Valuation Model

[jmcilroy]

Clinton,

Thanks. Great forum. Very interesting and helpful article on valuing web businesses. I don't know if you have time to answer questions, but I was wondering if:

1. You could clarify what you mean by "earnings" when you talk about "content sites" selling at a multiple 16-24 times monthly "earnings." Just wondering if that is top line revenue or sales? Or bottom line profit?

2. You have published the algorithm or formula you use to derive the valuations you report when people use the valuation calculator?

I am trying to value a web business. Your articles have been the most helpful I have found. But I am a little unclear on your definition of "earnings."

Thanks!

John

[hooperman]

Hi John, and welcome to the forums

It's been a while since I've looked at that article, but I would imagine the multiples are of profit. It wouldn't make sense to use revenue, as the costs might be astronomical. Many sites go for multiples other than 16-24x, too. There is so much variation, that it's probably better to think of there being no general rule and judge every site on its own merits.

[Clinton]

#2. No, it's not published. But does one ever need an exact formula for this sort of thing? The idea when selling is to get the highest price among your bidders. The idea when buying is to pay the lowest possible price that beats other bidders.

As you'll notice, whether you're a buyer or seller, it's the sum total of other bidder activity that's the major influence. And there's no exact formula that can predict this. We are talking moods, we are talking tech skills, we are talking the variable cost of money (interest rates). Buyer willingness to keep bidding varies from site to site, buyer to buyer, day to day. Everything from economic conditions to rumours about an affiliate program closing down can affect sentiment. The closest you can hope to get is by watching similar sites and observing how the bidding goes.

BTW, welcome

[jmcilroy]

Funny, I was thinking it must have been top line, because profit is so subject to manipulation, and you need almost the equivalent of audited statements to "normalize" the profit so that a standard industry multiple can be applied.

I totally understand that there is a difference between maximizing selling price, which means maximizing the cash that changes hands in a transaction, and valuing a web business, that might require coming up with a number, even though no transaction occurs.

I am interested in both.

My understanding is that the "starting point" for a valuation is .5 to 2.5 times yearly revenue, with the individual facts case-by-case determining where in the range the valuation might fall, or outside the range in lots of situations for lots of reasons.

I am intrigued by these valuation calculators, which I consider mostly novelties or "toys" but was wondering if someone really took the time to try and create the "best" algorithm what factor model and weights would be used to come up with the value.

I know you created a calculator, so was wondering how you came up with factors that represented the value drivers and how you weighted them.

John

[Clinton]

I know you created a calculator, so was wondering how you came up with factors that represented the value drivers and how you weighted them.

I examined several hundred sites that sold in Sitepoint (Flippa's predecessor). However, it wasn't a simple matter of taking the figures provided by individual sellers. I had to work out an approximation of the real profit for every single site. I had to do at least a partial due diligence on each and every one to assess, for example, nominal costs of webmaster time. I had to leave a lot of those sites out of my calculation for the various reasons explained in the "caveats" to the valuation article.

Much manual work went into the calculations and the page with the graphs may be helpful if you want to know about how various types of sites performed (averages and medians of the multiples).

[flipfilter]

I examined several hundred sites that sold in Sitepoint (Flippa's predecessor). However, it wasn't a simple matter of taking the figures provided by individual sellers. I had to work out an approximation of the real profit for every single site. I had to do at least a partial due diligence on each and every one to assess, for example, nominal costs of webmaster time. I had to leave a lot of those sites out of my calculation for the various reasons explained in the "caveats" to the valuation article.

Clinton, your tool takes a lot of factors into consideration, but do think it can be too accurate especially with sub $50K sites?

(e.g. Intangible factors that shouldn't affect prices often do (Page Rank) and things that should (a huge mailing list for example) often have little effect on the final price because people fail to do their research and buy on perception)

[Clinton]

I've said before that you can't expect a high degree of accuracy. However, the more you ignore those factors the more inaccurate your conclusions will be. While I respect your tech and maths skills, I do not believe that working off sellers' claims on earnings and profits, as you do, is a game that's worth the candle. Any calculation based off claims made in the listing is only as accurate as those claims themselves ...and Flippa sellers don't have the reputation for honest claims.

But I appreciate that your system is automated and such systems can't tell the difference between a crucial input such as actual earnings and the seller's wild estimates of how much the site is capable of generating in the future. That's why I believe your calculations of multiples is deeply flawed. It's multiples of claimed earnings whereas buyers are bidding based on a multiple of what they see as the real earnings. I buyer may bid what he thinks is 50x and you could be counting it as 10x.

Intangible factors that shouldn't affect prices often do

I don't believe that. There are no such intangible factors. If someone is buying a non earning site for the PR7 homepage then he has estimated what he can earn off that PR7 (or has a rough idea - perception, if you like - of what he can make).

Either there's an economic value to the intangible ... or there isn't. You can't have both.

[flipfilter]

We're talking about two different ball games here hence why I created the deliberately oversimplified website value calculator.

With the mid - lower end $5 - $50K stuff on Flippa, people generally bid and buy on the strength of the information supplied. Sure you can argue that buyers will due their DD and I know they will, but generally, the bid price is based on the info supplied. The site is worth (as a value) what someone will pay for it, real figures or not.

To me it makes more sense to measure a site on what something listed with it's qualities sells for, not to work out its real qualities are then try to derive a price. I realise what a mess I'm making of trying to convey my point, but it's a case of if 10 sites all listed as earning $100 sell for $5000 over the last month, I'm going to assume that my site that makes the same will also sell for $5000 regardless of whether the 10 sites correctly declared their income in the listing.

[Clinton]

people generally bid and buy on the strength of the information supplied.

I can see that being the case for some of the turnkey sites at the sub $500 price. Buyers aren't necessarily buying these based on the figures provided. They could have other motives like stripping the content and using the domain for something else... or they may fully appreciate that the figures are fake but buy the site anyway because of the tech work already put in.

but generally, the bid price is based on the info supplied.

For $10K - $50K sites I suspect most buyers don't go by just any old claims the seller makes.

Between $500 and $10K, there could be a mixture of both with some less savvy buyers basing the value perception on the figures in the listing rather than on their own research.