What's Your Web Site Worth?

Valuing a Site that Sells a Service

The number of these types of sites -- those that sell image or video hosting, spam protection, and so on -- is continuing to grow as the acceptance and perceived need for innovative, intangible services escalates. And the prices -- in the big sales at least -- seem to be exploding too. Does this mean valuing such sites is more complex than others? Andrew Johnson doesn't think so.

"I would look at their traffic source first. Is it sustainable?" he asks. While it sounds elementary, this is an important point -- particularly for sites in a newer genre than some others. "The traffic could come from word of mouth," Andrew suggests, "which leaves lots of room for growth in advertising and free organic search traffic. However, if the bulk of those profits are coming from less than stable sources, it may be worth a bit of a discount."

"Just as importantly," Andrew continues, "how much time does the new owner have to put in? Are you buying yourself a job? If the seller is currently doing all the work, can the buyer still outsource it profitably?" This issue often crops up in the sale of more innovative sites that, as brain-children of their owners, demand a lot of care and feeding. If your site requires much of your time, perhaps you should consider ways to automate aspects of it before you sell, as a means to add value and gain a higher sales price. After all, as Dan Grossman is quick to add, "With a subscription or product site, it's more about revenue and the costs of running that business." Reduce those costs, and your sales price will likely increase.

Of course, innovation frequently justifies a higher price. "If the service is truly revolutionary or a market leader you could likely add a premium to its value," Andrew comments, indicating that a little research, a comparative cost analysis, and taking any opportunity to clearly differentiate your site from others, could pay off in your negotiations with potential buyers.

With this, Dan firmly agrees, but as well as the uniqueness of the technology, and how easily it could be replicated, he believes that "you also have to look at whether it will it scale as growth continues, and will the buyer be able to maintain it without the original author's help? There's also a loyalty issue there," Dan suggests, arguing that steady sales could drop after a change in ownership, particularly on sites that offer scripts, software, or tools, and for which responding directly to the customer community -- with correspondence as well as product enhancements -- is critical to success.

Good -- or bad -- news for owners of sites that sell intangible products and services is that the buyer can have a significant impact on the potential selling price for an innovative site. As Andrew is quick to point out, "Rupert Murdoch was laughed at for paying $600 million for Myspace. After a $1 billion ad deal with Google he looked like a genius." And although, as Andrew says, these kinds of numbers defy logic for those looking at value investments, they do make the unique service site segment seem extremely lucrative for the innovators out there.

That said, sellers must recognise the risks buyers take in making such purchases. "Technology is evolving very, very rapidly," Andrew summarises. "It can work both ways -- perhaps in 5 years your company is worth $1 billion, or your entire business model might be extinct." Dan agrees. "Many service industries are expanding right now, so it's important to consider the direction in which the market for that service is moving. If it's growing, and the site provides some unique value to that market, it may be worth significantly more than current revenue."

Ultimately, risk is inherent in these types of purchases, but the market direction and technology might be the biggest issues the site buyer faces. Site owners looking to get the best price for their service site need to make sure that the site was built with a vision for the future, that they can identify potential directions for the site and service it offers, and, of course, that the technology is robust and scalable. Verifying traffic sources and reliability, and ensuring the site has a minimal maintenance burden should also be goals for the would-be seller wanting to get the best price for their site.

Using Site Appraisal Tools and Services

Many site owners feel that they're the best judges of their sites' worth -- and their predictions are horribly wrong. Perhaps their research is poor, or their perceptions of the sites' potential or revenue potential are off (after all, it's hard to be objective about a site you've put your life into). Either way, self-assessment can end in tears.

As a result of the general uncertainty and perceived unpredictability of the online property market, numerous tools and appraisal services have emerged to cater to the needs of site owners who want an objective view of a site's value.

The tools, including dnScoop and Tidget.com's Tidgulator, tend to assess a site on the basis of a number of tangible factors -- traffic, PageRank, backlinks, the number of years the site has been online, how long the domain has been registered, the value of property that will be transferred to the new owner, and so on -- which may or may not necessarily have relevance to your site's sale. The other potential hitch with these calculator-style tools is that they rely on your own perceptions much of the time (for instance, in valuing the property that's involved in the sale), which can lead to unrealistic expectations. That said, these tools can alert sellers to many of the factors they might consider in assessing their sites' worth, and the tools can also be more affordable than appraisals -- the sites provided here provide value assessments free.

The appraisal services, of which buysellwebsite.com and Venture Planning Associates are just a couple, typically promote their offerings as providing a value-add for the seller that can increase the ultimate sale price. They account for a wide range of less tangible elements like the site's stability, ease of use, content offering, and potential sources of income, as well as the nuts-and-bolts metrics of unique visitors, pageviews, and so on, but this investigation comes at a price -- from around US$450 up.

The options can be bewildering -- particularly for first-time site sellers, or sellers operating in a segment of the property market that's new to them. So are these offerings worthwhile?

Tim is quick to outline his concerns. "The tools use a straight formula. This is fine, but they aren't people and they don't check the originality or quality of the content or design, which are both very important." Chris furthers this argument, saying "any type of objective algorithmic evaluation will always be second rate because statistics are in the end only a portion of what gives a site value." And Dan believes that "only being diligent in your own research will tell you if the traffic and links the site attracts are transient or likely to stay, if the users will remain loyal after an acquisition, and if there's a growing market for whatever content or service the site offers."

Rob sees another problem with assessment tools, commenting that "I used to use them, but most of them are way off. They give site owners a high price, because that makes the site owner feel good, and come back to use their tool again. But then the sellers get mad when no one will buy at the "appraised" price"

But Yaro sees a role for these kinds of offerings. "I don't use tools that attempt to tell me a site's worth," he says, "however, I do use tools that give me data related to how much a site is worth." He uses tools like the SEOMoz Pagestrength tool, Yahoo Site Explorer, the Search Status extension for FireFox, and the Way Back Machine to obtain vital statistics on a site -- AlexaRank and PageRank, how long it's been online, the domain name's age, the number of pages it has, and backlink counts from authority sites. He uses all these factors to build a clear picture of a site, but then relies on his own assessment, including "just spending some time at the site I'm evaluating," to develop a solid idea of the site's value.

Chris also has faith in what we might call the "human factor". "The best tool in my opinion is a panel of experts, AKA a forum, who can give you a human opinion." So does that mean he advocates the use of appraisal services? "No," he says. "I've never seen a professional site appraisal service that gave what I thought were realistic appraisals." Dan is more open to the idea. "Appraisal services with real people behind them can be valuable," he suggests. "Unfortunately a lot of business appraisal services are geared toward the offline world, focusing on accounting and physical assets."

Another potential hurdle facing those who might otherwise consider using appraisal services is cost. "For smaller purchases, the costs of hiring these people can be more than the value of the site, or certainly take a large chunk out of the first year's potential profits," says Tim. For bigger sites, though, he sees the value of professional appraisal. "If a site costs millions to run, or claims to make millions in profit, then a professional site appraiser can help the buyer to decide with more peace of mind if the site is worth the purchase price."

Of course, as the market matures, these services may have a bigger role to play. "I expect as the industry expands, more and more people will come to use professional appraisal services as part of the process to assess any potential purchase," Yaro predicts. "One or two services that offer exceptional output and have a demonstrated history and knowledge of the industry could rise to the top and become must-use services for any serious web site traders," he adds.

It seems that, for now, the value of appraisal tools and professional services may be very limited for smaller site sellers -- and the argument that an appraised site will sell for more may be difficult to substantiate. After all, as Chris says, the decision to sell a site ultimately comes down to opportunity cost: "what is the opportunity cost of not having the money from the sale in your pocket?" Again, the human factor can do much to undermine theory and statistically based assessments.