sold by brokers.
Case Study: Being Conned
It is more than a bit embarrassing to write this chapter about being conned. I had evaluated a website that sold software packages, and I did not win the auction. However, in communication with the seller after the auction, he told me that he had another very similar website and said that he would give me a good price on it. The price sounded good to me, and I’m a big fan of selling software because of its profitability. So I purchased the site and almost immediately started earning money from software sales.
The problem was the domain never got transferred to my name. The seller had disappeared, and I had no way to contact him. He had also failed to deliver some files and support that he had promised. I would like to defend myself, but the truth is that the way I conducted this transaction was indefensible. I made numerous errors, including the following:
• I did not use an escrow process.
• I did not get legitimate contact info from the seller.
• I did not verify that the seller had rights to sell the software (although I had asked the seller about that).
• I accepted the seller’s excuse that there was a problem in transferring the domain and that he would resolve it the next day.
• The seller had offered to let me continue to use his web host. I took him up on the offer.
After I understood that I had been ripped off and was not in control of the domain, I immediately purchased another similar domain name and published all the website content and products for sale under the new domain. I continued to operate the website I had purchased for another three months. At that time, the seller removed my access to the web-hosting account and replaced the website with his own website so that sales began to flow to him instead of me.
The end of this story may not be as bad as what you think. If the majority of traffic and sales had come from search engines, this would have ended badly. The new domain I had purchased as a backup for the one that had been stolen from me would have required a long time to begin generating traffic on its own.
As luck would have it, and I do mean luck, because I certainly didn’t plan it this way, the primary traffic source was paid advertising on HotScripts.com. I was able to redirect traffic from Hot Scripts to the new domain name, and the setback in sales turned out to be very minor.
Although no one ever accused me of copyright infringement, I discovered that I could not legitimately sell some of the software products on the website. I sold the website and provided full disclosure about the software license situation to the buyer, who did not seem too concerned about it. Overall, I tripled my investment in about five months.
But that wasn’t the only time it happened.
I purchased a Google News site from a guy on Flippa. The transaction went smoothly; the domain and website were transferred, and I began to operate the site. Google News sites are typically valued on the basis of their inclusion in Google News—not on their historical performance. However, after the first few weeks of publishing articles, this website was not performing nearly as well as my other Google News sites. I contacted the seller, and he agreed to refund three fourths of the payment I had made and take the website back. Over the course of a month, I contacted the seller repeatedly, but he never returned the money, and I never heard from him again.
While this was not a scam in the sense that the seller purposely tried to defraud me, I still ended up losing my entire investment. While I was waiting for the seller to refund my money, I stopped publishing articles on the website. Google News apparently took that as a sign that I was not a serious news publisher and removed the website from the Google News index. This action made the site worthless.