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Georgina Laidlaw
Georgina is a professional writer based near Melbourne, Australia. She works on all kinds of projects, from marketing collateral, theses and novels, to blog posts, articles and speeches.
What's Your Web Site Worth?
Every day, we hear of yet another enormous company that's paid an even more unbelievable sum for an online entity that -- it often seems from where you and I are sitting -- doesn't actually generate much of an income. In the last few years, Yahoo! has bought MyBlogLog (for a rumoured $10-12 million), MusicMatch (for $160 million) and Flickr (for an undisclosed value); Google has snapped up Jaiku and MeasureMap for undisclosed sums, and YouTube for the much-touted figure of $1.65 billion.
That's right: $1.65 billion.
Sums like this may remind some pundits a little too much of the Bad Old Days of the web bubble -- some have even questioned big sites' valuations -- but, quite naturally, they lead site owners the world over to ask themselves, "Well, just how much is my site worth?"
Ask in any forum how you should value your web site, and countless would-be online investment experts will give you intriguing, but often contradictory advice. There are the accounting formulae, the professional appraisers, the online tools (just enter a few facts about your site and we'll give you a rough valuation!), the endless cries of, "if I see value in the site, then it doesn't matter what anyone else says. I'll pay whatever's necessary to get it!" … none of which are very helpful.
So recently, SitePoint set out to find something approaching a clear answer on site valuation. We asked several experts -- people who have, for years, made their livings online, and have first-hand experience buying and selling web properties of various types -- for their insights into the web property market, and for tips and advice on valuing sites. We also scoured the stats from the SitePoint Marketplace, in an effort to get a more complete, balanced picture of what's going on at the everyday end of the site sales market.
The ultimate aim of all this was not, of course, to produce yet another formula or tool into which you could plug a few figures and a domain name to get some kind of valuation for your site. Instead, we wanted to clarify the issues surrounding site valuations, and give site owners a clear picture of the factors that were affecting their sites' values. We wanted also to provide starting points from which you could work to translate those factors into dollar values.
But before we jump into the complexities of site appraisals, let's shed a little light on the technique that investors have traditionally used to value businesses: financial formulae.
Valuing a Site Using Financial Formulae
Many of us find the valuations given to online entities baffling -- the YouTube sale was a case in point. Sure, big companies might pay big bucks, but if Joe Average wants to sell his online forum or ecommerce site, he knows he's unlikely to sell it to Google. And so, rather than relying on their, apparently generous, valuation, Joe needs a guideline of his own.
Many people in this situation turn to age-old accounting formulae. One common version of these rules of thumb states that the value of an online business lies somewhere between five and seven times its net monthly revenues; another states that the value is around 50% of the business's turnover.
A quick search online will turn up countless similar rules of thumb. One business broker lists four common methods for business valuation:
- profit-based valuation, which obviously requires the business to have reliable profit figures
- asset-based valuation, which is commonly used by buyers who aren't really interested in running the business, but want to obtain the assets in question
- the comparable sales method, which considers the sales prices of similar, recently-sold businesses, and makes a comparative valuation on that basis
- the "Rule of Thumb" approach, which compares the industry standard figure for a value that's considered important (e.g. sales or gross profits) with the business's own figures. So, for example, you might obtain the average ratio of sales to gross profits for businesses in the industry in question, then compare it to the same ratio for the single business in question. Ultimately, this compares the business to its industry average, but is used in specific industries.
Rob May, owner of ValueOnTheWeb.com, a company that developed and sells a web site valuation system that allows customers to tap into a raft of web property market data in order to gain insight into their own sites' values, makes an important distinction between these formulae, suggesting that "what really matters is cashflow and net profit." In this vein we find another rule of thumb that's long been used to assess the value of an investment: the "discounted cashflow approach", where the projected income from the site over a given time period is discounted by the rate of interest you want to earn on your money within that time period. This approach is used to determine what you should pay for that investment now -- in today's dollars.
This sounds good, but can cashflow- and profit-based formulae like this really be relied upon in the volatile online market? Rob doesn't believe so. He contends that, "when it comes to web sites, those values can vary dramatically from owner to owner because the cost structure can change with a new owner. For instance, if a site has both programming and content work to be done, I'll outsource the programming, but might sometimes write the content. Another owner may outsource the content and do the programming. Another owner may outsource both."
So although a formula might give a buyer a valuation of the site as it stands, from a purely financial viewpoint, it can't take into account the value a new owner might be able to add -- that takes foresight, vision, and a thorough assessment of the skills and capabilities that the potential buyer can bring to the table. And that's probably why, though there are numerous valuation techniques, many pundits advise site owners to ignore all such rules, or at the very least, to consider them as only one piece of a much larger jigsaw.
Yet Dan Grossman, of Awio.com -- a network of sites that provides tools and information for site owners -- believes that there are some cases in which a formula might be worth considering as one aspect of a valuation. "If you're going to buy a web site just to continue operating it, then basing the buying price on expected future revenues is fair," he comments. But again, he points out that "it's not always that simple. When I browse the SitePoint Marketplace and other similar venues, I'm looking for two things: a web site with great content or technology that could grow significantly if it were exposed to the right market, or one that would integrate well with my existing sites to grow their revenue. The price of that kind of purchase isn't strictly based on the revenue the site is currently earning, but what value it can potentially bring."
That sentiment is echoed by Chris Beasley, web publishing stalwart and Editor of websitepublisher.net. "As a buyer what matters is what a website is worth to you," he comments. "If think you can make 10 times more than what the current owner makes, then limiting yourself to a multiple based on the current owner's revenue is dumb."
These comments hint at the miasma of factors that can impact on a site's ultimate sale price -- factors we'll get to in a moment. But in addition to the nuances of the site itself, there are two broader considerations that a formula simply cannot take into account. Yaro Starak, an online businessman who tracks his adventures online at Entrepreneur's Journey, identifies one of these considerations. "As with all investments, what someone is willing to spend is what something is worth," he says. "As long as we're dealing with people, the potential to manipulate price is very real."
What we might call the "human factor" obviously varies with each sale, and each of the parties involved -- there's no accounting for either gullibility or ruthlessness!
Of course, in the changing world of the Web, site sellers need to beware of more than just intentional manipulation. "The Internet is fast moving and situations can change very quickly if a new site comes to the market in your niche," advises PrimitiveNetwork's Tim Dickinson. "Paying more than the predicted profit for the next year or two can be risky, and even if a site offers more than just profit to you or your users, you still normally need to break even on a site at worst."
Again, no formula could have anticipated the explosive popularity of social networking sites -- that kind of foresight requires more than an ability to crunch numbers.
It seems that, while a formula may provide site owners with a starting point, the limits of a formula-based approach may greatly restrict its relevance to many of the deals being made today. So, if formulae and accounting equations only give us a part of the picture -- at best -- what else should we consider in valuing our sites?