People will tell you, and you’ve heard before, that a website (or anything for that matter) is worth what someone is willing to pay for it, right? What the market will bear for that asset is what it’s worth and that’s partially true…
But of course, markets have problems, sometimes they’re illiquid, sometimes there are frictions in the market things like lack of information on the part of buyers or sellers being deceitful or transaction costs from brokers or what have you. These issues all impact the value of websites.
For the moment, let’s put all those caveats aside because I want to give you a framework for valuing websites something that you can start with as a process and then adjust to suit you.
It’s important to remember that what you bring to the table is vital, it’s really a matter of what the website is worth to you.
How do you value a website?
I use what I call a ‘risk-based valuation framework’. I start with a market rate for a website which I take that from the Centurica Annual Report. This report might tell me, for example, that an e-commerce site is trading at approximately 2.4x or 2.5x annual net income in the current year, and so I take a that multiple and I valuate the risk profile and adjust the multiple I’m willing to pay.
I call this a risk-based approach because the first step in the process is to identify the risk profile, the risk characteristics, of the business that you’re looking to buy.
How do you identify a websites risk profile?
Firstly, you want to look at how old the website business is. A young website is going to have a higher risk profile than an older website because younger websites have not stood the test of time. When Google or Amazon, for example, inevitably introduce changes, a younger website may not have the historical information to prove it can handle those changes whereas older sites that have demonstrated consistency or growth in the face of change give you the perception that they have a much lower risk profile because they’ve proven themselves in the past.
You also want to look for diversification in different areas of the website. In the realm of traffic, for example, if there’s a single source of traffic and only one way to get the traffic from that source then that would be a higher risk than a site that has multiple traffic sources of traffic. This same methodology can be applied to looking at revenue, does it have a single source of revenue? Has it been tapped out? Or are there multiple sources of revenue? Be aware though, too many sources of revenue can be a risk as well because managing it can be difficult.
Dependencies can be crucial
As part of your risk profile you want to look at dependencies, and these are things like a dependency on an employee or a specific software or maybe a particular vendor or supplier. These types of dependencies can be crucial, and they represent high risk if replacing them or changing them is difficult or very costly to do. If you identify these types of dependencies, then place the business in a higher risk category.
If these dependencies are easily replaceable or not costly to do so then they might be beneficial for your business, and if it hasn’t got any dependencies at all, the business would be in a much lower risk category.
At this point you want to ask yourself, ‘Hey, in my analysis are there risk indicators that make it more risky or less risky or about the same as an average business?’
If it’s more risky, the multiple that I’m willing to pay should be lower than whatever the industry average is for that niche at this time and if it is less risky than the average business, then the multiple that I would pay is going to be a little bit higher than what I find in that Centurica report. This is the guts of the process, the fundamentals that you want to do with this risk analysis.
Complement your strategic advantages
Every website has a different value to a different buyer because of what they bring to the table. Even if I have a strategic advantage, I’m not going to automatically offer more money for a website. I may be willing to raise my maximum price (not my offer but my price ceiling) because of my advantages if I’m competing against other buyers for the same property.
Advantages are things like if I have a business that might have synergy with the one that I’m going to buy, for example, I have an audience and the one I’m going to buy has a product, that’s the strategic advantage that makes this potential business perhaps more valuable to me than another buyer who does not have that strategic advantage.
How much is a website worth? The price that I want to pay is based on the risk profile, the historical performance of the business, the current performance of the business. Don’t think about the future potential of the business. When you start talking about the future everything gets murkier than when you’re talking about the past.
Be cautious with predicting the future
There are some times that we can look into the future for example, if we identify very specific and known improvements – I may have a very strong feeling that I can make a lot more money per 1,000 page views than someone else with a different ad network or I know for certain that I can sell a particular product at a different price point than it’s currently being sold. In these cases I’ve done the analysis on the volume impact of my actions and that gives me latitude in what I might be willing to pay.
But you must be cautious with those future ideas and potentials because unless you have lots of expertise in that area you may be wrong. It’s possible that the seller has already tested those things and has arrived at the optimal level of whatever they’re doing.