Websites can be a key and primary asset in any online or physical business. They provide information about products and services to the consumer in an effort to inform them enough to make a purchase. Since websites are such an important asset, as a website owner, wouldn’t you want to know what your asset is worth? When the Internet first launched, it was nearly impossible to track the valuation of a website. However, with the launch of analytics and other types of metrics from Google, Comscore, Alexa, and about a million other sources, it has made valuation much easier over the years.
Factors for Making Websites Valuable
The primary reason a website has value is because the buyer sees it as a method of achieving a high return on investment. You may be thinking that the website has a lot of potential to make money but that is a flawed methodology. Buyers are searching for money back from the purchase in the quickest amount of time and will pay more or less based on the risk of receiving their money back.
Another piece of flawed thinking is that because you have invested money into your website, it adds value to the buyer. Many website owners believe that because they have invested $15,000 into website creation, $50,000 into generating traffic and $10,000 in the domain name that the site should be worth an extra $75,000. This is completely incorrect as these three assets combine to create profit that gets valued, not the specific assets.
Key Criteria Used in Website Valuation
Like when evaluating any type of business, website valuation has several key criteria that help to place a financial value on the site when you are ready to buy or sell. The valuation will help you determine if the price tag on the website is worth purchasing or if you are selling your site for the correct amount. The following is a list of the key criteria used in website valuation:
There are multiple types of business models that are key criteria used during valuation. The most popular and highest multipliers within the business models include:
- Membership/subscription – with a 3.86 multiplier, membership or subscription sites ensure a constant monthly revenue stream which makes them so valuable.
- App – featuring a 3.85 multiplier, apps are extremely valuable in that they provide instant access for anyone with a smartphone.
- Ecommerce – these sites have a 2.77 multiplier in that they sell products directly from the consumer for immediate cash-on-hand.
- Service – with a 2.72 multiple, online service business usually offer the service transaction directly on the Internet.
- Software as a service – SAAS is a growing area with more companies providing software for a monthly fee hence the 2.56 multiplier.
- Advertising – advertising companies have a 2.15 multiplier due to the value they bring other websites.
- Lead generation – lead generation sites have a 2x multiplier because they drum up new business for other websites.
- Content based – nearly impossible to have a multiple but it’s said to be up to 4.
One of the biggest criteria in website valuation is the cash flow. This is the amount of money the website is making. This includes several traditional valuation methods: earnings multiple, comparable sales and asset valuation.
Earnings multiple refers to the calculation whereby a buyer applies a multiple, of around 1-3, and multiples it by annual profits. However, when viewing monthly statistics, the multiple can range from 12 to 36. For larger and fast growing businesses, this can be a multiple of total sales. For the standard Internet business that is valued at less than $5 million, this method is not typically used.
Comparable sales is a criteria in which the buyer finds sales data on similar sites that you have sold in the past. Although this method is not the most accurate, it provides a precise range with which your online company should be sold.
With asset valuation, many buyers and sellers view websites with regards to the assets tied to the company. These assets include traffic, quality of traffic, mailing list size, recognizable brand name, brand equity and a premium domain name.
Search engine algorithms love targeted and relevant content when evaluating analytics about the website. Well-written, original content is critical to the success of any website in that it allows the audience to find the exact information or products in which they are searching. Strong content leads to higher search engine rankings which typically results in a higher valuation.
Search Engine Rankings
As previously mentioned, when Google released and expanded its analytics, this allowed website buyers and sellers to better hone in on website valuation. After Google launched these tools, other major search engines (Yahoo! And Bing), released similar tools. The premise behind search engine rankings is that the higher you are in the search engine for a specific keyword, the more potential customers will see your site thus equating this to sales.
A portion of website valuation should be placed on search engine rankings as it is a true metric to the success of the website. There are a number of search engine ranking criteria such as unique content, layout of the page, relevancy to a specific keyword, search engine optimized pages and multiple other factors that help the site to rank high. Without relevant, qualified, targeted traffic, a website is not worth the space in which it is hosted.
Since most of website valuation involves intangible assets, even the most seasoned experts have difficulty pinpointing the exact value of a website. However, with the continued evolution of analytics tools and tracking resources, valuation is improving and becoming easier for buyers and sellers. It is important to keep your head on straight when valuing a website for buying or selling and not to get caught up in the glitz and glamor of the site. Stick to the numbers and search for the future value of the property.
Do not get sucked into the fool’s gold being sold or estimating the website for a lesser value by those savvy enough to sell the picks and shovels to the prospector. As you are now aware, there are amillion different variables to the valuation equation. Until you are able to identify, understand and examine a significant portion of these variables, it can be difficult to slap a price tag on any website.