Tom
13th Dec 2007, 05:56 am
A friend raised the issue of how a web business should be valued. It is an interesting question and relevant to those who study website architecture. There are many considerations: (1) businesses are generally valued at about ten times their annual earnings (a p/e ratio of 10) (2) small businesses are valued less than large businesses (3) the really large internet businesses, like Google, and AOL in its day, have p/e ratios of 50+ (4) high p/e ratios are characteristic of businesses with a steady growth path, for obvious reasons (5) web businesses are famous for their unpredictable valuations, some far higher than one would expect and some far lower (6) domain names (eg www.sex.com and www.garden.com) can have a high value without any revenue (7) customer lists etc (see quote below) can have value [the AA was bought by Saga mainly for its customer list - or rather a private equity house acquired both] (8) because of a general scepticism about the web, a 'typical' web business is worth less than a typical bricks and mortar business (the quote below suggests p/e ratios of 3-6 (9) the classic quip about valuations is that anything is worth 'what someone is prepared to pay for it'.
See http://www.ventureplan.com/web.valuations.html "Internet businesses are unique, but not impossible to value. Beside the standard income and balance sheet numbers the following represents some of the other issues to consider: affiliate networks, databases of customers, visitors, "cookies", and opt-in email lists, advertising sell through rates, search engine rankings, web site traffic and sources of traffic, content value, process patents, "stickiness" of the web site and visits to sales ratios. Additional expenses that must be considered carefully are hosting fees, maintenance and tech support, server farm streaming fees, web site optimization costs, daily site refresh costs and periodic creative redesign of the web site.... One way to get an idea of current valuations of web properties is to use a multiple of Trailing Twelve Month (TTM) revenues that the site has generated. Our analysis indicates that mainstream web properties are selling at the following median multiples: eCommerce sites: 3 x TTM; Content sites: 6 x TTM"
See http://www.gaebler.com/Web-Site-Valuation.htm "I do these kind of quicky website valuations for clients all the time. The site has revenues of $72,000/year (12 months x $6K) and expenses of $6,000 and about $10K in labor (50 weeks x 2hrs/wk x $100/hr -- I note that at the $100/hr rate the purely financially motivated buyer could almost certainly purchase the website editing services needed in the marketplace). That leaves about $56,000 in pure profit per year. If this stream of income extended for a long time into the future, it would be worth about $450,000 at the classical capital rate of return of 12% (stock market rate for the last 75 years). The problem is it may not extend more than a few years and this investment is much riskier than holding an S&P index fund that should return about 12%, on average. Based on this, I think it would take a discount rate of 20% or 25% to attract a buyer -- making the site worth 4 to 5 times current profit making it worth somewhere in the $250K range. With those numbers, the buyer can get his money back in 5 years and then have a money machine for the rest of his life -- that's pretty attractive. This is a purely financial analysis. The main people who would buy the website, as you allude, are the ones who feel they could do more with it and increase the revenues. Still, such an individual at worst need only match a corporate bond rate (still some risk but a lot less than the website) to convince the owner to duplicate the income flow with bonds rather than the risky website. This would lead to a valuation of 12 to 15 (interest rate of 8% to high 6%) the profit or, perhaps, around $750,000. If the investor really wanted the site, maybe he'd pay about $900K so the seller would have about $750K after he paid his capital gains tax. That's about the max I see for these numbers -- IF the new owner has really ambitious growth plan (which, of course, may not work out). Of course, if somebody is willing to pay that much, they may have some really great plans for your site so I'd tell the client to try to hang on to some equity so you are not totally kicking yourself if the site is worth $10M someday."
See http://www.ventureplan.com/web.valuations.html "Internet businesses are unique, but not impossible to value. Beside the standard income and balance sheet numbers the following represents some of the other issues to consider: affiliate networks, databases of customers, visitors, "cookies", and opt-in email lists, advertising sell through rates, search engine rankings, web site traffic and sources of traffic, content value, process patents, "stickiness" of the web site and visits to sales ratios. Additional expenses that must be considered carefully are hosting fees, maintenance and tech support, server farm streaming fees, web site optimization costs, daily site refresh costs and periodic creative redesign of the web site.... One way to get an idea of current valuations of web properties is to use a multiple of Trailing Twelve Month (TTM) revenues that the site has generated. Our analysis indicates that mainstream web properties are selling at the following median multiples: eCommerce sites: 3 x TTM; Content sites: 6 x TTM"
See http://www.gaebler.com/Web-Site-Valuation.htm "I do these kind of quicky website valuations for clients all the time. The site has revenues of $72,000/year (12 months x $6K) and expenses of $6,000 and about $10K in labor (50 weeks x 2hrs/wk x $100/hr -- I note that at the $100/hr rate the purely financially motivated buyer could almost certainly purchase the website editing services needed in the marketplace). That leaves about $56,000 in pure profit per year. If this stream of income extended for a long time into the future, it would be worth about $450,000 at the classical capital rate of return of 12% (stock market rate for the last 75 years). The problem is it may not extend more than a few years and this investment is much riskier than holding an S&P index fund that should return about 12%, on average. Based on this, I think it would take a discount rate of 20% or 25% to attract a buyer -- making the site worth 4 to 5 times current profit making it worth somewhere in the $250K range. With those numbers, the buyer can get his money back in 5 years and then have a money machine for the rest of his life -- that's pretty attractive. This is a purely financial analysis. The main people who would buy the website, as you allude, are the ones who feel they could do more with it and increase the revenues. Still, such an individual at worst need only match a corporate bond rate (still some risk but a lot less than the website) to convince the owner to duplicate the income flow with bonds rather than the risky website. This would lead to a valuation of 12 to 15 (interest rate of 8% to high 6%) the profit or, perhaps, around $750,000. If the investor really wanted the site, maybe he'd pay about $900K so the seller would have about $750K after he paid his capital gains tax. That's about the max I see for these numbers -- IF the new owner has really ambitious growth plan (which, of course, may not work out). Of course, if somebody is willing to pay that much, they may have some really great plans for your site so I'd tell the client to try to hang on to some equity so you are not totally kicking yourself if the site is worth $10M someday."