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Reprinted with permission of VotanWeb.com
As a market leader in existing website sales, VontanWeb receives many questions about valuing websites. It always amazes me how some website owners come up with the value of a website being sold. No wonder many websites never sell. In many instances no consideration is given to the total picture. Will the available cash flow of the website be able to pay the debt of a loan to purchase the website? Will the website as priced be attractive to financing sources?
I have seen many “professional website valuations” where the price just doesn’t make sense – and sellers wonder why buyers are not standing in line to purchase their website.
There is a solution that is grounded in the fundamentals of economics, and time tested in the marketplace, where the influences of supply and demand ultimately determine where a website belongs on the price scale. One economist explains this market approach by comparing a business to a machine which has the purpose of making money: The more money it makes, the more it is worth. This is why there is greater demand for very small and profitable websites with few hard assets, than there is for large, popular and high maintenance websites that generate a huge cash flow, but can’t make a living for its owner.
Adjusted Net Income
The first category of information needed is called adjusted net income, and is the total amount of cash produced by the “money machine.” Of course, this figure includes the website profits and the owner’s salary. It’s important to remember that the adjusted net income should also include all of the many cash-related benefits which are enjoyed by the website owners. Those benefits may include the use of a car owned by the website, the website-paid premiums for health, life and auto insurance, website paid memberships to country clubs and spas, travel and entertainment expenses that are actually vacation and taking the wife out to eat expenses. Don’t forget expenses for high speed internet and cable TV that are needed for the website but also provide entertainment for the whole family. There are many, many other hidden personal expenditures in any typical website business, subscriptions to magazines, gifts for your wife and girlfriend and similar “business expense” categories. Interest expense should also be added to adjusted net income, along with accounting entries—such as depreciation and amortization—that can divert money to the owner’s pocket so that it never appears on the bottom line of the P & L.
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"Pricing Websites For Sale." 123HelpMe.com. 24 Feb 2020
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While some of these items vary from website to website, any owner knows which categories of expenses in his or her financial records include sums of money that should be added to adjusted net income. Many website owners also know of cash income that never sees the business records in any way, shape or form. Some owners feel they should get credit for these sums in the calculation of value. But it’s a poor policy to collect unreported income and then attempt to have it included in adjusted net income for evaluation purposes. When selling your website, prospective buyers want any statements you make about your business to be supported by evidence in the form of accounting records and other reliable sources. To admit that you are doing business “off the books” not only exposes you to problems with the IRS, it also sets a bad tone with prospective buyers who—if they are going to be interested in your business-- need to believe your practices and record keeping are above reproach.
Adjusted net income is usually the first thing any buyer wants to know about when investigating a website; and not just the past few months’ worth of income. A seller should be prepared to demonstrate a history of earnings, and have the documentation to back it up.
The next piece of the equation comes from the expectations working in the marketplace to shape the multiplier—a figure which will be computed, along with the cash flow, to calculate a rough value. The validity of the multiple is that it reflects behavior in the market. There is no need to theorize about a proper multiplier. It’s calculated by determining what people actually pay for websites.
The experience with low risk websites is that their high market demand is reflected in a fairly strong multiple. A lot of buyers want, for example, a well-established website with little direct competition in a niche market. Its multiple might be in the range of three to five times annual adjusted net income.
A one-half or one multiple, on the other hand, would be associated with a website in which the buyer is assuming greater risk. An example is a small website in a highly competitive niche which leaves the buyer of the smaller website vulnerable to the competitive marketing activities of much larger websites. The lower multiple is a consequence of lower market demand. Fewer people want that kind of website.
Since profitable low risk websites are much sought after, it’s not unusual to see them command a price upwards of four times annual adjusted net profit. A website in this category providing adjusted net profit of $200,000 might realize a selling price of $800,000 or higher. Remember, a seller must be able to establish the website’s history of earnings with financial reports and tax returns, before the highest offers will be made.
More commonly available websites, such as dating websites, are priced with a much lower multiple to reflect the abundance of these types of websites available for sale at any one time. In this case it’s purely a matter of supply and demand.
Pricing a website is as much or more of an art than a science. Sellers who take a look at the big picture are usually the ones who are successful in selling their websites!