« Checking A Website’s Sales History | Home | The Internet Gold Rush 2.0 »
Website Valuations - How Much Is It Worth?
By Max | May 21, 2007
I was browsing Sitepoint today, when I saw this auction. In the comments of the auction listing, there is an argument about the price of a site. The seller wants way too much for his site. He is asking $285,000. His monthly revenues are about 4000-5000 from Google Adsense. At this level of income, it would take 5 years to breakeven buying this site. In the fast paced world of the internet, that is a long time, and involves too much risk. This is also ofcourse assuming that the new owner will have to do little to no work, which just isn’t true.
In the Brick and Mortar world, small businesses sell for 3-5x yearly earnings after all salaries have been paid. On the internet, most sites trade for a smaller multiple. This is because there is more risk involved. A website usually gets its traffic from search engines (or at least those are the ones I am mostly interested in purchasing). Any little change in search engine algorithms could greatly impact a website’s traffic. Compared to a business on a busy street in the brick and mortar world, the inherent risk is a lot greater for a website. This pushes the value of a website down. FinanceGuy’s comments in this auction listing present also present this argument.
Sellers often just don’t realize how websites are valued. I don’t understand the reluctance to lower the opening bid. He is not required to sell the site if he doesn’t meet his reserve price, but under the auction format, he will find out what the maximum price is that someone is willing to pay. I suppose this site won’t be selling at its current price. If I were going to buy it, I would like to pay about $100,000 for it. I think if his adsense claims can be verified, CPM ads could be added to make quite a bit more yielding a decent return.
A lot of sellers talk about potential and how to boost earnings, but you have to ask yourself why the seller wouldn’t make these changes himself? If its easy to do, and offers a good return to make the changes, the seller would have already made them. The only explanation for a seller to leave money on the table is laziness or ignorance. In either case, why should you pay a premium to take on another unknown risk. Its just not worth it.
Sellers also like to mention that the valuation of their site should be based on some amount of work that went in to creating it. This argument is flawed as well. Remember when I reviewed the Movie-Vault sale? Part of the seller’s reasoning behind his asking price for movie-vault was the value of all the work that went into creating the 2000+ original movie reviews. If some work was done on a website and it didn’t yield monetary returns great enough to cover that time/money investment, the new buyer should not be the one who takes the loss. This loss is realized by the current owner, since obviously the value of that investment should be discounted.
Topics: Website Valuation |
May 21st, 2007 at 6:48 pm
I think that the only value in content is the revenue generated from that content. This is clearly defined in earnings reports. Even publicly traded companies are primarily valued in this way. I don’t see how a web site is much different.
May 21st, 2007 at 11:20 pm
Yup. Thats the whole point. Not all webmasters are business savvy. This can be good and bad. Sometimes its good because they haven’t fully realized their websites business potential. Other times its bad, because they mislead themselves into overvaluing things like content.
May 22nd, 2007 at 2:04 pm
Nice post! I agree that buying websites have a lot of risk in them. Have you personally bought and resold any?
May 22nd, 2007 at 3:17 pm
Alex,
I have not sold any websites. I have bought several. I usually try to buy sites that I think will provide a nice sustainable income. If I can improve the earnings of some of my sites substantially I may try to lock in the profit (and huge ROI) by selling them but for right now I am realizing more value in just holding on to them. Flipping a site makes the most sense when you have an idea on how to reinvest the proceeds.
Hmm, this gives me an idea for another post.
June 27th, 2007 at 2:43 pm
I agree with you here about websites being risky. But you overvalue the worth of brick and mortar businesses. Most brick and mortar business that are being sold usually go for 2-3 years profits for a P/E ratio of 2-3. Most websites trade for about a P/E 0.8 to 2. There is not that much difference btween buying a good website and a profitable brick and mortar business running for five years in terms of cost
June 27th, 2007 at 4:38 pm
William,
Thanks for the info. I haven’t spent much time investigating the B&M world. I imagine that quite a few B&M businesses sell for 2-3x. I know a lot of the time the advertised price is around 4x. The best websites (that are for sale) can go for 24 months revenue.
June 27th, 2007 at 5:41 pm
Websites are risky, but so are some b&m business like restaurants, the profit margins are ony 7-10%. A small mistake could mean a loss for that month. But with most ad-based websites the profit margins are 80-95%. If your site gets tagged with a virus message by google like mine did three months ago my revenue dropped by 60% during the time the message was up. I was still making money, but not as much. Imagine if this happened to a b&m business, I am pretty sure you would be not just making less but losing money.
On your point about SE traffic. I have alot of websites that don’t get alot of SE traffic (only 20%) and know alot of people in the same position I am in. Having high % of SE traffic means only one thing to me: “work on non-SE traffic”. While SE traffic usually means more “actionable” users, a site can’t live on SE traffic alone.
But when I look at buying at website, I don’t automatically say a high % SE traffic is good. Once you go around to buying a website, you have to check its SERPS carefully. Is the owner of the site not doing it correctly? A lot of webmasters just use the website domain as the tag. If your main keyword is not in the domain name, then you are not going to do well in the SERPS.
June 27th, 2007 at 7:20 pm
William,
I agree. You bring up some excellent points. It is nice to have a good mix of traffic sources. The ideal would be to have no single source of traffic so large that losing it becomes catastrophic.
If I had to choose however, I would prefer to have a lot of google traffic rather than traffic as a result of a link from another site. Search engine traffic is more profitable and in many cases more stable.
December 14th, 2007 at 5:33 am
Website valuations can be tricky. One needs to also look at many different factors to come up with a value for a site. Things become even more difficult if a site does not have any revene. I wrote an article about the subject of website valuations back in the late ‘90. I recently updated the article and interestingly not much has changed in terms of valuing a website. Many of the same principles still hold and a few new ones have been added. I have also put together most of the information into a free online website valuation tool for anyone that is interested.
May 28th, 2008 at 10:20 am
Very interesting article, thanks. I was searching for info about website valuations, which led me here. Prior to that I found several freebie website valuation tools. Some of the results were quite silly, anything from millions of dollars to about $15,000 - and $25,000 for the same site the next day using same tool.
A website’s value is so subjective. I bought one about seven months ago for 10x its monthly revenue. I’ve almost made my money back so I think I got a good deal. Maybe I was just lucky because buying and selling websites isn’t really part of my core business. I’d like to learn more as I have a few sites I’d like to offload because I’m bored with them. But I’ll probably hang on to them as I have no skills in selling.