I mentioned last week that an really good article was on the way for the ever so common question of what it my site worth... and here it is, enjoy!
Thank Georgina not me . If you liked it your going to love our next kit we're about to release.
I wish it was a million posters
Great article, Georgina, and carefully researched. It must have taken you AGES to put that together.
But there are some factual errors.
I've no idea where that came from and I'd be interested in the background to this claim. Maybe she meant "years", not "months" ... but it's still way outside what really happens. As a buyer, I like to talk prices down, not up but even I have to admit 5x is a bit low. Try to sell me a site at 5x and I may persuade you to take a bit moreOne common rule of thumb states that the value of a business lies somewhere between five and seven times its net monthly revenues
I know there are various models of valuation discussed. But, the simple fact is that, in 99.9% of cases the buyer is pricing a site based on the profit he expects to be making as a result of the acquisition (and the time frame for that return). That profit could come in a variety of forms. In fact, the purchased site may be a competitor and he may be buying it just to shut it down! None of the valuation methods explained would cover some of the real life scenarios. But, there is your explanation for the value of the social networking sites: It's about the profit expectation. That's why sites that have never turned a profit can be worth billions.
The conclusions drawn from the correlation of traffic to selling price are strange. Averages is completely the wrong math tool here. Some sites with millions of uniques (celeb/pic sharing/social networking) earn very little money and I've got sites that get only 100,000 visitors a month but make a comfortable CPM of $50+ It's really about the earnings - that's the focus rather than the quantity of visitors. Other things being the same would you rather buy a torrent forum with 100K uniques a month or a legal site with 50K attorney visitors looking for document storage services?
Actually, in some cases PR makes no difference at all and in other cases PR is all there is. A point that may be worth making in a discussion of PR relative to valuation is that some sites sell for the PR value of their pages alone. It's called PR p*mping - buyers buy the high PR sites to cram them full of links they've sold. They run the PR down but have more than made their money with the link sales in the interim....it's interesting to note that there was some correlation between PageRank and sales prices in the SitePoint Marketplace...if PR doesn't directly impact a site's sale price
I've got to go, I may comment on page 3+ later
Actually, the money made from many community sites doesn't happen just on the site. True, some sell ad space, charge for sticky posts - cough, cough - sell their own services (DNF), run Adsense on a rev share model (DP), sell sitewide links etc. But the statement suggests the author isn't very experienced with buying community sites. Personally, I tend to avoid buying forums myself and have less experience in that area of market than someone like Edman or petertdavis, for example, but if you're a member of a few forums you'll realise that there are various other rev models. Off-site models. Like Webmasterworld: The owner relies on the reputation of the forum to drive sign-ups for the hugely lucrative conferences he runs. Some use their list for promoting targeted advertiser offers. Some sell competitive information/an industry newsletter.Tim Dickinson believes that, as with any site, the value of a community forum relates to both synergies with the potential buyer's site, and the revenue strategy that has -- or could be -- implemented on the community site.
You get the picture. In fact, some of the most successful forums don't make their money on the site.
Who's this Tim Dickinson anyway? I though he was some kind of expert but apparently he owns this small network. Two sites lead to this single, deserted forum, two lead to 404s and 404s, and this one doesn't have a forum. The only other forum he seems to own has a grand total of 3 posts. I mean, this Tim might be a really wise geezer when it comes to valuing forums but it would be good to establish a bit of credibility for him in the article before going on to pass off his advice as the gold standard for valuing forums. I haven't yet checked on some of the other "experts" you quote.
Some other comments giveaway the amateur nature of Tim's advice.
(page 3)If the site's using a commercial script then you'd have to continue to pay license fees to run the site
Yes. So? As far as valuations are concerned, the fees are not a consideration surely? Tim, the calculation of net profit involves the deduction of costs like license fees. Given two sites with the exact same net profit but one which benefits from the stability of a big-name-backed-software company that charges a licence fee and one that relies on some cobbled together code, are you arguing that the latter is more desirable?
LOL. No Georgina, it doesn't work that way. The time invested has no value if it doesn't translate into $$$. If I spend 10,000 hours developing the world's most sophisticated illegal weapon site - but it's not likely to earn anything - no sane buyer would take into account the time put into the project. Sellers routinely argue about how much of time went into their design/custom tweaks etc. and buyers routinely laugh at that argument. I could create in one hour what some of those sellers took all month to do. You saying I should pay them more because they are incompetent?Experienced buyers will expect to pay for the time that's been spent both developing a site and establishing its position within a niche. If a buyer baulks at a price that takes this time into account, you can always present them with a comparative cost analysis that shows exactly how much it would cost them to create and establish the same site from scratch.
Let me explain something. The earning on which a buyer bases his valuation is supported by the domain name, the content, the coding, the links, the good will built up, the incoming links etc. It's all those factors put together that cause the site to earn $x. It's only the pretty dumb sellers who then try to argue that that they should be paid extra for the links they've built up, for their Alexa rank, for their copyrighted content or for any of those factors that have already been counted!
Arrghh! Experienced buyers don't value sites based on gross "revenue". Two sites have an identical revenue of $10K a month. One has no costs. The other spends $15K a month on Adwords to get their traffic. You think buyers value these two sites based on the $10K figure? Or do you think they're smart enough to see that one is making a net profit of $10K and other is making a net loss of $5K (assuming identical "other costs" of $0). Yes, it's "net" profit that matters. And with blogs net profit is calculated after deducting a value for the time the blogger spends running the site. So comparing muliples of gross revenue for sites that are in two completely different markets/models is not very helpful or insightful. Or useful.Rob agrees that the amount of work involved in running a blog may also be affecting this segment of the web property market at the moment. "According to our data," he says, "blogs have sold on average for about 11.56 times revenue over the last year. Sites with more static content have sold for an average of 14.37 times revenue. They attract a price that represents a higher multiple of revenue because they're less work.
So much for pages 3 and 4. Nothing personal, Geogina, but a lot of people are going to be reading that article. I hope you consider correcting at least some of the wrong advice.
Hi FruitMedley Post,
Thanks so much for taking the time to look over this article, and to provide these interesting and valuable thoughts on some of the points it makes. I was really hoping that it would generate some discussion since, as is indicated through the article, site valuation is by no means a cut and dried proposition. You've made a wealth of points, but for the sake of brevity (haha) I grouped my responses to them in the hope that this post wouldn't drag on forever. Unfortunately, I failed in that aim! Oh well
Okay, to your first point, about this quote:
“One common rule of thumb states that the value of a business lies somewhere between five and seven times its net monthly revenues; another states that the value is around 50% of the business's turnover.”
You're right: that quote is weird. In fact, I omitted the word “online” before businesses—an omission that I've now rectified. Thanks very much for pointing it out—it's much appreciated, as that was a small but significant error.
You said you'd be interested in the “background to this claim,” and I'm happy to oblige. In researching this article, my first thought was to see what techniques people were using to determine the value of sites in the market. So I looked at places like the SitePoint Marketplace, Webmasterworld, and so on. Discussions in those locations frequently included advice to price online businesses on a multiple of those business's net revenues, though the specifics of the advice varied. Five to seven times seemed to be a rough average based on what I'd read.
Next, your comment that “in 99.9% of cases the buyer is pricing a site based on the profit he expects to be making as a result of the acquisition (and the time frame for that return),” is supported by Rob May's comment immediately following the list of various formulae there. I'm so glad you agree on this point
As I'm sure will other readers, I found your positions on issues such as the idea that there might be a correlation between traffic and selling price (i.e. traffic can contribute to a site's profit potential), and the relevance of PageRank in obtaining a selling price, interesting. Again, these are presented as two factors among many that can contribute to a site's overall selling price. As you say, sometimes PR, for example, doesn't matter; sometimes it's the only factor a buyer will consider. It's the same with traffic—sometimes, a buyer will see an opportunity to monetize a high-traffic site making no revenue—and therefore no profit—and will therefore pay handsomely for that site. In fact, this point came up again and again in my research. It may not be your preferred way to value a site, but in some cases (no, not all—not even most! Just some), it's the key factor influencing a person to buy.
Furthermore, the use of averages (by me, using figures taken from the SitePoint Marketplace, and Rob May, using data aggregated from a range of sources) to try to indicate a possible correlation between, in my case, traffic and selling price, and in Rob's case, revenues and selling price, isn't intended to reflect these as the sole determinants of price for those site sales. What we're doing here is trying to see if there is any correlation between these factors and selling price. The results of these calculations aren't intended to imply that they're the sole determinants of selling price—a point that's made throughout the article.
On the issue of revenue versus profits, I believe it's likely that buyers will want to know revenue figures for a site—and indeed may trust revenue figures more than they do profit figures—because many of us believe that profit figures can be manipulated or distorted more easily than revenue figures. Few site owners will omit a revenue source from their revenue calculations. They may, however, neglect to factor in their own time spent running the site, as well as other costs (such as hosting if, for example, they host the site themselves, along with a number of other sites, and can't be bothered working out what percentage of their total bill that site's hosting costs), and so on, in determining profits. Additionally, a prospective buyer may believe that s/he can run the site more cost-effectively than the current owner, so revenue may be a more important factor than profit in some sales. Of course, here, as in the article, I'm not saying they'll only look at revenue, or look at it to the exclusion of a profit figure—or how that profit figure is calculated. I'm just suggesting that it is a factor in many sales.
The point you make over Tim's comment that “the value of a community forum relates to both synergies with the potential buyer's site, and the revenue strategy that has -- or could be -- implemented on the community site,” is a great one. Again, word choice is the culprit here. I've altered it to “potential buyer's operations” for the very reasons you've stated in your post.
On this point, you ask, “Given two sites with the exact same net profit but one which benefits from the stability of a big-name-backed-software company that charges a license fee and one that relies on some cobbled together code, are you arguing that the latter is more desirable?”
No, I'm not, as is explained in the paragraph immediately following the one you quoted:
“If you can answer these questions about your site and, more importantly, ensure they don't present hurdles to potential buyers, then you may be able to command a better price for your site.”
Obviously, my meaning here isn't sufficiently clear, so let me elucidate. If a prospective buyer is deterred by the license fees for your site—for whatever reason (perhaps they're an open source advocate from way back, who'd rather rely on open source code than proprietary systems), you'll need to address that, to remove the potential hurdle to making the sale to that prospective buyer.
“I could create in one hour what some of those sellers took all month to do. You saying I should pay them more because they are incompetent?”
Again, no, as the statement immediately following your quoted excerpt explains:
“Of course, if potential buyers can design and build a similar site for less than the asking price on a turnkey proposition -- and they have an equally useful domain, and other assets -- then they're likely to have difficulty seeing the value in the sale.”
I'm sorry if this is unclear. If you're still unsure of the point I'm trying to get across, by all means, let me know.
Finally, I wanted to respond to your point that, “The earning on which a buyer bases his valuation is supported by the domain name, the content, the coding, the links, the good will built up, the incoming links etc. It's all those factors put together that cause the site to earn $x. It's only the pretty dumb sellers who then try to argue that that they should be paid extra for the links they've built up, for their Alexa rank, for their copyrighted content or for any of those factors that have already been counted!”
Agreed! Your comment echoes the point of this article—that a range of factors affect any sale, and that every sale is different not just because every site is different, but because every potential buyer is different and every seller is different. At no point is is suggested that any of these factors should necessarily be taken as the single factor that determines a site's ultimate value (unless, as I've indicated—as have you in your comments on PR—that factor is the only important element for the seller).
I'll be interested to hear your comments on the remaining pages—I hope, as you commented at the very beginning of your first post, you do indeed find them “great”.
Thanks again for the discussion
georgina, thanks for your reply. It's very kind of you to spend your time addressing the issues I raised.
It's not any missing word I have a problem with. It's the whole premise that a business would generally command a net annual revenue of just 0.5. But you know that - my comment on this was pretty clear. I don't appreciate your strawman argument. Please don't play that game with me.You're right: that quote is weird. In fact, I omitted the word “online” before businesses
See, it's my theory that some here are selling jobs they've created for themselves and some are selling business. Of those selling established businesses with proven revenue streams, only the idiots would sell for 5-7 months' net income. As a site buyer myself I would dearly love to know how I can find/identify these fools. I'll go further than that - find me a few such sites advertised here, I'll buy every single one of them and pay YOU that same amount again as commission. I'm that confident your estimate is rubbish.
Let me also point out that, contrary to your claims, 50% of turnover isn't an established "rule of thumb". Some websites spend more than their turnover on PPC (i.e. they are making a loss). Your rule of thumb would reward them for pumping up their PPC spend, doubling it - and doubling their loss - to double the value of their site. It don't make no sense. Got a link to a thread or two that gave you this misleading impression?
Maybe the problem lies with the sources you used. Casual discussions in webmaster forums isn't a basis for forming valuation rules. Those discussions are steered by parties with vested interests. It's here that you should have used your access to Sitepoint's empirical data on the multiples that real sites have actually sold for. Tip: Include only those sales where the seller expressly confirmed that the sale went through and escrow was complete. Include only sales of sites that ... listen, PM me if you want to do that research and want to talk about it, I'd be happy to help.
Rob May starts off well on Page1 if he's the one who advised you about discounted cashflow. But, you talk about today's value of future profits and then meander off to display a gross misunderstanding of what profit is. The DCF doesn't change based on what work the webmaster does! Whether he does the work himself - or outsources it - a value for that work must be deducted to get the profit. That's Accountancy 101. In fact, when you sign off your annual accounts you have to declare that they represent a true and fair picture of the business's performance over the year. Making the classic newbie/small webmaster mistake of not subtracting a notional wage is called fraudulent misrepresentation in M&As. I'm surprised that someone who has developed a "web site valuation system" doesn't understand the basic math.Next, your comment that “in 99.9% of cases the buyer is pricing a site based on the profit he expects to be making as a result of the acquisition (and the time frame for that return),” is supported by Rob May's comment immediately following the list of various formulae there. I'm so glad you agree on this point
The point was, as you know, about the worhtless correlations. That doesn't change. It's not even like you used a Median! There isn't that connection between PR and sales price. Next you'll be saying that sellers should get a better Alexa rank to improve their price.It may not be your preferred way to value a site, but in some cases (no, not all—not even most! Just some), it's the key factor influencing a person to buy.
You counter some points by saying that they were covered in the preceeding para of your article. In most cases they weren't.
Georgina, it's not personal. I appreciate that you may not have any experience yourself of valuing sites or buying/selling sites and you were relying on some of the so called experts out there. The problem is that some of them misled you on several points and that's messed up the article a fair bit. I think it's a shame.
Page 5&6 comment preview.
Your Andrew Johnson seems to know what he's talking about! He talks sense. And Yaro Starak is sound. I don't share his opinion that companies are increasingly buying sites to gain traffic but he's cool.
I don't believe there is any evidence that prices are "exploding" for this type of site. Prices are driven by profit expectations of the buyers, not whether the site hosts images or videos.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.
I've no idea what that means. The buyer has a significant impact on every selling price. Exactly 50% of impact. The seller has the other 50%. When they are both agreed on the price, there is a sale. I doubt a 60% agreement is required of the buyer if the site is "innovative".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.
True.Many site owners feel that they're the best judges of their sites' worth -- and their predictions are horribly wrong.
False. These services would quickly die out if they told sellers the truth. Instead, they play to the sellers' ego by overvaluing the sites in the hopes of attracting more business. There is only one valuation that has any merit from the point of view of selling a site: valuation by potential buyers. People who aren't going to put their money where their mouth is can talk a lot of rubbish. Most usually do. Dnscoop?! Give me a break! Without any idea of what profit a site makes, they can predict its worth? LOL They value Google.com at $2 billion, an error that makes it just a few hundred billion dollars out. That's OK, then.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
Er, they are not the same thing. Appraisal tools are less useful than "very limited"... but why bundle "professional services" in with them? Professional services extend all the way from business brokers who actually achieve the sale for you ...to accountants who revise your statutory accounts to "adjusted figures" for the Sales Memorandum ...to places like Sitepoint where you can list your site for sale.the value of appraisal tools and professional services may be very limited for smaller site sellers
I'm glad you linked to this webmasterworld thread on your last page as a place to go for good advice. "Oddsod" who has provided that advice is helping me compile a guide to valuation that 3Six mentioned that in this thread. Hopefully, we can post it on Sitepoint or give you a link to it when it's ready.