Guest Post: 5 Ways to Value a Website

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Today’s post is by David Gass of BuyingAndSellingwebsites.com. David is one of the organisers of the Internet Investment Summit, happening May 18 – 20 in Las Vegas. Note that early bird tickets end 20 April!


Ask five website buyers what they think your website is worth, and you’re likely to get five different answers. Each buyer would likely have a different valuation number and potentially a different method for creating the valuation.

There are so many factors involved in determining the value of a website it’s easy to understand why valuations will fluctuate from buyer to buyer.

So what is your site really worth? “What anyone is willing to pay for it!” That’s the real answer. However, that’s not an answer you can put in your bank account. To make it a bit easier to find a fair valuation for your site, here are five valuation methods to use:

Website Valuation Method #1 – Comparable Sales

In the real estate market, Comparable Sales are called COMPS. A comparable is found by searching for related sites in your niche that are as close to your site’s age, traffic and revenue as possible. The closer the numbers are for a comparable site, the higher relevance the site has in the valuation.

To create a comparable valuation on a website generating $250 in monthly income from Adsense, with 5,000 unique monthly visitors and a PR of 1, the first step is to search Flippa.com won listings for sites that closely match this criteria.

The following are six sites in the results that can be used for the comparison.

Domain                                                           Won Price       Profit   Mthly Unique  PageRank

Onlineincomeportal.com   (listing)                $2,950             $212             72,062                 0

 

Cheapholidaytr.com        (listing)                     $1,500             $229              4,200                 1

 

Theexpensivecars.com       (listing)                   $1,700             $300            45,000              0

 

Garnethillcoupon.biz        (listing)                    $2,450             $312                9,237               1

 

CnaTrainingSuccess.com    (listing)                $9,000             $366               2,523               3

 

Bankruptcy-chapter-7.org    (listing)                $3,700             $152              2,547                 0

 

A Formula for comparable valuation:

Step 1: Add “won price” for all sites sold in the comparable listing: $2,950+$1,500+$1,700+$2,450+$9,000+$3,700 = $21,300

Step 2: Find the average price of comparable sites:

$21,300 divided by # of Sites (6) = $3,550

The comparable valuation would be $3,550 for the site.

In this particular case, I’d recommend dropping the highest and lowest priced sites that were sold to get a better valuation. If you drop the $9,000 and $1,500 sites, the comparable valuation is $2,700.

Website Valuation Method #2 – Revenue Multiple

The revenue multiple valuation method is to divide the monthly or yearly profit by the sales price. Although buyers use this method frequently, it’s not an exact science.

For example, the valuations should be different for two sites with $500 per month in net profit from the same revenue source (adsense for example) if one site has three months of history versus another site with three years of history generating the same income.

A site with just three months history might get 6 times monthly profit as the valuation where as a site with three years may get 20 times monthly profit.

Using the same six websites above from recent Flippa auction sales these are the multiples the sites sold for:

Domain                                       Won Price       Profit         Monthly Multiple

Onlienincomeportal.com               $2,950             $212                13.9

Cheapholidaytr.com                        $1,500             $229                6.5

Theexpensivecars.com                    $1,700             $300                5.6

Garnethillcoupon.biz                      $2,450             $312                7.8

CnaTrainingSuccess.com              $9,000             $366                24.5

Bankruptcy-chapter-7.org             $3,700             $152                24.3

The multiple valuation method results vary from 5.6 to 24.5 for these sites. Age isn’t the only factor in determining the multiple. The buyer could have additional sites in that niche or know ways to increase revenue for the site that the current owner isn’t using, which is why they will pay a higher multiple.

It’s easy to see with this example that using just the multiple as a valuation method can be deceiving.

Formula for Multiple Valuation Method:

Monthly Revenue divided by Sale Price = x

X is the number of months it would take to earn back the purchase price of the site with the current monetization methods.

Website Valuation Method #3 – Traffic Value

Another approach to determining the value of a site, specifically sites that have yet to be monetized but have traffic, is the Traffic Value Valuation Method.

This method is determined by researching the top key phrase or phrases that drive the majority of traffic to a website. Then find the Cost-Per-Click value of the keywords.

For example, the site we have used in other examples: Bankruptcy-Chapter-7.org has two key phrases driving over 90% of its traffic, the two key phrases are; Chapter 7 and Bankruptcy Chapter 7.

Once you know these terms go to Google Adword’s keyword tool and enter both terms. The approximate cost per click for each term will be found. For [Chapter 7] it’s $5.95 and for [bankruptcy chapter 7]it’s $11.44.

If the amount of traffic going to Bankruptcy-Chapter-7.org is 900 visitors using Chapter 7 and 500 using bankruptcy chapter 7, then you can multiple the cost per click with the visits.

Formula for Traffic Value Valuation Method

Cost per click x # of Monthly Unique Visitors from That Keyword

$5.95 x 900 = $5,355 + $11.44 x 500 = $5,720

$5,355 + $5,720 = $11,075

The value of traffic to the site is worth $11,075 per month if a site had to pay, for each visitor with a service like Google Adwords. The next step is to multiply $11,075 by an amount around 45%. Taking a percentage of the total traffic value creates a more realistic picture of what the traffic will cost if paid, since not everyone would pay the maximum cost-per-click.

Traffic Value ($11,075) x Percentage .45 = $4,983.75/month.

Website Valuation Method #4 – Reverse Engineering Cost

The Reverse Engineering Cost method formula calculates the price to build a site from scratch to match the site being sold.  The formula is:

Cost to Build Site + Cost to Drive the Same Amount of Traffic + Time Factors = Value

The cost to build a site is pretty easy to determine. It’s easy to go to developers and ask them to look at a site and give a fair quote for the cost of creating the same type of site with new content. Obviously, a complex site versus a simple site will require a higher cost to build.

The cost of attracting traffic to a site can be difficult to calculate. However, getting a quote from an SEO company may provide some good valuations.

The first time factor includes the amount of hours for the buyer to get the site built and driving the same amount of traffic, whether its outsourced or created on their own. The second time factor is the opportunity cost. How much money would the site make in the time frame it would take to build a new one?

For example, if the cost to build the site is $1,500, and an SEO company quotes $3,500 to build the same amount of traffic, the site is valued at $5,000. Then add the opportunity cost and hours spent by the buyer. If the buyer needs to spend 10 hours and their time, is worth $50/hour it’s an additional $500. If the time to build the site and traffic is six months and the original site would have generated $300 per month, the opportunity cost is $1,800. ($300 x 6)

The total cost to reverse engineer the site is $5,000 + $500 + $1,800 or $7,300.

Website Valuation Method #5 – Customer Value

If a buyer already has a list of customers or prospects, he/she likely knows what that list is worth. There are a few metrics list owners use:

LTV – Life Time Value of a customer

DPE – Dollar per email

To best understand how to calculate the life time value of a customer when taking into consideration other expenses in the business and the acquisition cost of a customer, download the Harvard tool that calculates the LTV.

Once a buyer understand the LTV they are able to determine how much they can spend for a site that will generate x number of customers.

With DPE (dollar per email), a list owner may know, for every email they have in the list that matches the current demographics of their list, they can generate $3 per email. If they can find websites to purchase that have lists with emails that match their demographics, that list is worth $3 per email.

 

A site with 2,000 emails could be valued at $6,000 for the buyer, without even looking at any other factors. If the site already generates income from other sources, add the value of income with the $6,000 valuation to determine the overall value of the site.

Internet Investment Summit May 18-20, 2012 | Las Vegas, NVFor additional methods of valuing websites, strategies for buying and selling websites and to meet others in the industry, visit InternetInvestmentSummit.com. The event is a live seminar held in Las Vegas for anyone looking to learn the latest strategies and techniques for buying, selling or investing in websites.

About The Author

David Gass is a serial entrepreneur who has started businesses with $200 and grew to multi-millions.  His companies have been listed on the Inc. 5000 list of fastest growing companies in the United States three years in a row and he has received several awards for his entrepreneurial efforts and commitment to giving back to his community.  He currently buys established websites as a business and teaches others to do the same at buyingandsellingwebsites.com.

How do you generally value web sites? Do you have any questions for David? Let us know in the comments!

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  • http://webdealswatch.com/ Rob Start

    Would be great if flippa allowed you to plug your site data as per the above in and then give a approx value. Or have someone from flippa value it based on that value, like a real estate agent does.

  • https://flippa.com/users/146575 Scripteen

    @ Rob Start

    I think this should be left to the seller pitch to show how valuable his site and how it stands from similar sites.

  • https://flippa.com/users/359676 hartwm

    Pretty good article. I respectfully disagree with Rob though on having flippa value or a value calculator for a number of reasons, but some pretty basic factors influencing actual value.
    1) Length of Trend/Niche: Niche could have short shelf life, or seemingly endless (technology niche vs health niche)
    2) Current vs Future Popularity: Certain niches could be in early stages of popularity vs downside of a trend
    3) Expandability: Certain sites touch a very small market and this could allow potential buyers upside to easily tap into similar markets using and existing established site
    4) Traffic vs Conversion Rates: If a site gets a lot of traffic but low conversion it might be worth more than its counterpart because a site with similar revenue, high conversion and low traffic, has peeked unless you can drive more traffic, which generally is more costly than say improving copy and design to increase conversion.
    5) Websites are unique in they are not a business itself. They are a means to do a multitude of different businesses. Since the topics, revenues and business models differ significantly its is nearly impossible to institute an across the board numerical valuation of a website.
    6) Lastly it would pigeon hole thinking of buyers and sellers on a set value, not really allowing a free market to determine prices.

    Sorry for some reason I just felt like commenting. But I hope flippa never takes this into consideration. Thanks

  • https://flippa.com/users/98389 omar6627

    nice but incomplete article e.g Website Valuation Method #3 – Traffic Value, he doesn’t close with a site price, just the traffic value, so how do you go from traffic value to site value/price?

    • https://flippa.com/users/114289 FruitMedley Post

      Traffic valuation is a bunch of nonsense. Always was. Always will be. If the author or anyone else genuinely believes that Traffic Value * 0.45 is fair value, I’ve got several sites they can buy at Traffic Value * 0.225! (Go on, guys, buy these sites and make a whacking great profit flipping them!) It’s funny how it’s only good value when they’re selling sites, not when they are buying them.

      You might want to read the carefully researched article on valuation that I together with several other experienced players put together for Flippa’s sister site: http://articles.sitepoint.com/article/web-site-valuation-guide. I believe it’s still the only authoritative piece on website valuations.

      • http://www.buyingandsellingwebsites.com David Gass

        Regarding reply #4 and #5: 90% of my business is buying websites, not selling. I’m not a flipper, I’m an investor. So my article above is based on buying hundreds of thousands of dollars in sites. Yes, real experience.

        Do I use the Traffic Valuation Method – YES, but not exclusively. I find that the best method for valuations is to combine several depending on the niche site. Here’s the thing with the traffic valuation – if you have sites in an existing niche and you know your metrics (revenue per unique visitor, page views, click through rates, % of subscribers to your email list, etc), you have a very good idea what you’re revenue will be with a site that has the same type of traffic in the same niche. For example, if I owned a site selling renters insurance in Las Vegas, and I found another site driving traffic with the same keywords/phrases to a site not yet monetized, I know I can convert that traffic at a similar rate to the first. If the first site was generating $1.00 per unique visitor, I could assume the other site would generate somewhere around the same number. To be safe, I might use $0.75 as the basis.

        As for how you go from traffic value to site price, that’s pretty straight forward. You take the amount you can make monthly from the site traffic and multiple by the number you are willing to pay. If you can generate $500 per month from the traffic and you are willing to pay 20 times the monthly, the price is $10,000.

        • https://flippa.com/users/114289 FruitMedley Post

          David, I have no doubt about your experience. But you’re wrong about “traffic value”. It has come up in the past in previous threads on Flippa. won’t go through all the arguments again but, in short, the estimated cost of PPC traffic is unreliable. Till you play the game, tweak your ad copy, improve your landing page etc., you don’t know what your PPC costs will be. Further, PPC costs for an ad in the US can’t be the basis on which you value a site that gets traffic only from India. The quality of the traffic could vary in numerous other ways. For example, it might be an expensive finance keyword but your visitor base could be skewed towards students doing research on mortgages rather than consumers looking for a mortgage. Anyway, this has all been covered in some depth in Flippa comments in posts like blog/website-due-diligence-page/ and elsewhere.

          Valuing sites based on traffic does suit the seller and allows him to cash in before the site loses its “new site boost” in Google / before the Google algo changes / before the buyer realises that traffic + keyword doesn’t necessarily translate to revenue. Anybody who advocates “Traffic Value” * 0.45 would do well buying up sites in Flippa that are routinely selling at multiples well below 0.05.

      • http://flippa.com/ Andrew Knibbe

        @FruitMedley Post – this isn’t your personal forum. As such,we’re hoping for less bluster and more rational and respectful discussion.

        If you have a problem with traffic as a valuation approach, then maybe try outlining where it falls short for you – nothing in your post does this.

        You could learn a lot from David’s reply – both in terms of an appropriate tone for respectful disagreement but also by way of content – there are a number of serious and otherwise intelligent/successful buyers on Flippa who use the same approach.

  • https://flippa.com/users/378142 jayveedee

    Part of the valuation that the author of the article left out was how the website generates revenue.

    I see sites that earn say $1000/month from adsense (or any passive way) selling for quite a bit more than a site that earns $1000/month from sales that would need to be drop shipped. The drop shipped sales would need to be processed and customers frequently have questions which all takes time.

    I have seen quality passive revenue sites going for about 24 x the monthly profit, while the quality sites that require a daily time commitment sell for about 12 x the monthly profit.

    (My eBook discusses topics, such as this, to take into consideration before purchasing a website on Flippa in greater detail- http://www.howtobuyawebsitebusiness.com )

  • http://www.johnnapoletano.com John Napoletano

    This article and discussion is a good start, but I’d like to see more thought put into each valuation method. I’m tired of Flippa buyers saying 10x monthly income is what all websites should sell at. That is just rediculous. The more high quality valuation discussion that can be easily found on this site the better it will be as a marketplace for both buyers and sellers.

    Niche is a huge factor when looking at comps and multiples. Domain name should be valued seperate from the income multiple. At the vary least something like “domain value + website value + value added = list price.” Value added is anything you can explain to the buyer that makes real sense, increasing the price.

  • https://flippa.com/users/418976 holycow

    Thank you David for providing these valuation methods. Much appreciated as it does provide solid guidance. For me its always been a mix of emotion, gut, practicality, opportunity and does it fall inline with the “master plan”. Ultimately, any site is only worth what someone is willing to pay for it.

  • http://www.buyingandsellingwebsites.com David Gass

    Great suggestions for additional ways to value sites. Valuing sites is much like the methods I’ve used for buying/selling offline businesses as well. There are so many approaches and ways to put value on a business/site that it’s virtually impossible to write one article and get them all in.

    Post #9 reminded me of the reason one of the buyers of a business I sold back in 2008. They said the value they placed on the business was much higher than other buyers because they had a product they were selling that would be a secondary up sell to the current business, essentially doubling sales just by adding that one product to the mix without having to do anything else.

    So the value for one buyer is going to be different than another even if they were to use the valuation methods of above. The reason is leverage. Can they leverage current assets or knowledge for the business they are buying and increase sales right away? If the answer is yes, they buy and typically at higher multiples.

    Andrew – thanks for the reply.

  • https://flippa.com/users/501079 bobmcd

    The value of a website should be tied in to its domain name. If yours is the most beautiful website on the planet, and you happen to sell green widgets, your domain should be memorable, easy to spell and contain your phrase “green widgets” in its name. Having such a website with a domain name like: xpqsty.com, or xy123z.com will bring you no organic traffkic at all. You’ll have to PAY for every visitor, WAIT at least 6 months to get out of the Sandbox, and cross your fingers and HOPE someone sends an order for green widgets soon or you’ll go broke.

    Imagine opening a seafood restaurant in the West Texas desert, naming it “JibberJabber” and then wondering why no one knows you make the most delicious crab cakes west of Baltimore.

    Sooner or later, you will either relocate, or rename your restaurant, or close the doors and go out of business.

    BobMcd

  • http://www.southburnetmarketplace.com.au builditfirst

    To build a quality website that has a lot of traffic and provides good income takes time and money and plenty of planning, if you have done this and the site is providing you a nice monthly revenue/income stream you would want to get top dollar for it when it came time to sell regardless of the valuation prosess.

  • http://www.philippinestraveladvice.com adventureguy

    This was a great article and gives me several things to keep in mind as I build new sites

  • https://flippa.com/users/511964 optimuscleaning

    All great replies. I enjoyed reading everyone’s responses! I feel that when true artwork is created is up to the owner of the artwork to price his or her work accordingly…plus time and cost of materials. Traffic flow or number of hits the website/domain name is receiving can further add to the valuation of the company website/domain name. Advertising space would be highly lucrative on sites with added traffic flow. One can look at monthly or yearly averages and include this in the valuation criteria. What one hopes is to seek that emotional buyer that seeks out your website, and agrees with the core website content and services.

    However, still clueless on website pricing 101. LOL!

  • Bobby Garrett

    Nice article. Great tools to also develop a site that someone can value easily and therefore support your sale.