What's Your Web Site Worth?

Valuing a Community Forum Site

Tim Dickinson believes that, as with any site, the value of a community forum relates to both synergies with the potential buyer's operations, and the revenue strategy that has -- or could be -- implemented on the community site.

Now on a forum site, members mean revenue. And revenue, more often than not, is generated through advertising. Are particular community sites better bets for ad revenue generation than others? Yes, says Tim. "Some niches will be of greater value to an advertiser as the relevant products could be of higher value, or the demographic of the users are more wealthy people with spare cash to spend," he advises.

User experience within the niche or industry on which the forum is focused is also closely tied to a site's ad revenue potential. Tim believes a mix of expert (innovator) and less-experienced users offer the greatest potential, as "advertisers on the forum gain from being associated with a site that offers honest and high-quality discussion, but also from getting ‘eyeballs' from casual users who have come to the forum." To that end, members' profiles are an asset that can boost a forum's sale price. "Better member profiles generally mean more information," Tim explains, "which can be used to target ads more effectively."

"The number of visitors is another factor that's of central importance to the revenue potential of a site," says Tim. This is not to say that smaller niche site can't do well, but that it's potentially easier to make money with a larger community. Smaller sites must overcome a couple of extra hurdles if they are to achieve high sale prices. One is the potential impact of losing key staff members as a result of the sale -- a situation that Tim believes larger sites would be in a better position to weather. Another is the perception that, as Tim says, "forums need a certain number of visitors to keep all the content fresh and questions answered quickly."

Regardless of a forum's size, activity is always considered in a sale. Often we'll see a sale listing for a community site whose owner boasts, "I could make $x a month quickly, if I only had the time to monetise the site," though the site languishes with few posts and even fewer members. Tim doesn't really see value in this kind of purchase. "If a forum hasn't reached critical mass," he argues, "it has little more potential than a brand new forum with few users other than the content that is on there. Forums that haven't reached critical mass should be treated exactly as a pure content site in terms of value."

Does this mean sellers of large, established forums are necessarily on easy street? Not quite! "The site would certainly have potential," Tim says, "but the new owners would have to be very careful about how they treat the users once the transaction is complete. The selling of a community can often lose users, as people feel slightly betrayed by the old owners."

Transition strategies -- where the new owners are introduced to the forum and co-run the community with the seller for a period of time -- might help overcome this hurdle. And of course, a well-planned transition strategy could also translate to an improved selling price for the site.

Valuing a Site that Sells Products

Sites that sell products -- traditional ecommerce sites -- can seem comparatively easy to value. But are they? Tim believes that "Web sites that sell physical products should be valued in the same way as highstreet retailers -- by the volume of products they sell and the profit they make from each sale compared with the cost of making or obtaining, storing, and sending the goods to the buyers." Ultimately, he argues, a financial basis for the assessment is just. "The site should be valued on the amount of net profit it makes after all costs, and there are more costs involved with ecommerce sites than with content or community sites because of all the physical product handling tasks."

Of course, provided the finances look good, other factors will also come into play. Dan lists numerous questions that potential buyers will likely be asking themselves:

• Do you have to maintain inventory and a warehouse to store it in?
• Does the purchase come with any existing inventory?
• Who supplies the products and at what cost? What are the payment terms? Are there any fees to becoming a distributor?
• How are orders fulfilled? If it's done in-house, how many employees does it take? If it's outsourced, how much will it cost to continue outsourcing fulfilment?
• What is the return rate for products the site sells?
• What is the chargeback and fraud rate for the site?
• Will the previous owner be around to help in the transition?

Pre-empting these questions -- and providing helpful solutions to any issues the buyer perceives -- may put the seller in a good position to get a great price for their site. Obviously, the buyer's previous experience with both ecommerce and the niche in which the site operates will have an impact on how much help they desire, but the seller would do well to anticipate and respond helpfully to any concerns the buyer might have about the business's operations.

The products that the site sells -- and the markets it serves -- are obviously crucial considerations for any buyer. "If a site is selling something like books," says Tim, "it has to compete with the big boys of Amazon, B&N, Waterstones, and others. It has to do something better -- or generally be cheaper -- than them to compete. Focusing on a niche could separate the business from the pack, but the site would have to show expertise in that field, perhaps by offering content on the site as well, or offering a wider selection of books from that niche than the other retailers."

Next up, says Dan, "you have to figure out the value of the current customer base" -- a job which he describes as being "part research and part intuition. The existing owner should be able to tell you about the number of orders per customer and the percentage of new customers that become repeat customers," he explains. A buyer may also want to see customer records or profiles, complaint registers and resolution strategies, and more. They'll likely be interested in the way customers have been treated in the past, as well as the approaches the seller has taken to building loyalty and new customer acquisition, and the costs involved in those approaches.

But from that point, valuing the customer base becomes more difficult. "Potential buyers have to take a look at the products and customers and get a feel for whether they're likely to keep buying after a change in ownership," he says. And, similarly to the business's staff, its customers can react to new owners. "Sometimes, the web site is run in such a way that the customers are very attached to the current owner," Dan says -- a point that site sellers will want to factor into their valuation of the site, as it increases the buyer's risk. "Other times, the change in ownership can happen behind the scenes." Obviously, from the buyer's viewpoint, this will likely be the best scenario, so it might pay the seller to develop the business with a view to their own exit from it.

Synergy also has a role to play in an ecommerce site valuation, says Tim. "As with purchasing other sites, if the buyer already has a network of web sites devoted to a subject, such as gadgets, then a gadget-focused ecommerce site would be worth more to them than an ecommerce site in a new field." As well as the potential for greater monetisation, this arrangement would let the buyers leverage their existing expertise in the field. Tim believes those skills "could be used to help the site expand, so growth may be easier and cheaper to achieve."

"Finally, the relationship the web site or company has with its suppliers and staff is also important," Tim adds. In fact, it's critical, he feels, in making sure "costs won't rise significantly after someone new purchases the business." If staff relations are poor, or staff feel that they are mere pawns in the sale of the business, this could ultimately affect the sale price. Of course, if the business is a one-person affair, then the buyer may want to assess the tasks involved in order to plan their growth of the business, and potential staff acquisition. The seller who makes such planning easy, by providing details and assistance as required, will likely end up with a better sale price.