How Do You Value A Website?
March 25th, 2008 | by ScottIt appears that you're new here, if you like what you read, please subscribe to the news feed or sign up for the Leap eTips news and updates email list. Thank you for visiting :)
I’ve read several different pieces recently on buying or selling web sites, and the only hard conclusion I’ve come away with is that everybody has their own system for placing a value on a site.
That’s equally true with me and I thought I’d take a few minutes to share how I value web sites, and approach sales as both a buyer and a seller.
From a seller position it’s usually pretty simple for me, I have only sold a few profitable web sites–and placing a value on a non-profitable web site is pretty easy… if someone will pay you for your headaches take what they offer.
That may seem overly simple, but if I’ve put everything I could into a project and wasn’t able to make it profitable then I’m happy to just cut my losses and move on. It doesn’t happen often, but when it does I begin to view the project as a giant pit consuming my time and resources so I’ll sell at that point for almost any offer. I don’t even worry about breaking even because I see it as better to be “a little in the red and done” than to be “a lot in the red and still falling” if I held onto the project longer.
In the rare times when I’ve sold profitable sites I’ve had a lot of trouble making the deals, which is probably why I don’t sell many profitable projects.
Here’s the problem I run into, there seems to be some conventional wisdom that a web site is worth somewhere between 10 and 24 times its monthly profits. I could accept that line of logic if it wasn’t for this simple question, “how do you determine the monthly profits of a cyclical operation?”
Very few businesses or web sites have a steady sales/revenue stream from month to month over the course of a year. And the method I’ve had offered to me over and over was to take the last 3 months and average them together… but that’s a horrible way to formulate an average on a cyclical operation.
There’s almost always some high and low periods, for example a lingerie site is likely to do very well from November through February because of Christmas and Valentine’s Day appeal, but what if you’re selling in July? The combined totals of April, May and June might not even equal a single month of revenue during the holiday season, so would you get a fair value for this site from averaging those 3 months together? Of course not.
And if you were selling that site in March, the average calculated by taking the December, January and February totals would be too high and cheating the buyer.
In negotiating deals on profitable sites in the past I’ve always insisted on using long term revenue data to pick a selling price. I look at what the site has done in total over the past 24 months, and provided the site isn’t based on a dying trend or fad I’m looking for a price that’s near or above that total.
Obviously this isn’t the same for a site that’s based around a television show that’s just been canceled or some technology that’s now outdated–but for general sites dealing with products that will likely retain their demand (such as a clothing or lingerie site like I mentioned earlier) there’s a reasonable expectation of growth over the long term, so a selling price equal to the previous 2 years worth of profits is fair.
In the real world a selling price equal to the profits of the previous 2 years isn’t a very hard sell for a small business, I’ve seen local Garages and Mom-and-Pop shops sell for anywhere from 18 months to 5 years worth of profits. But online it seems that there’s more of an “instant gratification” demand among buyers. Many don’t view web sites as investments for the long haul, they see them almost like scratch-n-win lottery tickets.
I can’t even deal with those folks. When I build a web site I do it thinking about how the project will provide returns for me into the future. I try to build around niches that are going to remain in demand rather than firecracker markets that tend to flash and burn.
I build a lot of niche mini-sites, I’ve got almost 100 of them online right now and for the majority of them it’s a safe assumption that they’ll still be relevant 5 or maybe even 10 years from now. Some of them are over 5 years old already and still profitable–most are even more profitable then they were when I launched them; so what would the incentive to sell such a property at cheap rates be?
As a buyer (yes, the flip side of the coin) I actually take almost the same approach. Of course I want to get the best deal I can, but before even entering into serious negotiations with a seller I like to review the long term revenue totals from the site (at-least 12 months but preferably 24 months of data) and I’ll make a determination for myself on what I would sell this site for, and then if I feel I would be comfortable paying that amount I’ll talk further with the seller to flush out any problems that may exist in the site data–traffic and revenue stats can be misleading if you don’t scrutinize them thoroughly before making the deal–and hopefully negotiate a price below what I’ve estimated the site is worth to me.
I think I’m a pretty easy buyer to deal with for that reason. While everybody else is trying to low-ball sellers I’m usually there to offer a fair price when I see a site I want and believe will bring me long term returns. I don’t make offers on what I think I’ll get from the site in the next 6 months, I base offers on the long term potential that I believe exists with the site. I see the purchase as an investment.
And I know I’ve made some great deals with this approach because I was willing to pay 2 years worth of revenue and other buyers were offering 10 months worth to the seller, so I easily went over their offers without coming close to the final price I was willing to pay.
So that’s how I place a dollar value on web sites for buying and selling.
I didn’t touch on factors like how much maintenance a site needs and so on because I rarely work with sites that require a lot of maintenance and typically wouldn’t be interested as a buyer in a site I thought would require a lot of time, so this usually isn’t much of a factor–if at all–in any deals I’m involved with.
I also didn’t touch on design or back end programming values because I see those as operational costs and deduct them from the profit figures when calculating a site’s value. If I were buying or selling a brick-n-mortar shop I’d deduct the cost of utilities from the profits when calculating the value, they’re operational costs, so I see it the same with designs and programming or scripts. No matter how great the design or programming might be they’ll need to be updated or modified over time anyway, so they’re just operational expenses.
That really upsets a lot of sellers because I see them all the time trying to get the value of the $6oo design they just purchased added into the selling price of their site without deducting that $600 from the profit totals they’re claiming. I just don’t see it that way, that was an operational cost, so I deduct the $600 from the profit figures and base my offerings accordingly.
Like everything there are nuances to setting a value on a web site and this isn’t a comprehensive guide by any means. It’s just a general look at how I value a web site when buying or selling.
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3 Responses to “How Do You Value A Website?”
By Amber on Mar 25, 2008 | Reply
What if someone is selling because they need money fast though? I understand that you may not be in that position, but for some of us the decision to sell a site can come about because we’re in the hole from over reaching or just poor at turning visitors into money.
If you needed to sell a site fast just to get some cash flow how would your method of valuing your site for sale be different?
By Scott on Mar 25, 2008 | Reply
Amber, that’s a good question and I struggled with that when writing this piece. I know there are times when someone is selling because of a money shortage, I’ve been there in the past so I certainly understand it, but what I wanted to focus on was buying and selling just for the sake of buying or selling and not because of financial circumstances.
Obviously if you need instant cash to pay your rent or bills then you’re in a bad position and will probably have to take a lower offer for your site rather than holding out for the best. Still, I don’t think being in that position would change how I valued the site I was planning to sell, it would only change how flexible I would be on an acceptable price to make the sale.
Beyond that, my advice to someone in that position would be to take a few moments and really consider if selling your web site is the best way to raise quick cash for you or not.
There are many, easy ways to earn fast money online that might be better. Unless your web site is developed enough to be worth a thousand dollars or more even in a fire sale, you’re probably better off earning the money you need in other ways and keeping the site or holding onto it until a fair offer comes along.