That's right, the everlasting question of revenue multiples.
What revenue multiples do you usually end up paying?
I find the majority are in 10-12 months. Some I paid 15 months for, others only 5. One site I sold recently was for an amazing 7 years revenue!
Clinton has a great article on this that he used sales information from SP to generate that you should look at for some thoughts.
Nice to see something a little more empirical than the standard fluff multiples people post.
Thanks, tke71709. I posted a copy of those charts from the Sitepoint article in my sticky on valuation. There are some caveats to interpretation of those graphs, not least that they are not comprehensive and are drawn from only a sample of the sales.
Flippa did talk to me about getting involved in a larger such project which would allow me access to their database to scale up that analysis to draw more accurate averages, medians and other stats.
However, that is not practical. A lot of work went into the analysis of the various businesses that sold before I compiled those charts. For example
1. I had to weed out the ones that seem sold but were not actually sold (involved using WHOIS and other DD tools such as comparing Adsense publisher IDs before and after to discover if ownership really changed) and
2. All the figures in each listing had to be carefully analysed, especially the claimed profits. As the charts were showing multiples of profits it was important to get the profit figures right as "multiples of claimed profit" doesn't really tell us much.
And that was just the start of the work I did on each apparent sale. A lot of ones I analysed had to be thrown away because some factor or the other was corrupting the quality - like the site that sold for just a fraction of what it would normally have achieved because the seller disclosed there were some legal problems surrounding his ownership.
I decided that it was just not possible to automate such an analysis. It would take someone with some experience a lot of time to manually go through each sale and do a great deal of DD work.
The theory is that you can get a higher multiple in exchange for deferring payment or connecting payment with performance. Buyers, including me, would be willing to pay a higher multiple than the market if some such arrangement was possible. If I'm paying $5K for a site and you wash you hands off I'd be willing to pay $7,500 if I had to pay only 50% down and the rest contingent on the site making $10K over the next 12 months.
So if you feel your site has "fantastic potential" and will make reach $2K profit per month in the next few months then you'll go for the option where you get a whole 50% more money. Downside is that if you're full of shit and the site doesn't really cut the mustard you'll end up with only $3750 instead of $5K.
Bottom line - put your money where your mouth is and you'll get a higher multiple.
Yeah I did that a few times, but sellers usually want cash and want it now, so it's not easy to convince them to follow through with this.Originally Posted by 3Six
You can't blame a seller for not being all gung ho about this kind of deal though.
1) They have no control over how you market the site after they transfer it to you. What if they sell you the site and you proceed to run it into the ground? They should take a hit for that?
2) They have no way to prove what income was earned after the site was transferred to you. They're basically taking your word for the revenue, and you have every financial incentive to lie.
So there's a lot of risks associated with this kind of deal for the seller.
I would consider such a deal (as a seller) only if I was dealing with reputable well known people such as some of the people on this site that I have talked to in the past.
If someone like DomainMagnate approached me with that deal then I would have to decline because I have no clue who he is, but if someone vouched for him that I did trust I might consider it.
It tends not to happen for the lower price deals so much. But in almost every $1,000,000+ transaction (not my typical transaction by the way!) you have some arrangement for seller financing, deferred payments, a note or a performance related payment to be made in the future. And sellers agree in these larger deals because an extra couple of thousands on a watertight legal agreement is not an issue for someone on the receiving end of a million dollars. In fact, the whole process often starts with the seller credit checking the buyer and inspecting his accounts!
My friend, Richard Parker, who should be joining us on these forums in the next week or two has written on structuring a deal when buying a business.
Deal structuring is very common with performance payments in regular business purchase transactions, so no reason it cant be more so in websites. Just regulating and policing it can be difficult, particularly with smaller sites.
But certainly the most common in regular business is financing to be taken care of by the bank. Loans etc. Could be difficult to do for smaller sites!
There's an idea, start your own company loaning against peoples purchases of websites. You could do the due diligence on the site see if it seems good, then give the buyer the cash and he pays you interest etc. Again for the smaller transactions where this would be great policing it and enforcing payment etc is going to be difficult!
nEquity, if loaning money is such a good idea, why aren't you doing it?
I tend not to get excited about business ideas from people who don't have the wherewithal to implement them themselves.
I look at it this way, if you're going to have to loan the money to someone to buy the website, you're probably better off buying it yourself and paying them a finder's fee.
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