How Much is a Website Worth?

Hey, this is Jeff Hunt
and today we're going to talk about how much
is a website worth?
Well,
that's a big question to tackle in
just 6 minutes but I got to give you my
best shot at it and of course people will tell you
and you've heard before that websites
are worth or
anything 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 - there aren't enough buyers
and sellers so things sell at
strange prices, 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,
those things all impact the
value of websites but,
of course, what you bring to the table is
also really important,
it's really a matter of what the website
is worth to you.
But, all of those caveats aside what I
want to try to do is give
you a framework for valuing websites something that you can start
with as a process
and then make it adjusted
to whatever you bring to the table
and your ideas about how to value
things.
So, what I use is what I call a
'risk-based valuation framework'
and what that means is simply we
start with a market rate for a website,
the multiples that most
people are willing to pay at a given time for a particular
niche or business model,
and I take that from the
Centurica Annual Report where it
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
multiple like that, a standard multiple,
and then I make adjustments to the
multiple and I called
this a risk-based approach because
the first step in the process is to really try to identify the
risk profile, the
risk characteristics, of the business that you're looking to buy.
So, for website businesses,
those kinds of characteristics would
be sort of on
the fundamental vital signs of the business how old is
it? So, a younger website is going
to have a higher risk profile than an
older website because younger websites have
not stood the test of time, they haven't like pushed
through and Google's made changes
or Amazon or Facebook have made policy
changes that negatively impacted the
businesses or there have been new
devices that have come up so the user behavior
has changed the way users search for things
and buy things have changed.
Young websites haven't
seen those things happen and you
don't have the historical information to know how the site is
going to handle those changes whereas older
sites that have demonstrated consistency
or growth in
the face of those changes give you the
perception that they have a
much lower risk profile because
they've proven themselves in the past.
So you
look for things like diversification
and diversification in a
lot of different categories, for example, in
the realm of traffic,
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 or different
ways to get traffic from each of those sources
and you can apply that same methodology
to looking at things like revenue
or single
source of revenue has it been tapped out
or multiple sources of revenue.
There are
too many sources of revenue that can be a risk as well
because managing those things is difficult
and
then the
area of dependencies, and what I mean by
dependencies are very often in
businesses, there are things like sort
of unnatural dependencies on
certain things, for example,
maybe there's a
dependency on a particular employee or particular
kind of software that was purchased at some point
or maybe a particular vendor
or supplier of a
product, those kind of dependencies
can be really crucial and they represent high
risk if replacing
them or adding to them
or changing them in some ways
is
difficult to do or impossible to do
or may be very costly to do,
and then those
dependencies place the business potentially
in a higher
risk category whereas if
those things are
easily replaceable or not
costly to do so then those dependencies actually
might be beneficial to
a particular business,
and if it hasn't dependencies at
all, it could be in a
much lower risk category.
So, you get the idea,
what you're really trying to do is to to
take this business to
the extent that you can and say,
'Hey, in my analysis are there
risk indicators that make
it more risky than an average business
or less risky
or about the same as an average business?' And
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, for that business,
at this time and if
it is less risky than
the average business, then probably other
people will
understand that as well and the multiple that I would pay is going
to be a little bit higher than what I find in
that Centurica report. So,
this is kind of the guts of the process,
the fundamentals that you want to do is
this risk analysis. Now,
beyond that,
every website has
a different value to a different buyer
because of what they bring to the table.
So, I may have strategic
advantages
that other people don't have and I'm
not going to automatically offer more money for a website because
I have advantages but, if in a kind
of competitive environment competing
against other buyers for
the same property, I
may be willing to raise my maximum price because
I know that I bring advantages
to the table and what I mean specifically
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 I could
sell to my existing audience
or I bring a product that
I can sell to a new audience,
that I might buy into,
that's the strategic advantage that
makes this potential business
perhaps more valuable
or worthwhile to me than another buyer
who
does not have that strategic advantage.
And there are a lot of examples
of possible strategic advantages but in those cases I
might adjust the multiple that I'm willing to pay,
the maximum,
not the amount that I'm going to offer to
begin with necessarily
but I might be willing
to pay more because essentially I'm
looking for businesses where I do have advantages,
those are the kinds of businesses that I
want to buy but 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 and not based on the
future potential of
the business, OK?
Because when you start talking about the future everything gets
murkier than
when you're talking about the past, right?
And a lot of people read into
things about the future that
they probably should not read in.
There are some times that
we can do that like if we identify very
very specific and known improvements,
for
example, I may know that
or 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 then
I might be able to factor that into my rationale
or if I
know for certain that I can sell a particular product at a
different price point than it's currently being sold
and I've done the analysis
on the volume
impact that that price change might have,
then that
gives me latitude
in what I might be willing to pay.
But, you have to be really cautious
with those future ideas
and potentials because
unless
you have lots of expertise in that particular area you
may be wrong about these things.
It's possible that the seller has already
tested those things and has arrived at
the optimal level of whatever they're doing.
So, that's my
best shot at collapsing online
business valuation into like 6
or 7 minutes.
Hopefully that was helpful to you.
I have a tool that you can find at
www.flipminds.com/today
and some other items there that
might be helpful to your online business.
Thats what I've got for you today,
see you next time.

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