The problem with comparative valuations

**Clinton** · April 11th, 2012, 8:52 AM

Flippa has this new blog post about various ways to value sites.

I don't agree with much of it and have argued in the past that examining multiples is worthless unless it's multiples of net income and you don't see net income in listings, that's something you have to work out manually yourself by weeding out all the bullsh*t in the description.

But comparative valuations have got to be a good way, right? It's what I used when creating my own valuation engine.

Not so. I argue now that the fundamentals have changed.

When I wrote the valuation article for Sitepoint I collected data on hundreds of sites, normalized their earnings etc., before calculating what multiples various categories of sites sold for. It worked then.

It don't work no more.

One of the problems then was that there weren't a great number of places to take samples from and without enough samples you can't draw reliable conclusions. Brokers wouldn't share data of private sales and sale prices, they didn't need to. The only source for pricing was Flippa.

That's still the case, the only source for pricing is Flippa. But the quality of data has deteriorated. NPB have become, I feel, an endemic problem. Just because a site appears to have been sold in Flippa doesn't mean it's sold. There's a good chance the buyer backed out. Using it and the sale price in your calculation will, therefore, include highly overpriced and spurious bids that were not backed by any real buyer intent.

Someone did a blog post recently and drew some conclusions from the "final selling prices" of various Flippa listings. As I pointed out in there, one of his examples that supposedly sold for $200K was "sold" a month later by the same seller for $40K. That happens a lot.

Can we brainstorm for ideas? How can we clean the data, use a different data source or otherwise improve the reliability for calculation on comparative valuations?

**akirk** · April 11th, 2012, 12:09 PM

CLinton - I certainly agree that matching repeated sales is one such way - you have to make a decision based on seller / price / website as to whether the first was a duff sale - but you can only infer - I don't think enough information is being shared to really know...

Alasdair

**Clinton** · April 12th, 2012, 4:19 AM

Some of the classified listing sites publish aggregated figures, valuations by sector and other stats. Example: http://www.bizbuysell.com/business-v...ort/?vr_cat=YF

The problem with websites-sold data, even if that is compiled, is that it's going to be based not on audited annual accounts as with the typical B&M business sold above, but on unverified figures provided by the seller.

**crabfoot** · April 12th, 2012, 9:15 PM

With B&M stuff there are accepted ways of arriving at a value for a business - Net Present Value, Internal Rate of Return are what the tax people will take as "accepted" - but they don't represent truth.

If they represented truth, the asset strippers who bought companies, took out the B&M assets, killed or transferred R&D, then sold the remains as a functional business, would not have got away with it.

The truth was that those stripped companies were only good for profits in the short term - the structure was reduced to the "production entity" and the "goodwill" associated with the company name.

When you buy a website, you buy a "production entity" - but not the R&D or the "goodwill". Since most of the website "goodwill" is generated by links and SEO, you may be given instructions on how to maintain it - but how well that works is up to you as the purchaser.

The value of a website has to be determined by its NPV, for however long it can be envisaged to carry on. So if a site makes $xxx per month, it is usually reasonable to assume that the site will make that much for the following year, when Force Majeure might intervene and render future profits somewhat speculative - if we're talking Force Panda, the whole thing might be foutu! (or up yr gegy, in Glaswegian).

If the purchaser can see elements within the structure that can be exploited to give significant additional revenue, he is in an advantageous position, like the asset strippers of old - but unless the seller can point to those elements, he has no justification in asking about the extra dosh they represent, and if the seller hasn't exploited them, he'd be foolish to ask questions why he has not - no prospective purchaser will ask those questions, or the price might go up.

Deal or no deal -

**richrf** · April 26th, 2012, 3:51 PM

Hi Clinton,

I don't know how to get around the problem. There is no motivation for a seller to provide the real selling price after a sale is completed and often the seller is prohibited from mentioned the price. Now and then, I hear some sales prices via the grapevine which give me a clue of what prices might be but these are all hearsay.

I would be more than happy to share with you the highest offer that I have received to date for links.com, with a confidentiality agreement, and it might provide some clues as to the market but even then, who knows whether the deal with have gone through.

I would benefit everyone, buyers and sellers, to have a transparent market, but no one seems to want to participate. Buyers and brokers seek to keep the sellers in the dark in order to try to get cheaper prices but at the end it just gridlocks the market since sellers will not sell without some degree of transparency. At some point, there may be a transparent clearinghouse, but as long as buyers and brokers keep true sale prices hidden, we are going to be in the dark.

**Clinton** · April 26th, 2012, 5:49 PM

That neither sellers nor buyers have an incentive to disclose final prices ...is not going to change.

There are two variables here that are difficult to pin down: the net profit and the final sale price. The former is subjective and can only be determined via a careful examination of the financial records. One needs to have the access typically provided to prospective buyers.

Getting data on the selling price is a little less tricky.

One option would be to monitor public auctions of websites for sale and then tracking WHOIS and other sources to detect when the apparently sold sites have changed hands ...thus confirming the final auction prices. It's not infallible. A publicly visible final bid price could have been re-negotiated prior to sale execution, but it's a better input for calculation of multiples especially when the results are aggregated across several transactions.

Any brokers or other players with better ideas?

**Melissa** · April 27th, 2012, 5:10 AM

Can the tracking of WHOIS and other sources be automated? If yes then the job is limited to calculation of net profit for each of the sites sold. Could you maybe have a standard accounting form that sellers fill in to provide gross revenues, expenditures, time spent on the site and so on. That would automate the calculation of net profit. It would mean posing as a buyer for all the auctions you wish to monitor.