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Valuations for Buying and Selling Websites

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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.

Published in: Business
  • This format is not conducive to resolving our differences. Let's just agree to disagree. Thank you.
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  • @TomMacPherson You're inventing things now. I thought we were talking about a business that produced $100,000 in profit per year, now you're saying 'Well now... he wants to pull a salary.' A profit is the money left over after you've paid salaries and wages and all other expenses (again, you should know that). On the other point, if you're a broker, then your position as a broker may make you concerned about the pool of buyers because you want to close the transaction, but a seller is stupid if they consider anything other than their own needs. If the seller needs to sell, if they need capital, then sure, they have to worry about how to attract buyers, obviously. But if a seller does not need to sell, they have no need to make accommodations for potential buyers who may come sniffing around. A seller should sell an income producing asset at a price they are comfortable with, period. As for buyers, if you can't do better, income wise, with a website than the current owner, you shouldn't be in the business of buying websites. An ideal transaction as such would be an owner who earns X from their asset selling to a seller who, because of better execution abilities, could earn x*y from the same asset. That is the only situation where both parties are winners, otherwise someone has to be the loser. And if someone is selling a long term income producing asset for the equivalent of a 50% cap rate, it is probably the seller. If you had something that tossed off $100k a year for the past 10 years and you sold it for $200k, you should get your head checked. So, anyways, a website that earns $100,000 in revenue but pays $80,000 in wages has a $20,000 profit, not a $100,000 profit. That makes a big difference, selling a website that makes $20,000 in profit for $1mm is a bad deal for the buyer for sure.
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  • Chris Beasley: I respectfully differ with you in many ways, as I’ll show below:
    Your comment: “@TomMacPherson it is irrelevant to the seller how the buyer pays for a purchase, no matter what that purchase is. Someone could easily pay cash, they could get private financing, they could get an SBA loan as you say (good luck).” My response: With all due respect, it is extremely important how a buyer pays for a purchase. If there is no money to complete the transaction, than there is no transaction. In my 12 years in M&A, I’ve never come across a buyer willing to pay cash for a business; and 90% of my deals (ranging in value from %500K to $4MM) have been financed using SBA guaranteed loans. The rest have used seller financing – which most sellers are loath to even think about. So, unless the seller is willing to finance the transaction, then the price must be in line with lending criteria, or there’s no deal.
    Your comment: “A seller must sell an asset at a multiple that makes them comfortable considering the income they're losing.” My response: The seller who considers what makes them “comfortable”, and ignores the market, is doomed to own the company for many years – or until is goes under. Sellers who successfully negotiate a business transition transaction understand that the net cash they receive for their business (for which they have worked many days and nights) cannot be reinvested in a passive investment that produces the same returns. Not happening! The seller’s comfort is over-rated if he actually wants to sell his business.
    Your comment: “Also, I don't think you understand how leverage works, which is alarming considering your purported position as 'principal at summit acquisitions group' which I can only assume uses leverage to buy things (or hopes to one day?).” My response: No need to be patronizing. I do know how leverage works.
    Your comment: Buying things with other people's money is a great way to juice your returns. You didn't include the down payment in your hypothetical SBA loan. My response: I know about the “juice”, and I DID include the d/p.
    Your comment: “Let’s call it 20%. So you pay $200,000 for an asset that makes $100,000 a year in net profit. You then incorrectly list debt service costs as the sum of P&I, when it is only I (interest) and any associates fees.” My response: Debt service IS principal AND interest. http://www.investopedia.com/terms/d/debtservice.asp Your comment: Paying back principal is not an expense under any accounting regime. My response: I’m talking about “cash flow”, not net income.
    Your comment: “Go ahead, try to expense it with the IRS. If paying back principal was an expense, loans would be income, and they're not. These are basic accounting concepts. My response: I’m a CPA - I know the difference.
    Your comment: “But ignoring that. You're only investing $200,000, not $1,000,000. Your income off that $200,000, even with your incorrect expensing of principal, is $23k, a yield in excess of 10%, which is pretty good. Using actual GAAP accounting under your loan scenario with my assumption of 20% down since you didn't indicate a down payment... You'd pay ~240k interest over the life of the loan, that obvious is front loaded but we'll just average it to $2,000 a month for 120 months. Or $24,000 a year. So in reality, your debt serving expense is $24,000 a year, not $77,000 a year. Putting your net profit at $76,000 a year, off an initial investment of $200,000. That gives you a yield of 38%. You understand, you get a higher yield by using leverage? You'd have a yield of only 10% if you had paid cash, but by using other people's money you have a yield of 38%. You increase your risk of course, but you definitely increase your yield. I am genuinely alarmed you don't understand this considering your resume.” My response: You don’t earn points for attacks at my professionalism. After all, I’m the guy in the trenches, successfully helping business owners sell their companies every day. Back to this case: I’m assuming the hypothetical buyer is going to actually work on the business, and wants to earn market compensation. Someone able to come up with $200K down payment would probably want to be paid at least $80K a year – his likely market value as an employee. So, when you factor that additional expense, under our equal scenarios (please recall, I did include the down payment), this buyer would have to pay $77K in debt service (P&I) for ten years for the privilege of working for himself – rather than working for someone else and keeping his after-tax salary. The buyers I encounter in my deals would never enter into such a transaction. I wish they would. I'd sell my deals much faster.
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  • @TomMacPherson it is irrelevant to the seller how the buyer pays for a purchase, no matter what that purchase is. Someone could easily pay cash, they could get private financing, they could get an SBA loan as you say (good luck). A seller must sell an asset at a multiple that makes them comfortable considering the income they're losing. Also, I don't think you understand how leverage works, which is alarming considering your purported position as 'principal at summit acquisitions group' which I can only assume uses leverage to buy things (or hopes to one day?). Buying things with other people's money is a great way to juice your returns. You didn't include the down payment in your hypothetical SBA loan. Lets call it 20%. So you pay $200,000 for an asset that makes $100,000 a year in net profit. You then incorrectly list debt service costs as the sum of P&I, when it is only I (interest) and any associates fees. Paying back principal is not an expense under any accounting regime. Go ahead, try to expense it with the IRS. If paying back principal was an expense, loans would be income, and they're not. These are basic accounting concepts. But ignoring that. You're only investing $200,000, not $1,000,000. Your income off that $200,000, even with your incorrect expensing of principal, is $23k, a yield in excess of 10%, which is pretty good. Using actual GAAP accounting under your loan scenario with my assumption of 20% down since you didn't indicate a down payment... You'd pay ~240k interest over the life of the loan, that obvious is front loaded but we'll just average it to $2,000 a month for 120 months. Or $24,000 a year. So in reality, your debt serving expense is $24,000 a year, not $77,000 a year. Putting your net profit at $76,000 a year, off an initial investment of $200,000. That gives you a yield of 38%. You understand, you get a higher yield by using leverage? You'd have a yield of only 10% if you had paid cash, but by using other people's money you have a yield of 38%. You increase your risk of course, but you definitely increase your yield. I am genuinely alarmed you don't understand this considering your resume.
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  • @TomMacPherson Tom - thanks for adding to the discussion. (I'm assuming by above, you mean the comment below?).

    Without a traditional M&A background, I can only go off what's really happening in the space which I work in - typically transactions between $100K and $5mm.

    Things have changed drastically since I produced this, especially with regards to valuations. An internet business in this space on average (n.b. averages can be dangerous, as it lumps the distressed transactions in with the better ones), sold for approx 2.7x EBITDA in 2013 and that continues to rise.

    You can see the transactions that this average was based upon in the 2013 Website Buyers Report - http://centurica.com/website-buyers-report
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Valuations for Buying and Selling Websites

  1. 1. First, forget everything you know about conventional valuations
  2. 2. Value, Valuing and Valuations• Most people confuse a sites 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.
  3. 3. Value, Valuing and Valuations• Value is something which is internal• A Valuation is external
  4. 4. Businesses have been bought and sold for …. ever
  5. 5. 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
  6. 6. 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.
  7. 7. Internet Businesses wereoriginally quite simple entities So the valuation process was simple too
  8. 8. Website Assets – Circa 2004• Revenue• Traffic• The Domain
  9. 9. Reinforcing Theory kept prices around 4x monthly revenue
  10. 10. How is this even relevant to what were doing today?
  11. 11. Sites have become more complexFrom
  12. 12. Sites have become more complexTo
  13. 13. The 4 – 6x monthly revenue model isnow a little too basic to work with by itself
  14. 14. One idea that hasn’t changedCore elements still affect a site’s value and valuation:• Profit (not so much revenue now)• Traffic• The Domain
  15. 15. All very simple things to assign a $ value to
  16. 16. 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
  17. 17. Two Similar Bathroom Supplies BusinessesAnnual Net Profit £32,000 Annual Net Profit £33,000 Sold for £155,000 Sold for £62,000Valuation Multiple of 4.84x Valuation Multiple of 1.88x Or 23x monthly net
  18. 18. Web and Online businesses typicallysell for 50 - 80% less than an equivalentoffline one. That creates an opportunity to buy now while prices are still relatively undervalued. But theres another overlooked opportunity...
  19. 19. Internet Business Valuations 4 – 6x net profit = Business Core Value (Cash Flow, Traffic, Domain) +/- Auxiliary Factors
  20. 20. 1. Core Value2. Auxiliary Factors 3. Context
  21. 21. 1 .Core ValueExample A - Cash Flow
  22. 22. 1. Core ValueExample B - Traffic
  23. 23. 1. Core ValueExample C - Domain
  24. 24. 1. Core ValueExample D – none of the above
  25. 25. 1. Core Value2. Auxiliary Factors 3. Context
  26. 26. Internet Business Valuations 4 – 6x net profit = Business Core Value (Cash Flow, Traffic, Domain) +/- Auxiliary Factors
  27. 27. 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
  28. 28. 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
  29. 29. Buyer Psychology in Three Minutes Fredrick Herzberg (1923 - 2000) Two Factor Theory
  30. 30. Buyer Psychology in Three MinutesStaff need two types of factors for job satisfaction: Motivator Factors
  31. 31. Buyer Psychology in Three MinutesStaff need two types of factors for job satisfaction: Hygiene Factors
  32. 32. 2. Auxiliary Value Similar thing happen with buyers Motivator Factors IP or Unique Software, Lists and Members or Documented Systems Hygiene FactorsTraffic diversification, being Legally Sound or lacking The Core Basics
  33. 33. 2. Auxiliary ValueBy 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
  34. 34. 1. Core Value2. Auxiliary Factors 3. Context
  35. 35. 3. Context – The Site
  36. 36. 3. Context – The SiteNot all sites are created equallyEvery site has a ceiling attached to its Core Value
  37. 37. 3. Context – The BuyerThe buyers opinion on a purchase naturally has an effect on the valuation too.
  38. 38. 3. Context – The Buyer Basic Wants Loss Protection Reduce loss over maximising gain Growth Potential Golden ParachuteIf all were to fail, what can I recoup?
  39. 39. 3. Context – The Buyer Attraction More Potential Buyers= More Bidders / Interested Parties = More Competition = Higher Sale Price
  40. 40. 3. Context – The Buyer ValueBuyers attribute their own personal value to every site they look at Consider this example …
  41. 41. Computerquoteinsurance.com10,000 visitors that convert to leads at 1% = 100 leads per month £25 per lead = £2,500 in revenue
  42. 42. Computerquoteinsurance.com Buyer A New to Insurance but familiar with Lead GenWill receive same arrangement as the previous owner - £25 per lead or £2,500 in revenue
  43. 43. Computerquoteinsurance.com Buyer B Owns a price comparison engineWill earn £25 per lead too but also £275 over that customer’s lifespanSame site now has a $30,000 per month value to B
  44. 44. Sometimes, valuations rely more on the buyer than the business.
  45. 45. Putting it all together
  46. 46. Putting it all together1. 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
  47. 47. Putting it all together3. Increase or decrease your valuation based on auxiliary factors4. Use those same factors to spot things which other buyers may miss to seize opportunities5. Use those factors as a systematic way to increase a site’s value
  48. 48. Putting it all together6. Consider the site in context of its core value7. Consider the personal value to you as a buyer – can you extract value in a way that others currently aren’t?
  49. 49. Opportunity out of Chaos
  50. 50. Thanks for watchingwww.flipfilter.com/blog Twitter.com/flipfilter

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