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How Much Is A Web Site Worth?
BluSkreen asks: "We've been approached by someone that is interested in buying our five-year-old site. Using the metrics from the Andover purchase of /. and Freshmeat (from the Andover 10Q filing), and scaled to our traffic level (about 1.5 million page/month), I've come up with a value of about US$250,000 or so. They were shocked when I mentioned this figure. We figure we have at least US$60,000 in costs over the last five years, (not counting hundreds, if not thousands, of hours of labor) and gross about US$20,000 in banner ads a year, though I've 'pitched' nearly US$100k in banner sales in the last year. How does one go about determining the value of a site?"
Like a piece of art, a website is worth whatever someone is willing to pay for it. If they blanched at $250k, see if there is anyone ELSE interested in it for that price. If not, then maybe the price IS high....
-=Bob
Put it up for auction on ebay.
;-)
Then you will see what people
thinks it is worth
Knud
Let's see. Very little revenue. Small site. Room for growth. On the stock market, that's about one billion dollars.
20x earnings is an absurdly high multiple for any business. The problem with this discussion is that you are comparing this web site to the market valuation of public web sites - also absurdly high. Typical valuations are at 3 to 5 times earnings. Given that this site is grossing $20,000 yearly, I'd say an asking price of $650,000 is off by a factor of ten at least. Think about this logically. Any buyer is in this as an investment. If they aren't getting a good rate of return, why not invest in a mutual fund? 'Potential' for huge future earnings is all very well, but you have to consider where those earnings will come from - probably their financial investment in the site - and whether or not your website has any more potential than the 100s of other similar websites.
You might be able to get more money by structuring some kind of earnout, where your compensation is linked to some specific performance index.
That 3 to 5 number is a rough rule of thumb. Usually things just work out that way. The problem with 'normal' multiples such as Yahoo's, is that they aren't normal. The valuation a company has on the stock market has little or no connection to the valuation process a prospective buyer goes through when considering the purchase of a company (that is, a buyer who knows what he/she is doing).
In calculating the value of a small business especially, you have to remember one thing: the buyer, any buyer, is in it for the money and they will consider primarily the return they will get on that money when deciding how much to offer for a business. Leaving aside synergies, etc. let me lay this out very simply, lord knows it took me a while to understand it: A buyer has, say $500,000 to invest. He has several options on what to do with it. He could invest it in the stock market - pretty good investment, these days. He might expect to get 15% to 25% back on that money every year depending on what stocks he picks. Or he could invest in bonds and get 10% a year. Now why would any choose to get 10% a year instead of 15%? Because bonds are much safer than stocks. You invest in the stock market, you risk all sorts of nasty things happening to your money. For whatever reason, our hypothetical buyer is considering buying a business with his money instead of stocks and bonds. Buying a business is extremely risky. Businesses fail all the time. For that reason, a buyer demands a very high rate of return. They will expect to get around %17 back yearly on their money.
How is this calculated? It involves a lot of fiddling with financial statements and predictions about the future. But let's assume for the sake of this example that the web site cited above had earnings of $20,000 last year. Let's assume that profits grow 15% a year over the next five years. That means in 2000 it will make $23,000, in 2001 it will make c. $26,450, in 2002 it will make $30,417, in 2003 c. $35,000, in 2004 $40,000. Total earnings over the next three years: $134,150.
Return to the 3-to-5 times earnings multiple. Consider the high end - 5 times earnings. If our buyer invested $100,000 in the stock market and got an ROI (return on investment) of 15%, he would earn $152,000 in the next three years. So why should he pay $100,000 for your company and lose $17,000? He'd probably want to pay a good deal less for it.
There are always strategic fits, synergies, and 'potential' that might induce a bueyr to pay more than the strictly financial value of a company. But don't count on it. If it's a publicly held company, you might think they have tons of $$ to throw around, but if they pay you 20 times the value of your business, they will have to explain it to their shareholders. And sure, maybe your website has tons of 'potential'; but how much money are they going to have to spend to realize that potential? They need to spend a ton of money on advertising and expanding the site? That will affect their ROI significantly. Your users might call you a sell-out and desert you? High rate of risk - they will want a higher ROI.
That was a lot more complicated than I wanted it to be, but you get the picture - it's a complicated scenario, there are a lot of factors, but anybody with enough money to want to buy your company is going to know what's up and they will not want to over-pay.
There really isn't a standardized way to assign value to a web site, unlike things like cars which have "blue book" values.
The thing about a website is it is worth whatever somebody wants to pay for it. The trick is convincing somebody to pay a lot.
You have to evaluate many things when coming up with an asking price. The number of hits, etc isn't as relevant often as the user base (i.e. slashdot == geeks == people with buying power == geeks that hit other sites == high value) and the amount of "impression" time your site generates.
Banner Ads as a source of revenue should not be taken seriously by a buyer who is in this for the long run. This is because the revenue stream is potentially unstable in the future.
What revenue/value does your page bring? Is there an intrinsic need for it?
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