How to Value Your Online Business - Domain Magnate

How to Value Your Online Business

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No one builds up an online business for nothing. Of course, passion is one thing. But most people in the online business space are also hoping their business will become the pot of gold at the end of the rainbow. 

It is easy to see when your website starts performing well. You are making sales, seeing traffic rise or watching your ads bring in the cash. However, figuring out exactly what your business is worth can be surprisingly difficult. 

Many first-time, or even experienced, business owners can misvalue their business. There are so many different types of business models out there as well as many different factors that can impact the value of your business. This makes it tricky to find a quick, one-size-fits-all calculation.

We’ve valued hundreds of sites over the years so we have a pretty good idea of how to land on a price for your business. While the best way to get a true in-depth valuation is to work with professionals, we are here to share some of our expertise with the basics of how to value your website!

What kind of website do you have? 

The business model your website uses can be important when it comes to the best way to value it. Valuing an e-commerce business, for example, will be quite a different process to valuing a SaaS business. 

Our history of deals has typically focused on content sites that rely heavily on organic Google traffic. These are generally sites that are monetized by: 

  • Ads
  • Affiliate marketing 
  • Digital product sales
  • Services

For this article, therefore, we will mainly be focusing on these types of businesses. But that doesn’t mean it can’t be valuable for other business models too. 

Earnings multiple 

The most common method used to calculate a high-level valuation of a website is an earnings multiple. Your site’s profits are multiplied by this mystical number to determine how much your site is worth. 

Pros

  • Most common method that can work for any type of business
  • Fairly simple to calculate 
  • Works even if lacking extensive financial or comparable information 

Cons:

  • Defining the multiple can be difficult as they are affected by many factors 
  • This method focuses on financial data

The magic formula 

The earnings multiple formula can help you get a general idea of what your website is worth. It looks like this. 

Average yearly net profits x Multiple = Value of site 

How do you define your yearly profits? 

Most businesses define their yearly profits using Seller Discretionary Earnings (SDE). This refers to profits after all overheads or ‘add-backs’ have been deducted, like salaries, content costs or any expenses that don’t directly impact the profits of your site. It is the most common way of looking at earnings as it gives an honest picture of pure profit expected each year. 

For a more complex business, people may use the more formal valuation method of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). This is mainly for bigger businesses that are bringing in 5 million+ yearly.

Some people also use monthly profits to value a business. 

The earnings multiple formula is a simple calculation, the difficult part is defining the multiple. But don’t worry, we will go over that now. And discuss the many different factors that go into defining the multiple. 

How to define your multiple 

Deciding on a multiple can be difficult as there are many different things to consider. From our experience content sites typically can be with 2x to 6x multiples, but it can vary greatly. 

Revenue 

  • Do you have diverse revenue sources? 

As well as looking at a website’s monthly earnings, where that revenue comes from is important when it comes to defining the worth of a website. A website that relies solely on one revenue source will fetch a lower multiple than a site with diverse sources of earnings. Having multiple revenue streams gives your site more stability. For example you might choose to monetize with Adsense as well as affiliate links. If one source is suddenly impacted by affiliate commission cuts (*cough* Amazon Associates) or changing trends, you will not risk losing all your revenue.  

Traffic 

  • Do you have diverse traffic sources?

Similarly to revenue, having multiple traffic sources reduces the risks of losing traffic from unforeseen changes. Google and social media platforms tend to regularly update their algorithms. If you rely heavily on organic Google traffic, for example, an algorithm update could greatly impact your site’s ranking and traffic stream. Having several sources will help compensate for any unexpected issues and push your multiple much higher.  

Niche 

  • Do you have an evergreen niche? 

The niche of your business is a factor that can impact the earnings multiple. Is the business in a niche that is unlikely to lose popularity or is it a new trend? Is the niche growing? If so, how long has it been on an upward trend and will it last? Businesses that are in new, trending niches may seem less stable and reliable. This is because there is not enough long-term evidence of how successful sites in the niche can be. Therefore they are likely to fetch a much lower multiple than a niche that is always popular and has a stable background or long-term upward trend.

Backlinking 

  • Do you have a high-quality backlink profile? 

Backlinking, aka having other websites display links to your site, can impact your multiple. The more expansive and high-quality your backlink profile is, the bigger multiple you can demand. But, remember that quantity does not win out over quality. Backlinks from high-authority websites in the niche will be attractive to buyers, while poor-quality or broken links can actually hinder your reputation. In general, white hat links are preferred over links from public blog networks (PBNs) which aim to manipulate search engine rankings. Therefore building up a reputable and clean link profile will pay off when it comes to selling.  

Age and reliability 

  • Has your business been around long enough? 

If your business has been around a while, this can actually boost your multiple. It instills trust in buyers as there is more data to verify your business performance. It also shows that the business has managed to run successfully for a long time, overcome obstacles, and still turn a profit. This means they will be able to take over with peace of mind.  

Owner involvement 

  • Does the success of your business rely heavily on you or your specialist skills? 

How easy the business is to take over can have an impact on your earnings multiple. Are you the face of your brand? Do operations rely heavily on your specialist skill that not everyone has? Or do you run every aspect of the business yourself that takes up all your time? If so, this could push down your multiple as it will be hard for a buyer to take over. You can make this more appealing to buyers by taking steps to reduce your involvement in the business before selling. This could be changing from personal to company-based branding, creating Standard Operating Procedures (SOPs) to detail your operations processes, or outsourcing tasks to manage the business.  

Email marketing and social media 

  • Do you have a big email list or social following? 

An email list is a valuable resource to market to and increase revenue and sales. If you can pass a big email list to a buyer alongside the website, this can certainly push up your earnings multiple. A large social media following can also be an advantage. It boosts your brand’s authority and presents some marketing opportunities. An email list, however, is even better. It is essentially a list of warm leads of people that have voluntarily expressed interest in your products or site. 

Technical 

  • Is your site built on a reputable platform? 

The technical aspects of your website can also affect the multiple of your business. Not all buyers will be able to code. They are also likely to only have experience with some of the main site builders. Common and reputable platforms like WordPress are likely to fetch the highest multiples. This is because most people will recognize them, they will trust the platform as well as know how to use it. 

Do you have to have a year of data?

The ideal amount of financial and traffic data is 12 months. However, if your site hasn’t been around for long or is rapidly declining or scaling, there are different pricing windows that can be used. 

12 months 

Most buyers will prefer to invest in websites with a full 12 months of data. This gives a full picture of the site’s growth and will give investors a good idea of how the site will likely perform throughout the year. It will also account for any seasonal performance drops. You will find most buyers looking to purchase in the 12-month window, which will allow you to fetch a more competitive multiple. 

6 months 

While a 12-month window is usually preferable, it is possible to use a 6-month window. This is particularly common if the business has been rapidly expanding or declining. This will give a more realistic picture of the site’s performance. If your business is growing, this can work in your favor. If it is declining, it may damage your asking price. Overall though, only showing only 6 months of data will likely reduce the multiple you can ask for.

3 months

While you should really aim to avoid a 3-month window, if your business is really young or very small, in extreme cases you may be able to use a 3-month window. For low-value sites, you may find a buyer that accepts this minimal show of data. However, it is recommended to hold out until you can present more data to buyers. 

Some other ways to value your business

Check marketplaces 

If you don’t know where to begin, you can get a basic idea of how much a business is worth by checking marketplaces for previous transactions. You can check out their lists of past deals as well as sites that are listed for sale to see how much they sell for. Look for similar sites to yours and you will begin to build up a picture. This method is not fully accurate as each site may have wildly differing factors but it can be a good start point. 

Automated calculators  

If you search on Google, you will find a number of automated valuation tools. Automated calculators can be a good way to value a business. Although not all calculators are of equal quality. They usually work by plugging in your domain name and having the tool analyze particular available data sources. These can be inaccurate and overlook many important aspects. A well-developed valuation tool can be fairly accurate but make sure to be discerning when choosing one. 

Speak to experts 

The only way to get a true and legitimate valuation for your business is to speak to experts in the industry. Experience managing, buying and selling businesses as well as expertise in a business model and niche will mean no important factors are missed.

Final thoughts

In short, to sell your website for as high a multiple as possible, you need to demonstrate to your buyer that they will get a good return on investment (ROI). Take a look over different aspects of your business such as growth, traffic sources, management, overheads and see if you are ready to sell. If you are worried about certain under-performing areas, consider working on optimizing processes or waiting until you can present your site in its optimum condition. How much is your website worth?

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