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How much is my website worth Website valuations explained
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How Much Is My Website Worth Website Valuations Explained

So You've Found A Website You Want To Buy, But You Have No Idea How Much It's Worth. There Are A Few Methods To Determine The Value Of A Website, All Of Which Are Relying On Avid Numbers And Facts, So You Need To Determine A Few Factors About The Website You Are Going To Buy. Here Are A Few Generally Used Methods:

 

DCF Analysis

DCF, Or Discounted Cash Flow, Analysis Is One Of The Most Thorough Ways To Value A Business. It Takes Into Account The Predicted Free Cash Flow Of The Business And Discounts It Using A Predetermined Rate, Usually The WACC (Weighted Average Cost Of Capital), Which Is Basically A Calculation Of The Business's Cost Of Capital. The Assumption For This Method Of Analysis Is That A Dollar Today Is Worth More (or Less, In Very Rare Occasions, Depending On Interest Rates) Than A Dollar Next Month (or Year). DCF Analysis Takes The Predicted Free Cash Flow (Meaning Incoming Cash Flow Minus Taxes) And Normalizes It To Its Value Today.

 

The Variance In Monthly Cash Flow, The Fact That Website Investing Is Still Immature In Comparison To Other Markets, And The Quality Of Financial Data Available Makes DCF, At Best, A Useful Data Point, And At Worst Redundant.

 

Precedent Transactions

Looking At Previous Transaction, Of Similar Businesses, Within A Ranged Criteria (Either Geographical Location Or A Certain Time Period) Is Another Wonderful Way Of Assessing The General Worth Of A Business. It Is Mostly Used As A Frame Of Reference, Or Sanity Check, Against Other Methods (Such As Previously Discussed – DCF) Rather Than Being A Standalone Method Of Operation. It Is Important To Identify The Key Valuation Method Used In Those Previous Transactions, Either The Companies Were Evaluated By EBIT (Earnings Before Interest And Taxes), EBITDA (Earnings Before Interest, Taxes, Depreciation And Amortization), IRR (Internal Rate Of Return) Or Any Other Variant. Looking At Previous Transactions, And Assessing Their Relevance, Is A Quick And Simple Way To Make An Evaluation, Or Rather Certify That A Previous One Is Precise.

 

Earnings-Multiple

Another Great Way To Assess The Value Of A Business In General, Or A Website Specifically, Is To Use On Of The Many Earnings Multiples. A Few Generally Used Multiples Are Such As Price/Earnings Or EV/Sales, Or Any Other Iterations Of These.

The Multiple-led Method Is One Of The Key Methods Of Evaluating Internet Businesses And Websites, And By Far The One Most Commonly Used. There Are Two Elements That Should Be Perfected In Order To Use This Method Effectively – Defining Profitability, And Identifying Influential Factors.

 

Defining Profitability

The Most Commonly Used Number To Describe Profits In An Owner-Operator Managed Business (Such As An Online Business, Or A Website), Is What's Called The Sellers discretionary Earnings, Which Is Basically The Money Left After All The Costs Of The Goods Sold, And All Non-discretionary Operating Expenses, Are Deducted From The Gross Income. Formally Defined As Pre-tax Earnings. As Fortune Would Have It, Most Internet Businesses Have A Much Simpler Cost Structure, And Thus Are Not Subjected To The Same Bias As Other Businesses, When It Comes To Discretionary Earnings. That Being Said, You Should Always Assess The Calculation Of This Earnings Multiple To Verify It Does Not Take Into Account Redundant Factors (Such As Office Rent, If The Business Does Not Require An Office, Or Travel Expenses Not Related To The Business). After Clearly Defining And Evaluating The Discretionary Earnings, The Next Step Is:

 

Factors That Influence The Multiple

While There Is No Definitive List, It Is Simple To Divide The Factors Into Three Major Categories: Transferability, Sustainability And Revenue Scalability. Factors That Have A Direct Or Indirect Influence On Those Core Drivers Will Also Influence The Multiple. There Are, Of Course, Dozens Of Factors To Be Considered, Here Are A Few Major Ones:

 

-          Age Of Business (How Long Does It Exist).

-          How Much Of The Traffic Is Derived From Search?

-          How Much Time And Effort Is Required To Run The Business?

-          What Level Of Technical Skills Are Required To Run The Business?

-          What Are The Berries Of Entry?

-          What Are The Options For Expanding?

-          Is Traffic Influenced By Trends?

-          Can A New Owner Replicate The Cost Structure?

-          Can The New Owner Enjoy All The Revenue Streams?

-          How Will Suppliers React To The New Owner? Will Stock Prices Be Kept As Is?

-          How Has Gross/net Income Been Trending The Past 2-3 Years/months?

-          Where Do Customers Come From?

-          Are There Any Returning Customers (One Time) Or Long-time Subscribers (Subscription)?

-          Is There A Mailing List? And Is It Possible To Get Customers To Come Back? (remarketing)

-          Is The Business Regional In Its Nature? Can It Go Global If Desired?

 

All Of Those Can Be Split Into Different Categories, But They All Represent The Same Ideas. With A Good Sense Of The Relevant Influential Factors, A Smart Buyer Can Appraise And Evaluate The Business, And Make A Pretty Good Prediction As To The His Ability To Generate A Good Revenue Stream.

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