The site in question is making $3500 a month in revenue.
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The site in question is making $3500 a month in revenue.
10 years of revenue
There are a lot of factors that go into it to calculate the value. Please see an example report at our website (inm y signature here) which can give you some ideas
I had a look at your site, nequityonline. I'm puzzled by some of your claims and methods. For example, in your sample valuation you talk about value of the traffic based on how much those visitors would cost in Adwords. I've seen one or two sellers here try to talk up the value of their sites using this flawed logic. Real buyers don't work that way. It would be extremely foolish of them to consider all traffic - even cheap bot visits from "traffic sellers" - on par with the type of traffic Adwords sends. FYI, even Google SERPs traffic does not convert anywhere near as well as Adwords traffic for several of the sites I monitor.
With help from several other members here I've put together the Sitepoint's Guide to Valuing Websites. The OP may find it worth a visit.
Firstly, valuation is not an exact science. And this involves the valuation of any asset. I have worked for a long time in valuations for some of the worlds most respected companies, and can assure you, no valuation is fool proof, it is more an art then a science to get a rough figure at what range is acceptable.
The first valuation in the sample is based upon FCF valuation, a tried and trusted method used by most major players in valuations, so we dont need to discuss this.
Secondly the next valuation that you are puzzled by was a secondary method used to value the site and confirm things. It took into account all the intangible assets that go into making up the website. Traffic is one of these intangibles (which is acquired through search engine rankings and links), and the best way to value it was via the cost of such traffic from adwords. Most of the traffic garnered by this site is organic, and not paid for. We think it is very fair to put a value on this traffic. Our valuation considers all organic derived traffic, not paid for traffic.
And by the way, I do think your guide to valuing websites is very good, and I really hope you are not trying to take away from our work so as to promote yours.
Valuation is an art, I agree. But there are a lot of misconceptions around and a lot of "tools" trade on the inexact nature of valuation to come up with figures that have no basis in any fact and are completely worthless. I'm not saying that of your valuation but I've seen so many so called valuations based on faulty principles/logic that I'm usually wary of their claims. I don't see any other valuation tool as competition. If I find one that is sound I'm happy to actually help it with links in articles I write etc. I only developed a valuation tool because there was no tool on the internet done by anybody who understands (website) valuations though there are a lot of people who claim to be experts. It was during the course of the article writing when no online tool was proving competent - and taking input from people like Jeremy Wright, hooperman etc - that I decided there needed to be a tool to support the article... and that's why it came about.
One of the major flaws displayed by some valuation tools is the premise that traffic can be valued based on the PPC price of keywords visitors came in on. You claim that this is "a nEquity" (sic) method. Actually, a lot of "experts" preach this "method". There are several reasons why it's seriously flawed.
1. The main keywords of the site are sometimes far removed from the long tail terms searchers use and have different PPC costs - usually a lot, lot less
2. There's a geo element. Visitors come from all over the world. You can't use the PPC cost of a keyword in the US to qualify Indian or Chinese traffic
3. Adwords clickthroughs shows 10x-100x better conversion because ads can be tested and tweaked. By that reckoning the value you associate with each visitor should be a tiny proportion of the PPC cost
4. SERPs traffic is the riskiest of all traffic and a small change in the SE's algo can vapourise the traffic. That risk is not included in your calculation. PPC traffic is, by comparison, very stable.
5. There does not seem to be any filtering of repeat visitors
6. (other reasons cut for purposes of brevity)
7. While anyone can use their own method to value their own site the value is significant only if it has some meaning outside of his own head. For example, it meets regulatory guidelines for valuing assets on the balance sheet. Or meets some accounting/bank standards as an acceptable method to secure financing. Or, on the practical level, if buyers of sites use that method to value sites they're buying. I fail to see the purpose or worth of a valuation method that's used by the site owner himself but by nobody else who ever needs to ascertain a site's value.
I understand your wariness, because you are correct there are pplenty of terrible valuers out there, and this is why my company is out there to fill this void and provide more accurate valuations. To suggest there is no basis in fact and the valuation of ours is worthless, is an profound statement. We have applied a traditionally well accepted valuation technique, used as the main method in all investment banks and private equity firms around the world. But I guess you are not saying this of our valuation as you say, bur certainly hinting towards it.
Yes we claim to be experts, and this is because we are. We are all highly educated professionals with financial degrees and/or IT degrees and work experience.
Secondly you make very good points there. The report is just a sample report, so detailed explanations are not included, they are included usually in a memo along with the report that is sent to the client which outlines assumptions and explanations with reasoning. It include some of those involved points on the traffic of which you seem so driven to point out as not being an acceptable value.
I should also point out this method is not always used by us, only if we think the traffic is acceptable to analyse.
These keywords are what searchers are using, as this is how they found the site, so I have no idea what you are on about here. The traffic to the site was analysed for location, and this was taken into account in pricing an average for key words based upon geographies of the historical make up.
All the best,
nEquity
Originally Posted by FruitMedley Post
I'd be interested in any links you have demonstrating that these institutions use this method.We have applied a traditionally well accepted valuation technique, used as the main method in all investment banks and private equity firms around the world
The fact that you are not aware that DCF is the main method used in valuation is unfathomable for me to comprehend for someone purporting to be a valuation expert.
So, in other words, no you won't show any links backing up your claims.
A little tip that maybe they didn't teach you all in business school or you missed in your years of experience, when you challenge someone who is considered an "authority" in a community, you should be willing to back up your claims with facts and not just a personal attack on their skill levels.
You might be right and fruit might be wrong (I'm more of a veggie person myself). The correct way to show that is to offer facts, not to insult him personally. That's of course assuming that you want to build a good reputation and thus a following here.
Personally I think everything that Fruit wrote makes an incredible amount of sense, just jumping in with some statement about discounted cash flows being used everywhere is irrelevant if DCF doesn't work well in terms of web properties.
Look I agree, he does make a lot of sense, and I didn't pick a fight with him. I just feel he is picking on us here trying to make as though he is the authority on all thigns valuation, and that is not how the real world works.
And you want proof, please see the below links
http://www.investopedia.com/articles/03/011403.asp
"At a time when financial statements are under close scrutiny, the choice of what metric to use for making company valuations has become increasingly important. Wall Street analysts are emphasizing cash flow-based analysis for making judgments about company performance.
A key valuation tool at analysts' disposal is discounted cash flow (DCF) analysis. Analysts use DCF to determine a company's current value according to its estimated future cash flows."
http://en.wikipedia.org/wiki/Discounted_cash_flow
"Discounted cash flow analysis is widely used in investment finance, real estate development, and corporate financial management."
Happy now? Google it further yourself if now
The difference between the risk of a website's traffic disappearing vs. say a grocery store's traffic disappearing is huge. Discounted cash flow must be adjusted for the inherent risk of an industry.
I believe in free speech, free markets, and free software.
You are perfectly correct. This is why people who think they can buy a website with minimal to no effort to look after it, and sellers who say this are deluding themselves.
You have to keep on working to keep the traffic up in almost all circumstances.
Er, nifty footwork but he wasn't asking you to prove that DCF is used. He was referring to your claim that PPC costs can be extrapolated to a website's entire traffic. If you even read his article (that you say is very good) you'll see he's explained DCF in some depth with examples.The fact that you are not aware that DCF is the main method used in valuation is unfathomable for me to comprehend for someone purporting to be a valuation expert.
I too would be interested in seeing which authority recommends using PPC costs as a measure of value of traffic from SERPs.
Last edited by 3Six; Mar 31, 2009 at 01:48. Reason: typo corrected
Well there is no method that claims this. But traffic is of value, and you can not argue this fact. It is a major asset of the site.
It needs to be valued and this is a good way of valuing by using a comparable to value what it would cost to buy the traffic in an arms length transaction, and adjusting for any variables. This is a method used all the time in the field of transfer pricing to value intangible assets and so on. Its called comparable uncontrolled price.
In addition, this method of adding up the value of the intangible assets was used to further substantiate the DCF and give it further credibility.
PS. it is also explained further in the OECD Guidelines (The Organisation for Economic Co-operation and Development), I suggest you read them if you would like to know more.
I must be missing the part where they state that it's a good tool to use for valuing Internet properties in that statement.
Oh wait...
Awesome backpeddling there. Quite the difference between your statementWell there is no method that claims this.
So we start with "you're a moron for not understanding what I'm saying" and then we end with "well, maybe if I had presented my arguments more coherently rather than lashing out they would have made more sense".The fact that you are not aware that DCF is the main method used in valuation is unfathomable for me to comprehend for someone purporting to be a valuation expert.
Again I state the following:Happy now? Google it further yourself if now
The correct way to show that is to offer facts, not to insult him personally. That's of course assuming that you want to build a good reputation and thus a following here.
You're halfway there, you managed some facts in your post.
Now you just need to learn a little about civility and being polite to others instead of throwing out things like your statement above. But hey, there's no better way to get ahead in a community then to butt heads with its respected senior members.
Keep up the good work!
Look mate, you started with getting into an argument with me. And then you go on about civility? Just read your last post, I was a lot more civil and understanding in my comments throughout then you.
I have no animosity towards anyone here, and if it has come off that way I apologise, it is just frustrating when all you get is people trying to discredit you, when you have the facts and are clearly correct.
Things like you saying you miss where it is used in valuing internet properties are just presenting an argument your way. You and I both know that there is no accepted method for valuing websites, but since this is a method used for valuing most other assets, it can certainly be adapted, and in most cases is.
DCF, DCF, DCF! I like the way you keep returning to something that's not in contention because you cannot defend what has actually been challenged: your ridiculous PPC claim.
Isn't there? I thought it was DCFYou and I both know that there is no accepted method for valuing websites
I believe you are telling porkies when you say traffic logs are cleaned of duplicates, analysed for keywords and each visitor is valued based on the PPC costs for that keyword at that time and in the visitor's location country. I call your bluff, I don't believe your analysis does that - you only claim it does as a reaction to being caught out. The level of sophistication required is far above what it appears are your limitations. Prove me wrong.
Yeah, sureI have worked for a long time in valuations for some of the worlds most respected companies
I am not talkinga bout DCF, if you read on I continue on about the other approach used in addition to the DCF buddy.
The traffic is not made 100% clean, but we do it as successfully as we can. So in a sense it is put through the washing machine to get off as much dirt as we can. This is the nature of valuations work, to try and get in an accurate range, being such an expert you should be aware of this.
The fact that you can dispute a comparables method of valuation is quite inconceivable on my part, and all financial analysts around the world. It is a method used constantly in valuations, please go read the curriculum of the CFA (chartered Financial Analyst). They are one of the msot respected authorities and financial qualification in the world, or jsut google it further.
Furthermore, go read a little further on transfer pricing principles. Pricing is done via comparison of third party transactions. By analysing third party transactions of a similar nature (which using traffic costs in this case has done) a value can be obtained. While not perfect, this is an accepted method as there is no perfect method.
DCF is used to first establish a price, and because the calculation fo WACC is at times a very subjective thing as assessing a correct risk premium is very difficult a secondary method of comparables is used to see if the price attained is somewhere near that range. It is a verification method.
So please do your homework before you start bullying ebcause there is a new player in town who you want to harass out.
I ask fruit Medley to please look further into what I say so as to confirm waht I am saying is correct and accepted methods in the world of valuations, as he is obviously quite respected on here.
So please don't go shooting everyone in the foot who comes along, because you are really making yourself look stupid here and making this forum bereft of other views. Shooting people down without asking for facts is a terrible way for this forum to continue, you are creating an atmosphere making it hard for newbies to want to get involved here.
Compare by all means. That's pretty standard in business valuations. You can get an idea of what a business is likely to sell for based on what similar businesses have sold for. 100% agree. But that's not what you're doing. You're taking a business based in Mongolia and valuing their 10,000 square feet of freehold at the same price as that space in the centre of London.The fact that you can dispute a comparables method of valuation is quite inconceivable on my part, and all financial analysts around the world.
The idea that a website's traffic from SERPs is worth the same as the traffic from PPC is ridiculous in the extreme. The wording on the page attracts the click. The wording on the organic listings is longer than the ads and it tends to be more infomation oriented i.e. click here for information. The wording on the ads is carefully targeted to attract those who are looking to spend. If you have any experience with the PPC side of things you'll know the massive difference in conversion rates. And that's the bottom line - the conversion or profit. Why would I pay $0.10 for free traffic that converts at 1:1000 when I can pay PPC at $0.10 for a 1:20?
One other thing - a lot of the long tail terms you see in the stats likely don't even have associated PPC costs as many terms are too obscure to attract ads. So, let me guess, you already anticipated that and have a complex algorithm in your calculation to put a PPC value to those clicks?
So, yes, compare. And keep referring to CFA and OECD and DCF to shore up your credibility but you'd make a better case arguing your case logically and factually than telling everyone to go read other documents elsewhere (with the sub-text suggestion being that you're read them yourself!)
Valuing free traffic at PPC rates is just plain silly.
Valuing free traffic is not silly.It takes effort, SEO a well targeted site etc, to get that traffic, therefore it is of value.
PPC is the best comparable there is and not a bad one at all considering the type of site we are talking about here. I do agree with you on some levels. But in this case it is a site selling dashboard kits. Generally people searching for dashboard kits are looking to purchase them, as with adwords targeted clicks. 80% of this companies traffic came from search engines, people searching for kits.
I do think this is a good discussion by the way, lets try and keep any agression out of it, it is quite informative I think for people here
nequityonline, I appreciate that, like most people here, you're just trying to earn a living and charge people to value their sites. There's nothing wrong with that. However, you'd get more customers if you demonstrated your expertise rather than just claimed it.
In my article I've explained DCF which, in its simplified form, involves a calculation of all expected future earnings from a site and the price someone is willing to pay today to buy that future revenue. ArtDeco is correct in that risk needs to be accounted for. The higher the risk the lower the price buyers are willing to pay to buy that revenue. And I've no doubt you understand DCF. What I do doubt is that buyers will share your belief that projected profits from 8, 9 and 10 years in the future should be used in the calculation. Most buyers would put a $0 value to projected profits beyond 3-4 years.
There do seem to be several inconsistencies in your arguments. Your sample report states that there are no extra costs other than hosting. Yet you claim - rightly - that the owner would have to keep working to "keep the (organic) traffic up". I've often had to point out here that time has a cost. Like many sellers you seem to turn a blind eye to this cost.
You claim that organic traffic is the best kind of traffic. Many here believe it's the riskiest kind of traffic and savvy business people would prefer the fixed costs (and continuity) of PPC or affiliate driven traffic. They are infinitely superior. Free (organic) traffic is a bonus and more useful to the sites making money from contextual ads and CPM rather than those selling products.
But while I could pick more holes in your sample valuation and show more contradictions in your comments here, what would be more useful to readers is if I focus on what's the right way to do things. To that end I'd like to point out
1. Traffic is not always of value. Sometimes it's worthless.
2. And, strangely, sometimes even a zero traffic site can have a large value (premium doman / scope for selling PR/links)
3. There is only one reasonable yardstick for calculating the value of traffic: the profit it can generate either directly or indirectly
4. There is no universally accepted way to value sites or traffic. Anybody can use any method he wants - even picking numbers out of a hat. And he can choose to act on such random numbers if he's spending his own money. So, yes, for any given site there are an infinite number of values... but, if it's put up for sale, it will achieve only one maximum price. And that's the only one that matters.
5. There is no right or wrong valuation. Everybody is entitled to his own opinion on how much something is worth. But, that figure won't necessarily translate into a sale.
It seems to me that traffic should be broken out into at least three sources: PPC, SEO, and SMO , after deleting the bots and other junk traffic. Then different values can be assigned to each (as well as possible, I'm just thinkiing out loud here). Perhaps traffic from PPC or Affiliates at full value, Search at 25% of PPC value, and Social at 1% of PPC value, just as an example. Something like that would reflect the difference in conversion rates and the risk of the traffic disappearing overnight the way Digg or Stumble traffic does. Once someone opts in or sets up an account, then they can arguably be counted as an asset, but someone who just dropped by to see a linkbait video probably isn't going to return or buy, IMHO.
And not to be an jerk, but for sites selling under ~$100,000, I don't think Discounted Cash Flow matters, just because no one is considering the value of traffic or sales from 2 or 3 years out - it's just too risky. For the biggies like Amazon or eBay, then future traffic is likely to continue, but not for an ordinary automotive affiliate site.
Anyway, I'm interested in what you experts have to say on this. I'd really like to have a spreadsheet to blame when I end up selling a site for half of what I thought it was worth!
I believe in free speech, free markets, and free software.
I think I am demonstrating expertise here. i have put down on paper why the use of comparables is acceptable, especially in this case, and why it is a commonly used method, backed up with its usage in the financial world, hell even the OECD model is a fan! And I believe you agree on this from waht Im reading.
I think our main difference here is on weather this organic traffic is of value. Yes this is subjective. Some people liek the fact taht it is free, and the site is SE optimised, and therefore the only work required is seo (pardon the word only as it is hard, but you get what i mean. And im jsut talking about traffic work here). PPC is the same deal, you need to keep ontop of words, and costs. Lets face it, as is part of any industry as profits increase, there comes more competition and this will cause a decrease in profits, in this case it will certainly create higher PPC costs. If you look at the cost per click many years back for a site advertising financing, and at it today, it is astronimcally higher! So as I point out, preference over organic or PPC I think very much depends on the buyer and the site in question.
In this sites case, people generally go to a site like this because they want to buy the kits, so it is a good conversion ratio and valuable search engine traffic in our opinion.
And I agree with the costs of man hours, this is something the buyer puts their own value on, and if it is a site with a high input requirement, this should be included in the valuation or discount factor.
We have valued quite a lot of sites now, and most of them have been fairly spot on. Sellers have ended up getting prices in or very close to our range.
PS. Yes I do post on here because in the hope that people see my signature and we get publicity. But I never will directly tell someone to use our services, that is entirely up to them to make that choice. But I also post on here because I enjoy discussions like this and getting other peoples views and also educating others. As you say there is no right or wrong valuation and we need to wrok together to certainly get mroe accurate valuations.
Also we hope to be coming out soon with a new valuation product which we really believe will be one of the best on the market in time, and i look forward to demonstrating it to you all when it is completed and fully tested. It will be quite simple and very cheap, so should be good for buyers and sellers and only have a positive impact on the website sales market place.
One of the biggest problems we find with website sales is due diligence for buyers. There are tips and tricks, but at the end of the day, there are certain things you jsut cannot cover with the way the website marketplace works. This isnt a service I provide as I can't do it accurately and would therefore not want to sell such a service since that is the case. Does anyone know of any companys providing such services that I could check out and psosibly recommend to some of my clients, as I have had many requests for thsi from them.
Thanks
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