How to Value a Website or Online Business in 2020?
How to Value a Website or Online Business in 2020?
Determining the value of a website involves many factors, so it’s easy to understand why valuations fluctuate among the buyers. Although e-commerce and SaaS businesses generally tend to achieve a higher value, each business model has unique variables that can affect its overall value.
There are several methods commonly used to determine the value of an online business. In some cases, multiple methods were used for accuracy and due diligence purposes.
In this article, I have summarized some best practices from the most experienced investors and some pieces of knowledge from our own acquisitions, providing some guidance for new and existing customers to help them answer: How to Value a Website or Online Business in 2020?
Five (main) types of online business
Most online companies fall into one of the following five categories:
- Lead generation: A business that provides leads to partner businesses.
- Content and media: Entertainment or affiliate sites, such as Forbes or Entrepreneur.
- Membership and subscriptions: Websites that pay for educational content, such as Lynda.
- E-commerce: An online store that sells various items, such as Amazon.
- SaaS and software products: Subscriptions to tools that make your life or business easier, such as Hootsuite.
Taking a step back and thinking about this question, the main challenges in arriving at a fair corporate valuation seem to be:
- Misunderstanding or incorrect use of valuation techniques;
- Collecting or using incorrect information for analysis; and
- Monitoring unrelated factors Or “the big picture.
Accurately evaluating digital services, the following factors are considered:
When determining the value of your online business, it can be difficult to know where to start. When accurately evaluating digital services, the following factors are considered:
- How old is the company?
- What are the trends in total and net income over the past 1-3 years? In recent months?
- Can the new owner copy the cost structure? Can they save money?
- Are there any abnormalities in the company’s financial history? If so, do they have an explanation?
- Is it possible to transfer all revenue streams to the new owner?
- How stable is the ability to make money, such as CPM is in a downward trend / difficult to replace in this market segment?
- Does the owner have an impact on the ability to earn (that is, the owner-specific profit relationship)?
- How much traffic does the search drive? (That is, how much risk a change in search engine algorithms can cause)
- How secure is search ranking? What is the mix of short tail and long tail?
- What is the traffic trend over the past year? In recent months?
- Is the site affected by changes in Google algorithms or human penalties?
- What are industry trends (see Google Trends)?
- Where does the recommended traffic come from? Is it sustainable?
Mode of operation:
- How much time does the owner need to run the business?
- What is the responsibility of the owner? Are there high technical requirements?
- What technical knowledge is required to run or manage a business?
- Are there employees/contractors in the company and how are they managed?
- How competitive is the niche market?
- What are the barriers to entry?
- Is the niche market growing?
- What are the latest trends and developments in niche markets?
- What extension options are available?
- Where does the business get customers?
- How much does the customer get?
- If subscribed, what are the customer’s lifetime value and churn rate?
- If it is one-off, how active is the customer base? Are they reordering?
- Is it possible to remarket to existing customers? Is there a mailing list?
- Does the company have physical assets or specific regional responsibilities?
- Are there any licensing requirements for running a business?
- Does it infringe any trademark?
- Does the business offer any unique advantages? (E.g. trademark)
So, how much is your website really worth? “Anyone is willing to pay for it!” That was the real answer. However, this is not the answer you can enter into your bank account. To make it easier to learn how to evaluate a website, five evaluation methods are used here:
Easier five website evaluation methods!
Website assessment method # 1-comparable sales
In the real estate market, comparable sales are called COMPS. You can find comparable sites by searching for relevant sites in your market segment that are as close as possible to the site’s age, traffic, and income. The closer the number of comparable sites, the more relevant the site is to the valuation.
In order to make a comparable valuation on a website that generates $ 250 in monthly income from Adsense, 5,000 unique monthly visitors, and a PR of 1, the first step is to search the list won by Flippa.com or Feinternational.com (Fe international sales $1000+ earning website) for an exact match for the condition website.
Here are six locations that can be compared in the results.
Domain Won Price Profit Mthly Unique PageRank
Onlineincomeportal.com $2,950 $212 72,062 0
Cheapholidaytr.com $1,500 $229 4,200 1
Theexpensivecars.com $1,700 $300 45,000 0
Garnethillcoupon.biz $2,450 $312 9,237 1
CnaTrainingSuccess.com $9,000 $366 2,523 3
Bankruptcy-chapter-7.org $3,700 $152 2,547 0
Formula for comparable valuation:
Step 1: Add a “winning price” for all sites sold in the comparable list:
- $ 2,950 + $ 1,500 + $ 1,700 + $ 2,450 + $ 9,000 + $ 3,700 = $ 21,300
Step 2: Find the average price of comparable sites:
- $ 21,300 divided by the number of sites (6) = $ 3,550
The site has a comparable valuation of $ 3,550.
In this case, I recommend that you abandon the highest and lowest selling sites for a better valuation. If you delete the site for $ 9,000 and $ 1,500, the comparable valuation is $ 2,700.
Website Evaluation Method 2-Revenue Multiple
Multiple valuation methods are to divide monthly or annual profit by sales price. Although buyers often use this method, it is not an exact science.
For example, if one site has a three-month history and another site has a three-year history generating the same revenue, the two sites ’monthly net profit from the same revenue source (for example, Adsense) should be differently valued.
The monthly profit of a website with a three-month history maybe 6 times the valuation, and the monthly profit of a three-year-old website maybe 20 times the valuation.
Use the same six sites above as the most recent Flippa auctions, these are multiples of the revenue sold by these sites:
Domain Won Price Profit Monthly Multiple
Onlienincomeportal.com $2,950 $212 13.9
Cheapholidaytr.com $1,500 $229 6.5
Theexpensivecars.com $1,700 $300 5.6
Garnethillcoupon.biz $2,450 $312 7.8
CnaTrainingSuccess.com $9,000 $366 24.5
Bankruptcy-chapter-7.org $3,700 $152 24.3
The multiple assessment methods for these sites range from 5.6 to 24.5. Age is not the only factor determining the multiple. Buyers can own other sites in that segment, or know how to increase revenue for sites that are not used by the current owner, which is why they pay a higher multiple.
From this example, it is easy to see that using multiples only as a valuation method can deceive people.
The formula for multiple assessment methods:
Monthly revenue divided by sale price = x
X is the number of months required to repurchase the purchase price of the website using the current monetization method.
Website Evaluation Method 3-Traffic Value
Another way to determine the value of a website is the “Traffic Value Evaluation Method”, especially for websites that have not been monetized but have traffic.
The method is determined by researching one or more of the most important phrases that drive the most visited website. Then find the keyword’s CPC value.
For example, the website we used in other examples: Bankruptcy-Chapter-7.org has two keywords that attract 90% of the traffic, these two keywords are: Chapter 7 and Bankruptcy Chapter 7
Once you know these words, go to Google Adword’s keyword tool and enter two words. An approximate CPC for each term will be found. [Chapter 7] is $ 5.95 and [Bankruptcy Chapter 7] is $ 11.44.
If you use Chapter 7 to visit Bankruptcy-Chapter-7.org for 900 visits and use Bankruptcy Chapter 7 for 500 visits, the cost per click of the visit can multiply.
Traffic value evaluation method formula
CPC x Number of unique visitors per month for this keyword
$ 5.95 x 900 = $ 5,355 + $ 11.44 x 500 = $ 5,720
$ 5,355 + $ 5,720 = $ 11,075
If the site has to pay, the traffic value of the site is $ 11,075 per month per visitor for services like Google Adwords. The next step is to multiply $ 11,075 by about 45%. The percentage of total traffic value can more realistically reflect the costs incurred if you pay for the traffic because not everyone is willing to pay the highest CPC.
Traffic value ($ 11,075) x percentage 0.45 = $ 4,983.75 / month.
Website Evaluation Method 4-Reverse Engineering Cost
The reverse engineering cost method formula calculates the price at which the site is built from scratch to match the site to be sold. The formula is:
Construction cost + cost to drive the same traffic + time factor = value
The cost of setting up a site is very easy to determine. Developers can easily ask them to look at a website and fairly quote the cost of creating the same type of website with new content. Obviously, complex sites are more expensive to build than simple sites.
The cost of driving website traffic can be difficult to calculate. However, getting a quote from an SEO company may provide some good valuations.
The first time factor includes the number of hours the buyer has set up the site and attracted the same traffic, whether it was outsourced or created on their own. The second time factor is opportunity cost. How much money can the site make within the time frame of building a new one?
For example, if the cost of building the site is $ 1,500, and an SEO company quotes $ 3,500 to build the same traffic, the site is worth $ 5,000. Then add opportunity costs and buyer time. If the buyer needs to spend 10 hours and their time at an hourly value of $ 50, then an additional $ 500 will be charged. If the time to set up a site and traffic is six months, and the original site generates $ 300 per month, the opportunity cost is $ 1,800. ($ 300 x 6)
The total cost of reverse-engineering the site is $ 5,000 + $ 500 + $ 1,800 or $ 7,300.
Website Evaluation Method 5-Customer Value
If the buyer already has a list of customers or potential customers, he/she may know the value of the list. List owners use some metrics:
LTV-Customer Lifetime Value
DPE-USD per email
To better understand how to calculate a customer’s lifecycle value when considering other expenses in the business and the customer’s purchase cost, download the Harvard tool for calculating LTV.
Once buyers understand LTV, they can determine how much they can spend on a website that will generate x customers.
With DPE (USD per email), the list owner may know that each email in the list can generate $ 3 per email when it matches the current demographics in the list. If they can find the website they want to buy and their list contains emails that match their demographics, the list is worth $ 3 per email.
For a website with 2,000 emails, it could be worth $ 6,000 to the buyer without considering any other factors. If the site has generated revenue from other sources, add the value of the revenue to a valuation of $ 6,000 to determine the overall value of the site.
Others Methods of Valuation
Traffic Valuation Methodology:
In this method, companies identify popular keywords that will drive the majority of search traffic to the corresponding website. Then bid on cost-per-click (CPC), which is the monetary value of each keyword.
For example, if a website has two keywords that drive the most traffic. The first step is to determine the cost-per-click in your Google ad terms, then multiply the cost-per-click for each keyword by the number of people who will reach the site. This will provide the value of website traffic.
The formula for the value-of-traffic evaluation method-“CPC x Unique Visitors per Month for this keyword.”
Customer value assessment method:
-Some of the parameters that the owner uses for this assessment method is as follows:
“LTV = customer life cycle value, DPE = USD per email”.
In order to create a large number of consumers, buyers must consider LTV, which will determine the amount that must be spent on the website.
Discounted cash flow valuation method:
One of the most accurate methods for valuing a company through DCF analysis, because it involves predicting the free cash flow of the acquisition target and discounting it at a predetermined discount rate (usually a weighted average cost of capital). (WACC)).
Pre-determined transaction valuation method:
Pre-acquisition of similar companies is another way to evaluate the value of a business. The purpose of the former is to access transaction data. If it’s a public company, the database is easily accessible in the public domain. However, if the comment is privately held, it provides a lot of privacy for the data. Precedent analysis can be a tricky technique.
Yield multiple valuation methods:
Yield multiples is another important example of valuation. P / E ratio, EV / EBITDA and EV / sales are core indicators.
Investors have become very inclined to multiple valuation methods. Its simplicity requires a reliable solution.
Revenue multiples are widely regarded as the most synonymous valuation method for small Internet companies. The profit calculation formula for an enterprise is “total sales-cost of sales-expenses + owner’s salary”.
Multiple income assessment methods:
Dividing the monthly / year profit by the sales price will result in multiple income assessment methods.
The formula for the multiple evaluation methods: “Monthly / Annual Revenue divided by Sale Price = z”
Z is the number of months required to obtain the price of the website for a return on investment.
Some Points About Automation Tools
The internet is a hotbed of quick solutions, and after Google search for “website evaluation tools”, the internet is more common than this. As this article aims to show, proper valuation of a website or internet business requires hard data, some financial analysis, and most importantly, human judgment. Unfortunately, this is where automated website assessment tools cannot compete.
In contrast, online assessment tools often make estimates based on public traffic statistics (usually Alexa rankings) and use the estimated CPM to estimate ad revenue. Apply some arbitrary discount rates based on domain age, the number of backlinks, and other metrics. Of course, there are still many problems related to this: financial performance is not considered, and different types of monetization are not considered (to name a few). If we take the top four tools on Google (CheckWebsitePrice, SitePrice, NetValuator, and Webuka) as examples, Facebook’s valuation (currently publicly listed) will reach $ 1.1 billion, up to $ 6.8 billion. At the time of writing, Facebook’s enterprise value is $ 138 billion.
Leaving aside large companies, just entering the five recent transactions completed by FE International into SitePrice’s tools, you will find that the actual price error is between 5 and 90 times, which is seriously underestimated in each case.
Website valuation comparison by FE International
Don’t be fooled into thinking that online assessment tools always underestimate websites for sale. Usually, they are equally inaccurate in the other direction. These calculators cannot properly evaluate websites because they simply do not have enough information to make an accurate assessment. Therefore, you will never be able to fairly and accurately represent the actual value of your website.
in conclusion? Do not use them.
Valuing an e-commerce business
The key to determining the real value of an online business depends on a combination of:
- Careful consumer and market research, and
- Application of many evaluation factors used in many more traditional businesses.
1. Consumer and market research
When evaluating an online business, it may be more valuable than any other business, especially those in its infancy, and comprehensive analysis of consumer and market trends is essential. The industry is rapidly growing and online customers are unpredictable.
One of the people’s favourite days may be the history of the next day. Easy to make costly mistakes. In 2005, ITV acquired the “Friends Reunited” website for £ 175 million. Four years later, it was sold to Brightsolid for only £ 25 million. The next big thing (Facebook) replaced that business; its customers have moved on.
Whether you are buying or selling an internet business, you need to investigate the markets you are or will be operating in.
- What is the forecast trend?
- How is the predicted growth achieved? What is a competitive threat?
- How easy is it to convert non-paying visitors into revenue?
2. Traditional valuation factors
When calculating the value of an internet business, you need to consider more traditional factors:
(A) Asset evaluation
If the internet business in question sells products, then inventory, equipment and premises will need to be considered.
However, other assets of the online business can be difficult to value. For example, intellectual property, reputation, customer database, quality of products/services, and goodwill. The value of these intangible assets will depend on an assessment of financial factors, such as the strength of the sales channel and the perceived position of the company in the market.
(B) Financial performance
You will need to look at the historical performance of your business, including cash flow and net profit.
A professional accountant or broker may recommend a price-earnings ratio (P / E) based on which the valuation of the business should be a multiple of the industry-recognized annual net profit. A successful Internet business usually sells for two to three times its annual net profit, sometimes higher and sometimes lower.
If the Internet business in question is relatively new and has few assets, it can be valued using the discounted cash flow method. This requires analyzing the expected future cash flows over a number of years and then discounting them to account for the possibility that the buyer will experience delays and / or cash flows that cannot be realized before cash can be realized.
(C) Registration fee
If your business is relatively young and you don’t have years of accounts to rely on, another assessment method might be to determine the cost of an individual setting up the same business from scratch, including, for example, the cost of any place, assets, inventory, marketing costs and Staff training costs.
However, such valuations will not take into account the time and effort invested by the seller to start an online business and develop its potential growth.
(D) Personal circumstances
Why is the seller selling? If he or she needs to sell quickly due to illness, relocation or interpersonal issues, this will reduce the value of the business.
Moreover, if the buyer needs to borrow a large amount of money to fund the purchase or is eager to obtain a part of the competitive market, this may also have an impact on the value of the business.
(E) Operational factors
Does online business depend on the skills and knowledge of the seller? Or is there an established system, procedures, and trained personnel that can conduct business independently of the owner?
Businesses and scalable businesses that can operate without owner input will attract a higher value.
Gathering the right information is key to assessing your online business. The more you understand how your business works, the ups and downs, the time it takes to run it, how much money you make, etc., the more you can evaluate its value.
The three most important areas to focus on during the due diligence process are finance, traffic, and operations.
- Finance: Check monthly reports to spot any emerging trends. Is there a valley? If so, what caused it? Is the company’s revenue seasonally affected?
- Transportation: Where does the traffic come from? Does it come from many sources or is it just one? Organic or paid? Does the website have a lot of backlinks to it? Is the website search engine optimized? Does the traffic drop at any time? If so, why?
- Action: Do you have the ability to run the site? Is it possible to outsource most operational tasks? Is the procedure well documented?
Valuing an Online Business from a Buyer’s Perspective
Buying and selling Internet-related businesses is very different from buying and selling physical businesses; Internet channels use very different skills to generate customer leads, complete orders and provide customer service.
Generally, buyers who see Internet business are concerned about the following factors. These characteristics may affect future profit potential and the risks involved in owning an online business.
If the company to be sold is in the growth industry, it will immediately become more attractive to buyers. If the potential buyer is from the same industry as the company he is interested in, the potential buyer may have a better understanding of the growth prospects. On the other hand, if he or she is from a different industry, a potential buyer will have to double-check its growth prospects before deciding whether to buy.
Although the Internet has made it easier than ever for potential buyers to assess the growth prospects of the business, unless the buyer has a crystal ball, he will not be able to accurately predict the growth prospects of the business and the industry as a whole. However, if the buyer’s research indicates that the company is in a growth industry, he will immediately provide the company with a higher value.
They say that the best prediction of future behaviour is past behaviour, so the historical earnings of online companies are one of the most important factors for potential buyers. When buying a company, the buyer will look for a long history of steady revenue growth. He may avoid companies with a short history and/or inconsistent income. Even if a startup does a good job, its short record will be seen as detrimental to potential buyers. A positive aspect for startups is that new buyers can have the huge potential hidden growth potential that can be leveraged quickly.
Overall, the longer an online company has been doing business, the more money the company has made, and the higher its value. The Internet company with the best record has been in business for at least five years, the Internet company with the medium record has been in business for at least three years, and the Internet company with the worst record has been established for less than five years and more than two years.
Depending on the type of business, the business has different levels of risk. An easy-to-use online company requires fewer skilled workers, thereby reducing overhead costs related to wages and benefits. Most online companies don’t need expertise in that particular industry, but those that can’t adapt quickly will be less valuable at resale. In addition, some industries are more popular than others.
Regarding the management team of an online company, the number of company leaders and their level of training and skills will help determine the value of the business, but this is not the only factor. Generally, the smaller the Internet business, the smaller the management depth and vice versa. The more a company relies on a single owner or manager to run smoothly, the less revenue it needs to earn higher profits. An online company with a strong management team will have a positive impact on higher-value businesses. Moreover, some potential buyers prefer companies with more than one level of management at the time of purchase. For a single buyer who intends to buy a business to run on its own, there are many suitable options for transforming a company operated by one level of management into multiple levels and vice versa.
If the company is equipped with well-trained and skilled employees who are satisfied with their work, it will become more valuable. Potential buyers know that if the company does not have stable employees, they will have to spend money to hire and train new employees. As a result, companies with a stable and reliable workforce will be sold at high prices. Having said that, most online businesses have a scalable infrastructure that makes it easy for new hires and managers to receive training and transitions, which makes this premium not always applicable to every online business.
If a company is restricted in terms of geography, products or services, it will be less valuable than a company that has related products across the country and can easily change or expand.
The Internet has redefined competition. It is no longer the lowest price, but the entire customer experience. Factors such as website design, customer reviews, brand reputation, price, shipping schedules and expenses are not all factors considered by consumers, so competition is intensifying to provide an advantage in any or all of these areas. “Hot” markets and industries are most competitive, but this does not necessarily devalue the company. Because of the many factors affecting online consumers, “hot” or saturated markets are more valuable online because they have high consumer demand.
Companies located in ideal locations and well-maintained facilities are cheaper. This is true for both online and offline businesses. On the web, “well-maintained facilities” translate into websites, inventory handling systems, infrastructure and customer databases.
Terms of sale:
The terms of the sale of a company will also increase or decrease its value. For example, if a company is stable enough to support debt financing rather than equity capital, or if it is a private company willing to raise funds for acquisitions, it will be more valuable. In the online industry business, it is easy to move the headquarters, which also makes the company more valuable, because in most cases you can buy the company without relocation.
When selling a company, both buyers and sellers should be aware of the above factors that may affect online business valuation. The more the two parties understand these characteristics, the smoother the acquisition.
Some Words on Buyer Profile
As the father of value investing taught in his groundbreaking investment book, value means different things to different people, so the prices that different buyers offer for the same asset can be considerable.
Self-service quotation The investment environment and standards of each buyer can greatly affect the perceived value of the asset. Some examples include:
- Strategic investors: Buyers interested in the same or complementary niche can view acquisition targets as additions or mergers to existing assets and can achieve significant cost and benefit synergies
- Financial sponsor: With the improvement of industry standardization, more and more investment funds are participating in the merger and acquisition of Internet business. Generally, these funds provide investors with a fixed ROI or independent IRR (internal rate of return) and these returns will determine their investment multiples
- Investors in debt financing: Rare breeds but similar to ROI-focused investors, those who use debt to acquire internet business usually have the highest valuation multiples to repay the principal and interest on their loans.
When assessing the value of a website or internet business, consider all these investment-specific elements.
Although a sane investor should not be overly affected by asset market prices, it must keep pace with changes in Internet business M & A trends. With the continuous development of the industry, formalization and maturity, it will naturally attract more buyers to enter this field, so the demand for Internet business will increase. At FusionExcel International, more and more new immigrants enter the industry every day. The supply of high-quality Internet business (especially below $ 1 million) is relatively small, so we expect that competition for listing will intensify in the foreseeable future. However, as an investor, it is important to adhere to an objective, reasonable, deductive valuation process, and try to avoid falling into market dynamics, and pay attention to places such as fierce competition.
6 questions each owner must answer before selling
- Why are you selling? Is it necessary to continue to grow, or do you want to make a profit?
- What do you need to make your company attractive to potential buyers? Does your website need to be updated, cleared inventory, planned marketing campaigns? Are your bookkeeping and financial documents organized?
- How does your customer benefit from sales? Will there be more available inventory, faster shipping times, and more product choices?
- Who has the ability to grow your business the way your customers want? Competitors, manufacturers, consumers?
- What is the financial environment of your industry? Stagnation, growth or fading?
- Where will you find buyers? Is it in your best interest to find a broker or find yourself through a network, conference, industry organization or word of mouth?
The golden rule of value online business
As with any business, as a seller, you must keep in mind that the value of an online business is simply someone who is willing to pay for it. And, as a buyer, don’t trust everything the seller tells you-research and do your homework for the real reasons behind the sale. In both cases, it is worth getting professional and objective advice.
Make a free enquiry
We are solicitors who specialise in working with business buyers and business sellers from across Bangladesh, USA & England, including buyers and sellers of online eCommerce businesses.
If you’d like to talk through an internet business valuation with a solicitor at Truelegal, or are looking for a solicitor to help with the legal aspects of your business sale or purchase, please either call us now on 8801716988953 or complete our Free Online Enquiry and we will soon be in touch. Our full contact details can be found on our Contact Us page. We look forward to hearing from you.
I hope you learned a little bit about how to evaluate your website and internet business in this article, and hope you have some due diligence points for future use. Each business has its own complexity and intricacies, which is part of what prompted us to develop a comprehensive evaluation process for the companies we recommend to sell.
Disclosure: This post contains affiliate links. This means we may make a small commission if you make a purchase.
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