The Ultimate Web Site Valuation Guide

Adding Value to a Site

Bear in mind that this whole article is intended to offer the buyer’s perspective. Knowing what factors influence a given buyer’s perception of value puts the seller in a stronger position to control the sale and improve the selling price.

So what are assets that buyers like? Here’s a list that contains some obvious examples, as well as some more obscure ones. Sadly, there’s a twist in the tale for sellers ... but, first, let’s look at the motivators that help push a site’s valuation up:

• prime real estate, which is a good domain name (preferably also registered in other TLDs as a precaution against misuse)
• a long, unbroken WHOIS history—an aged domain that has never been allowed to expire
• aged links, particularly from the big directories like the ODP and “grandfathered” Yahoo (before it started charging)
• an aged site—the longer the earnings history, the level of traffic, the inward links, and the statistics and data to prove it all, the better
• a large quantity of links from a wide range of domains—for example, some buyers tend to place extra value on links from .edu and .gov domains
• brand and goodwill—usually translates to a loyal visitor base and trust, both of which have value to advertisers
• first mover advantage
• the page rank of the top pages of the site and, to a lesser extent, the site’s ranking in traffic monitoring sites such as Alexa, Compete, and the like
• low risk; for example, plenty of evergreen content in a subject that’s not fast changing
• high threshold to impede new competitors
• high flexibility—anything from content to technology, scripts, and relationships can be easily managed, migrated to a new owner, or moved to a different host if required
• quality databases, such as a large database of double opt-in subscribers eager for every newsletter sent out
• a high cost to recreate the site, which acts as a high barrier to entry
• a quality customer base that places regular orders
• low expenses relative to gross profit—a proxy site with a bandwidth bill of 80% of revenue represents a high risk, as a small increase in costs could make the whole enterprise unviable
• large amounts of stock in good resale condition
• large numbers of visitors and page views—larger sites are seen as more stable
• a demographic valuable to advertisers—50,000 lawyers a month looking to subscribe to a trade monthly beats 200,000 teenagers looking for the latest news on a pop diva
• quality content, well-developed functionality, a carefully built up community with a large participation
• well-established partnerships and joint ventures
• a secure source of earnings that doesn’t require much regular work—Adsense would be seen as a lot less onerous than the blogging, pay-per-post model
• multiple sources of such earnings to give further security
• opportunities for buyers to further monetize the site
• an honest, professional presentation by the seller—exaggeration, boasting, or quoting server hits as unique visitors puts buyers on guard and raises their risk perception
• guaranteed continued seller involvement post-sale

There are many more—from stickiness to SEO—but lest we forget, what’s probably the most important is how the seller presents the sale. A professional sales pitch is vital—a good description of the business and what it does, where the money comes from and the breakdown of earnings, traffic and referrer stats, reasons for sale, and all the other core information (there are more tips here). Otherwise, buyers may not even bother to stop and consider the business for sale.

The Bad News

Consider a large content site with thousands of pages of unique and high-quality content. It’s long established and has lots of “natural” inward links because it’s a genuinely good resource. The site’s sole revenue stream is Adsense and it makes $5,000 a month. Now, if current market sentiment is paying in the range of 24 months’ net earnings for similar sites, this site is likely to fetch:

Earnings x Multiple = Price

24 x $5,000 = $120,000

Yet the seller is aware that this huge amount of quality content doesn’t come cheap. If the buyer were to commission similar content, it would cost over $100,000.

There is also the strength of the tens of thousands of inward links, the high page rank, the large number of unique visitors, and the single-word memorable domain name that also attracts its own type-in traffic! How is all of this valued in any appraisal?

Here is the bad news for sellers: it isn’t. Those assets contribute no more than what’s already been added up.

The assets form the infrastructure of the business. Without them, there would be no earnings. Without the quality content, there wouldn’t be so many inward links, there would be no PR, and there would be no large traffic from search engines. Without the type-in domain name, further traffic would be lost. With all that traffic gone, there would be nobody to click the Adsense ads and there would be no earnings. The value of all those assets was reflected in the earnings. It’s already been counted.

What then of age of domain, length and consistency of earnings, and other assets that arguably don’t contribute directly to traffic and earnings? The value for these assets is reflected in the multiple. Again, it’s already been counted.

The longer the history, the more secure the investment is seen to be, and the higher the multiple it subsequently commands.

Since the Price is a product of the Earnings and Multiple, and all assets underpin either Earnings or Multiple, there is no further value to the assets.

So, contrary to sellers’ claims, the assets responsible for earnings don’t add any further value to the business than what’s been counted. More site-selling myths are debunked here.

It is in the nature of the seller to overprice their own site. Their next argument may well be that the earnings don’t reflect the full value of the assets. And that’s entirely possible. However, it’s a claim that any seller can make, that most sellers do make, and it’s rare for a buyer to accept the seller’s prejudiced opinion. It is in the buyer’s interest to suspect that any further earnings to be extracted out of the business can come only at a huge cost in time or money that would make it uneconomical to pursue.

Where the seller believes there’s substantial additional profit to be generated easily from the existing assets, it would be less of a task to actually ramp up earnings and demonstrate the figures than to convince skeptical buyers to believe a figure plucked out of thin air.

So what are some ways the seller can add value?

• Sharing risk—if the seller shares the risk with the buyer by taking part of the payment contingent on the site achieving some predefined goals, there are grounds to negotiate a higher multiple.
• Providing finance—where the seller is willing to take payment in stages or instalments, the buyer benefits from the time value of that cash; that’s a good basis for arguing a higher price.
• Providing expertise—if the seller undertakes to provide ongoing consultancy services, or contribute via some other skill, it’s reassuring to the buyer. Having that first-hand experience of the business on hand is worth a premium.
• Offering part ownership—sellers often take a share in a new, merged business. They may lay down conditions or take out warrants (stock options) to avoid dilution of their share through further financing, but the fact that they still have a monetary interest in the business is reassuring enough to nudge the achievable price higher.
• Agreeing not to compete—in some cases, a no-compete clause in the Sale Agreement can make a big difference.