Valuing a website is never easy, but there are a growing number of web site owners wondering "How much is my website worth?"
For example, I have a friend who has a website that makes $6,000 per month in advertising revenues.
He indicates that he spends about $6,000 per year on the site in expenses, which primarily involves buying articles written by freelance writers.
He's got about 2,000 articles on his site right now.
He spends about 2 hours per week maintain his site and he values his time at about $100 per hour.
It's his sense that any smart entrepreneur with a little bit of web savvy could buy his site from him and at least maintain the revenue levels that he's currently established. It's also possible that they could ramp up revenues over time. In fact, he thinks he could get the site to $10,000 per month within two years if he continued what he's doing now and just kept adding new content to his site.
Given all of the above he asked me what I thought the valuation of his website was. I'm no expert in website valuation so it was tempting to just say "It's worth whatever somebody will pay for it." and leave it at that.
But as I thought about it, his question reminded me of one of those MBA finance test questions that I used to be able to do. Isn't the website value just the net present value of future cash flows? Don't I need to figure out the cost of capital for this venture and do the discounted cash flows?
The methodology to value the website was too hazy for me to figure it out. It was like being asked a trigonometry question and you can't quite remember the difference between sine and cosine. I was stumped.
So, I decided to ask a few finance experts and see what they thought the site was worth based on all the information above.
Here's the back-of-the-envelope website valuation from one really smart finance guru:
[Hang tight --- I'm still waiting to get the answer from a finance professor I contacted. If you have a web valuation that you think is right for this or have a comment, please contact us with your thoughts. Thanks!]
We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.
|Thomas B. Duffy, Esquire
I do these kind of quicky website valuations for clients all the time. The site has revenues of $72,000/year (12 months x $6K) and expenses of $6,000 and about $10K in labor (50 weeks x 2hrs/wk x $100/hr -- I note that at the $100/hr rate the purely financially motivated buyer could almost certainly purchase the website editing services needed in the marketplace). That leaves about $56,000 in pure profit per year. If this stream of income extended for a long time into the future, it would be worth about $450,000 at the classical capital rate of return of 12% (stock market rate for the last 75 years).
The problem is it may not extend more than a few years and this investment is much riskier than holding an S&P index fund that should return about 12%, on average. Based on this, I think it would take a discount rate of 20% or 25% to attract a buyer -- making the site worth 4 to 5 times current profit making it worth somewhere in the $250K range. With those numbers, the buyer can get his money back in 5 years and then have a money machine for the rest of his life -- that's pretty attractive.
This is a purely financial analysis. The main people who would buy the website, as you allude, are the ones who feel they could do more with it and increase the revenues. Still, such an individual at worst need only match a corporate bond rate (still some risk but a lot less than the website) to convince the owner to duplicate the income flow with bonds rather than the risky website. This would lead to a valuation of 12 to 15 (interest rate of 8% to high 6%) the profit or, perhaps, around $750,000. If the investor really wanted the site, maybe he'd pay about $900K so the seller would have about $750K after he paid his capital gains tax. That's about the max I see for these numbers -- IF the new owner has really ambitious growth plan (which, of course, may not work out).
Of course, if somebody is willing to pay that much, they may have some really great plans for your site so I'd tell the client to try to hang on to some equity so you are not totally kicking yourself if the site is worth $10M someday.
As an update, after the crash of 08, valuations for websites have cratered. Back to your hypothetical scenario, you are probably looking at best at a 24 month net income stream at a 30% discount - meaning that the projected two years of revenue discounted by 30% of cash flow would equal the valuation. So in the case you outline above, you are probably looking at values between $60K - $75K tops. Welcome to 2010