Forget everything you know about conventional valuations.
Valuing internet businesses with a value below $250K can seem a little random when you look at what's currently being sold, but there is some logic to the process.
This presentation, given at the 2012 Internet Investment Summit, delves into site valuations and also gives some practical advice on how to improve the value of an asset you intend to keep for a while.
3. Value, Valuing and Valuations
• Most people confuse a site's value with the
valuation or price.
• Value is anchored to real tangible(ish) assets
like traffic, or revenue.
• Valuation is ultimately a made up consensus
of what a site is worth.
4. Value, Valuing and Valuations
• Value is something which is internal
• A Valuation is external
6. Offline Businesses
• Premises - an office, shop or factory
• Physical Tasks - and hence employees or at least 1
person who takes a 'salary' of some kind
• Connections - websites, phone numbers and
addresses
• Accounts - usually audited
7. Offline Valuation Adjustments
• IP, or unique technology
• Valuable staff or a solid management team
• Contracts, leases and agreements
• Good or bad recent financial performance
• Stock and Inventory etc.
17. Two Similar Bathroom Supplies Businesses
•Held stock for about 20% of the •All Items dropshipped – no stock
items sold held
•Annual Net Profit £32,000 •Annual Net Profit £33,000
•Sold for £155,000 •Sold for £62,000
•Two members of staff •No staff
•Three years remaining on •No lease or agreements – run from
warehouse lease home
18. Two Similar Bathroom Supplies Businesses
Annual Net Profit £32,000 Annual Net Profit £33,000
Sold for £155,000 Sold for £62,000
Valuation Multiple of 4.84x Valuation Multiple of 1.88x
Or 23x monthly net
19. Web and Online businesses typically
sell for 50 - 80% less than an equivalent
offline one. That creates an opportunity
to buy now while prices are still
relatively undervalued.
But there's another overlooked
opportunity...
20. Internet Business Valuations
4 – 6x net profit
=
Business 'Core' Value (Cash
Flow, Traffic, Domain)
+/-
'Auxiliary Factors'
27. Internet Business Valuations
4 – 6x net profit
=
Business 'Core' Value (Cash
Flow, Traffic, Domain)
+/-
'Auxiliary Factors'
28. Auxiliary Factors for Internet Businesses
• The Core Basics • Trust and Transparency
• Lists and Members • Links
• The Content • Sales Partners and Affiliates
• Cash Flow • Reputation and Brand
• Critical Mass • Legally Sound
• Traffic Diversification • The Niche
• Revenue Diversification • IP, Software and Products
• Documented Systems • Scalability and Redundancy
29. Buyer Psychology in Three Minutes
• Sorry for using the ‘P’ Word
• It’s like NLP in relation to selling online
business
• Important to understand that it’s not only
‘tangible’ factors which affect a site’s valuation
30. Buyer Psychology in Three Minutes
Fredrick Herzberg
(1923 - 2000)
Two Factor Theory
31. Buyer Psychology in Three Minutes
Staff need two types of factors for job satisfaction:
Motivator Factors
32. Buyer Psychology in Three Minutes
Staff need two types of factors for job satisfaction:
Hygiene Factors
33. 2. Auxiliary Value
Similar thing happen with buyers
Motivator Factors
IP or Unique Software, Lists and Members or
Documented Systems
Hygiene Factors
Traffic diversification, being Legally Sound or lacking
The Core Basics
34. 2. Auxiliary Value
By understanding what buyers look for and how
they attribute those things to 'value', you can
•See value or problems that other bidders /
parties might miss in an asset
and
•Know where to add value to an asset you
already own to increase the valuation
37. 3. Context – The Site
Not all sites are created equally
Every site has a ceiling attached
to its Core Value
38. 3. Context – The Buyer
The buyer's opinion on a purchase naturally
has an effect on the valuation too.
39. 3. Context – The Buyer
Basic Wants
Loss Protection
Reduce loss over maximising gain
Growth Potential
Golden Parachute
If all were to fail, what can I recoup?
40. 3. Context – The Buyer
Attraction
More Potential Buyers
= More Bidders / Interested Parties
= More Competition
= Higher Sale Price
41. 3. Context – The Buyer
Value
Buyers attribute their own personal value to
every site they look at
Consider this example …
43. Computerquoteinsurance.com
Buyer A
New to Insurance but familiar with Lead Gen
Will receive same arrangement as the previous owner -
£25 per lead or £2,500 in revenue
44. Computerquoteinsurance.com
Buyer B
Owns a price comparison engine
Will earn £25 per lead too but also £275 over that
customer’s lifespan
Same site now has a $30,000 per month value to B
47. Putting it all together
1. There is no calculation that can tell you what
to pay for a particular site, or what it’s
‘worth’ …. Sorry!
2. Your best starting point is from historical
transactions – what have people paid in the
past for sites with similar core values
48. Putting it all together
3. Increase or decrease your valuation based on
auxiliary factors
4. Use those same factors to spot things which
other buyers may miss to seize opportunities
5. Use those factors as a systematic way to
increase a site’s value
49. Putting it all together
6. Consider the site in context of its core value
7. Consider the personal value to you as a buyer
– can you extract value in a way that others
currently aren’t?
What I originally found most daunting about this industry, coming from the offline world, is it's like somebody woke up one day and thought all that stuff cash flow discounting, or net book value which people have used for years and years on thousands of deals - no longer applies!It's like they just started again!But actually there is some logic to the way businesses are valued in this industry and we'll take a brief look into where Web business valuations stem from in order to get to where they are now.
Most people confuse a site's value - the core things which make it desirable to a buyer - with the valuation or price - a $ amount.The main difference is that value is anchored to real tangible assets like traffic, or revenue valuation is ultimately a made up consensus of what a site is worth based on what people are willing to paySorry to disappoint – first thing to understand
Value internal; built into the site before decision to sell rarely affected by the sale process.Valuation external – perception of that site's worth affected by external things like.Before we understand how valuations are derived and ultimately how to hack a site's valuation to get more than the next seller, we need to go back a little - back to the reason this opportunity even exists and probably the reason why we're all here today.
Bricks and mortar organisations have been sold since the dark ages; advantage of hindsight. We've got enough historic data for almost any industry to assess what people are likely to pay.HairdresserPharma company
And this works on the idea that an offline business is a pretty constant entity. You're always going to have things like
I know guys at Price Waterhouse Cooper who would have me killed for trying to break business valuation in five minutes, but ultimately - it's that simple. And it's a reinforcing theory; if company X ……eventually get recorded. …The next company comes alongguess what the broker will say ....
When smaller sites began sell publically, it happened on Forums in the mid - late 90s with Sitepoint being the main focus. Most if not all the sites were generic affiliate or Adsense ones and so they had very few assets and very few moving parts.
The only thing to separate one site from another was Revenue. expenses low – revenue = profit. Traffic. generic adsense or affiliate site, traffic proportional to revenue so ultimately if you knew revenue then this factor didn't matter so much. The domain.
Assuming an average domain, it really all came to down to revenue de facto way to value a site - as a multiplier of its revenue. Back then, someone, somewhere, decided it should be around 4 months and that reinforcing theory just seemed to stick. it later increased to 6 months as demand increased
However we've still got this huge gap between the valuation of an offline business and the valuation of an online one. Some of this stems from perceived risk and some of it stems from investors having little historical transactions to go by, and many of those transactions following the 4- 6 months revenue model. Here's a real example:
This price was technically a good result in the online world, but given two businesses that generate about the same amount, one having less liabilities than the other, which would you go for?
Investors are realising this every day and they're coming from all walks of business - property being one of the most common recently, and they are ready to acquire 'good' businesses because they know that even at 26X monthly profits it's still a fraction of the cost of acquiring an offline one, typically at 3 -4 years net or 24 - 48 months profit.In fact, I usually get laughed at by people from outside this industry when I explain I'm using a value multiplier based on months and not years!But just as with offline business where there are factors like IP, management teams or stock that can nudge a valuation above the norm, internet businesses have their own factors which do pretty much the same things.
<<slide>>*The key comes from understanding that a site's valuation is about more than just its core value. Butthe two are linked, and if we can't increase the value, we can increase one of more of the 'Auxiliary factors' to get the same end result, So then it becomesless about going against industry defaults or norms and more about knowing what to do to add value in the eyes of a buyer.
* I’d like to go over each one of factors in a site’s valuation so we can see how they all fit together.
Going back to our definition, CoreValue is usually about something internal or something the seller has done prior to selling the site. Three examples -
*... And this site has none of the above, which is why if it does sell, (there's always someone eager to part with their money so don't rule it out!) it will be for a very low valuation, one that's unlikely to even cover the selling fees. With the exception of the latter, all of these sites have a core value and it's usually something we can put a $ amount on. The core value of a site will usually be pretty constant. So if you have two sites in the same niche with no difference other than one is doing twice as much net profit as the other, then the latter will be worth twice as much.
In reality though, every site tends to be different in many ways and this is where the ‘auxiliary factors' come into play.
* If you remember our grossly oversimplified valuation modelthen you'll also remember that the valuation can be changed not just by changing the core value, but also by tweaking, adding or removing any of these auxiliary factors.If we're looking specifically at internet business, then we can actually break them down into 15 key areas and we'll look at each one in more detail in another session. This gives us a system to not only assess a purchase by, but one where we can look at our own assets and see what's missing.
Each one of these areas contribute to a site's overall valuation; very few people understand all of them and their role in increasing or decreasing the valuation of a site. Those that do build businesses that are ... to quote someone else ... 'bought rather than sold' as in people crave it as an asset and are more likely to pay something nearer to 26 months profit rather than 4 -6.Doesn’t have to be naturalI treat it like an MOTIt's a list of things whereby understanding each one will add a little extra value to an asset you own or you're about to sell, and we'll take a more in depth look at each one a little later this weekend.
Now just as a side note, I've been reluctant to use the word psychology because 1) business people usually switch off at that point and 2) It generally makes me sound like I'm trying to be smarter than I actually am, but unfortunately it was the most concise way of getting the point across and I promise this is all relevant, so stay with me.
There are some key areas out of our 17 which are like motivators, so their presence increases a site's value. Some key areas are like hygiene factors, so their absence decreases a site's valueThe 'hygiene factors' work on the idea that not having something like varied sources of traffic means more risk if the main source, for example Google, makes a change and that traffic no longer exists. As an experienced investor you may decided the risk isn't worth the investment and ultimately pull out of the bidding / withdraw your interest. Less potential buyers means less competition and ultimately less bids / interest to fetch a higher price.
Usually comes with experience knowing this is essentially a shortcut for exampleLack of traffic diversification
Now, Although we’ve only mentioned Core Value and Auxiliary factors contributing to a site’s valuation there is also one more thing which we need to consider and that’s context
*There's a show we stole or imported from you called pimp my ride and for anyone that hasn't seen it, each week they take a battered old car and add the craziest modifications and upgrades to it. Imagine you've got a sports car that's worth $50K and you add $10K worth of TV, DVD, Alloy Wheels, Leather Upgrades and Audio.Now Imagine you've got a $500 family sedan that's 15 years old and you add exactly the same $10K of equipment.Do you think the increase in value is going to be the same for both cars despite the upgraded equipment being identical?Clearly not; the second car has a ceiling that no amount of upgrading will break and it's the same with looking at the value of sites.
A site with a core value of $200 with every auxiliary value ticked from our list won't see an increase anywhere as much as a $20,000 one with the same areas of value added to it.This why it's important as a investor to buy at your upper limit - Applying $5K of changes over 3 months will have a much more substantial increase on a site's valuation if the site is worth $20K than if it's only worth $5K.This is also why it's generally much more difficult for sub $5K sites to break that double digit valuation ceiling.
And if we’re looking at context, we also need to look at the buyer;Imagine a triangleEach stage needs to be satisfied in a buyer's mind before moving onto the next. Basic WantsRegardless of the niche, type of site or price bracket, there are some things that all buyers want. To list a site without demonstrating that you have these covered is like committing ‘virtual suicide’, and it’s unlikely a buyer will move on without these being met.
Loss ProtectionThe primary concern - part with their cash and have nothing in return. This can either be at the start (e.g. through fraud / scams) or after (e.g. a drop in search rankings ). The sites that fetch the higher valuations are the ones...Growth PotentialMost sites fortunately have a mechanism for growth as standard (e.g. more seo to get more traffic) Those that have a limit on their capacity or a model that means it becomes unprofitable to grow are penalised in their valuations when savvy buyers realise and back out.Golden ParachuteIn some ways, this is loss protection too. Buyers often want to know ... (This is why it’s important to go niche, but not so niche that you will always struggle to find buyers).
*By removing things that are likely to put buyers off, and adding things that buyers would potentially not buy without, you include the maximum amount of people in your auction.
Providing all the basics needs have been met, and you've managed to create and maintain attraction, buyers usually look for some personal value from your site to finally motivate them to buy. This can be as simple as the core values like traffic or revenue, but sometimes it's something that's unique to that individual or organisation.Sites have different values to different buyers, and what affects that value depends on a lot of factors like their strategy, timeframe, skill set and resources available.
Generates car insurance leads 10,000 visitors each month. Current owner receives £25 per lead converts at 1% giving 100 leads or £2,500 in revenue.
Buyer B is a happy buyer as she'll pay the same amount for the site as buyer A, but ultimately earn a lot more. Furthermore, if she includes her sales and the methods for generating those additional sales into the business, the value of the business will increase significantly even if she sold just months after buying.Buyer B will put a higher valuation on the site than Buyer A and this illustrates our final key concept
Wild West - Things wont always be this way - Already moving to more conventional valuation systems as more online businesses keep formalised accounts - strike whilst the iron is hot and take advantage of the opportunity that’s out there