Website fundamentals that determine valuation
When determining the actual value of a website business beyond the financial profit and loss statements using method such as EBITA , Cash Basis , etc , the main supporting fundamentals, other than the financial condition of the business, are unique to internet opportunities. These fundamentals typically underscore the reason for a buyer to pay a fair market price or above average multiple of net profit. The following list encompasses what are considered relevant and important attributes of an internet business opportunity:
- Domain Name – specific to the product niche, generic, dotcom or other suffix, memorable, etc
- Organic Search Engine Positioning – Natural rankings on major and tiertiary keywords in Google as well as yahoo and MSN
- Unique Monthly Visitor Traffic and Page Views – natural traffic vs PPC, country of origin, top 20 referrers
- Age and History of Website Business – Usually -the older the site, the more stable and potentially authoritative, as well as easier to spot trends and solidity
- Unique and/or proprietary content and products – content is king – unique content along with proprietary products or product or information dominence providing competitive edge
- Customer Database – Large loyal customer base, % of repeat sales, recurring billing – autoship, etc
- Niche / Market Size And Potential And Competition – Is the product or service easy to obtain offline, popularity, price points, who else is selling, growth sector or dying…?
- Growth Trends – Sales, Profits and margins, and Traffic – Trending up consistently year over year, flat yet stable, dropping like a sack of hammers?
- Vendors – Quantity and Quality – barriers to entry, proprietary relationships, etc
- Drop-Ship or Inventory Model – can it be home based or is a warehouse needed – other considerations – margins, speed to ship, customer service experience, extra fees
- strategic partnerships – ie Amazon.com , shop.com , Bizrate, BBB, etc – other developed sales channels make for more stable revenues and growth.
Having checked through these line items and finding most if not all of these to be robust , for example, would likely lend to a website business being substantiated at a higher valuation – say 3.5 – 5 times net annual cashflow or profit verses an average 2.5 -3 times multiple of earnings.
Solid Fundamentals beyond the actual sales revenues and net profit will compel a buyer to make his best offer potentially well above the average market multiple because the business has greater probability of creating a stronger and quicker ROI(return on investment) than online businesses without them. Sellers with websites that have these elements typically receive at or close to asking price for their businesses for sale and sometimes even more when there are multiple suitors.
So if you are a buyer seeking a website for sale be sure to review these elements closely as long as the financial statements meet your interest.
Sellers need to present as much detail on these as possible to the buyer so they can make a sound and solid offer that is acceptable.