Please help value a website

[ChilliBoy]

Hi,

I've been asked to help work with a relatively new internet company which has done so well over the past 6 months since release that it is looking to expand. They need to raise some finance and to avoid getting ripped of they need some sort of approximate value put on there web business - I know this is extreamly difficult to do but any help you can give will be of use.

The situation is this:

There main revenue stream is by taking product requests on their site, which are then sent straight to another company who follow up the leads. They get a current commission of 10% per sale. Now they are sending so much business to this other company that they are thinking of just selling the products themselves - which make sense as they will get a higher profit per sale and also the repeat business.

They currently send this company $35,000 (fresh) leads per week which works out at approx $1.8 mill per year - although they are increasing the value of leads they send by 20% month. (Each order is worth approx $700).

The company sell approx 30% of all leads - which works out at approximately $550,000 per year.

The company that sells the product makes 25% on all sales. So at the current rate of site referrals the internet company is sending them business that is worth $550,000 per year to there turnover and $136,000 to their gross profit.

I know this is really hard to put a figure on company values, and even harder to put a value on internet companies, but can anyone give me a rough figure of what you would consider this internet company to be worth (considering the fact that it is still growing at 20% a month).

I'd be really grateful if anyone could give me some sound advise - I've really no idea about this but I've been asked to do some investigating.

Really appreciate any advice - sorry I can't give more info but I'm sure you will appreciate that its all confidential.

Thanks

[Saz]

This would get a better response in one of the Grow forums. I'll move it to Promotion and Marketing for the time being, but it could end up being moved again!

[MartyWinston]

The only relevant numbers are the revenue numbers - apparently 10% of 30% of $35,000 per week, projecting to $54,600 per year - less than the salary of one employee plus site operating costs plus taxes.
The accepted post-dot-bomb valuation is probably 3-5 times that, so the current valuation of the company is on the order of $150-250,000.

Taking the sales directly probably won't help, since there are additional costs and liabilities associated with that.

20% growth also doesn't help because there is no proof that it's sustainable growth.

[MartyWinston]

De-bunking addendum.

For a $700 product, $35,000 in leads means 50 leads. If 30% of these result in sales, that means 15 sales.

Even at a $700 price, 15 sales per week is unlikely to attract any but the smallest investors.

[ChilliBoy]

Hi,

Thanks for your input.

Just a few points that I picked up on from your comments.

- apparently 10% of 30% of $35,000 per week, projecting to $54,600 per year

That is what the company currently recieve - if they where to sell the product themselves they would be making a profit margin of 25% per sale. Therefore the company would expect to have the following figures if they where to sell the product themselves:

Yearly Turnover = $550,000 per year.
Gross Profit = £137,500 per year.

Not a great deal but not bad for a dot com that has only been operating for 6 months and has not spent a single penny on promotion yet.

I know that as a general rule for 'offline businesses' you very roughly value them a 4 time their yearly turnover. So my thinking was this - say an offline company bought this internet company as a way of increasing there sales. This would immediately add $550,000 to that companies yearly turnover (as I said previously these are fresh leads and will lead to repeat business) and hence using the 4x turnover rule, roughly increase their company value by $2.2 million.

So from my point of view the internet company should really be worth a lot more than the $150-200,000 figure you quoted (which is about 1/3 the value of fresh turnover this would give to a purchasing company).

I would welcome your thoughts on the above.

Thanks

[iTec]

I know that as a general rule for 'offline businesses' you very roughly value them a 4 time their yearly turnover

i actually thought it was 2 times...

[ChilliBoy]

Well I can't be sure but I think this was the multiple Marty was talking about when he said: -

The accepted post-dot-bomb valuation is probably 3-5 times that

I've heared from several people that that the multiple for an internet company is still more than that for an established offline biz - generally around x16.

However, this has obviously got to vary depending on if the company is profiatable or not. IE a company turning over $10 mill/year but loosing $5mill/year must have worth significantly less than a company turning over $10 mill/year and making $1 mill/year profit.

The point is that this internet company I'm referring to is already profitable (currently only 1 full team employee).

Even if you use your 2x figure then if this company where aquired by another company it would still add $1.1 mill straight onto that companies value. Hence I would have thought that its 'value' must by definition be somewhere in that region - and thats not counting any other benifits that the purchasing would benifit from - eg $550,000/year worth of fresh biz not going to a competitor (only about 5 big market players for this product in the country).

Your Thoughts ??

[MartyWinston]

In picking up sales (and the extra margin), the company also picks up additional expenses, including inbound procurement costs (as in shipping from the Pacific Rim), outbound shipping and handling, warranty expensesz, support expenses, loss insurance, loss coverage (insurance is not 100% and has deductibles), returns, reversed charges on credit cards, etc. - plus additional legal and accounting costs, and probably a different level of taxes.

All of this on a one-man operation -m and now he's the shipping and fulfillment clerk, too.

An investor will want to know how you're going to grow this. Where will you invest market development funds? Who you going to hire to do that? How much will you spend? How can you justify that? What will be your return on that investment?

Stay where you are. It may be a lemonade stand, but you are controlling your risks and making a small profit.

There's no need to feed the greed weed - you'll just spenmd all your time pruning it and lose your yard in the process.

[ChilliBoy]

In picking up sales (and the extra margin), the company also picks up additional expenses, including inbound procurement costs (as in shipping from the Pacific Rim), outbound shipping and handling, warranty expensesz, support expenses, loss insurance, loss coverage (insurance is not 100% and has deductibles), returns, reversed charges on credit cards, etc. - plus additional legal and accounting costs, and probably a different level of taxes.

I understand the points you raise and why if the above where true then "going it alone" would not seem so attractive. However 'the product' is what you would consider a dream e-commerce product. Unfortunately I can't divulge exactly what it is, but I can say is that it is more of a 'service' than a product. The most relevant analogy I can think of would be an insurance policy you would purchase from a broker. A request comes in then the broker searches for relevant quotes and sell the policy of another company to the customer taking their cut. Other than a letter from the broker that is the only thing they send to the customer - everything else from there on in is handled between the provider of insurance policy and the customer.

Therefore the product has none of the 'product' pitfalls which has led to the collapse of so many e-commerce companies selling 'material' goods.

One of the main reasons this company wants to 'go it alone' is that all request are currently sent to this offline company who are simply just acting as the broker. They therefore wish to act as the broker themselves. Maybe it was unclear from the what I initially posted but the current sequence of the customer to product chain is as follows:-

Customer sends request from online companies site to offline company => Offline company contacts relevant supplier to check product availability => Offline company completes the sale then all further contact is between supplier and customer.

The online company knows how easy it is for the offline company to contact the supplier and complete the sale and also knows that margins could be significantly increased if they where to act as the broker themselves.

They know that given the increase in margins they will recieve they will be able to increase there employees from 1 to 3 (initially). Any investment will go towards setting up company hardware and marketing (they are not looking for much). As I said initially the company is increasing orders by atleast 20% month on month (past 6 months) and this has been done purely by word of mouth.

Personnaly I see a very big potential in this, which brings me back to how we can put some sort of value on the business as it is (which I believe should also be reflective of potential future growth), so we have an approxiamte figure when talking to potential investors.

[MartyWinston]

It all comes back to 15 sales per week.

What is your net profit on that?

Multiply that times 52, then times 4 and that's the number you share with your investor.

[ChilliBoy]

Surely it must be yearly turnover x4 and not net profit x4??

If a company is turning over $2 mill per year and making a net profit of $100,000/year would the company really only be worth $400,000 ??

I've heard the 4x turnover figure used many times but never the 4x net profit.

[Jeremy W.]

This whole discussion seems to have gone well off track...

1. What are the current sales. Future sales projections are useless, as are the potential profits from selling the products themselves as in reality there is a greater liability when you sell then when you refer thus the profit margin may actually go down.

2. Who are the competitors? Are they turning such large profits? If yes, how will this company which is now hugely exposed to 1 market segment increase it's market share AND prevent competitors from fragmenting it's market share.

3. Is the product one which lends itself to long term growth. For instance, selling keyboard buttons is not an item of long term growth as button-less keyboards will come to pass sooner then later.

4. What is the ROI and how is it delivered?

5. How is profitability sustained?

6. What is the FMV of the staff?

7. What other assets does the company have?

See? Really the sales is just the smallest part of the whole picture, there are a dozen other questions I could ask as well. You should have a professional evaluator (BDO Dunwoody comes to mind) look @ this, specifically if you feel the company is worth 1M plus, right now.

[ChilliBoy]

Thanks for the advice Jeremy - it looks like we will have to pay for an independant valuation.

Cheers